Going Big and Fast on Renewables Would Save Trillions in Energy Costs
(Bloomberg Opinion) -- The Biden Administration this month set out a pathbreaking plan to boost solar power to 45% of U.S. electricity by 2050 from the current 4%. The announcement was made against the backdrop of destruction from Hurricane Ida in the U.S. East and vast wildfires in the West. The goal is a necessary step on the way to achieving net-zero carbon emissions by 2050 and preventing such climate disasters from growing drastically worse.
But aside from the climate benefits, a fast, decisive shift to solar and other zero-emissions technologies will yield significant economic benefits, likely saving trillions in energy costs. The conventional wisdom for decades has been that a clean-energy future would cost more than the fossil-energy past, but was worth it for all the future benefits of avoiding climate damage. This thinking (pioneered by Nobel economist William Nordhaus) concluded that going slower would stretch out the costs and minimize the pain of transition.
However, new research, and decades of data on the actual costs of solar, wind and other energy technologies, has turned this logic on its head — going faster is cheaper. Here’s why: In 1975 semiconductor pioneer Gordon Moore observed that computer chips were doubling in density each year, dramatically increasing per-dollar computing power and lowering costs exponentially over time. Research by our group at Oxford and others shows that many technologies, including zero-carbon technologies, follow similar improvement curves, known as Moore's Law.
Zero-carbon technologies such as solar photovoltaics, wind, batteries and hydrogen electrolysis have been on a Moore-like path for decades, with costs declining about 10% a year. Solar has been on this curve the longest, becoming 2,000 times cheaper since its first commercial use in 1958. While government subsidies helped, fundamental improvements in technology and production have driven the vast bulk of this drop.
Interestingly, fossil fuels don’t follow such cost improvement curves (despite receiving far more in subsidies — $447 billion worldwide for fossil fuels versus $128 billion for renewables, according to the latest figures). We’ve analyzed more than 140 years of data on oil, coal and natural gas and found that their inflation-adjusted costs are roughly the same as they were in the late 19th century (based on "useful energy costs,” a measure that enables an apples-to-apples comparison between different energy technologies roughly equating to what consumers experience). While fossil fuel costs go up and down a lot, there is no long-term trend.
Unlike computing or solar, technological improvements in fossil fuels haven't translated to lower costs for consumers over the long run. Innovation has mainly allowed the industry to replace finite resources as they've been consumed and keep up with rising demand rather than deliver fundamental, long-term cost savings. And while the reasons are debated, the data shows that nuclear costs have actually risen since the technology was first commercialized in the 1950s.
Remarkably, the energy models used by policymakers, investors and most researchers don’t properly account for the Moore's Law effect. Leading authorities such as the International Energy Agency (IEA) have systematically underestimated the cost declines of renewables every year for 20 years. We analyzed the projections of 2,905 major energy models and found on average the cost of solar dropped at a rate almost six-times faster than forecast. So it's not surprising there's a misperception that zero-carbon will cost more.
The 20th century produced another industrial rule of thumb known as Wright's Law. It's basically the idea of the learning curve — the more we make something, the cheaper it gets as experience and innovation produce savings. Our analysis shows that the exponential declines in renewables costs are highly consistent with this Wright’s Law learning effect. It's not a universal effect, though, and again, fossil fuels haven't followed suit for the same reasons we cited above.
Past improvement is, however, highly indicative of future improvement. The evidence says that once technologies such as solar and wind are established on Wright’s Law curves, their cost declines are very predictable.
The implications of this are profound. We can confidently say that the further we go in transitioning to solar, wind, batteries, hydrogen electrolysis and other zero-carbon technologies, the cheaper it will get. And there is strong evidence that these Wright’s Law cost declines can be accelerated by policy. Investment and trade policies in Germany and China, for example, have significantly increased cumulative production, speeding the learning effect and playing a major role in recent, dramatic cost declines in solar.
Our modeling shows that what we call a “decisive transition” of accelerated zero-carbon deployment would save the world $26 trillion in energy costs over the coming decades compared with continuing today’s energy system, while at the same time meeting the Paris targets. That estimate, which also accounts for costs to adapt the grid, is conservative. The savings could be even larger if competition from cheap renewables causes fossil fuel demand and prices to plummet (although this depends on policies to drive fossil fuel emissions to zero by 2050 that would prevent a bounce-back in use due to cheaper prices).
President Joe Biden's solar plan represents just such a decisive transition. And he could go even faster — global solar generation has grown at an average rate of 44% a year over the last 30 years; if that trend continues, Biden would hit his targets in the 2030s, not 2050s.
New policies are required to drive the deployment of zero-carbon technologies, expand markets, accelerate progress down the Wright’s Law curves, and build the smart-grid and electric-vehicle charging infrastructure that such a transition requires. It's imperative that Congress acts on Biden's plan — doing so will save U.S. consumers trillions in energy costs, create millions of new jobs, reduce harm from climate change and ensure the U.S. leads in the energy technologies of the future.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Eric Beinhocker is the executive director of the Institute for New Economic Thinking at the University of Oxford's Martin School.
J. Doyne Farmer is a professor at the University of Oxford's Mathematical Institute.
Cameron Hepburn is a professor at the University of Oxford and director of the Smith School of Enterprise & Environment.
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