The global electric power business is changing. The economic hegemony of fossil fuels (and perhaps nuclear as well) is gradually being undermined by the adoption of renewable generating technologies such as solar and wind. This economic and technological transition resembles warfare or a sporting event with distinct winners and losers. Our argument is based on a stunningly non-controversial premise—namely, that superior, lower-cost technologies producing an identical commodity eventually achieve dominance.
Let’s look at a previous technology transition, from telegraph to telephones, to see if it offers clues about the present power-generating transition.
Alexander Graham Bell received his telephone patent in the US in 1876. Universal phone service was on its way to being the accepted norm by the early 1900s. During this early period, telephone use was increasing, but so was that of the telegraph system, as the economy grew. Heavy commercial users depended on the information it carried, especially so in financial markets, railroads, newspapers, and the government. The original Wall Street ticker tape was a specialized form of telegraph. (The telegraph system, incidentally, replaced the Pony Express, which took ten days to deliver messages from St. Joseph, Missouri to California.)
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The telephone and telegraph, two competing technologies, thrived side by side into the early part of the twentieth century, although the growth in transcontinental phone service began around 1920 to eclipse the demand for telegraphy. The dominant telegraph provider Western Union, founded in 1851, lost ground in the post World War Two years and finalized its demise in the 1980s via unfortunate corporate restructurings and the addition of significant debt. However, the name itself still carried so much prestige and value that it remained in use until 2006 in the money transfer business. These two competing communications technologies, telephony and telegraphy, existed and operated profitably side by side for decades, although one was gradually lapsing into technological irrelevance.
Renewables, in our view, are the new dominant power-generating technology, analogous to telephones and fossil fuels will gradually fade thing like telegraph.
Renewables will absolutely crush fossil fuels, over the long term, in electric generation because:
1) Renewables will show a lower lifetime cost of operation (no fuel costs). This will be the game changer. (Okay, this is not so evident now. The projected all- in costs of renewables- with storage -and those of low -cost -fossil- fuel generation are close. But fossil -fuel generation cost is vulnerable to increases from fuel cost inflation, pollution controls, and environmental lawsuits that should be factored into any realistic long term scenario.) So, consider two power-generating sources, producing the same commodity, only one of which, fossil fuels, has enormous lifetime (and probably increasing) fuel costs. The other technology has high initial build costs (we call these capital costs) and then produces electricity essentially for free, meaning it has relatively low operating expenses. We don’t think it’s a unique insight to call this an insurmountable competitive advantage. This is the whole game from an economic perspective right here. Everything else after this, as the sage said, is just commentary.
2) Renewables can be deployed more rapidly: two-year new build time versus 5-6 for new gas-fired power generation and 10+ years for new nuclear power stations. Time is money, and the cost of capital tied up for years in a project gets passed on to consumers.
3) Proliferation of batteries increases renewables penetration and begins to address the principal criticism against them, the intermittency of power production. Batteries provide storage capability, enhancing or offsetting the generating limitations of renewables. And in places like California, they are displacing natural gas-fired power generation as well.
4) Demand side management (DSM) techniques are also improving for shifting electrical load and this only helps this transition. One benefit of large commercial electricity customers in a utility’s service area is that they are or can be extremely price sensitive and, as sophisticated customers, can be willing participants in DSM programs with the right incentives.
5) Renewables produce less pollution and environmental degradation. Climate change concerns, however, in our view, have less to do with the emerging dominance of renewables than people realize. In contemporary slang, one might say “It’s all about the Benjamin’s, baby.”
But there is a further analogy between wholesale electricity power production and the transition from the telegraph to the telephone. The essence of the telegraph was short correspondence and data. Today we call those emails and faxes. We still communicate in a fairly similar fashion, but via a completely different conveyance system that’s digital and fiber optic. Similarly, the photo camera industry is mostly a relic, but people still love taking and sharing pictures, just now it’s with their phones. We don’t think electricity is any different in this respect. Electricity consumers of all types simply want affordable and reliable power, and they don’t care all that much about how it’s made. Renewables, for the reasons cited, will produce electricity more cheaply (and more reliably) than fossil-fired competitors. For that reason, they will continue to take market share and increasingly displace fossil-fired generation in all power markets where they compete.
In the electricity business, fossil-fired power generation, to remain dominant, needs superior technology and the ability to undercut competitors on price. Our fossil fuel industry today possesses neither. Its costs will rise more or less at the rate of inflation not counting the increasing volatility of natural gas markets. Renewables, on the other hand, are a technology where costs are declining with new scientific advances in things like battery materials and solar panel efficiency. To us, this type of economic competition is like a war in which only one party emerges victorious. The fossil fuel industry may have already lost.
By Leonard Hyman and William Tilles for Oilprice.com