Three Reasons for Optimism About Climate Change
But whatever happens across the Atlantic, there are at least three reasons for optimism about moving away from fossil fuels. Specifically, the cost of renewable energy continues to decline, storage options are improving and hydrogen shows significant promise in a wide array of applications, according to studies released last week by Lazard Ltd., where both of us work.
The studies, however, also highlight risks, especially that the supply constraints affecting other parts of the economy may put upward pressure on the cost of renewable energy over the next couple of years.
Renewable-energy cost declines over the past 15 years have been remarkable, and they continued into 2021. Lazard’s studies show, for example, that utility-scale solar power declined in cost by 90 percent between 2009 and 2021. The cost of onshore wind power declined by 70 percent over the same period. These stunning declines offer hope for the transition away from reliance on energy produced by coal and natural gas.
Still, there are reasons to worry about whether these costs will keep dropping. For projects being priced in 2021 and thereafter (Lazard’s 2021 studies reflect cost data and projects being built in 2021, with pricing finalized earlier), costs seem to be increasing because of supply chain disruptions, commodity cost inflation, higher labor costs and expanded demand for renewable-energy generation capacity. The uncertainty over clean energy legislation in the U.S. and elsewhere may also have had a chilling effect on project development and implementation, adding to costs. Cost increases would slow the crucial shift away from carbon, but they are likely to fade as supply disruptions ease.
Battery technology is also improving, a welcome development given the need to store energy from renewable sources for use when the wind doesn’t blow and the sun doesn’t shine. But supply constraints are also posing problems in this area; the availability of lithium-ion battery modules is becoming a particular concern. That makes a strong case for encouraging nuclear power, which provides a carbon-free alternative that can be critical for reliability.
Another potentially promising renewable fuel is hydrogen. Generating electricity through a mixture of hydrogen gas and natural gas is technically feasible but still too expensive to compete with alternatives. But it might soon become economical to use hydrogen as part of the fuel mix.
It might also become cost-competitive to produce hydrogen using renewable technologies. Using hydrogen produced that way today to generate electricity at scale would cost many times more than natural gas, depending on the technology used. But the potential for reduced capital costs, in a manner similar to the decline in solar costs over the past 15 years, might make green hydrogen cost-competitive in the foreseeable future, especially if subsidy support is provided.
The policy makers gathering in Glasgow can help drive the energy transition several ways. First, they can provide research funding and commercial subsidies to storage-battery technology, which is crucial to expanding the use of renewables and to the evolution of electric vehicles. Second, they can take similar steps regarding hydrogen given its myriad applications and decarbonizing benefits. Third, they can ease antitrust constraints on industry consolidation in cases where it would aid development of complex renewables projects like those involving hydrogen or energy storage. Fourth, they can take steps to relieve the supply constraints plaguing ports and trucking that are slowing the declines in renewables costs and the uptake of lithium-ion storage.
The overall picture from the Lazard studies is that innovation can keep reducing the cost of carbon alternatives. If the cost reductions of the past 15 years can be matched in the next 15 in the realms of storage and hydrogen, the world’s efforts to reduce carbon emissions will be made dramatically easier to accomplish.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Peter R. Orszag is a Bloomberg Opinion columnist. He is the chief executive officer of financial advisory at Lazard. He was director of the Office of Management and Budget from 2009 to 2010, and director of the Congressional Budget Office from 2007 to 2008.
George Bilicic is a vice chairman of investment banking and global head of power, energy and infrastructure at Lazard.
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