I found myself facilitating a discussion about a subject I
know little – energy. I share the same
enthusiasm for the eminently logical choices towards clean energy when they
make sense, and certainly for the long run.
I also see how passion overwhelms logic on both sides. The fossil fuel legacy industry has a huge
investment in the status quo, and clean energy advocates place passion over
everything including economic pain.
The critical question
With the precipitous decline in oil prices, the logical
question involves the momentum of the transition towards long term investment
in clean energy. It is impossible to be totally ignorant on the subject since
the recent tipping point published
by Lazard indicating that the economics of clean energy matches or
surpasses fossil fuels, or the transition underway in Germany towards conversion
away from fossil fuels, or the commitment
of the PRC in the recent (sometimes inexplicably maligned) treaty
committing to investment in clean energy equivalent to the entire US grid. The
headline news gets in the way. If oil
prices are low, shouldn’t this disrupt the trend towards renewables?
The elements of the
discussion
Politics, as usual gets in the way. There are subsidies and tax breaks and market
manipulations, as well as the geopolitics surrounding the oil industry and individual country interests (think
Japan and nuclear).So the platitudes
and the narratives emerge – always oversimplified and often ignoring data. I cringe when the topic is on the
evening news or the radio news shows – they can never get it right. Those fully committed to investment in clean
energy take it as nonnegotiable. The
opponents are equally entrenched as they calculate the cost of disruption. This
is my blog – I disagree with the all.
The emergence of favorable economics of green energy and the
future trend for low cost oil and natural gas have shaken the structure of the
entire energy industry. Suppliers,
distributors, and consumers both large and small have transformed from massive
groups of institutions and people to much smaller micro segments all along the
supply chain. Thus the arguments must be
nuanced and the data behind those argument granular. Nuance and granular data is hard work, and
that is certainly why the news organizations will often get it wrong.
Take an easy pair of examples – an isolated tropical island
with substantial population comes first.
Renewables don’t just make sense; they are already dominating energy investment
for those who have access to capital.
With the anticipated decline in the costs of solar panels, the ‘islands’
in poor countries will get the benefit as well. The other easy example is the
population centers that sit atop easily and cheaply accessible fossil
fuels. Here in Pennsylvania we can anticipate
the future with natural gas stations fueling both industry and vehicles (hopefully
in a clean application). But the world is not a simple extreme example. And the
players and influencers, including politicians, are not deeply informed (remember
nuance and granularity). Add short term focus, where the cost of disruption is
both shocking and a personal disaster (if you lose your job or business).
One more observation – the long term investment forces have
already, without reference to oil price, embraced the clean energy future. The giant projects,
generation/storage/distribution, are now promoted by the investment banks (see
Lazard reference below); and the asset manager advisors have now put forward a
case for divesture of fossil fuel projects and investment in clean energy. See
Institutional investor references also below). Let me take a moment to explain these two
important views. Lazard notes the
fundamental shift in the value of generation facilities (the billions of
dollars projects) to renewable and clean energy over fossil fuel projects. Lazard is important because they are the
investment bank that arranges the very large global projects globally. In the Institutional Investor article, the
author constructs two model portfolios – the clean energy investment outperforms
the fossil fuels investments. So in this
capitalist world of ours, both the wholesale and retail investment domains have
already concluded that clean energy is where capital should go – all with minimal
reference to oil price. But remember these are esoteric, albeit expert,
indicators, and are for the long term.
What to do about short term discussions?
Proposed solution
The result of the multiple structural pressures (in
production, distribution, and storage) is a fundamental structural change in
the entire industry from monoliths to disaggregated (sub market) units of
analysis. So more than ever the high level arguments with simplistic views or
results do not apply. The exceptions
will outnumber the normative examples, and more importantly there will not be a
mean to revert to.
So….(everyone now starts there commentary with ‘so’)
everyone, no matter their perspective, should embrace a disaggregated approach. We have to recognize the micro segments in
production, the multiple channels for distribution, and the diverse and
emerging dispersed storage alternatives. There are scenarios, models, and
results for each of these components.
The level of nuance and detail will
indicate how much work has been done in the analysis. Once the framework is established, results
will be elaborated across the ‘map’ of the components under discussion.
What does the answer
look like?
Take our original extreme examples; for the island (one with
access to capital) the production and distribution and storage is independent
of the oil price; and for the legacy fossil fuel dependent ecosystem (without
access to capital) oil price is both a short and long term determinant. The
interesting part of the analytic framework emerges as the components in the
value chain begin to change. Storage
comes to mind first. When and if those
mythical perfect batteries become practical, or the risks of storage of fossil
fuel energy or its waste become unmanageable the game changes. But similar
transformational events can occur in production and distribution.
Clean energy advocates, particularly true believers, are
accused of ignoring practical matters like how cold it is in the Ukraine in
wintertime. Fossil fuel protectionists, circling the wagons around their legacy
systems, are accused of failing to include all the long term costs to society.
A disaggregated approach to the analysis with not convert either group, nor
will it ease the pain of the disruptions to the elements of societies (emerging
market populations) who feel the greatest impact.
An answer
The answer is that the volatility of oil price by itself
will barely impact the analysis supporting long term investments in clean energy. The greater the volatility, however, the
greater the cost (financial and human) and benefits of all the disruption.
Also, and not trivially, a very low oil price will have a multiplier effect as most
economies improve and capital goods have to be replaced. Every investment from the family vehicle to
the energy distribution network needs cyclical renewal. Low energy cost benefits the micro economy
and then allows for more of these upgrading projects. The analysis, however, is not unitary because
that ‘upgrade’ may well need to be perfecting a fossil fuel system under
certain circumstances –such as the grid threatened in Cuba.
(Caveat: If you want
to know the effect of oil price volatility on politics or broad public views
(read news) you will not find it here.
Remember ‘correlation is not causality’ is a basic philosophical construct
that is absent from both politics and the public media.)
References that,
IMHOP, do not exaggerate:
Original
Lazard comment http://www.lazard.com/media/198582/levelized-cost-of-energy-release-version-80.pdf
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