Beyond the horizon

Beyond the horizon

Beyond the horizon

Beyond the horizon

Anish De | Partner,

Across the world renewables have been growing at a fast clip over the past decade. BP World Energy Outlook 2019 indicated that renewables as an energy source would become the largest among all by 2040, exceeding the share of coal.  It appears that this will be hastened. The share of renewables has inched up significantly in the past several months in course of the COVID – 19 pandemic.  In India, the share of renewables in the electricity basket has increased from under 10 per cent to well above that level between the pre-lockdown time around mid-March and early June when lockdown was lifted.  Supply from renewables was not curtailed by utilities in this low demand period.  Instead they preferred to temporarily shut down coal-fired generation this time around. 

Across the globe, companies with heavy renewable energy share in their production and supply portfolio have been doing extremely well.  Stocks of these companies recovered very quickly from the vertiginous falls in the worst days of the pandemic and some are touching all-time highs.  COVID-19, it would appear, is just a blip in a long and promising journey to traverse.  Not so for fossil fuel majors.  Most of them have seen sustained drop in stock prices over the years and are struggling to recover. Coal-fired generation capacity is increasingly being valued purely based on discounted cash flows, with a high discount rate applied, hurting stock prices.

This phenomenon of deep discounting of the conventional is not limited to energy alone.  Consumers as well as equity markets value the clean and new much more than traditional majors with mature technologies.  Despite technological advancements these are deemed as sunset technologies.  That sets up its own virtuous cycle for the new and conversely a downward spiral for the old as the transition progresses.

What will accelerate the transition?  There are four factors to look at closely.  The first is the cost curve.  Most mature technologies have plateaued out in terms of cost innovation and now likely witness higher costs.  In contrast, the new technologies typically have downward cost curves.  Ones like solar that have already become cost competitive against traditional fossil fuels will be at a further advantage if the costs continue to decline or hold steady.   This points to the second factor – financing. Traditional technologies with high gestation periods and long cost recovery periods will find it almost impossible to be commercially financed on erstwhile terms.  As risks outweigh returns lenders are tending to stay away from these technologies or are asking for terms that will raise the costs, further accelerating the demise. The third factor is on possibilities that the new technologies offer.  Renewables can be combined with storage to bring about new product and business model innovation.  As the two come together, new virtues get created.  Cost curves dip in conjunction and products and services become more versatile and reliable. Finally, but most importantly, the present-day sensitivities against ecological harm and discriminatory effects.  If clean options exist at acceptable cost points, then polluting options would be even less acceptable over passage of time.  At times this may put even operating assets at the risk of closure.

The net effect of these trends would be further acceleration of some of the technologies that were earlier beyond the horizon but may become commercially viable sooner. According to BP World Energy Outlook 2019, hydrogen as a substantial transport and energy storage technology has been in the past typically been assumed to be viable around  2040. That timeline seems to be advancing sharply and it is now variously estimated by reputed organisations that hydrogen at scale for these applications will come to age much more quickly and is a key candidate for green stimulus as governments try and bring economies out of the COVID -19 pandemic impact.

Would the advancement of the energy transition limit global warming to the 2-degree Celsius ceiling beyond the pre-industrial age that is generally considered to be the maximum that the earth can afford without unbearable and unaffordable permanent effects? It is difficult to say, except that we probably now have a better chance than we had till recently.  It will be important to build on these gains.

However, it is not easy to dismantle the edifice that exists. For example, the automobile industry is discovering the challenges in unwinding the legacy of the internal combustion engine despite the apparent transition trends.  The situation is likewise for the power sector.  Often, it’s not the technology legacy that comes in the way, but the institutions and the associated structures, systems, skills and above all the mindset of these institutions.  Those are often much more difficult to unwind than technology itself. 

A version of this article was carried by The Economic Times - Energyworld.com on 6 July 2020