Election Risk

Monday 14 October 2024

Spanish local elections and the proclamation of the Second Republic, April 1931.

Global solar manufacturing remains in overcapacity, and is expected to reach a level that’s twice the size of annual output, by the end of this year. While this makes for exceedingly challenging conditions for producers, overall it’s terrific news for solar growth as prices are once again pulled lower—significantly lower. According to the IEA, in its just released renewables report, global capacity will grow to 1100 GW, and has already resulted in a halving of PV panel prices. Importantly, the IEA notes this glut is now triggering cancellations of new manufacturing capacity—and frankly, that’s fine. New, fast growing technologies typically oscillate between tight supply and oversupply as upwardly volatile growth cannot easily be matched with finely calibrated planning. Indeed, that capacity grew quickly and actually topped out is a great sign: it means the world is justifiably eager to capture future solar demand, doesn’t want to miss out, and sees an even bigger annual market to come. Best of all, if demand spikes, the capacity is ready.

Forecasters expect global solar additions to reach 550-600 GW this year. And we are likely to see solar continue to spread more robustly now across the Non-OECD, as prices fall. Cold Eye Earth has previously made the point that later adopters (typically countries that are not as rich as the early adopters) will eventually wind up as fuller beneficiaries of the manufacturing learning rate. So, while China will continue to be the top global adopter, we should anticipate now that solar will spread even more quickly through Asia and Africa. A good proxy for this anticipated growth among the laggards of solar is India, where per capita deployment so far has been disappointing. Right now, the economic conditions are stellar for India to massively increase solar. Let’s hope that happens.

Wind and solar are having a very good year in the United States. Together, they are on course to reach 17% of total US generation in 2024. Even more impressive is that wind and solar are easily keeping up with total system growth, which is currently set to reach 4.4% this year. How fast is US wind and solar growing? The two energy sources together accounted for not quite 10% of US power in 2019, just five years ago. They will likely reach 20% share in the next two years.

The United Kingdom has zeroed out coal, in power generation. Impressively, this cleaning of the grid was accomplished without adding more natural gas, thus locking in all the emissions gains from the effort. How did they do it? Wind power. Offshore wind power, especially. In the chart below, you can see the final, remaining coal presence that hung around in 2003, providing just 3 TWh of power to the UK Grid. As of last month however, with the closing of the country’s last coal plant, that leftover is now gone.

Notice however that power generation from natural gas has been cut by 30% if one uses 2003 as the baseline. Yes, for a short period after 2015, natural gas in UK power rose again, but that setback ended shortly thereafter and gas in power resumed its decline. This outcome matters to the larger conversation about how emissions in power can be lowered through myriad strategies, because a number of observers have lapsed into thinking that natural gas is key to lowering coal emissions. The UK showed that is not the case at all.

Natural gas is going to play a crucial role in the transition to renewables, but not as a baseload solution. Because gas can be paired with highly-efficient turbines that can act as grid balancers and back-up, it’s almost a certainty that a highly renewable grid of the future will have some natural gas (and nuclear) as key parts of the puzzle. In a June issue, Portfolio Nuclear, Cold Eye Earth offered up a plausible end-state in which natural gas provides 10% of global power. Note: it has long been the position of Cold Eye Earth that a successful energy transition, in electricity, will be reached when renewables make up the bulk of generation with small roles for natgas, hydro, and nuclear. The 100% renewable goal is not necessary.

Unfortunately, the United States unlike the United Kingdom has built far too much new natural gas during the great coal retirement cycle. This means that every gain made by closing a coal plant has been diluted by the opening of a new natural gas plant. Again, the US will absolutely need natural gas in the future to help balance a grid that is highly dominated by renewables. This principle is also going to be true at the local or commercial level, where regional or commercial grids are also made more robust by natural gas capability. But the US has seriously degraded the collective effort to close coal power—which is not an easy thing to do—by replacing too much of that capacity with fresh natural gas. The chart tells the tale:

The US is to be congratulated for taking coal power down from 1847 TWh to 829 TWh from 2010 through last year, and, for growing combined wind and solar from 96 TWh to 639 TWh. As previously stated, wind and solar growth in the US is quite good, and that line will be going higher this year, next, and the years thereafter. The problem is that the 1000 TWh of coal we cut, and the 500+ TWh of wind and solar we added, is being diluted—quite seriously diluted—by the growth of 700 TWh of natural gas.

No one argues that natural gas produces fewer emissions than coal. If you replaced 100% of your coal fleet with a new natural gas fleet, you will have lowered emissions. The problem is that this is a one-off gain. Inexorably, a young natural-gas fleet exerts path dependency, and it also becomes capacity that can run more hours, if necessary, to handle demand. This is why you do not want to lapse into making the general formulation that “we need natural gas to lower coal emissions.” No. Let’s make this plain: the closing of coal plants lowers emissions, and the deployment of wind, solar, and storage in substitution preserves those lower emissions. Increased use of NG in the power sector does not lower emissions.

Only in a world which contains no economically affordable solution to the closing of coal-power other than the building of NG-power can we say that NG is the thing that helps us lower emissions. We do not live in that world, and we haven't for a while.

With three weeks to go the race is extremely tight, with neither candidate displaying any edge. That puts all the battlegrounds fully back in play.

Rhetoric from the Trump campaign has been more harsh than usual on the topic of energy transition, energy policy, and legislation like the Inflation Reduction Act. While Cold Eye Earth continues to forecast that the job-creating effects of the IRA in red states places a natural brake on any federal level efforts to undermine that development, we need to consider that rhetoric can also have a dampening effect on business outlook, and the plans industry makes.