The New Economics of Saving the World

Paradoxically, the way to help create solutions to the climate crisis is... the same way we got into this mess - by following the money.

Most people realize that we all need to create impactful solutions to the urgent environmental situation. An obvious reason why this isn’t the case already is because environmental and economic incentives don’t point the same way.

In order to actually get wide-scale change happening quickly, we have to make use of the main driving factor in our society - capitalism. Broad appeals to people’s emotions unfortunately aren’t getting us where we need to be fast enough. Let’s instead use people’s self-interest to solve issues.

The majority of greenhouse gas emissions today are due to burning fossil fuels for energy usage [1]. Coincidentally, I think that the energy industry is the one which will change the most over the next 30 years. There are a few reasons why this is the case. Ultimately, it is about economics and the very nature of the technologies themselves.

Let’s look at what’s driving these changes:

1. Clean energy is free (...the fuel costs are at least)

The fuel costs for solar, wind, and geothermal energy generation are zero. The major costs associated with these types of energy generation technologies are upfront construction and maintenance as necessary. This naturally leads to downwards pressure on prices as abundant, clean, and cheap energy pours onto the grid - encouraged by public sentiment and political subsidies. This has and will continue to turn the utility model on its head in the future.

2. New business & system models are emerging

For over 100 years, the energy delivery model has remained largely the same. The model is completely centralized. Large power plants generate large amounts of energy. This energy is transmitted over long distances at great expense to you and I and the bakery down the street. It is difficult to predict the exact usage in advance. Because of this, "peak power" plants are turned on quickly to match real-time demand. The peak plants usually operate at enormous costs and are some of the dirtiest gas generation methods.

Enter Distributed Energy. Technologies generating and working with electricity at or near where it will be used. Rooftop solar, small-scale combined heat and power (CHP), residential smart thermostats, electric vehicles, and behind-the-meter batteries count themselves among this group.

Distributed generation can serve a single structure (i.e. a home or business) but can also be part of a microgrid. It might appear at a major industrial facility, a military base, or a large college campus. When connected to the electric utility’s lower voltage distribution lines, distributed generation can help support delivery of clean, reliable power to additional customers and reduce electricity losses along transmission and distribution lines.

Distributed Energy Resources (DERs) are major components in the power system modernization. They are supported strongly by public and environmental drivers.

The two-way, transactive grid is a concept which is in its infancy but will only get bigger going forward.

The new economic energy architecture is about everyone financing everyone to build smaller, distributed power plants everywhere.

The companies who win will be those that enable people to participate in the generation, storage, distribution, consumption, and financing of energy. You should position yourself on the right side of this major paradigm shift.

Business model innovation is perhaps more important than technology innovation. The cost curves of wind and solar are decreasing at an encouraging pace, but in order to enable this transition it is imperative that consumers are not expected to bear the burden of financing their own transition towards clean energy. This will be one of the most important factors in converting to a new energy economy, leading directly to our next point….

3. Clean energy finance is big and getting bigger

The results are in. People like social finance, they like impact investing, and they like clean energy.

Historically, capital for solar and wind projects has been limited. The returns banks demanded was high and not commensurate to the adjusted risk/reward for the technologies. Transaction costs were high.

Now let’s think about the financial profile of clean energy projects. These are big projects with stable returns. Most of the risk is in construction. Predictable, regular cash flows are typical.

Financial markets have started to evolve around wind, solar, and the like. We’re now at the point where investors are willing to treat long term power purchase agreements (contracts) with trustworthy counter parties as proxies for bonds. Securitization of clean energy assets is fully on.

In the US, Canada, EU, and other developed areas, commissioned cash flowing projects are now attracting capital at low cost. Pre-construction capital is still expensive, in line with the risks associated with permitting and navigating regulations. Construction capital to build the generation is becoming cheaper as experience and best practices can be applied.

What does the future look like? One very interesting progression could be around the idea of participatory finance. What does that mean? The idea of crowdfunding could be extended to raising funding for the construction of clean energy projects. Groups of individuals banding together to fund and build solar or wind projects as a collaborative investment vehicle. Unlocking the power of the collective could be a game changer for the financing side.

4. Controversial: The utility death spiral is real

Now here’s where it starts to get interesting. As participants in the old infrastructure move towards a new distributed infrastructure, they may choose to abandon large-scale grids. Instead, they may rely on localized networks and microgrids.

Currently, energy distribution represents a large (between 22% and 47% of a customer’s total bill) portion of electricity bills. There is also a lot of energy which is lost during the transmission. Total effective energy efficiency is higher the closer the source is to point of use. Every participant on the conventional grid pays to maintain and upgrade the infrastructure underlying this long distance energy transmission.

Well, what happens when people start leaving the grid? It’s still the same cost spread across less participants. Naturally, the cost of grid energy needs to rise in response. This then gives more reason for people to switch off the grid. The grid abandonment and subsequent rising costs create a vicious cycle for utilities…. Dare we use the dreaded words, stranded assets?

Eventually the role of conventional utilities may be more as a warden and administrator for vast networks of connected microgrids. They will be compensated for their ability to ensure a fair and stable system.

TL;DR

The short form of all this is that we can use the same economic engine which drove us down the hole of a carbon-based society to pull ourselves back out of it.

Regardless of how you feel about capitalism, it is a strong machine for getting things done. Let’s line up the financial incentives with the well-being of the planet. It might be the only hope.

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