?? The remarkable cost of the energy transition

The transition of our fossil-fuelled energy system to a renewable is, we are told, going to be expensive and unaffordable. A McKinsey report from earlier this year suggests spending on physical assets for the transition would?top $275 trillion by 2050, or $9.2 trillion per annum, roughly 7% of global household spending. That is meaningful. Even in the best of times, we would feel the pinch. (Six months earlier, the UN High-Level Climate Champions, rocked up with the number of?$125 trillion, another big number. But what is $150 trillion between friends?)

But do these costs really stack up?

As someone who studies the nature of technology evolution, and in particular how prices for core tech falls, I have had my doubts for years. I believed that such assessments mischaracterized exponential technologies, ones which reduce in price by 10% or more, year after year. The analysts took linear thinking and applied to exponential phenomena.

Now a paper for Oxford academics comes to that staggering conclusion.

A switch to 100% renewables is possible by 2050 and “without accounting for climate damages, transitioning to a net-zero energy system by 2050 is likely to be economically beneficial”. How beneficial? To the tune of $5–15 trillion. And the faster we make the transition happen, the more significant the non-climate-related economic benefits accrue.

How is all this possible? It seems like we’re having our cake and eating it. The “secret” is in the exponential nature of these technologies: the compounding drumbeat of price/performance improvements. Let’s dig in.

Look at solar power. In 1972, solar-generated electricity cost $29,855 per MWh (in 2020 dollars). In 2020, it ran to $57 per MWh. For batteries, storage ran to $5055 per kWh in 1995 and was at $135 per kWh in 2020. The price decline because of "learning", we literally learn how to make them more effectively. Fossil fuel power has no learning rate, it just ebbs and flows with commodity prices.

When you plug in such price declines, it turns out that the net present cost of a rapid transition to renewables (fully complete by 2050) is cheaper than just maintain the existing energy infrastructure. The researchers estimate that by 2050, to rapidly transition the energy system will cost $5.9 trillion a year. But the “No Transition” energy system will run to $6.3 trillion a year. And with plausible discount rates, that works out to an?expected payoff of $5 to 15 trillion with an 80% likelihood that it will be cheaper than continuing with a fossil system.

In a funny way, we can have our cake and eat it.

Narrative matters

Narrative matters. Switching this from the myth of the cost of renewables, the story we’ve told here is crucial. And it becomes critical to ensure policymakers understand and repeat the same robust message.

This research demonstrates that a transition need not be costly, in the sense that many think, and is plausible within the next decades. It is, of course, a theoretical but robust model—but one that could provide enough clarity for more detailed ambitions in this direction. And, yes, we need to consider the capacity of capital markets to supply the capital today for this payoff, at this time of war shocks, higher inflation, interest rates and government borrowing.

A fast transition to a clean energy system is going to be not merely environmentally helpful but hugely economically beneficial.

I examine this paper in more depth in my newsletter, Exponential View. You can access the full essay here.

Cheers,

Azeem