Can Growth of Renewables Prevent a Carbon Bubble?

businesswindLast month when the International Energy Agency (IEA) issued its Medium-Term Renewable Energy Market Report, which forecasts energy trends up until 2018, they surprised a lot of people when they said that clean energy will overtake natural gas by 2016, becoming the second largest energy source after coal. It is also expected to produce double, in absolute terms, the output of nuclear power during the same time frame.

The report came after renewables showed a surprising 8.2 percent growth rate for 2012. This projects out to a 40 percent increase that will put renewables ahead of natural gas by 2018. It also shows renewables accounting for a full 25 percent of the global energy mix by the same year.

Most of this generation will come from hydropower, though the contribution of wind, solar, bio-energy, and geothermal are expected to double by 2018, making up a full 8 percent of the total mix by 2018, as compared to 4 percent in 2011. For OECD states, the non-hydro renewable share will rise to 11 percent.

The growth rate is accelerating. The predicted renewable generation capacity for 2012-2018 is a full 50 percent higher than what had been achieved during the 2006-2012 time interval.

Meanwhile, biofuels are expected to grow by 25 percent over the same time frame. This would bring the share of bio-derived fuels up to 3.9 percent of the total global oil demand by 2018.

As generation capacity increases, costs are also dropping. In some areas, like Brazil, Turkey, New Zealand, Chile, and Mexico, the levelized cost of electricity (LCOE) for onshore wind is already competitive with new coal and natural gas plants.

And as we wrote about last week, here in the U.S., rooftop solar is already competitive in areas with low cloud cover, high utility rates, and strong local incentives, a trend expected to continue.

So is this the beginning of the end for fossil fuels? There are a number of reasons to think so. A few weeks back we wrote about the mounting financial risks associated with a carbon bubble.

IEA, the same agency that produced the renewable energy forecast, also issued a World Energy Outlook for 2012, in which they said, “No more than one-third of proven reserves of fossil fuels can be consumed prior to 2050 if the world is to achieve the 2-degree C goal, unless carbon capture and storage (CCS) technology is widely deployed.”

Some sources claim that as much as 80 percent of “proven reserves” could end up being nonburnable. Some of these same analyses have found that we might have only as little as four more years before we’ve locked in all the carbon required to drive up global temperatures by the two degrees that experts at the UN IPCC say represents the threshold level for “dangerous climate change.”

What this means, in a nutshell, barring the miraculous overnight development of a highly replicable, scalable, safe, and effective carbon sequestration process, is that there is an awful lot of fossil fuel assets, whose value is on the books of numerous corporations, that could very well be zeroed out in the coming months and years.

That loss would amount to an estimated $8.2 trillion. This exceeds the losses suffered in the real estate industry as the result of the 2008 financial crisis. It also means the impacts could be widespread and severe. Shareholder resolutions are beginning to appear from investors, some aimed at energy companies, demanding that the companies put forth an action plan describing how they intend to manage the risks associated with climate change. Of particular note are items related to the question of “stranded reserves,” referring to the fossil fuel assets that could ultimately fail to generate revenue as previously assumed, if the market should, by necessity, be forced to move to other sources.

weighing-energyThat appears to put a lot of fossil fuel somewhere between a rock and a hard place. If it gets sold and burned, a lot of economic value is retained at the risk of seriously destabilizing our planet’s climate control system. On the other hand, if we keep it in the ground where it won’t threaten our life support system, it could cause another severe blow to an economy that is just beginning to recover.

Fortunately, there is a way through, which is to invest in the clean energy, where will provide lots of economic value without threatening our living conditions. Of course, the players will change and there will be winners and losers in the reshuffling as there always is.

The impressive growth we’ve seen in renewables is a testament to the potential for this to be a win-win. But there are still a number of roadblocks standing in the way of this becoming the success story that it could be.

Renewable projects tend to be capital intensive. This means they require substantial long term investments. The one thing that investors fear most is uncertainty. They require assurance the government policy, market forces, and the direction of technology will all be likely to remain favorable for the proposed project.

Policy uncertainty is clearly one of the biggest risks to these growth projections. Here in the U.S., congressional Republicans continue to obstruct policy measures that would regulate coal, oil, and gas production, or which would provide incentives for renewable alternatives. This, despite increasing evidence that even Republican voters want to reduce our dependence on fossil fuels.

Renewable energy has other weak points that could stall their growth. Infrastructure, for example, needs to be modified to incorporate renewable energy into the electric grid. This costs money and will require commitment on the part of government officials.

Utilities, which can also make a big difference, have initially resisted the proliferation of renewables, seeing them as a threat to their profitability. More recently, they have begun to recognize the numerous advantages, and are putting down substantial amounts of cash to build up their renewable energy portfolios.

Many climate watchers are ready to concede that the two degree Celsius target is “patently unachievable.”  To get there would require a 15 percent drop in emissions by 2020. The IEA believes it is still possible if we aggressively pursue the following four policy priorities.

  • Targeting energy efficiency in buildings, industry and transport;
  • Limiting the construction and use of inefficient coal-fired power plants;
  • Actions to halve expected methane  releases into the atmosphere
  • Beginning to phase-out of fossil fuel consumption subsidies.

As we confront this growing dilemma, it’s good to remember what the poet Robert Frost once said, “the best way around is through.” That means moving forward aggressively on efficiency and renewable energy as countries, businesses, individuals, and cities all around the globe are beginning to do. If we all pull together and make this a priority we just might scrape through with relatively minor damage.



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