Strategy & economics
Investors should note the approaching tipping point for renewable energy
The efforts to mitigate climate change may be approaching a tipping point. The wave of support for Green Party candidates in last month’s elections for the European Parliament prompted a plethora of articles highlighting the cost of dealing with climate change and the regressive implications for those on low incomes.
Subsidies to promote renewable energy are felt most acutely by the poorest in society, so the narrative goes. This is a very backward-looking view, largely based on assumptions that no longer stand up to scrutiny.
In the coming decade, we expect a wave of cheap renewable energy to put downward, not upward, pressure on energy prices This in turn will make electric vehicles (EVs) a more affordable option than their polluting combustion engine counterparts.
The common political narrative that a major initiative to tackle climate change is a liberal luxury is likely to be transformed. It will be replaced by a symbiotic set of social and economic policies that will accelerate the transformation away from fossil fuels.
Outdated attitudes persist despite lower wind and solar power prices
Renewables are now "in the money", yet attitudes remain outdated. Yes, the 30% of power production in Europe that comes from renewables was only achieved with significant taxpayer subsidies. These initially raised energy bills for consumers. However, as the charts below illustrate, a powerful combination of technological development and manufacturing scale advances has brought unsubsidised wind and solar power costs to below the average wholesale power price across the European continent.
Projected falls in the cost of solar energy
Projected falls in the cost of onshore wind energy
The same applies in the US and many other parts of the world. In fact, last year James Robo, of Next Era Energy, the largest developer of renewables in the US, predicted that by the early 2020s the total cost of building new wind and solar plants will be below even the variable costs required to operate an existing coal or generating facility, at which point it makes no economic sense to even operate such facilities.
This all means that from now on as we add more renewables to the energy generation mix, they will begin to exert a deflationary force on overall power prices. More of the electricity consumed by the grid will come from lower cost renewable sources, squeezing out the higher cost fossil fuel generation from the system.
As power prices fall, so will the cost of EVs. Battery costs are declining rapidly, and cheap power will further support the total cost of ownership for EVs to decline below their combustion engine equivalents within a few years.
Renewable energy is making electric mobility more affordable
As with so much related to climate change, the importance of this shift is being underestimated by financial markets: investors appear reluctant to forecast a future in which renewables and energy storage come to dominate power markets.
In recent years it has been a very powerful and well used argument for entrenched industry and various politicians to argue that tackling climate change is socially regressive. Yet instead of being a liberal-inspired tax on the poor (who spend a greater portion of their income on heating and energy), renewable energy is now making electrical power and electric mobility more affordable, a fact that is likely to be increasingly recognised by politicians across the political spectrum.
It will also be increasingly apparent that those arguing against such action are largely driven by vested interests to protect profit pools or existing assets, to the overall detriment of consumers and taxpayers.
However, it remains the case that renewable power will only tackle part of the sources of greenhouse gas emissions that need to be eliminated by 2050. At the moment, industries such as cement, aerospace and livestock farming have no viable technological solution for eliminating the gross emissions from their operations. In other industries, such as chemicals and many consumer products, the solutions are available but will be expensive and inflationary to implement.
“If we all worked on the assumption that what is accepted as true is really true, there would be little hope of advance”, Orville Wright, American Inventor
Despite Orville Wright’s prescient awareness to challenge assumptions, even he couldn’t get over his own deeply ingrained assumptions about what will and won’t be possible in the future when he said that “No flying machine will ever fly from New York to Paris”.
With renewable energy we now have a clear view of what is possible in the next decade – cleaner power and lower transport prices that will be increasingly socially progressive. We now need to hope and believe that technology will help us with the other solutions needed to fully achieve a zero emission economy. Is this any less achievable than flying uninterrupted to Paris from New York seemed to Orville Wright in 1909?
This article is issued by Cazenove Capital which is part of the Schroder Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. All data contained within this document is sourced from Cazenove Capital unless otherwise stated.