The Economics of Clean Energy: Transitioning to Renewables in a Post-COVID Era

“the climate emergency is a race we are losing, but it is a race we can win” – Antonio Guterres, UN Secretary General

Even without a global health pandemic, our world is still facing a crisis of staggering proportions.  In the 21st century the threat of climate change has outweighed almost all the other threats put together. Such is the pressing nature of the issue that it has even prompted re-branding of nomenclature from ‘climate change’ to ‘climate crisis’ – because that is what it is, a crisis. But as the UN secretary general António Guterres points out, “the climate emergency is a race we are losing, but it is a race we can win”.

In this light, it is high time a discourse on transition to clean energy systems takes centre stage. With climate change progressing at an alarming rate, the need for clean energy has only been compounded.  At a time of great disruption for the world owing to an unprecedented health crisis with severe economic and social ramifications, a transition to renewables could be the way forward. As governments around the world lead COVID-19 recovery efforts, the verdict is clear that we cannot go back to our old systems – a transition to clean energy must be on the forefront of national agendas.  While the road to recovery is long and might take years, it is also the perfect opportunity for governments to accelerate clean energy adoption by putting this transition at the heart of post-COVID-19 social and economic recovery plans.

While COVID-19 has certainly slowed down this transition by disrupting and delaying several renewable energy expansion and installation projects, the outlook on clean energy still looks very promising. In Q1 2020, global use of renewable energy in all sectors increased by about 1.5% relative to Q1 2019, while the overall share of renewables in global electricity generation jumped to nearly 28% from 26% in Q1 2019. While this does not reflect the impact of COVID-19 on capacity expansion, as the increase in use is largely due to expansion efforts in the preceding years, it is still a positive sign.

Solar PV has had the most remarkable fall during this period, with the levelized cost of electricity (LCOE) falling almost 82% over the last decade. Closely following are CSP and On-shore Wind, both of which have fallen 47% and 38% respectively

Even without factoring in the current global scenario, the rationale for transition has never been more compelling. Over the past decade, the cost of renewables has fallen to record lows (as shown in Figure 1), making it more attractive than ever before to invest in clean energy. Solar PV has had the most remarkable fall during this period, with the levelized cost of electricity (LCOE) falling almost 82% over the last decade. Closely following are CSP and On-shore Wind, both of which have fallen 47% and 38% respectively. Batteries, which have been appraised as one of the key enabling technologies in accelerating the shift to clean energy, have also recorded significantly lower costs in the past couple of years. Battery technologies such as Lithium-ion and Vanadium-flow have long been considered the missing link in ensuring continuity of supply for Wind and Solar generated power, which often depend on the vagaries of the weather. The LCOE for Lithium-Ion batteries has fallen by 35% since 2018, owing to advancements in technology. The only increases in cost have been recorded by Geothermal and Hydropower.

With the cost of renewables falling, fossil fuel options are looking more and more expensive. According to IRENA (International Renewable Energy Agency), by 2020 Solar PV and onshore wind will be less expensive than the cheapest fossil fuel alternative. In the past, one of the key reasons why fossil fuels such as oil and gas were considered attractive options was because they were highly subsidized and incentivized. The true cost of these non-renewable sources minus the subsidies may well be much higher. The conventional cost of fossil fuels also does not factor in the environmental costs associated with carbon emissions. The extraction and use of these resources are often accompanied by several negative externalities associated with environmental degradation, pollution and global warming. This failure to account for the emissions and their impact has been termed by many as one of the greatest market failures the world has seen.

Thus, falling costs of renewables coupled with the growing pressure on fossil fuels has presented the world with a unique opportunity to accelerate the adoption of clean energy. As governments pump more money into economies as part of COVID recovery efforts, the same level of investments can now yield greater returns owing to falling costs. Globally, investments in renewable capacity and technology have been on the rise and have shown remarkable growth, especially for Solar and Wind. Investments in Solar PV (Utility) in particular have shown astounding growth, increasing over 200% since 2010 to reach $69.4 billion in 2019. Total investments across renewables stands at $253.6 billion, having grown 21% in the last decade.

While renewable capacity and investments have been growing, so has the demand for electricity. This growth in demand has somewhat offset the impact of transition to renewables. While mainstream adoption of clean energy is still progressing in the right direction, policy makers are worried that the pace of transition is not fast enough to offset growing demands. Unless renewable technology can scale up quickly and bridge the demand-supply gap, this excess demand will inevitably have to be met by fossil fuels.

The IRENA estimates that investments in clean energy could boost global GDP by close to $98 trillion by 2050

Despite several roadblocks still existing for large-scale adoption of clean energy to be made feasible, governments and institutions are putting climate action at the forefront now more than ever before. Post COVID-19, as economic recovery consolidates, we cannot afford to put clean energy on the back burner. Across the world, clean energy technologies such as electric vehicles, solar and wind energy are becoming increasingly mainstream. According to a UN report, global investment in renewables is set to triple in the next 10 years. If governments continue to sustain this momentum, the benefits are manifold. The IRENA estimates that investments in clean energy could boost global GDP by close to $98 trillion by 2050. Thus, the rationale is clear and more compelling than ever for a shift to clean energy. The robustness and resilience of economies to future global shocks will be determined by how quickly and effectively they transition to renewables and reduce dependence on fossil fuels.

References

https://www.un.org/en/un75/climate-crisis-race-we-can-win

https://www.iea.org/reports/global-energy-review-2020/renewables

Battery Power’s Latest Plunge in Costs Threatens Coal, Gas | BloombergNEF (bnef.com)

https://www.weforum.org/agenda/2020/09/renewable-energy-drive-post-covid-recovery/

Image Credit: AZoCleantech.com