The Four Horsemen of the Energy Transition

Last week we dug into the broad macroeconomic forces that are conspiring to slow down the progress we've made on the energy transition. The IEA anticipates that global installed capacity of renewable energy resources will reach 4,500 gigawatts by the end of this year, a staggering figure. This week, as global leaders and industry executives meet in New York for Climate Week, much of the conversation will center on how much further we need to go. The official tally in the World Energy Outlook for 2023 won't be published until October, but these 4,500 GW, when combined with nuclear, are likely only to account for roughly 40% of total electricity generation being decarbonized. Electricity itself only accounts for roughly 20% of global greenhouse gas emissions, a large share for a single sector but by no means the lion's share. Fossil fuel demand has not yet peaked, and global emissions continue to rise. Meanwhile, many markets are seeing the deployment of higher penetrations of renewables face some difficult and protracted challenges. I call them the Four Horsemen of the Energy Transition:

Consumer Impacts

Last week we talked about the challenges facing offshore wind and tied a lot of those issues back to inflation and rising interest rates. These issues will hinder other forms of renewable energy deployment as installation begins to outstrip manufacturing capacity, but offshore wind in the U.S. and other new markets is more vulnerable. When you still need to build ports, vessels, and new manufacturing capacity, the impacts of inflation and financing costs really start to stack up. Stephen Lacey recently did a great episode of The Carbon Copy highlighting this issue. I have been saying for months that the mounting costs of offshore wind could erode public support, with ratepayer impacts squeezing consumers who are already under a lot of stress. Six northeastern Governors clearly agreed, as demonstrated by the letter they sent to President Biden a few days ago requesting revisions to tax credit guidance to boost project margins, revenue sharing from federal leases to reduce ratepayer impacts, and federal action to expedite permitting. Unfortunately, only one of these things is really within the executive authority to influence (tax credit guidance).

When states began to pursue clean energy policies in the US in the form of Renewable Portfolio Standards (RPS), reaching peak frenzy in the mid-late 2010s, it was seen as a reasonable workaround in the absence of federal action on climate. 37 of the 50 U.S. states have some form of RPS (even Texas!) though in some states it is so low that it has long since been met (again, Texas) or isn't fully binding. However, 22 of these states have set goals to reach 100% carbon-free energy by a certain date, often in the 2040s-2050 range. These clean energy mandates often include carve-outs for specific energy resources and theoretically provide a long-term mechanism to push state utility commissioners to approve utility energy procurement plans that meet more criteria than simply the lowest-cost resource mix. Federal tax credits, scale, and technology improvements often mean that today the cheapest cost of new electricity generation is in fact wind or solar, when you don't account for transmission upgrades. Which brings us to the next Horseman.

Transmission

Building new wires is expensive. Utility-scale renewable energy projects are often built further from large population centers than their fossil fuel counterparts, whether that's to capture better resource, reduce cost by seeking out cheaper land, or to avoid pushback on the siting of very large and highly visible facilities. Multiple studies show that we would need to build out upwards of three times the existing transmission grid in the U.S. to reach a 100% clean electricity goal, requiring as much as $1.5 trillion in investment. Not only are these transmission lines enormously expensive and present sticky issues with respect to who pays for these upgrades, but they are also enormously difficult to permit and build. The BIG WIRES Act introduced to Congress last week would establish a minimum transfer requirement between regions of the grid, empowering FERC to step in to permit these lines if regions fail to do so themselves. This could help address some existing challenges and potentially reduce the cost of grid investments to support clean energy, but would not change existing rules on cost allocation or interconnection, which in many grid regions place the burden of expensive upgrades on the single project that triggers the upgrade requirement. These expenses are passed on to ratepayers (and often not included in much-lauded LCOE figures for renewables), who are increasingly bearing the burden of decarbonization. A growing number of communities are now playing host to large renewable energy installations and new transmission lines, bringing us to Horseman number three.

Social Acceptance

Solar better not get too comfortable. The higher the deployment penetration of a renewable energy resource, the more public opposition you begin to see to new projects. I highlighted these growing trends in a newsletter edition a few weeks back, go check it out. We tend to see pushback on renewable energy projects fall into a few categories: visibility and perceived impacts to the local community, a sense that the community isn't receiving enough benefit to compensate for these impacts, feelings of disenfranchisement in the siting and permitting process, and a skepticism that a single project will have a meaningful impact on climate change. These issues come together in different configurations depending on the project and the community. In the U.S. it is fairly easy to keep new projects from being built if you can organize a local opposition to change zoning laws, while motivating enough citizens to counter these efforts is far more challenging. Even more collectivist European countries like Norway can struggle to strike the right balance, as we've seen in Norway with onshore wind. Layer rising electricity costs on top of these more localized concerns and we have a recipe for stagnation in renewable energy deployment.

Workforce

At the end of the day, these projects need to be developed, built, and maintained by people. The energy transition will require the creation of millions of new jobs in trades that are already struggling to attract new talent. As discussed last week, the U.S. in particular will find workforce issues to be a major barrier, with historically-low unemployment meaning that the energy sector will need to siphon workers away from existing industries. Employment is sticky and it takes a long time for sectoral shifts to materialize - the fossil fuel sector will take decades to meaningfully contract as it grapples with slowly eroding market share, like a big tug of war for the future. This recent episode of Energy Policy Now flagged a dynamic I hadn't considered before: as certain investors divest from oil and gas majors, new investors step in who may be less likely to pressure boards to transition their business models to lower-carbon strategies. Low labor supply means higher wages, which means higher energy costs, both of which mean that inflation could remain high and keep interest rates well above recent norms. The vicious cycle intensifies.

Innovation is Borne from Imagination

Can we imagine ways to solve some of these problems in a different way? Ideally we could solve more than one problem at once, or make certain problems irrelevant. Here are some ideas to get us started:

1. Consumer Impacts: the political and economic dynamics of the U.S. have changed substantially since we decided to pursue the energy transition via ratemaking. It's highly regressive and fundamentally unjust - most ratepayers did not profit from creating the climate crisis and fossil fuel companies worked for decades to suppress the science to pursue their economic interests. Consumers and voters will likely be far more supportive today of selective taxation to offset the cost of new investments, but it's up to citizens to hold their policymakers accountable to their desires. Because most of the ratepayer impacts are coming from the cost of new transmission, let's shift our focus there for some more substantive recommendations.
2. Transmission: there are so many more things we could be doing here! For one thing, we could reduce the amount of transmission investment needed by deploying Grid Enhancing Technologies (GETs). Check out this amazing interview with Julia Selker to learn more about how they work and how much more capacity we could get from the existing grid. The reasons we aren't using more of them mostly come back to utility ratemaking procedures. We could also look at how we pay for new transmission, treating them like infrastructure by financing them with government-backed bonds that can be repaid at low rates over decades in public-private partnerships (PPPs), leveraging a green bank to facilitate this type of investment (see this episode of Volts on the potential for green banks in the U.S. and this episode of Zero highlighting Australia's successful green bank). Thinking further into the future, the potential for wireless transmission, with research currently being funded by DARPA , could completely change the way we think about moving around electricity. We could even think more radically about how we make use of existing transmission lines by forcing the retirement of existing fossil fuel generation near areas where utility-scale renewables could be built, financing the retirements via securitization of the assets, a technique already permitted in some states but mostly underutilized.
3. Social acceptance: perceived lack of local benefit is a major barrier to deployment, and one way to crack that nut is by creating new models for revenue-sharing or offering an equity stake in the project to local communities. What if we could apply the models used for Municipally Owned Utilities or even community solar to facilitate broader community ownership of energy assets? Community transmission, anyone? Surely there's a fintech firm out there who could aggregate the risk and securitize it. Developers may find that placing a more realistic value on the cost of project delays in their risk registers justifies sacrificing a much larger portion of their desired return to local community benefits. If the community stands to gain more from the project's success, suddenly barriers seem to evaporate. We can do a much better job of creating shared value.
4. Workforce: this one is a lot trickier. We can't really create a larger workforce at will. We can leverage new technologies to reduce the amount of workforce needed for the transition, like drones and AI. Even something as simple as standardization or simplifying the installation process for new appliances could make a meaningful difference. Immigration policy reform seems like a no-brainer here, but this is one of many areas where identity politics gets in the way. One thing is certain: we need to make the deployment of new energy technology more efficient, with fewer workers, which means we need to give politicians need something meaningful to brag about that isn't job creation figures. Jonah Goldman explains how Breakthrough Energy Ventures completely changed the game when it comes to how we finance "hard technologies" for the climate transition on My Climate Journey . Could there be a similar model for investing in workforce? There's so much more to this one, like housing, transportation, childcare, and cultural values. It's by far the most difficult of the Four Horsemen to defeat, but success here can help take out the other three.

Energy Policy Alone is not Enough

I hope you've noticed that the Four Horseman are closely linked and self-reinforcing. We've been tinkering around the edges of the energy system for decades and it is going to take massive, disruptive efforts to shift the dynamic. I've been slogging my way through Ministry for the Future for what feels like an eternity as fictional future policymakers struggle with these seemingly-intractable issues. It occurred to me yesterday that this slogging sensation is probably intentional, an "ah ha!" moment of literary analysis akin to my first reading of The Remains of the Day. In real life, much like in the book, we are finding that the old models for managing large global systems like the economy are no longer working as they once did. These fictional future heroes grapple with a hard reality that we mostly ignore: cleaning up our fossil fuel use only gets us part of the way there. I spent some time with Esmé Fantozzi while back tinkering with the En-ROADS model , which shows how various policy choices can impact future climate outcomes. It becomes immediately obvious that net zero is not enough - carbon drawdown and sequestration needs to make up a substantial portion of the solution. The protagonists finance these efforts through the creation of a carbon-backed cryptocurrency, a carbon price of a different sort. Meanwhile, antagonists launch a wave of climate-related terrorism, shooting down planes and poisoning supermarket beef in an effort to force a change in individual behaviors. The chaos and uncertainty the unfolds in the book is difficult to face because it feels all-too plausible. Some of the solutions and successes might feel a bit too idealistic, but some of the possibilities really spark the imagination.

This is the part of the weekly newsletter where I usually throw in some emotional and philosophical grounding for good measure. Two vignettes hit me hardest as I reach the close of this story. I was reminded of how lucky I am to live in North America, where a diversity of wild animals are a regular occurrence. Whenever I visit Europe, the lack of fauna has an emotional impact that's difficult to describe. I feel their absence. Conservationists in Ministry for the Future undertake a re-wilding effort to restore habitats that they call Half Earth. Scenes describing the Greater Yellowstone Ecosystem and herds of elk touched a part of me that we all share, the part that remembers we are a part of nature, not apart from it. It was followed by a heart-wrenching account of a rural town whose story has come to a close. Re-wilding and restoration means removing much of the sprawling human infrastructure that fragments habitats, and this town had long since lost the war with the modern economy. Its few remaining inhabitants take a buy-out, but first they must say goodbye. Our climate future includes so much grief and loss, and we need to make space for that and honor it, while finding new hope in a better future.