Published on June 14th, 2020 | by Brad Rouse0
Carbon Pricing & The Energy Transition
June 14th, 2020 by Brad Rouse
I love reading about all the advances in clean energy in CleanTechnica. But are these advances getting us where we need to go fast enough?
Short answer: NO.
We are making great progress, with costs of solar, wind, and batteries continuing their decline. But we are not moving fast enough to turn the tide on human-caused climate change. One study I saw recently said we need to be installing wind and solar at triple the current rate to get to 90% renewable just for electricity by 2035.
What are we missing to make the energy transition — a transition to renewables for close to 100% of our energy needs by 2050 or so? How do we do that?
My reading of many books and reports on the subject lead to a consensus that we must do three main things:
- Encourage conservation and energy efficiency throughout the economy
- Green the grid
- Electrify everything
According to most economists, we can best achieve all these goals and make the energy transition more quickly by putting a price on carbon so that fossil fuel burning bears the price for the damage to society it causes.
Are the Advances in Wind & Solar Enough?
One of the best sources for what is happening on the technology front is Lazard’s Levelized Cost of Energy Analysis, published last in November 2019. Most of my analysis is based on this LCOE study combined with some of my own modeling to incorporate carbon pricing.
There is a wealth of information in this short Lazard report. For example, we can see that the levelized cost of energy (LCOE) for wind energy from the 2019 study ranges from $28 to 54 (without any tax subsidies), whereas the utility-scale solar LCOE ranges from $36 to $44. The great news is that prices are declining, but they seem to be declining at a declining rate over time.
(Aside: The LCOE is a single number that is an estimate of what a developer would need to get in $/MWh over the life of a given technology to break even, taking upfront capital and operating costs into account. One way to understand LCOE is to compare it to, say, how much it will cost you to live, per day, in a home you are buying — your “Levelized Cost of Daily Living,” which would take into account your annual mortgage payment plus an estimate to incorporate the annual cost of taxes, insurance, utilities, maintenance, and food, all divided by the number of days you would be living at the home.)
Great News — Renewables Now Competitive for New Electric Plants
The other great news is that renewables are now competitive with traditional technology for new electricity generating plants. The below chart simplifies data from the 2019 Lazard report by taking the midpoint of the range for each technology:
The blue bars above show the total LCOE for each technology. As you can see, utility-scale solar and onshore wind are now cheaper than every fossil or nuclear form of new generation! You would be right to ask, then why are utilities still building gas combined cycle power plants? The answer is that (1) these estimates do not include the cost of overcoming solar and wind intermittency, so the advantage is sometimes not great enough to overcome that cost, (2) utilities are stuck in their thinking, (3) they make their profits by building plants, and (4) a combination of the above. Let’s go with (4) – all of the above.
Renewables are winning a lot of the battles, with solar and wind being picked anyway, despite intermittency issues. Plus, the technologies to deal with intermittency — storage (batteries, pumped hydro, or hydrogen production), improved interconnection like transmission lines, dispatchable loads, overbuilding the renewable resource, and others are all moving ahead. As these technologies and solar and wind come down further, utilities will work harder to figure out how to take advantage of these low costs. I predict that utility-scale solar and wind will win more and more of these battles.
But this is not enough to win the energy transition in time to solve the climate crisis. The reason is that existing plants can be coaxed to continue operating for decades longer, and Lazard expects new gas plants to be around for 20 years or so, coal for 40. While solar and wind operating costs beat fossil operating cost handily, new solar and wind total costs are not yet beating fossil operating costs. This is shown in the orange bars in the graph above. Just looking at the above costs, new wind and solar are significantly more expensive than just keeping the old coal and gas running. Renewables in most cases are only replacing old plants when those plants are nearing retirement and need to be replaced anyway (or would require major new spending to keep going). And wind and solar tax credits, which have helped, are scheduled to go away.
Enter Carbon Pricing — Removing the Pollution Subsidy for Fossil Plants
Most economists explain that climate change and pollution are examples of what are called “externalities,” or a harm to a third party (all of us) caused by economic activity that does not include that harm in the decision process. Correct the externalities, so the thinking goes, and the interests of all parties (the people on the planet) would be considered when utilities and consumers make decisions. A fee on fuels based on their carbon content would be sufficient to correct the externality. Since mass suffering from out of control climate change has a very high price tag indeed, the thinking is that the carbon fee would need to be high enough to motivate rapid change.
Actually, one carbon fee solution has received bi-partisan support and significant sponsorship and has already been filed in the US House of Representatives with 80 co-sponsors, House Resolution 763, the Energy Innovation and Carbon Dividends Act (EICDA). This bill would put a steadily rising fee on carbon and return the revenues collected in the form of a dividend to legal residents of the US. There are many other features of this bill which is summarized at www.energyinnovationact.org. EICDA incorporates a set of goals and a carbon fee projection that incorporates differing levels of the fee depending on how the US does in meeting the goals. The goals result in an annual reduction in carbon emissions beginning at 100% through 2022 and declining to 15% in 2050:
Note that this is overall reduction in carbon, not just the grid’s reduction in carbon. Reducing overall carbon emissions to 10% by 2050 requires air travel, cement making, and a host of other industries to find new ways of doing things using technologies that are now being invented. Compared to these challenges, getting the grid to go green is easy, because we already have the technologies we need. But reducing carbon emissions overall is a different story and much harder because it requires converting vehicles, equipment, heating, cement, air transport, and other sectors. The best choice for these sectors will be to convert them to green electricity.
To meet the goals for all carbon emissions, we must green the electric grid to 100% much before 2050 and simultaneously begin the transition to electrifying everything so it’s mostly all done by 2050. How does the EICDA help meet this goal? First, by starting low and gradually and inexorably increasing the fee over time, and then speeding up the increase if our progress shows we are not on the pathway to our goal.
To do this, EICDA imposes a fee that starts at $15 a ton and then has an increase of $10 a year when we are ahead of the goal and $15 a year if we didn’t make the target reduction. So, built into the plan is a strategy for what we do if we start falling behind. Thus, there is a range of possible carbon fees as shown below:
Does the Carbon Fee Cut Emissions?
Economists will often argue that placing a price on pollution is the most economically efficient way to go. By having a price on pollution, the market economy finds the least cost combination of methods available without having to have government make decisions on which technology to support and which to abandon. The correct mix of conservation, riding bicycles to work, taking public transport, sequestering carbon, buying high efficiency heat pumps, installing solar or wind power, building nuclear plants, and many more options all get thrown into the mix and all businesses and people need to do is pick the lowest cost options. But will it really work?
Clearly, it will green the grid. The example we started with is illustrative. I did calculations of the cost of alternative technologies from Lazard, adjusted for EICDA carbon fees for new plants, for 2021, the assumed start date for a carbon fee starting at $15 a ton and rising $10 per year assuming we meet all targets, with results shown below:
As shown by the blue bars above, immediately after the carbon fee is adopted, wind and solar become far less expensive than the cheapest fossil alternative, even in year one of the carbon fee, at about half the cheapest fossil alternative and only one quarter of the cost of coal. How does this happen in year one with only a $15 carbon fee? Easy. Once EICDA passes and becomes law, utilities will do a 20-year fuel forecast of the price of coal or gas to include in their LCOE and other planning tools. Bingo. The steadily rising carbon fee over the next 20 years, written into the law, makes a major impact on capital investment decisions on day one!
And this is a conservative estimate. Why conservative? Because the continuing decline in solar and wind and storage costs is not included above. My prediction is that when EICDA is passed by Congress and signed by the president, all US planned fossil fuel plants will be cancelled the next day. The cost advantage for new renewables versus new fossils will be so great that utilities will find a way to overcome the cost of dealing with grid intermittency issues.
No New Fossil Plants! Wonderful. But When Can We Get Rid of the Old Ones?
Note from the above chart that even with the passage of EICDA in 2021, it will still be cheaper for utilities to continue to run existing plants that year than to build new wind and solar. But check what happens by 2025:
By 2025, existing plants are now more expensive to run than it costs to build brand new wind or solar to replace them. Utilities still will have to upgrade transmission or add batteries, but the handwriting will be on the wall for a fast transition. Coal will go first with a $20 per MWh premium in 2025 just to run coal versus building new wind and solar. Then gas combined cycle, the lowest cost of the fossil options, will lose competitiveness over time. Just look at how the advantage of solar and wind grows over time as the carbon fee ramps up year after year, even before considering their ongoing decline in cost!
My prediction is that utilities will see the writing on the wall as soon as the carbon fee passes and will be quickly engaged in a program to Green the Grid. If utilities don’t do it on their own, then independent power producers and/or utility regulatory agencies will force their hands. A fee on carbon will be a powerful motivator to green the grid and speed the energy transition that we need!
To learn more, go to energyinnovationact.org. If you want to become a part of the political will needed to get this law passed, check out the grassroots organization that is building the political will for it to happen — Citizens Climate Lobby — and get involved: citizensclimatelobby.org.
In 2016 Brad started a non-profit — Energy Savers Network — that mobilizes volunteers to help low income people save energy.
He has a 10kW rooftop solar installation and his family cars are a Tesla Model 3 and a Prius Plug-in Hybrid with 150,000 miles and still about 9 miles of EV-only range.
Brad has been studying energy economics for over 40 years and holds a BA in economics from Yale University, where he learned about pricing pollution through a fee in freshman economics class. He also holds an MBA from the University of North Carolina at Chapel Hill.
All charts by Brad Rouse except first chart from Lazard.