The Time Is Now: Fighting Petrostates with Clean Energy

As the terrible war in Ukraine continues, our dependency on fossil fuels has challenged the world to make a choice. We stand at an unavoidable fork in the road. Either we double down by expanding oil and gas production and thereby increasing dependency, or we make the switch to a cleaner, cheaper energy system based on renewables, and with it, genuine independence. At present we burn fossil fuels every day to run our economies, despite the serious negative impacts on our environment and in particular the climate.

The Ukraine crisis has brought forward the inevitable. The biggest economic disruption of our modern era will be the transition from fossil fuels to renewable energy. This is a historic event that is unfolding rapidly simply as renewables are now cheaper in most—if not all—parts of the world. The good news, the great positive news, is that world is poised to enter both an era of cheap and abundant clean energy for all, and along with it, a democratic dividend as the fossil fuel base that keeps oligarchs in despotic states such as Russia in power begins to evaporate.

Europe depends on Russia for about 40% of its natural gas and we spend $1 billion every day on its gas, oil, and coal. But in the last few weeks, the European Commission has published an initial plan to cut Russian fossil fuels completely out of the energy system by 2027. The International Energy Agency (IEA) has published an emergency plan to show how Europe could cope if it came completely off Russian gas. This is a switch that can—and must—be done.

The conclusion is clear: In times of rapid disruptive innovation, incumbents defending dominant market shares are almost never safe. Whilst there is an important moral debate that “we shouldn’t burn this stuff,” now, because of clean technology competitiveness, it has become a financial debate which says “actually, there are cheaper, more efficient technologies out there. So, we won’t burn this stuff.”

The argument has evolved rapidly in the last decade because of the collapse in the cost of cleaner technologies. Renewable energy has historically been considered too expensive and too unreliable to power the grid, but research has overturned that trope for good. The amount of solar radiation that strikes the earth continuously is about 173,000 terawatts which far surpasses the approximately 20 terawatts that humanity requires. Plummeting wind, solar, and storage prices have fallen so fast that, for example, the United States can reach 90% clean electricity by 2035—without raising customer costs at all from today’s levels, and actually decreasing wholesale power costs 10%.

A great deal of the planned fossil fuel production by fossil companies such as Exxon and Chevron (even with Russia’s Rosneft and Gazprom out of the picture) is therefore going to be unneeded, leading to stranded assets. The mechanism of asset stranding is simply that as cheaper new energy technologies take over, the old ones are no longer required. In the case of solar and wind and batteries and electric vehicles, all the prices are dropping at over 30% for every doubling of capacity. So it becomes cheaper to drive electric vehicles, and cheaper to generate renewable electricity. There will be cascading effects through a multitude of industries, from coal to oil to gas. And it has already started in the machinery sectors which are linked to them, from power plants to gas turbines to cars.

The moment when the sticker price of an electric vehicle (EV) is comparable with the price of an internal combustion engine (ICE), we enter into a new paradigm: a world of declining demand for fossil fuels. And this then plays out in sector after sector, country after country. Peak demand for fossil fuels was reached in the OECD 16 years ago in 2005. Peak coal was in 2013; peak O&G Exploration & Production capex (capital expenditure) in 2014; peak ICE cars in 2017. Once you start searching for fossil fuel demand peaks, you find them everywhere. We will see peak oil demand and peak fossil fuel demand imminently and all the Ukraine crisis has done is bring the peak forward. The next shoe to drop will be peak ICE trucks, and then peak fossil fuels in China and peak coal in India.

Incumbents, however, expect growth and they build for growth. Which is what the Oil & Gas sector is doing now, planning for growth—as the $20-25-billion-a-year-each investment by the likes of Chevron and Exxon illustrates. But as challenging technologies take that growth, so incumbent demand starts to fall. So you get a gap opening up between capacity and demand. That is overcapacity and hence stranded assets. But it is not just a question of stranded assets and a few high-cost facilities being shut down. The problem is much deeper than that. Thanks to the simple laws of economics, overcapacity as new technologies like EVs take over means lower prices for everyone. So the entire fossil fuel industry faces lower volume and lower prices. And that means lower profits for incumbent fossil fuel companies, and lower returns for investors.

According to research conducted by BloombergNEF, the inflation-adjusted average price of battery packs for cars has dropped from $1,160 per kWh in 2010 to just $132 in the past two years, and EVs now make up over 15% of new vehicle sales internationally. Furthermore, the International Renewable Energy Agency (IRENA) study “Renewable Power Generation Costs in 2019” shows that more than half of the renewable capacity added in 2019 achieved lower power costs than the cheapest new coal plants. Electricity costs for solar and wind power have continued to fall significantly between 2010 and 2019, by 47% for concentrated solar power, 82% for solar PV, 39% for onshore wind, and 29% for offshore wind.

In Energy Explorer, we find wind and solar energy were scaled up rapidly in recent years; in 2019 renewables accounted for 72% of all new capacity additions worldwide. The global price of electricity from new coal (LCOE) declined from $111 to $109. While solar got 89% cheaper and wind 70%, the price of electricity from coal declined by merely 2%. As a consequence, between 2010 and 2018, 411 million people gained access to clean electricity, and an additional 200 million to clean cooking technologies and fuels.

Equity markets discount future expected profits. When they see a turning point, they therefore derate stocks and sectors. And by the time sales volume in coal or oil has peaked, price is already down a long way, before it finally finds a new equilibrium suitable to an industry in decline. The significant point is when the new technology takes all the growth, usually at a market share of 3-5 percent. This is roughly what happened with the European electricity sector after 2008, with U.S. coal after 2011, and with the oil services sectors after 2014. Moreover, you get price volatility, persistent financial share price swings, bumpy ‘reversals of hope’ as we’ve seen in post-Covid recovery, and an inevitable trend towards underperformance as the sector declines.

The risks of staying invested in fossil fuels doesn’t stop here. The world has built up an enormous fossil fuel system over the last 200 years. The three main assets are the 900 billion tonnes of coal, oil, and gas, valued by the World Bank at $39 trillion; supply infrastructure of $10 trillion and demand infrastructure (electricity, transport, and heavy industry) of $22 trillion; and financial markets with $18 trillion of equity (a quarter of the total), $8 trillion of traded bonds (half the total), and up to four times as much in unlisted debt. Endowment funds exposed to the fossil fuel system in the coming decade will face a roller-coaster ride of disruption, write-downs, financial instability, and share price de-ratings as markets adjust.

The only thing comparable with this is the rise of the internet, which also wrecked established industries and gave the opportunity to build the largest companies in the world today, from Google to Facebook, from Apple to Amazon. Policy shifts can be managed, technology shifts cannot. And because new-energy technology just keeps getting cheaper, and incumbent market-share keeps falling, it just gets worse and worse. Financial markets know this and change is being measured over years, not decades.

Who benefits from this shift? Emily Grubert, a Georgia Tech engineer who now works for the U.S. Department of Energy, has recently shown that it could cost less to replace every coal plant in the country with renewables than to simply maintain the existing coal plants. Data from Oxford INET shows while solar and wind costs today are under $50 per MWh and falling, in many unsubsidized markets they’ve already fallen through $30 and even below $20. So a “decisive transition” to renewable energy, INET reported, would save the world $26 trillion in energy costs in the coming decades.

As the clean energy transition fundamentally disrupts markets, the world may look back at the horror of the Ukraine crisis as the moment when a threshold has been passed. The world can look forward to an era of cheaper, wildly available energy, and with it, the displacement of despotic regimes upon whose fossil fuel wealth is based.

- Mark Campanale, Executive Director, Carbon Tracker Initiative

^{Mark Campanale is the founder and executive chairman of the Carbon Tracker Initiative, an independent non-profit financial think tank that conducts in-depth analysis on the impact of the energy transition on capital markets.}