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Haters Gonna Hate: Experience curve, induced demand, and the rapidly changing landscape of energy.




Every revolution has its critics, its naysayers; the people who love to point out why something will never work and why bother changing from the status quo.  Over the past few years (and especially the past few quarters), as clean energy and renewable storage continue to gain momentum, those haters have come out in a steady stream to regale the world with all the reasons the energy transition is impossible. Headlines discuss the “artificial transition” created by “unfair incentives or government mandates.” Other headlines report on how moving to clean energy just doesn’t work and is much too expensive. Yet, the funny thing, if you look at “the tale of the tape,” globally renewable plus storage is now the lowest cost form of energy. The world is entering a cycle in which the experience curve (efficiency gains following investments from such inputs as increased labor efficiency, technology driven learning, better use of equipment, shared experience effect, product redesign, etc.) is creating generated demand (a phenomenon whereby an increase in supply results in a decline in cost and an increase in consumption).  


Truth be told, to believe the haters, an argument would have to be made that communist, socialist and capitalist countries are somehow colluding to artificially fix the lower cost of renewable energy, to make it competitive with fossil fuel. Since it is almost a statistical impossibility for all countries around the world to collude on anything, especially something as generation-changing and politically divisive (especially in US) as clean energy, the truth of the matter is that clean energy plus storage is becoming the cheapest form of energy and is the future of energy worldwide.

               

Over the past three years, the energy transition has experienced a whirlwind of opportunities and challenges. Demand picked up, but rising rates and input costs hurt investor confidence.  Regulatory uncertainty slowed investment and the energy transition was caught up in the ESG debate. All of this weighed on investors over the past three years. These headaches overshadowed a major trend that recommenced late last year:  the decline of solar and battery costs. Those costs, which had plateaued or risen over the three-year period, finally returned to the pre-Covid experience curve trendline.

               

Below is a chart showing the relationship between solar module costs (a major component of the cost of solar) and annual solar installations.  The data documents an almost 35% drop in cost for each doubling of annual installations since 2015.  This is what would be expected considering the experience curve and why 2021-2023 was such an aberration.  While demand picked up during 2021-2023, so did costs.  This seemed unsustainable, as the expected several doublings of capacity is a precursor to lower costs.  As we ended 2023 and entered 2024, reality met expectations: a giant mean reversion, cost dropping sharply back to the pre-Covid trendlines, ensued.  Even with the rise in costs during the anomaly period of 2021-2023, demand still picked up globally. Now, with the cost dropping and demand still high, we are hitting some forecasters’ 2030 cost targets for solar - six years early. That is significant, and we continue to see strong forecasted demand growth in every major market around the world.  No geographic area fully dominates (for example the US is less than 20% of the global total) making this demand growth a truly global trend.

                       



The trend is not just limited to solar panels; it is playing out in many of the other technologies of clean energy including lithium batteries.  The chart below documents an almost 27% drop in cost for doubling of annual installations since 2015. In a way, the drop in cost of battery storage is even more impactful than solar panels. Battery storage is a much less mature industry. To reach net zero, the demand growth for EVs and battery storage systems is between 3-5 doubling of annual installations.  Following that current trendline would mean between 3 -5 events where costs would drop 27% each time.  These drops in cost impact both the future cost of electric vehicles and battery storage for the electrical grids.  The cost drops over the past year from the plateau of 2021-2023 is hastening a rapid drop in cost for EVs and renewable energy plus storage projects. The drop has not necessary played out through the US yet, but the technology exists (currently, mostly in China). It’s merely a matter of time before that technology arrives on our shores. Battery costs are dropping to levels that most forecasters did not expect until the second half of this decade.  Watching the global demand growth continue during a plateau cost environment leads us to believe we have entered a new era of generated demand.         



               

As the cost of solar and batteries fall to levels that make them cheaper than all forms of energy, both technologies have strong growth outlooks.  Obviously, they are not the only pieces of the energy transition but certainly are the biggest categories for a decarbonized future.  These drops now make solar combined with battery storage the cheapest form of energy compared with similarly utilized base load plants. With the drop in battery costs, renewables are fast becoming a “firming asset” (a critical energy asset that balances the demand load as power supply fluctuates).  As renewables plus storage becomes increasingly common, we are seeing a shift: storage assets becoming “on demand” to allow renewable power to serve as a virtual firming asset.


At the same time, outside the US, EVs are hitting price parity with gas powered vehicles. The BYD Seagull, for example, is now less than $10,000. (For the “but it’s made in China” camp - everything has Chinese components; even some US military vehicles which government audits have found which are not allowed according to government contracts).  That is why, soon, the tax incentives for EVs in places like the US will be gravy when it comes to vehicle cost.


To challenge the “haters gonna hate crowd” and the “what if we had no incentives” camp (usually fossil fuel leaning crowds); oil and gas drilling offers investors incentives that are similar to renewable incentives.  Currently, the main renewable investment tax credit is equal to 30% of a project which, very simply, would result in a $30,000 tax credit for a $100,000 qualifying renewable energy investment.  Please bear with me before you scream,” but what about fairness?”.   For decades the US has offered and continues to offer investors the opportunity to claim 85% of oil and gas drilling costs as a tax deduction through the intangible drilling cost tax deduction (a number of law and accounting firms claim up to this amount, but some put it between 60-80% of drilling costs).  The calculation is a bit more complicated because the tax benefit is not a tax credit but a tax deduction which is a function of the individual income tax bracket and actual tax liability.  However, taxable income of at least $100,000, a 37% tax bracket, and a $100,000 investment (presuming you can make 85% of drilling costs comply with the intangible drilling cost tax deduction), the first-year tax savings for the $100,000 oil and gas investment would be $31,450; $1,450 more than the $30,000 tax credit on the $100,000 renewable investment.  The world (at least the US tax code) is fair. 


Rapid cost declines of key energy transition categories are bringing the world light years ahead of expectations. Previous calculations predicted the current cost point would not be achieved until 2030, at the earliest. Yet…here we are in 2024, years ahead of the expected pace.  The scale of these industries is accelerating rapidly and we are looking at a brighter future as interest rates and supply chains normalize, and costs continue to drop as these technologies keep scaling.  There will always be those that “hate” the technology related to the energy transition, but that can’t stop this growing megatrend.  In the words of a great artist, “Don't stand in the doorway; Don't block up the hall; For he that gets hurt will be he who has stalled … For the times they are a-Changin.”

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