Podcast Summary
Peak emissions per capita in the 1970s despite population growth: Focusing on efficiency and reducing emissions is crucial to combat climate change as population growth and inherent rates of decline in emissions per unit of consumption will continue to be a challenge. Address all greenhouse gases in the transition to a decarbonized economy.
Greenhouse gas emissions per capita peaked globally in the 1970s, despite population growth. This was due to the energy intensity of GDP peaking in the developed world during that time, leading to a plateauing of emissions per capita since then. This trend highlights the importance of focusing on efficiency and reducing emissions to combat climate change, as population growth and inherent rates of decline in emissions per unit of consumption will continue to be a challenge. The data also shows that methane and nitrous oxide emissions peaked around the same time as carbon dioxide emissions, making it crucial to address all greenhouse gases in the transition to a decarbonized economy.
Solar Energy Market Growth: From 5 GW to 440 GW in 15 Years: The solar energy market has grown exponentially, with 440 GW installed globally in 2023, up from just 5 GW in 2008. Solar modules have become more efficient and cheaper, leading to oversupply and price drops, but continued growth is expected.
The solar energy market has seen exponential growth over the past two decades, with an estimated 440 gigawatts installed globally in 2023 compared to just 5 gigawatts in 2008. This growth is not showing signs of slowing down, with a significant increase in installations from 2022 to 2023. Solar modules have also become more efficient and cheaper, with a 40% increase in efficiency from 15% to 21% and a decrease in module prices from $0.019 to $0.012. The solar industry's ability to continuously improve and adapt has led to oversupply situations and dramatic price drops, but these market cycles have historically driven further growth rather than just reaching an asymptotic limit. The potential for solar to reach a terawatt year is plausible, and the industry's manufacturing capacity still has room to grow.
Cost of solar modules no longer dominates solar production costs: Rapid price decline of solar modules has shifted focus to financing and other commodity prices for further cost reduction, while LED adoption leads to significant energy savings
The cost of solar modules has become less significant in the overall cost of solar energy production due to their rapid price decline. This shift in cost dynamics means that other components, such as financing and other commodity prices, will need to improve to continue driving down solar costs. Another encouraging trend is the widespread adoption of LED lighting, which has seen a dramatic increase from just 1% market share in 2010 to over 50% in 2022. This global shift to LEDs has resulted in significant energy savings, making it a remarkable example of the pace of change possible in some product categories.
Progress in energy consumption from lighting and deforestation: Significant improvements have been made in energy consumption from lighting and deforestation, with lighting now accounting for only 10% of electricity consumption and deforestation rates decreasing by 60% since 2014.
Despite common perceptions, significant progress has been made in areas like energy consumption from lighting and deforestation. For instance, lighting, which was once a major consumer of electricity, now accounts for only around 10% of total electricity consumption. This improvement is due to both increased efficiency and the economy's shift towards using electricity for other purposes. Similarly, deforestation rates, particularly in the Amazon, have seen a significant decrease, with approximately 5,000 square kilometers of deforestation in 2021 being 60% less than in 2014 and much less than in the 1990s. Furthermore, emissions from land use change have also been decreasing, with a drop from 8 gigatons in the late 1950s to around 4 gigatons currently. While there is still work to be done in these areas, it's essential to acknowledge and celebrate the progress that has been made.
Renewable energy: Solar and energy storage on the rise: Solar and energy storage are becoming more affordable and accessible, with significant growth in installation rates and transferable tax credits under the Inflation Reduction Act.
The renewable energy sector is showing promising signs of progress, particularly in the areas of solar and energy storage. Solar is continuing to trend down in cost and is being installed at an increasingly rapid rate, with solar energy becoming more affordable and accessible than ever before. Energy storage is also following a similar trajectory, with the global installation of energy storage on the grid experiencing significant growth and showing no signs of slowing down. Additionally, the Inflation Reduction Act in the United States has allowed for the transferability of tax equity credits for renewable power and energy storage installations, which is leading to interesting developments in the economics of these projects. While there are still challenges to be addressed, the overall trend is one of optimism and progress towards a more sustainable energy future.
Impact of cost of capital on renewable energy projects: The cost of capital significantly influences the profitability of renewable energy projects, with smaller projects offering higher returns due to lower costs of capital, while larger projects face lower returns and closer pricing to risk-free investments.
The cost of capital significantly impacts the overall cost of renewable energy projects. For smaller projects under $1,000,000, investors can expect higher returns on investment (16-19%) due to lower costs of capital (84-86¢ on the dollar). However, as project sizes increase, such as $50,000,000 transfers, investors face lower returns (4-6%) and closer pricing to risk-free investments like treasury bills. This data from Basis Climate and Crux shows the evolving market and the spectrum of risk and return appetite for investors. As the market expands and becomes more transparent, it will attract a broader range of participants, moving towards the equity market's level of transparency and liquidity. Additionally, the cost of capital makes up a larger percentage of the total project cost as it increases. Renewable projects, with their upfront CapEx and small OpEx, are particularly sensitive to these financing costs. The recent increase in interest rates has highlighted the importance of considering the cost of capital in renewable energy projects.
Understanding external factors impacting renewable energy cost of capital: External factors like interest rates and risk adders push renewable energy costs up to 11-13%. Developers have limited control over these rates and the clean energy vs. traditional energy debate has high volatility.
The cost of capital for renewable energy projects is largely determined by external factors, particularly interest rates, and developers have limited control over these rates. The discussion highlighted the challenges of achieving lower costs of capital, with substantial adders for risk factors like currency and sovereign risk pushing costs up to 11% or even 13% in some markets. Additionally, the industry is largely a taker of these rates, unable to directly influence them. Another interesting point from the discussion was the analysis of a long-short strategy, where one goes long on clean energy and short on traditional energy. This strategy, which involves betting on the growth of clean energy at the expense of traditional energy, had strong returns for three years but experienced significant losses in 2021. The strategy's volatility might not be suitable for index investors seeking consistent annual returns. Overall, the conversation emphasized the importance of understanding the external factors impacting the cost of capital for renewable energy projects and the challenges of predicting short-term returns in the clean energy vs. traditional energy debate.
Traditional energy outperforms clean energy but a simple long-only approach to clean energy might have been more effective: Despite traditional energy's recent outperformance, a long-only approach to clean energy could have been more effective as Asian manufacturers dominate the battery market and continue to lead in production
The energy sector's performance in recent years has seen traditional energy outperform clean energy due to rising interest rates and oil and gas prices. However, a simpler approach might have been to just go long on clean energy and forget about shorting traditional energy. It's essential to remember that long-short positions do not necessarily mean being short on something else. In technology trends, the battery market is dominated by Asian manufacturers, with China, South Korea, and Japan holding the top spots. This trend has remained consistent, with China and South Korea leading in battery production. It will be interesting to see if this continues as the big growth companies, CATL and BYD, expand and seek partners outside of Asia.
The Rise of LFP Batteries in the EV Market: The battery market is evolving rapidly, with LFP batteries gaining popularity in the EV market due to Chinese demand and incentives in California, leading to a separation of markets based on use cases.
The battery industry is rapidly evolving, with technology and market trends shifting quickly. A prime example is the rise of LFP batteries in the EV market, which went from a minor share to nearly half of the market in just five years. This trend is driven by the Chinese EV market and is likely to spread globally. The battery market will see a separation based on use cases, with NMC batteries for high-performance applications and LFP batteries for middle-market automotive applications. Additionally, markets respond to incentives, positive or negative. In California, a change in net metering policies has led to a significant increase in the use of batteries with residential solar installations. This trend is expected to continue, with almost 25% of systems now using batteries and the number expected to rise.
Lithium price volatility and recycling challenges impact battery industry: Lithium price fluctuations and limited battery recycling capabilities pose challenges to battery manufacturers, but long-term battery price decreases and innovation in recycling are potential solutions
The market dynamics of batteries, specifically the cost of lithium and the supply and demand of recyclable batteries, significantly impact the industry. Lithium prices saw a dramatic increase and subsequent collapse, forcing battery manufacturers to absorb the costs or find ways to use prior contracts to their advantage. However, this volatility is expected to lead to decreasing battery prices in the long run. On the other hand, the current supply of recyclable batteries lags far behind the capability to recycle them, making it a challenge for new battery recycling companies to succeed. The end of life for batteries and the availability of them for recycling are crucial factors to consider in this equation.
Oversupply in Battery Recycling Market: Despite a projected gap between announced capacity and demand for battery recycling, it's crucial to consider competition from other uses and material efficiency of reusing batteries before recycling.
The battery recycling market is projected to be significantly oversupplied by 2030, with a gap of around 5x between announced capacity for material recovery and the projected amount of end-of-life batteries and production scrap. This means that material processing and recovery facilities will likely operate at only 20% capacity on average. For those considering battery recycling, it's essential to consider the competition not only from other end-of-life batteries but also from other uses and the material efficiency of keeping batteries in use as long as possible. It's also worth remembering that it's more efficient to reuse batteries than to recycle them. The oversupply in the market could lead to challenges for those not already at scale in sourcing feedstock.
