😎 The negative cost of Net Zero

A new paper inverts the costs of a clean energy system

A renewable energy grid as imagined by Auguste Renoir, generated by DreamStudio

There is a widely held view that the cost of getting to Net Zero is going to be high. We are told that the sums of money required for the new kit (solar panels, batteries, wind turbines, small modular reactors, high-voltage direct current interconnects, microgrids and the like) will be larger than a typical oligarch’s Loro Piana budget. Certainly, running into the trillions of dollars.

But is this really a large number in a sense of being either unaffordable or poor value for money? Yes, trillions are trillions. But global GDP is $85 trillion dollars. The US military costs about $2 trillion every three years. So in the context of military spending or the global economy, is trillions really a huge number?

Yet that notion that the energy transition will be expensive or unaffordable keeps rattling around. That either investment in renewables is not sound (in the sense that they might not pay back more than you put in). Perhaps, the cost of a net zero transition is higher than the cost of just bearing with climate change. Take, for example, Bjorn Lomborg bemoaning the cost of Biden’s carbon reduction plans: “the economic damage these policies would do is much greater than what most voters would tolerate, while the climate benefits are smaller than many would imagine.” Or Matt Ridley; “eliminating carbon dioxide from the energy sector has hardly begun, yet the cost is already huge.”

Even for those groups committed to the net zero transition at a pace, the dialogue is sombre rather than celebratory. A “flagship report” from IEA and IRENA, reported in the Financial Times¹ suggests an investment of $1 trillion per year in renewables and $130bn in hydrogen is required from now until 2030 to hit interim Net Zero targets. A McKinsey report from earlier this year suggests spending on physical assets for the transition would top $275 trillion by 2050, or $9.2 trillion per annum, roughly 7% of global household spending. That is meaningful. Even in the best of times, we would feel the pinch. (Six months earlier, the UN High-Level Climate Champions, rocked up with the number of $125 trillion, another big number. But what is $150 trillion between friends?)

Exponential, not linear

The problem with all these forecasts, these doomsayers, these backward Pollyannas, is that they are wrong. And the reason they are wrong is that they fail to grapple with the exponential nature of the key technologies. This cluster of lovelies — solar, wind, batteries, and electrolysers — will be the engine behind the Net Zero transition. The exponential nature means the cost of these technologies de facto declines by double-digit percentages every year, a stunning deflation in our inflationary contemporary.

But what drives the price decline is not merely increasing economies of scale but rapid learning effects. These are probably best described by Wright’s Law: that every doubling in cumulative capacity delivers a significant reduction in unit cost. As I write in my book:

researchers have discovered that his law applies to dozens of technologies – from the outputs of the chemical industry, to wind turbines and transistors. The doubling of volume does lead to relatively constant declines in per-unit price. And this holds true for the hallmark technologies of the Exponential Age.

What is more, the nature of how the architecture of renewable technology systems are structured helps massive market expansion (and therefore greater demand creation and faster learning.) Solar, wind, batteries and future electrolysers are largely modular. That is rather than massive 1000 gigawatt nuclear power plants, they are often built as small modular units. To achieve bigger systems, string smaller units together to scale out. Rooftop solar, commercial solar, utility solar. Car batteries, domestic battery storage, and giga-battery storage. The underlying elements remain the same. They scale out.

This means that these technologies can access many customer segments, which drives more and more demand. (Only the largest firms can afford coal, gas or nuclear plants. There are only about 8,000 active coal power stations in the world and about 450 nuclear ones—compare that to over a million distinct solar installations in the UK alone. It is mainframes vs PCs…)

Secondly, they can rather easily plug into our existing energy infrastructure. No heavy reboot is required. I transitioned our car transport from hydrocarbons to electricity by plugging our i3 into an existing electrical socket. Sure, over time the infrastructure will need to shift to support distributed, two-way microgrids and high-voltage direct current cables shifting sunny electricity to cloudy climes, but it is a game of evolution rather than revolution.

These attributes increase the scopes where renewable technologies can be deployed and reduce the friction of that deployment. All of that drives demand, which speeds up learning.

Wrightian dividends

Last week, a new paper (which we had previewed in EV a year ago) was published in Joule. It lays out the consequences of these exponential technologies. The paper, Empirically Grounded Technology Forecasts and the Energy Transition, uses robust historical data over several decades to build probabilistic models for where costs for key renewable technologies are likely to head. Rupert Way, the lead author, is part of a research group run by J Doyne Farmer at the Institute for New Economic Thinking at the Oxford Martin School². Farmer’s team, which has included people like Jessica Trancik (now at MIT) is a group whose research I have followed for several years. I consider them the Seal Team 6, the Torvill and Dean, The Beatles, Brazil team of ’70, of technology forecasting. So I’ve some confidence in the work.

The conclusions are staggering.

A switch to 100% renewables is possible by 2050 and “without accounting for climate damages, transitioning to a net-zero energy system by 2050 is likely to be economically beneficial”. How beneficial? To the tune of $5–15 trillion. And the faster we make the transition happen, the more significant the non-climate-related economic benefits accrue.

How is all this possible? It seems like we’re having our cake and eating it. The “secret” is in the exponential nature of these technologies: the compounding drumbeat of price/performance improvements. Let’s dig in.

We are experienced

Historical costs of key energy technologies