New Energy Drives Electricity Costs Lower
Renewables bring deflation to the energy sector; This year has offered a taste of what is to come in energy markets over the next decade
Mark Lewis, December 15, 2020 (Financial Times)
“…[T]he underlying reason for the astonishing transformation of renewables over the past decade from niche to mainstream competing head-to-head with fossil fuels is economic rather than environmental. Wind and solar are intrinsically deflationary, whereas fossil fuels are intrinsically inflationary. This has huge implications for the distribution of value across the global energy system over the next three decades…With wind and solar, there is no need to explore for reserves or drill a well to exploit them — you simply have to build the infrastructure in the right place to capture the energy that is already there and that is freely available once that has been built…
…[T]he short-run marginal cost of production is zero…[From 2010-19, the average cost of utility-scale solar] installations fell by 80 per cent. Onshore and more recently offshore wind have also seen dramatic cost reductions…[With interest rates at historic lows, new projects have had] a very competitive overall cost of capital…[By contrast, the cheapest oil] reserves are exploited first, and as these are depleted more expensive sources of supply are tapped…[Technology can mitigate this somewhat but] the essential point is that the geology of petroleum production is inherently inflationary…
…Equity investors [leading oil] are willing to accept a higher level of risk than lenders, but they expect higher returns…[But] with the policy imperatives of decarbonisation, reducing air pollution, and electrifying transport, the required rate of return for equity investors from oil is only going to increase…[2020] will be the first year ever in which wind and solar account for 100 per cent of the increase in global energy demand…[In 2019, they] accounted for only 34 per cent…[D]emand for fossil fuels will probably bounce back…[But as renewables’ market share rises,] the global energy system will be subjected to deflationary pressure…” click here for more
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