The energy transition costs less than you think

This article was published by The Energy Mix on Jan. 23, 2024.

The global renewables buildout is not insurmountably expensive after factoring the investment dollars that can be redeployed from fossil fuel technology, a team of U.S. analysts concludes in a new analysis.

“Financing the energy transition is a story of capital reallocation,” explains RMI, the Colorado think tank previously known as the Rocky Mountain Institute. In the next seven years, renewables capital expenditure (capex) will roughly double and fossil fuel capex will roughly halve under scenarios published by the International Energy Agency (IEA). “Falling fossil fuel capex will therefore provide half of the growth in renewable capex.”

That scenario puts the net growth in capex at only 2 per cent a year, and yet the standard conclusion from agencies like the IEA and the International Renewable Energy Agency (IRENA) is that renewables infrastructure will demand for an investment splurge.

This widespread belief wrongly casts the clean energy transition as an insurmountable expense, RMI says. That’s partly because projections include the “growth in end-use capex for renewables but not the decline in end-use capex for fossil technologies.”

“We have the money,” RMI stresses, noting that the IEA’s 2030 investment target for new energy supply, at $2.5 trillion, requires annual growth of just 2 per cent–lower than expected GDP growth of 3 per cent per year, and far less than the 9 per cent annual pace at which energy supply investment grew from 2000–2010.

The falling costs of renewable technologies and the decline in fossil fuel capex are also helping to “smooth the path.”

But misrepresentation persists, stemming from a multitude of problems with conventional analysis, says RMI: “not comparing like with like, not having a fair point of comparison, taking a conservative view on future renewable costs despite substantial contrary evidence, modelling excessive complexity, and continuing to emphasize business-as-usual (BAU) scenarios after years of incorrect forecasts.”

RMI says management consulting firm McKinsey & Company makes an unreasonable comparison in one 2021 report. It adds up all the capex required for energy and land use over 30 years and compares it to today’s figures, concluding that capital spending in a net-zero transition between 2021 and 2050 would amount to about $275 trillion. That’s $9.2 trillion per year, or about $3.5 trillion more than current annual spending.

Those large numbers compare future spending projections to the present, rather than weighing future projections in a clean energy transition against future business as usual, RMI explains. As McKinsey itself acknowledges later in its report, this latter comparison yields a lower increase of about $1 trillion per year.

Analyses by organizations like the IEA and IRENA also make unfair comparisons, RMI says. Their investment numbers for clean energy and fossil fuel supplies only include end use costs for clean sources, when those consumer devices are “the largest part of the system” for fossil fuels.

“As a result, the standard approach counts rising capex on clean energy but not falling capex on fossil fuel energy.”

IEA Chief Energy Economist Tim Gould told Inside Climate News reporter Dan Gearino that RMI’s critique is misplaced, because the IEA clearly accounts for declines in fossil fuel capital spending.

Gearino writes that RMI’s and the IEA’s analyses are fairly similar because RMI uses the agency’s spending estimates. But RMI adjusts the data to present a different outcome, which it contends more accurately considers declines in fossil fuel spending.

“The clash is largely about how those declines are calculated and communicated,” Gearino says. “I can see what RMI is saying and can also understand why IEA is confident in its approach.”

Gearino warns about the limitations of RMI’s broad analysis of a transition that will vary by region. He says the think tank acknowledges that data is lacking for costs in emerging markets, where transitions are unexpectedly slow and expensive.

But even so, “one of my main takeaways from this report is that the transition to clean energy is not some strange thing with astronomical costs that should be feared,” Gearino writes. “It’s the track we’re already on.”