Carbon crash – solar dawn

I think it’s time to call it. Renewables and associated storage, transport and digital technologies are so rapidly disrupting whole industries’ business models they are pushing the fossil fuel industry towards inevitable collapse.

Some of you will struggle with that statement. Most people accept the idea that fossil fuels are all powerful – that the industry controls governments and it will take many decades to force them out of our economy. Fortunately, the fossil fuel industry suffers the same delusion.

In fact, probably the main benefit of the US shale gas and oil “revolution” is that it’s keeping the fossil fuel industry and its cheer squad distracted while renewables, electric cars and associated technologies build the momentum needed to make their takeover unstoppable – even by the most powerful industry in the world.

How could they miss something so profound? One thing I’ve learnt from decades inside boardrooms is that, by and large, oil, coal and gas companies live in an analytical bubble, deluded about their immortality and firm in their beliefs that “renewables are decades away from competing” and “we are so cheap and dominant the economy depends on us” and “change will come, but not on my watch”. Dream on boys.

Their delusion, however, is good news for the world. If the industry really understood what was happening, it would pull out all stops to prevent it. While they’d ultimately fail, it would cost us decades of lost time – decades we can’t afford if we are to stabilise society and reduce the risk of collapse.

I intend to spend this year writing about these trends. They can’t be covered in a single column because they are so broad and interconnected. In fact this is perhaps the best example I’ve seen of system-wide transformational change driven by parallel, apparently disconnected forces. Here I will provide an overview, with further reading, so you can more easily see the signals emerging around us. I’ll then dive into more detail over the coming months.

I think it’s important to always start with a reminder of the underlying context. As I argued in my book The Great Disruption, dramatic economic change is not a choice we get to make it, but an inevitable result of physical science. This is because business as usual, with results like ever increasing resource constraint or a global temperature increase of 4 degrees or more, would trigger economic and social collapse. So the only realistic outcomes are such a collapse or an economic transformation that prevents it, with timing the only big unknown. I argued transformation was far more likely and, to my delight, that’s what we see emerging around us today – even faster than I expected.

In parallel, we are also seeing the physical impacts of climate change and resource constraint accelerating. This is triggering physical, economic and geopolitical responses – from melting arctic ice and spiking food prices to the Arab Spring and the war in Syria. (See here for further on that.) The goods news in this growing hard evidence is that the risk of collapse is being acknowledged by more mainstream analysts. Examples include this commentary by investment legend Jeremy Grantham and a recent NASA funded study explained here by Nafeez Ahmed. So the underlying driver – if we don’t change in a good way, we’ll change in a very bad way – is gathering acceptance.

So while it now frames thinking in this area, the mistake many make is to then extrapolate that risk into a likely global policy response as the main driver of change. The thinking goes that we need a “Pearl Harbour moment” – a physical event that forces a global policy agreement to change. As I also argued in The Great Disruption, that’s not how systems change or how our global market society works. Things are far more chaotic and messy – though ironically probably more predictable.

In that systems context, economics is the best lens through which we can both see the triggers for transformation and are able to measure its progress. And let’s remember we care more deeply about economics and markets – at both the personal and macro level – than about polar bears or ecosystems. Crazy and irrational but still true.

So when we see the price of solar plunge at extraordinary speed and watch it’s deployment swing like a wrecking ball through the utility sector, we should acknowledge it’s going to have more impact on the human system response to climate change than the terrifying acceleration of the melting of the Arctic.

And when I say wrecking ball I probably understate it. As this excellent overview from Stephen Lacey at Greentech Media explains, the utility sector now faces a “death spiral”, and it’s likely many of them won’t make it. This is not a theoretical future crisis – growth in renewables is the prime reason the top 20 European utilities have lost $600 billion (no, not a typo!) in value over the past 5 years. That’s what the financial carbon bubble bursting in a sector looks like – ugly and messy – and there’s many more to come.

The utility death spiral is a great example of system complexity that is simple to understand. Solar energy costs have plummeted – so far that in most places you can get electricity cheaper from your own solar panels than you can from a utility. The impact on the grid of people doing so at scale is to lower the overall cost of electricity generation by reducing both peak demand (and so peak pricing) and lowering volume. Utilities are then stuck with expensive physical assets, less sales and lower margins, so they need to increase either the cost per unit of power or impose grid connection charges to customers. But doing either gives customers more motivation to leave the utility – thus the death spiral.

And the disruption is worse for old players because this is not just technology switching. The whole sector is moving to a distributed rather than centralised system, thereby inviting in countless new, nimble competitors into the space. This is fundamental structural change that is going global, as Giles Parkinson from RenewEconomy explains.

If you think this utility problem isn’t enough to seriously threaten the overall fossil fuel industry, then think again – this is just one of a number of fronts where they’re being hammered. Long term expert on oil and energy trends, Richard Heinberg, explains the oil story well in this podcast, while this excellent overview from Chris Nelder, shows how oil, gas and coal are all under serious pressure. Like Heinberg, Nelder also argues the “soaring cost of producing oil has far outpaced the rise in oil prices”. Nelder also notes that in the US alone, 60 GW of coal power plants are expected to be taken off line by 2016 – double the volume forecast by the EIA less than 2 years ago. Things are moving very quickly now.

This is all just a brief insight into what’s happening and just touches on the complexity and interconnectedness of various disruptive trends.

I haven’t mentioned the revolution underway with electric cars, where Tesla is valued at more than half of GM – despite the latter producing 300 times as many cars! Do you think the market knows where that is going? Or the incredible impact of China having to clean up their air or risk economic and social unrest – knowing when China acts the market impacts are world scale.

Or the role of digital technology and dot com billionaires in driving disruptive change via the move to a distributed energy system – one characterised by rapid innovation and entrepreneurship and the arrival of the “Internet of Things”. It’s in these connections between innovations that the most interesting disruptions are developing. So electric cars become grid storage devices for home renewables, with each car a mini-power station in peak times. I’ll never look at a city car park the same way again.

Already businesses in the US can get battery systems from Coda Energy to even- out grid power use and avoid peak pricing. With software monitoring the grid to know the highest value time to respond, it can be installed at zero cost then paid for by sharing the savings with the battery company! And the solar industry is at last in boom times, with the HSBC’s Global Solar index up 65% last year and already up 23% in 2014.

It won’t be long before all these new players take on the old ones in a battle of “business vs business”, a moment I’ve argued was coming. Knowing how fast new technology players can sweep away slow movers, that will be an interesting battle to watch!

And all this brings increasing recognition by investors that the carbon bubble and stranded assets are serious financial risks, which in turn reinforces the growing power of NGO campaigns against coal and CSG along with their fossil fuel divestment campaign. Then of course there is the role of climate policy which, given the threat to civilisation, seems like it might gain traction at some point!

So, as I see it, the game is up for fossil fuels. Their decline is well underway and it won’t be a gentle one. Of course they won’t just be gone in few years but once the market and policy makers understand what’s happening, it will become self- reinforcing and accelerate rapidly. Markets come into their own in situations like this. They rarely initiate change, but once they’re racing down the hill, it’s time to jump on board or get out of the way. It’s an ugly and brutal process for those involved, but it gets the job done quickly.

When that occurs, we may find that those forecasts by myself and others like Tony Seba from Stanford University, that the oil, coal and gas companies will be all but obsolete by 2030, might turn out to be conservative after all. Interesting times indeed.