Oil companies: What is your plan in case renewables continue to grow like cell phones and dominate the energy market gradually over 20 years? Can you match Saudi Arabia’s plan?
Oil companies tell their valued investors that it will take about 70 years to transition from fossil fuels to renewables, locking in a disastrous 4 to 6 degrees of global warming. I’ve heard an earnest oil official say, in despair about the climate, “We need an energy system as cheap as cell phones”.
There is an energy system as cheap as cell phones that could replace 80% of fossil fuel usage in 20 years. If that transition has even a 10% chance of happening, investors should demand to know how the oil companies are planning to maintain their shareholder value in that scenario.
That energy system is, of course, renewables. Wind and solar at utility scale now cost about $2 per watt to build, and costs are falling 10% per year. At today’s costs, replacing 80% of all fossil fuel usage with renewables will cost about $20 trillion dollars, including storage*.
If we spread that investment out over 20 years, it is $1 trillion per year, which is just 60% of annual global cell phone business revenue. That $1 trillion is also what oil companies invested in 2013 to develop roughly the same amount of new oil and gas energy capacity**.
Shell CEO Ben van Beurden said last fall: We’re at 1% wind and solar: How do we get from 1% to 80%? The answer, as the cell phone industry demonstrated 25 years ago, is by growing to 5% market penetration per year, and then continuing that pace for 20 years.
Wind and solar penetration now is the same as cell phone penetration was in 1990. Remember what your phone looked like in 1990? How about in 2000, when penetration was 30%? Solar growth rates now are about the same as cell phone growth was in that decade.
In 2015 wind and solar will have increased their market penetration by another 1%, and if we keep the doubling rate for just five more years, by 2021 they will be replacing 5% more of the fossil fuel market share every year. Maintaining that 5% rate for fifteen years gets us to 80% replacement of fossil fuels by 2035.
If you’re an oil executive, delivering on that transition looks impossibly difficult when compared to the transition from coal to oil, or oil to natural gas. There are thousands of new technologies required now, compared to the earlier shifts from steam engines to internal combustion engines, and then to turbines, which each took 70 years to mature.
The world has 6 million engineers now and the internet. Yet it’s hard for someone with a career in a conservative command-and-control company to imagine that army of engineers and entrepreneurs working independently to deliver a meaningful result. Especially not a result like replacing in 20 years the result of 100 years of painstaking conventional energy development.
Does that sound like the 20 year cell phone revolution? Or the 20 year revolution in photography ending with Kodak declaring bankruptcy in 2012, thereby redefining the phrase a “Kodak moment”?
Is a transportation transition really possible? By 2020 battery electric cars will have 300 mile ranges and will cost less to buy, and far less to operate than conventional vehicles. Charging stations appearing everywhere already allow electric cars to cross the country. That transition may be inevitable.
Jet fuel can be generated now from biowaste or sunlight, but that could take 15 years to scale up. It only contributes 2% of emissions, so it’s not critical to the rapid transition.
How about heating? Ground source electric heat pumps are already cost effective in much of the US, and costs are falling.
What about the grid–Who will pay to upgrade our grid? The utilities will. We grant utilities monopoly status to allow them to invest heavily in infrastructure, assured of getting a return on that investment. Utilities will upgrade their grids as they are obligated to. Some will raise prices, and some will lower prices. Which way prices go depends mainly on how aggressive their public utility commissions are.
This scenario isn’t guaranteed to happen. Wind and solar could stall and stop following the market penetration curve of cell phones, despite the similar costs, and global market conditions. Much of the world’s population which could not afford wired phones in 1990 did adopt cell phones (we’re up to 7.2 billion cell phones and 7.2 billion people now). Similarly, much of the population which cannot afford grid electricity is rapidly being powered with solar and wind microgrids at steadily decreasing costs.
Renewables provide lower cost energy in most parts of the world now, and are providing about 60% of new generating capacity globally. There is no distinct reason for their growth to stop.
Oil companies are betting the farm on their prediction that the transition to renewable energy will occur at the same pre-globalization pace as the transition to petroleum did 100 years ago.
What will our oil companies do if wind and solar continue their ten years of exponential growth for five more years, and then displace the incumbent fossil fuels, as cell phones did?
Call to action:
If you are an oil shareholder, demand an answer to the question: What is your plan in case renewables continue to grow like cell phones and dominate the energy market gradually over 20 years? The process of answering that question will wake up the oil companies, and they will wake up our policy makers***.
* Note: This assumes 17 TW total global energy usage and replacing 80% of fossil fuel energy (80% of total energy) at $1.50 per watt, plus the equivalent of 2 billion Tesla battery units at $3500 each.
The capacity factor of 20% for solar, and 32% for wind is similar to the efficiency factor of electric vehicles compared to gas, and to the efficiency of heat pumps compared to combustion. To make calculations easy, we consider that they cancel out. If double the capacity is required, the transition will cost about the same as the cell phone transition and take two more years to achieve.
**Annual new oil and gas capacity consists of replacement of the 5% annual decrease in production of existing conventional wells, plus 1% increase in total consumption. Over 20 years the path could look like this, assuming current technology and growth patterns:
Replacing US fossil fuel usage with renewables: Data here. The global transition could have a similar pace: With some regions faster and some slower.
***The natural policy for a rapid transition is the steadily increasing price on carbon that oil companies generally promote.
Despite that, oil companies still promote a 70 year transition and the corresponding 4-6 degree warming. That grim future evokes desperate calls for coercive cap and trade policies that oil and other companies dread. Caps are disliked because they leave future prices uncertain, which makes wise investing difficult and thereby slows progress.
The future is unknown. It depends on our collective actions. Oil company planners understandably call a rapid transition to renewables “highly unlikely”.
Oil companies almost unanimously call for a meaningful, rising price on carbon, yet they don’t present such a scenario. It could look like the transition above, providing huge opportunities for well capitalized energy companies.
Consider a fast-transition scenario to be an insurance policy. When you buy insurance, you don’t list every reason that you might need or not need insurance. You look at the recent past, think of a handful of scenarios, and assess the probability of something happening. If the probability is more than 1 in 1000, you usually buy the insurance.
Oil company planners may think there is only a 1% chance that renewable energy could continue to grow on the cell phone curve, thereby avoiding catastrophic climate change. Like any other catastrophic insurance policy, a plan for even an “unlikely” rapid transition would be wise for them, critical for their shareholders, and incredibly valuable for humanity.
The stories we tell about possible futures profoundly affects the actions we take. Discussing and illustrating a possible happy-ending rapid transition option could lead to sensible market-friendly policy and better planning by all.
This story arguably can only be usefully told by oil companies. Neither President Obama nor Angela Merkel would be listened to, neither would the present author. Even the Saudi Oil minister, when he discusses this scenario is ignored. So this essay is an acknowledgment of the authority that our oil companies have accumulated.
Oil companies should discuss a rapid transition option. By encouraging a steadily increasing carbon tax that is investment-friendly, they will leverage their financial power into future profits.