What is the ‘energy transition’ and what is actually happening?

Purpose

The expression ‘energy transition’ has become a buzz word for politicians, corporates and consumers.

The objective of this paper is to share our research and explain how the ‘energy transition’ is impacting (disrupting) one of the world’s most important energy markets: electricity (which accounts for 30-40% of primary energy demand in most economies).

We will explain:

• Why electricity prices are increasing (notwithstanding renewable electricity being cheaper than the fuel cost of typical incumbent electricity generation);
• The solutions to achieving sustainably lower electricity prices and increased system reliability; and
• How electricity markets will evolve as the transition proceeds.

Key Points

• Renewables (particularly solar and wind, which were initially subsidised) have structurally changed the way electricity markets function.
• Today we generally have higher costs to generate and distribute electricity and therefore higher power prices for all consumers.
• Higher energy prices (especially during a cost-of-living crisis) leaves many up in arms. Despite the protests by some, there is no way to go back to what we had (the proverbial genie is out of its bottle).
• While it may seem counter-intuitive, the solution is in fact more renewables.
• Higher and higher electricity prices naturally incentivise investments in renewables and energy storage. The significant increase in electricity demand driven by the adoption of electric vehicles (which have a secondary beneficial use in stationary energy storage) will compress transmission and distribution network costs which are largely fixed.
• Our research forecasts extraordinary medium-term growth for key clean energy industries, for example: solar electricity generation will be 4-5x greater by 2030 (relative to 2023); wind by 2-3x; annual electric vehicle sales by 4-5x; and stationary energy storage capacity by 10-20x. This growth is being driven by the basic economic fundamentals.
• The end result will be in lower costs to generate and distribute electricity and therefore lower power prices for all consumers.
• This is the ‘energy transition’ and it will be a painful and highly disruptive process. However, our research clearly indicates that the end result will be abundant very low or zero-emission energy at a lower cost than today, with a high degree of energy security, which will usher in a period of sustainable prosperity and incredible value creation.

How did the electricity industry work before renewables?

Renewables (particularly solar and wind, which were initially subsidised) have structurally changed the way electricity markets function. In the past, cheap and reliable electricity was generated centrally (predominantly from fossil fuels) and delivered to where it was needed over a transmission and distribution network. Electricity was generated at a consistent, largely fixed cost and the transmission and distribution network was also operated for a largely fixed cost. The volume (electricity demand and supply) was stable – it was a largely fixed cost, fixed volume system. Delivered electricity costs primarily comprise generation and distribution costs (the split can be skewed either way depending on idiosyncratic factors e.g. in the United States transmission and distribution is c.40% of the delivered electricity cost, whereas in Australia it is c.70%. The reasons for the difference includes factors such as fuel costs, transmission distance and concentration of demand). This system was extremely effective.

What has happened since we started installing renewables?

When the world began installing wind and solar electricity generation (both utility-scale solar farms and distributed rooftop solar) we introduced a competing technology with very different attributes to existing generation (the key difference was solar and wind’s intermittency – which means they only generate during the day when the sun is shining, or when the wind is blowing). Solar and wind have no fuel cost which means it out-competes all conventional generation when it is producing (lower short run marginal cost). This additional, low-cost supply results in zero (or even negative) electricity prices during the day in many parts of the world where renewables have proliferated. Many low-cost baseload generators (typically relying on inflexible fuel sources such as coal and nuclear) have been driven out of business (they are unable to sell sufficient volume at a sufficient price). When the sun sets and on cloudy or still days, this has necessitated higher-cost, more flexible generation (typically powered by natural gas) to fill the gaps.

Second, managing the complexities of feeding highly fragmented, distributed rooftop solar into the grid as well as installing wind and utility-scale solar in different locations to the previous sources of generation, all with different electrical characteristics (such as voltage, frequency, etc) has required investment in the transmission and distribution network.

What is the situation now?

In many places, electricity prices are rising faster than inflation and the system is suffering from reliability issues.

The key impacts have been:

• The total cost of generation increased (due to the displacement of low-cost inflexible generation and the increased reliance on higher-cost variable generation);
• Investing in the regulated transmission and distribution network increased its total cost of operation; and
• Rooftop solar removed volume from a system with largely fixed costs.

These factors have combined to result in higher costs to generate and distribute electricity and therefore higher power prices for all consumers. This is notwithstanding the headline that solar and wind electricity have a ‘levelised lifecycle cost of electricity’ generation which is lower than the fuel cost of typical incumbent baseload electricity generation.

This is a problem. Higher energy prices (especially during a cost-of-living crisis) leaves many up in arms. Despite the protests by some, there is no way to go back to what we had (the proverbial genie is out of its bottle).

What are the solutions?

While it may seem counter-intuitive, the solution is in fact more renewables. More specifically, investment in:

• Renewables (to fully replace higher-cost generation);
• Energy storage (which negates solar and wind’s intermittency);
• Transmission and distribution grid infrastructure; and
• Electric vehicles (which will supplement energy storage capacity and significantly increase demand for electricity).

Higher and higher electricity prices naturally incentivise these investments.

Our research forecasts extraordinary medium-term growth for key clean energy industries, for example:

• Solar electricity generation will be 4-5x greater by 2030 (relative to 2023);
• Wind electricity generation by 2-3x;
• Annual electric vehicle sales by 4-5x; and
• Stationary energy storage capacity by 10-20x.

What will be the end result?

These ingredients will combine to result in lower costs to generate and distribute electricity and therefore lower power prices for all consumers.

This assertion is based on our research which indicates that:

• Renewables plus storage will become the cheapest form of dispatchable (baseload equivalent) electricity generation;
• Electric vehicles will be cheaper to purchase and operate than gasoline or diesel-powered vehicles (electric vehicles already have a comparable total cost of ownership notwithstanding a higher purchase price); and
• The significant increase in aggregate electricity demand driven by the adoption of electric vehicles will compress transmission and distribution network costs which are largely fixed and account for 40-70% of the delivered cost of electricity (electricity generation and transportation each account for 30-40% of primary energy demand in most economies – three-quarters of transportation is on roads and nearly all of this energy comes from oil).?

This is the ‘energy transition’ and it will be a painful and highly disruptive process. However, our research clearly indicates that the end result will be abundant very low or zero-emission energy at a lower cost than today, with a high degree of energy security, which will usher in a period of sustainable prosperity and incredible value creation.

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