No Fuel Costs: The Sexy, Seduction of Renewables

 

No fuel costs. That is renewable energy’s most powerful and seductive selling point. No need to discuss climate change with all its emotional hot buttons. No need to explain and justify how much carbon is avoided. No need to politicize the discussion. It’s simple. It’s sexy. It’s seductive. And it will drive investment. No fuel costs.

Renewable energy has been the subject of endless heated emotional debates and diatribes. Some more rational than others. It has also evolved to incorporate different arguments used by different sets of apologists. Such arguments warn of intermittency, solar “free-loaders” on the grid, the death of birds and the aesthetic horrors of wind farms. I don’t know…I kinda like them! These same arguments, however, are heard over and over again until they have now become trite. Is anyone still listening?

Well, we need to be listening not to old “stories” but to new facts. 

Money talks. So if you want to see where the next trend is look for the investment potential. And there is massive investment potential in decarbonizing the economy. So much so that I am going to make a prediction. Once investors and policy makers really comprehend just how much money can be made by transitioning the economy away from fossil fuels, there will be no stopping that train. Here’s why…

No fuel costs.

Yep, that’s it. No fuel costs. Because no fuel costs avoids the vagaries of the commodity markets which in turn equals price stability. And less involvement in politically unsavory regions. It also means significant additional capital becoming available which would otherwise go up in smoke in the form of burned hydrocarbons. That is what will drive the markets toward renewable adoption. It doesn’t hurt that wind and solar are technologies too. And technologies always get cheaper as they reach scale. So now we have no fuel costs and falling prices. It also helps that energy is the bedrock of the global economy and so anything using energy will benefit from…you guessed it…no energy fuel costs. So now we have no fuel costs, falling prices and price deflation across the global economy. And I used that word deflation on purpose though not in its more common sense. Here’s why…

Investopedia defines deflation as a decline in prices. They go on to state:

“Declining prices, if they persist, generally create a vicious spiral of negatives such as falling profits, closing factories, shrinking employment and incomes, and increasing defaults on loans by companies and individuals.”

It is precisely this aspect that I find so utterly fascinating about renewables. When renewable prices decline, profits increase. Profits increase because demand skyrockets. Manufacturing can now pass on cost savings to the consumer because their energy bills have fallen. Employment rises as more and more people want solar panels on their roofs. And investment returns increase often at exponential rates because of the growth and perceived potential. And this is bearing out in the markets as I write. This is not Camelot hyperbole. 

For instance, the most recent numbers being used to actually structure institutional investment in renewables are coming in at astonishing rates. The National Bank of Abu Dhabi issued a report in March 2015 which stated:

“…fossil fuels can no longer compete with solar technologies on price…The latest solar PV project tendered in Dubai returned a low bid that set a new global benchmark and is competitive with oil at US$10/barrel and gas at US$5/MMBtu.” 

And this was without subsidies.

Further, investors did not place monies into this project out of the goodness of their hearts or for moral purpose. They expect a reasonable return. And their projections tell them they will get it even at such low prices.

Employment has also increased for solar particularly when juxtaposed against oil and gas. Solar jobs have increased to more than double the job creation in oil and gas since 2012. And this in spite of the shale revolution and before the massive layoffs in the fossil fuel sector. Which brings us to another point. Oil and gas created jobs over the past 15 years while oil prices rose 450%. As prices have declined, jobs have been slashed. It is estimated by Continental Resources that over 100K jobs have been cut to date in the oil sector globally. This is in direct contrast to solar which has created more jobs as prices fell rather than as prices rose. Seeing the usual deflationary modes being turned on their head is like waking up and realizing that Newton’s laws of physics no longer are valid.

Going back to the no fuel costs scenario, IEA estimated in 2014 that it would cost approximately $50 trillion to decarbonize the global economy by 2050. That is a cost, true, but it is also an investment opportunity which could potentially generate returns. But IEA went on to state that the fuel costs savings would amount to about $117 trillion, far outweighing the $50 trillion price tag to decarbonize. And that is capital that can be employed in something other than the burning of fossil fuels. Stop and imagine the potential impact of $70+ trillion dollars of new investment in the global economy that would otherwise, literally, have primarily poured out of exhausts. Moreover it is simply a more efficient deployment of capital. Why burn money if you don’t have to?

Investment means growth and growth means economic prosperity for more people. Demographics tell us that we can’t provide energy security to a burgeoning human population based on a finite source of energy. But wind and sun are infinite and completely without fuel cost. And that is what will drive investment. 

Call it the holy grail. Call it the pot of gold at the end of the rainbow. Or just call it no fuel costs. That’s seductive enough.

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Deborah Lawrence began her financial career in London working in investment banking. Upon her return to the U.S., she worked as a financial consultant for several major Wall Street firms.Ms. Lawrence was appointed in 2013 and currently serves on a federal advisory committee for the U.S. Department of Interior's U.S. Extractive Industries Transparency Initiative (USEITI) for a three year term . In May, 2013 she testified by invitation before the U.S. Senate Committee on Energy and Natural Resources. She has also twice participated in a working group at the Energy Information Administration (EIA) of the U.S. Department of Energy. In June, 2013 she spoke before the NATO European Parliamentary Delegation regarding shale economics. In 2014, Ms. Lawrence presented at Planetworkshops in France, acclaimed by UNESCO as one of the premier venues for sustainability. In addition, Ms. Lawrence served on the Advisory Council for the Federal Reserve Bank of Dallas from 2008-2011. She is founder of Energy Policy Forum, a Consultancy group specializing in energy economics. Ms. Lawrence lectures on energy globally. She has appeared on MSNBC, NPR and has been featured in articles in the New York Times, Rolling Stone Magazine, PBS's Need To Know, London's Guardian, Tokyo's Sankei and Mexico City's Indigo.

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