The evolving process of RE

Solar power in particular, and renewables in general, may have reached a tipping point in terms of delivering energy at cost-effective prices. Alternatively, the current interest in renewables could be a relatively nascent phenomenon, triggered by fears about fossil-supply disruption.

One could back both these opinions with logic and data. Disruption in the supply of fossil fuel started with the Ukraine war. Fears of more disruption have occurred due to the Israel-Hamas conflict. Economic historians are harking back to the oil crises of 1973 and 1979, when the Organization of Petroleum Exporting Countries flexed its muscles after the Yom Kippur war and when the Iran revolution set off geopolitical tensions.

There’s always been a clear correlation between high fossil fuel prices and high investment in renewables. Hence, it’s not surprising that there’s been record investment in renewable energy (RE) in the last two years, given the fears of supply disruption.

India, for example, signed deals on new RE capacities of at least 2.6 Gw between January and June 2023. At the corporate level, many companies are swapping out thermals for RE. In India, Wipro is looking to get 75 per cent of its energy needs from RE. Other IT services companies are looking at similar targets as are the Indian Railways, the telecom networks, and airports. Tata Group is looking at RE induction across multiple facilities, mostly via the good offices of Tata Power. In places like South Australia and Denmark, grids are running on 75-80 per cent RE. Global tech giants like Meta, Amazon, Google, and Microsoft are looking at RE. So are metal smelters like Vedanta and Hindalco.

Apart from policy mandates, price is a critical factor in this shift of the energy mix. This is why solar may have hit a critical tipping point. It is already the cheapest form of energy in many places and by 2027 it will be the cheapest more or less everywhere.

A new paper in Nature titled “The momentum of the solar energy transition” indicates it will get even cheaper and, therefore, more popular. Several models run by those researchers indicate solar will generate at least 56 per cent of all global electricity by 2050. Fossil fuels, which produce over 60 per cent of electricity, currently will only contribute around 21 per cent by then.

The rest will come from other sources (including wind, hydro, hydrogen, and nuclear). Apart from mining, manufacturing, services, and domestic usage (electricity replacing gas as cooking fuel, for instance), transportation will also be shifting to RE with internal combustion engines, turbines, and jets replaced by electric engines and fuel cells in many instances. In other cases, synthetic fuels, depending on atmospheric carbon capture, may replace petrol.

Policy support will continue to be necessary and enormous R&D will have to be devoted to developing technologies to produce cheap green hydrogen and synthetic petrol, and to develop and stabilise critical elements of the supply chain like storage solutions, electrolytes, better recycling of industrial metals (recycling is much less energy-intensive than virgin production), etc. The US government, for example, targets green hydrogen production costs of $1/kg by 2030 — it costs anywhere between $3 and $8/kg now in different places.

For the shift to be sustainable and meaningfully carbon-reductive, many new technologies will have to be developed and stabilised. Electric propulsion for aircraft and ships, for example, has a long way to go. Lithium-storage batteries could be a bottleneck since proven global reserves can’t meet estimated demands. Other rare earths are also in short supply.

Hence, sodium batteries, or some other solution, must be developed. Hydrogen storage and transport is also an intractable challenge, which must be met for fuel cells to be widely used. Biomass collection in meaningful quantities for energy production is hard. Simply balancing smart grids, which use mainly intermittent RE sources like solar and wind, also requires more work. Global supply chains will shift massively during the transition.

The transition presents threats and opportunities for investors. Obviously vast sums will be spent. Going by historical precedent, there will be huge booms and busts since nobody will know how to value these new businesses. This will be the next big frontier for financiers.