In 2009, building a new solar farm was +223% more expensive than building a new coal plant. Now, it’s flipped! The world is now looking for ways to curb what they believe is a “climate crisis”. You can agree or disagree, but that is ultimately irrelevant. As I wrote yesterday, my new favorite quote is, “the world is guided and directed by the stories it loves and believes in.” Keep in mind, these can be truths, half-truths, or complete myths. As investors and business owners, it is our job not to determine what is fact or fiction but to determine and understand what “stories” the world is loving and believing in…
It’s my opinion that the powers that be around the globe want to end dependence on fossil fuels and move towards powering the world with renewables. Some argue the move is for improved “climate change” while others argue the move is to take money out of the hands of those who might use it for bad, i.e. huge oil production in the Middle East and Russia. I suspect the cheaper oil becomes, the less money they have to throw around and influence geopolitical movements. Regardless, we can see a large portion of the world and many powerful global leaders wanting to work towards clean energy and pushing efforts to reduce climate change.
We have all heard the story for many years, but now all of a sudden we look up and the price of renewables has been falling fast. In 10 years, the price of solar electricity dropped -89%, and the price of onshore wind dropped -70%. Many on Wall Street argue that “clean energy” has now passed its economic tipping point. A 2019 report from the nonprofit Rocky Mountain Institute found that it was cheaper to build and use a combination of renewables like wind and solar than to build new natural gas plants. A 2020 report from Carbon Tracker found that in almost every single one of the world’s energy markets, it’s now cheaper to invest in renewables than in coal. How did it all happen? In the famous words of Earnest Hemingway, “Like everything in life, gradually, then all at once…”
Below are some graphs recently published by “Our World in Data,” an online science publication, in partnership with Oxford University. They released a well-written research paper earlier in December titled “Why Did Renewables Become so Cheap so Fast ?” I encourage everyone to read it in full. The graphs they include compare the price of electricity from new power plants in 2009 vs. 2019. One graph shows how the price of solar photovoltaic power (from solar panels) plummets from $359 per megawatt hour to $40, the cheapest of any of the power options on the chart and an -89% decrease. For comparison, if housing rents declined at that same rate, a home that rented for $2,000 in 2009 would rent for about $220 in 2019, and moving lower. Over the same time period, the price of coal barely budged, from $111 per megawatt hour in 2009 to $109 in 2019.
Electricity from a new coal plant is now +177% more expensive than electricity from new solar panels. What caused the switch? Huge leaps in technological advancement. To understand why solar power got so cheap we have to understand why solar technology got cheap. In an elementary explanation, the world learned and found ways to produce cheaper and cheaper solar modules.
From 1976 to 2019, the cost of a photovoltaic module—a solar panel—dropped from $106 per watt to $0.38 per watt. “Once solar hit scale, it started having its own supply chain . . . and the module itself got a lot cheaper,” says David Feldman, a senior financial analyst at the U.S. Department of Energy’s National Renewable Energy Laboratory. And with that scale there was more research and development. “The technology itself continued to improve in terms of efficiency, reliability, longevity, so there are all these other things in addition to scaling up.”
This “learning by doing” helped lower the cost of installation and building for solar systems, too. With expanded capacity, the price of solar electricity, not just solar tech, also dropped. Another Our World in Data graph shows how, as we build more solar farms and renewable capacity goes up, the price of that renewable energy continues to go down. In 2010, with fewer than 50,000 megawatts of solar installed, a megawatt-hour of solar electricity cost $378. In 2019, with more than 500,000 megawatts installed, that price drops to $68.
This effect is not true for coal; in the same time period, even as coal capacity increased, the cost of coal electricity dropped just -2%. Coal is not getting cheaper and cheaper at the same pace as renewables. University of Oxford economist Max Roser notes there’s no reason to believe that it will in the future. It comes down to how renewable versus fossil fuel plants operate. For coal, gas, and nuclear power plants, there are two factors that affect price: the current cost of that fuel and the plant’s operating costs. Renewables like wind and solar don’t need to pay for fuel, so the only cost is in building and maintaining the technology. For a coal plant, the cost of the coal it burns accounts for 40% of that plant’s total costs. All power plants that rely on nonrenewable sources of energy will have this continual expense. Even if the technology to build the plants gets cheaper and the process more efficient, traditional coal, gas, and nuclear power plants still have the cost of fueling the plant’s operation, whereas wind, solar and many renewables are simply using the energy from the earth that is currently “free”. (Source: Our World in Data, Max Roser; Fast Company, Kristan Toussaint)
Thinking Beyond the Obvious… So we all know that the world is wanting to push climate change and clean energy, and we can see the data that shows NEW technology is starting to make the transition much easier. But what can we take away?
1. It’s Happening in our own backyards – This very same thing is happening in many industries, just look at what’s happening in agriculture. Ask yourself what stories are people wanting to follow and believe in? Remember, you personally don’t have to believe in them but you have to be open-minded enough with a broad enough perspective to understand and see what others are wanting to believe in and be guided by. Below are just a couple I see playing out that can help prime your thinking:
- Food Transparency & Perceived Improved Health – People are wanting to know where their food is coming from, how it’s grown, what’s being sprayed on it, or what genetic modifications have been made to it.
- Animal Health & Welfare – Regardless of the fact that we all know American farmers and ranchers take better care of their animals than anyone on earth, many people still want to love and follow the story of not killing animals for any reason. Hence many of the reasons that people love the plant-based or lab-grown meat story. Apply the same logic that we have learned above from the solar industry. As fake meat gets more and more money from investors that love the story and technology continues to advance, it stands to reason that prices are only going to get cheaper and the taste improves. While at the same time our traditional livestock operations will find it very difficult to decrease production costs. Eventually, there’s a chance we could hit a tipping point where fake meat becomes cheaper than traditional. What then?
2. Thinking like an investor, not a political activist – I understand why many are kicking and screaming about change and argue that the “stories” are littered with inaccuracies. And it’s perfectly fine to be a political activist defending and fighting for what we politically believe in. But be careful wearing the same hat when it comes to being a political activist and an investor. Again, these can be birds of an entirely different color. I learned long ago, you don’t have to agree with the way the government and the world want to travel but you better be fully aware of it or you will get steamrolled. So rather than just getting mad and frustrated from a political activist viewpoint, put on your investor hat and try to better understand and think about the possible opportunities.
- Renewable Storage – The more solar scales up, the more prices will drop, and it’s then that the issue starts to become about “energy storage”. Since solar energy is produced right when the sun is shining, some systems will need lots of battery storage or some type of storage to allow for more flexible energy use. Let’s not forget, we witnessed the same thing in the computer world. As the industry scaled, storage became insanely important, but eventually, storage and chip speed became cheaper and cheaper. We need to think about how this might apply to agriculture moving forward?
- Animal Health & Welfare – I feel like we are only going to have and hear more about viruses and pandemics. Just like we hear more about weather problems. I suspect there has been a ton of big money thrown at companies that do nothing but try and detect and sniff out new viruses. I know there has been a ton of money thrown at air and water purification companies whose underlying sales pitch will be to find and point out problems that they will have the solution for. Remember, that’s a big business 101 lesson, i.e., find and identify a problem, point it out to the public, then let them know you can provide a solution. I’m just thinking out loud here but I suspect there are now many businesses in place that could greatly benefit from pointing out new viruses and new worries. From an investment perspective, there are probably thousands of ways to make a play. I have personally invested in Zoeits Inc, as most of you know they are engaged in the discovery, development, manufacture, and commercialization of animal health medicines and vaccines, with a focus on both livestock and companion animals. Like I said, there are tons of ways you could invest, but I’m just offering up ways to think differently about the “stories” that are guiding our world.