Falling renewable costs and intermittency solutions drive a tipping point for the Inevitable Policy Response

The Inevitable Policy Response (IPR) is a landmark project which aims to prepare financial markets for a wave of policy moves as governments worldwide are forced to address climate change. More about this collaboration between PRI, Vivid Economics and Energy Transition Advisors can be found here.

This work focussing on renewable energy costs makes a compelling case for policy makers to enable and force the energy transition.

In this note we focus on the growth in the supply of electricity from solar and wind (renewables) in a system dominated by electricity from coal and gas. As renewable costs fall, it becomes economically rational to deploy renewable energy in more and more areas, a remarkable change from only a few years ago.

Cost tipping points

The below chart illustrates the cost per MWh and the four main tipping points for renewable energy:

  1. New renewables are cheaper than new fossils.
  2. New renewables are cheaper than the operating cost of existing fossil plants.
  3. New dispatchable renewables are cheaper than new fossils.
  4. New dispatchable renewables (with a battery) are cheaper than the operating cost of fossils.

Renewables are now an industry driven by economic gain, technological revolution and provide pathways to reach the goals of the Paris Agreement. The reward to successful policymakers will be greater wealth, cleaner air, reduced global warming, energy independence and electoral success.

Key Findings

Time to reap the harvest.  Renewable electricity from solar and wind costs less than electricity from gas and coal, and can be implemented everywhere at huge scale, giving rise to a trillion dollar energy windfall.  The challenge for policymakers is to reap this harvest.

Renewable costs are below those of fossil fuels.  Five years ago, fossil fuels were the cheapest baseload.  The collapse in renewable costs means that for two thirds of the world, renewable electricity is the cheapest source of new baseload.  By the early 2020s it will be every major country.

The business case keeps getting stronger.  As costs fall, so new cost tipping points will be crossed over the next decade.  The cost of new renewables will become cheaper than fossil operating costs during the 2020s, and the cost of dispatchable renewables (with a battery) will fall below the cost of new fossils.

The intermittency ceiling is high and rising.  New technologies and tools keep raising the intermittency ceiling, as countries like Germany and the UK move over 25% variable renewables and regions like South Australia and Northern Ireland aspire to 50% and more.  Meanwhile, 97% of the world’s population is below the intermittency ceiling, and can copy the leaders.

The imperative to act is still there.  Renewables provide a way to reach the goals of the Paris Agreement, cut deaths from air pollution, and enhance energy independence.  They produce more local jobs, increase social justice and are extremely popular.

The harvest is huge.  The world can now enjoy a renewable energy windfall – a Gigafall.  6 PWh of renewable energy can be produced before even today’s intermittency ceiling is reached.  Ascribe that a value of $10 per MWh and capitalise, and you have a trillion dollar windfall.  Add in the value of renewables in cutting the externality costs of fossil fuels, and you rapidly get to a much larger number.

The transition will be sequenced.  Countries with large domestic coal and gas extraction and electricity generation will face more powerful impediments to change.  However, countries with rising demand and pollution issues and those with significant fossil fuel imports will drive the transition.   A quarter of global coal and gas is imported, and 65% of people live in counties that have rising energy demand and import coal and gas.

Why will policymakers act.  The reward to successful policymakers will be greater wealth, cleaner air, reduced global warming, energy independence and electoral success.  This drives the Inevitable Policy Response.

What will policymakers do.  There are four key areas of action:  provide enabling regulatory regimes; tax the fossil fuel externality; force the pace of change, and retrain fossil fuel workers for the new world.