Nine Orders of Magnitude: Wind, Solar and Lithium Will Take It From Here


“The future is already here – it’s just not adequately described” (dolllarsperbbl after William Gibson)

Energy Transitions Do Not Have to Take a Very Very Long Time

Vaclav Smil is wrong.

Smil is a leading and influential academic champion of the view our global energy system took a very long time to get established, and therefore will take a very long time to change: because that is the inherent nature of energy systems.

World energy currently relies on fossil fuels – they have been the most effective energy source, to hand, for the large-scale energy consumption of the past century of industrialization.

Smil uses this fact to extrapolate that all future energy sources will need a long time to replace this sort of system: the fact that nuclear and hydro have not managed to do so after 50 years of development is key evidence.

Thus, the hypothesis goes, the dominant fossil fuel energy system, whilst undergoing some marginal disruptions, will dominate global energy for many – many – decades to come, and perhaps even then its low-carbon exemplar, gas, will be the dominant fuel of choice.

The transition, in this view, and supported by most oil and gas firms, will be gradual, orderly and linear.

It won’t.

The world is now witnessing the clash of exponentially-growing manufactured energy with the dominant conventional base as they compete for the slowing growth in overall energy demand.

Conventional hydrocarbon energy is therefore being replaced by wind, solar, and large-scale batteries – at an accelerating rate.

This is why the transition to the new energy system will not be slow, it will be fast, and far from linear.

In fact, it is already here, staring us in the face.

The Extracted Global Energy System

Let’s take a step back to reflect on the major energy system we currently have.

Fossil fuels, nuclear and hydro power are generally non-manufactured: that is, they are not created via dedicated factory-line structures, but mostly by complex, at-site, custom-designed projects for both the raw fuel extraction, and via a similar process to create large thermal, nuclear or hydro power generation plants.

That is why today, for example, international industry exploration, extraction and facility construction costs for oil and gas ranges around $30-$50/bbl (including over-runs), before transportation and operational costs are considered (hence the necessity for $60/bbl oil).

Add to this the costs of building and running gas and coal power plants, and the conventional energy industry typical power costs have been stuck around the $60-120/MWh range for many years.

The result: these projects continue to take many years to build, and costs per unit of fuel have generally increased over time – as you would expect with complex mega-projects which have negative learning curves.

This makes the current global energy system not just expensive, but fragile.

There are few ways to make these difficult projects less costly over time, so they are vulnerable to even relatively slow demand and price movements.

Unmanufactured …. and Unscalable

As we have noted before, this extractive method of fuel construction and centralized power generation is unscalable.

That is, most extraction and power-generation projects tend only to be economic at one size – the very large.

This is not a bug of the current energy system, it is a feature.

Fossil fuels and utility plants require long-cycle investment and production because of their specific nature.

This was an effective technology during the heavy phase of global industrialisation, when energy consumption grew about 3% pa in line with GDP: fossil fuels provided rapid access to the calorific heft the hungry globe needed.

But the energy the world needs does not have to be provided in this fashion.

Now, as world energy demand grows only at around 1%pa, the incumbent, large and unscalable system is quickly losing out to faster, cheaper, innovative and more adaptable energy sources.

Nine Orders of Magnitude – Wind, Solar and Lithium Will Take it From Here

Wind, solar and electric power-trains based on lithium-ion batteries are an energy different in kind to fossil fuels, not just degree.

They are manufactured energy – based on solid-state, scalable, capture and conversion technologies, rather than unmanufactured extraction and centralised construction projects.

Their manufactured nature allows rapid incremental improvements to be made following classic learning curves, and their solid-state nature allows energy to be produced in a variety of sizes and forms.

At a stroke, fossil-fuel (or nuclear / hydro) deficient countries are unshackled from having to import energy, and can develop and deploy it themselves.

Lithium-ion batteries can scale from iphones to automobile powertrains and out in to massive power storage arrays.

Mass-scale manufactured energy can be introduced in measured, incremental amounts such as low-cost roof-top kits of a few kW, to giant deployments of solar and wind parks of over 1-3GW which can power millions of habitations and / or vehicles.

That is scalability of over a billion times, or nine orders of magnitude.

Note:  Lazard LCOE version 11.0, BEV/ICE calculations based on 20,000km pa, $2.75/US gal, current EVs at 17kWh/100km

Contrast this with thermal, nuclear and hydro plants which tend to run economically only in a far narrower, and costly, range of 100MW to 1,000MW, or one order of magnitude, at the very large end of the energy scale.

One way to summarise this colonization of the energy landscape is shown above – summarizing the 21st Century Energy Technology Spectrum from a single Watt (roughly the power of your iPhone charger), up to 5GW, the largest sized central power plants that can be built on earth, and all points in between.

The chart also notes Lazard’s levelised cost of electricity for each of the technologies – and, to sum up, the new manufactured technologies are now capable of power across nine orders of magnitude, and are economic today without subsidies.

They can take it from here already, but the transition is still gathering pace.

Manufactured energy’s scalability also breeds energy innovation at a rapid rate – and via manufactured technology it can be exported globally and deployed locally at digital speed.

Recent estimates of PV solar learning rates for example are a 25% price reduction for every doubling of capacity which currently takes about 2-3 years. This means prices and costs have dropped by 80% over the past 7 years.

Lithium batteries have seen similar cost reductions, and wind turbine capacity factors are now about the same as gas plants, an 80% learning improvement over 10 years, undermining rapidly aging arguments about intermittency.

Indeed, all these improvements re faster than expected by manufacturing techniques alone – transferred learning at a distance and the less-complex-to work-with solid form are likely key factors.

Result – the world of energy is now a far more innovative and crowded space than it was just a few years ago.

The diversity of competitors is also much higher as technology and manufacturing firms produce large-scale energy.

This is the world incumbents and new entrants alike need to deal with.

A Non-Linear Transition Gets Underway

The energy transition is shaping up to be a sharp, non-linear, and disordered process: the rapid improvements and innovations of manufactured energy will swallow all up incremental energy growth, forcing the traditional long-cycle system into rapid decline or reinvention.

This process is, naturally, being resisted by incumbents.

Chevron put it this way in their latest climate change resilience report

“In general, assets are forecasted to be used for their service life, this tending to slow diffusion of new technologies and energy transitions.”

Not the case.

source: Wikipedia

Witness China’s, breakneck deployment of over 50GW of PV solar (a globally-accessible technology) in 2017 – the equivalent generating capacity of around 15 large nuclear plants, or 20 closed-cycle gas plants – in a single year.

This supported China’s strategy to put on hold investment in over 400GW of coal mine projects, some of which were already in construction. In turn this prompted a free-fall in global coal extraction activity in the space of one year, 2016-17, with a 62% drop in coal project construction starts and a 48% drop in pre-construction activity.

Elsewhere, coal plants have been referred to as rejected teenagers with many of them being retired early in their life, due to poor economics and new emission-reduction policies: some will be only 7 or 8 years into existence before their boilers go cold.

As the report summarises:

“Two of the key drivers for long plant life — a stable pro-coal political climate and favourable economics — are evaporating fast. The politics of climate change are shifting, often across the political spectrum, with support for phasing out coal plants growing rapidly. The plummeting cost of renewable generation is making running existing coal plants ever more marginal.”

In the UK, coal fell to 7% of power generation in 2017 from 40% in 2012, retiring plants with many functioning years left, as wind and solar rose to 30% of generation.

These coal assets have indeed, as Smil would point out, survived a long time, but their eventual demise was sudden, and unlike Chevron’s base estimate, they are being closed decades ahead of their full service life.

The slow linear change hypothesis also assumes that long-established prime-mover energy technologies such as diesel and gasoline engines will not yield quickly to alternatives either.

Again – not the reality.

For evidence see the free-fall of diesel car registrations in Europe in the space only of just 2 years due to management incompetence, a raft of policy changes against diesel (and gasoline engines) and the rise of EV alternatives.

Indeed, the long asset-life of diesel cars now work against it: who now will be wiling to buy and hold a diesel car for years as the market for re-sale vanishes by the month– the diesel engine’s long-cycle life is accelerating diffusion rather than slowing it, bringing forward it’s exit.

The consequences for oil demand are grim: BP’s Even Faster Transition scenario in their annual energy outlook forecasts that fast EV adoption would remove 9 million barrels per day from today’s oil demand by 2040.

Even this is an upbeat assumption as the scenario mischievously assumes that trucks and freight vehicles will pick up the demand slack, and somehow remain fully immune to EV powertrain advances.

Already Here – The Transition is Starting to Bite

Chevron’s climate resilience report is symptomatic of the oil and gas industry’s fierce desire to have smooth growth continue.

It’s headline chart of expected oil demand show practically zero-diversity from a simple smoothly growing future of upward demand.

Incumbents should now reshape their base strategies away from assumptions of neat linear growth (or gentle plateaus followed by tidy linear decline). A quick refresher course on Joseph Schumpeter may be in order for all C-suite oil and gas executives.

BP’s Even Faster Transition is a decent start in stress-testing favoured assumptions and cherry-picked scenarios.

In this world, wind and solar rise to over 35% of global primary energy use by 2040, or an increase of over 4,000 million tonnes pa compared to today. They also compare this rapid rise to previous “transitions” of nuclear, which faded in the 1990s, and even the golden age of gas to show how big the coming transition may be.

Note: Left panel: growth in % share of primary energy; Right panel increase in million tonne per annum consumption, 2040 – BP Energy Outlook Even Faster Transition scenario; dollarsperbbl analysis

Fossil fuel companies cannot comfort themselves by noting that even under these scenarios fossil fuels will remain 40-50% of primary energy for a long time – some scenarios from IRENA and elsewhere see renewables achieving at least 65% share by 2050.

And even if it fossil fuels hang on in, it still spells long-term chronic decline of their market, like a country with decades ahead of negative GDP.

History shows that when effective new technologies are even at low market shares of 1-3%, they can disrupt incumbents significantly. The problem for today’s traditional players is that wind, solar and even EVs are already at or beyond this small share.

This transition is underway.

And if oil and gas companies are unwilling to stare at the future objectively, the stock market is doing it for them.

A Portfolio of ex-Titans

Witness the fate of GE’s belief, dominant still in 2017, of a smooth growth in demand for gas turbines for centralized power plants

It did not happen, even as GE absorbed Alstrom’s power division, leaving it with huge excess capacity.

Orders rapidly declined as wind and solar swallowed up incremental power demand, at lower and lower costs. GE’s woes are many, but its Power Division underperformance is a main contributor.

Reuter’s report that GE executives were well aware of the levelised cost curves from Lazard’s annual reviews, and that current auction prices of solar and wind being were dropping far lower than even efficient closed-cycle gas turbines.

But still they convinced themselves of the “slow-transition” hypothesis.

Ford, a late starter to the EV transition, still closely tied to F150 sales and the SUV gasoline model, has seen a similar free-fall in stock as its tech strategy seems to be wait and see and still at the concept stage.

Even mighty Exxon has seen a fall-off as its new project pipeline underwhelms the market, and looks to be at the high end of the cost curve, increasing the risk of stranded or wasted capital.

source FT

A portfolio of these three erstwhile titans of traditional US industrial sectors would have yielded a 30% capital loss over the past 3 years: Ford and Exxon chronically, GE suddenly.

The transition is amongst us, and it will not be slow, and it will not be tidy.

If oil and gas and related sectors want to be resilient in the face of these new technologies, their stress tests need to be a lot less smooth and comforting, and much more rough and disorderly.

Whether or not they like what they see, the unblinking market, constantly looking to the future, has a way of finding out anyway.


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