How the renewable energy transition could usher in an economic revolution

By Felix FitzRoy

Source: Wikipedia

In the sixth contribution to the INSURGE symposium, ‘Pathways to the Post-Carbon Economy’, Felix FitzRoy, Professor Emeritus at the School of Economics and Finance, University of St Andrews, argues that scepticism of the potential for a prosperous renewable energy ignores two key issues: the colossal, yet often hidden, economic costs of fossil fuels, including huge subsidies, many times greater than renewable energy subsidies; and the myriad economic dividends that could thereby open up when a renewable energy transitions weans us away from fossil fuel dependence. More details are in the book — An Introduction to Climate Change Economics and Policy, 2nd ed. Routledge, 2016, by Felix FitzRoy and Elissaios Papyrakis.

In this context, concerns about net energy decline, while understandable, might not account for what a renewable energy transition could achieve, with the right sort of support from both government and industry. For FitzRoy, we have still barely begun to tap into the potential to scale up for renewable energy in a way that is sustainable.

The key, he says, is not in any single renewable energy source — which alone would be insufficient — but in the way multiple renewable sources can be effectively combined and integrated through a smart grid.

It is well known that the cost of Wind and Solar renewable energy generation (WS) has been declining dramatically for more than a decade, and the decline is predicted to continue.

Together with growing worries about climate change and local pollution, this has been driving the rapid, world-wide expansion of WS capacity. Political factors such as the 2015 Paris climate agreement have been much less important. Nafeez Ahmed’s ‘3 Ways’ article provides much more detail.

The role of subsidies is widely misunderstood. Germany’s feed-in tariff was important in the early build-up of WS when costs were much higher, but globally, direct subsidies for fossil fuels have averaged 10 to 20 times the total subsidies for renewable energy for many years.

As the International Monetary Fund (IMF) and World Health Organization (WHO) have emphasized, the health costs of just local pollution from fossil fuels include 3–4 million annual premature deaths from outdoor air pollution (including 40,000 in the UK), as well as extensive morbidity.

This was ‘costed’ in monetary terms at “US$5.3 trillion in 2015, or 6.5 percent of global GDP” by the IMF, costs not paid by the polluters due to inadequate energy or carbon taxes, and hence regarded as indirect subsidies.

And even this huge sum makes only a small allowance for the future costs of climate change, which in the worst case of continued inadequate mitigation efforts could eventually destroy civilization.

Ending fossil fuel subsidies and properly taxing carbon emissions would actually provide a large fiscal surplus for consumers, most equitably if the tax proceeds were returned to citizens on an equal per capita basis as a ‘fee and dividend’ — perhaps the most politically acceptable form of carbon pricing, which benefits the poor who use least energy on average.

And of course these measures would accelerate the ongoing transition from fossil energy to WS.

These facts have been given relatively little publicity in the popular media, which instead repeats fossil lobby claims that WS intermittency implies prohibitive costs for large scale replacement of fossil energy with renewables.

These claims are even supported by some independent analysts such as Gail Tverberg, so it is important to expand on the various factors well known to experts, but ignored by these critics.

Thus Mark Jacobson and a large team at Stanford University, energy pioneer Amory Lovins of the Rocky Mountain Institute and others have shown the feasibility of supplying most of the world’s power with wind, water and solar, but no expensive nuclear or unproven carbon capture and storage (CCS), by 2050, while reducing demand with investment in energy saving and efficiency.

Axiom 1. Continental scale deployment of Wind and Solar renewable energy (WS) connected by a ‘smart grid’ could smooth out most of the fluctuations or intermittency of individual and local supply and replace most fossil energy. Such a smart grid requires major investment, in addition to WS generating capacity, but combined with other, complementary investment including energy efficiency would result in very large energy savings compared to current wasteful use of mainly fossil energy supply.

Europe offers a particularly intuitive example of how this might work in qualitative terms.

Abundant solar potential in the South could reliably supply most of EU daytime power needs if interconnected with a modern, high voltage, direct current smart grid, which has very low, long distance transmission losses compared to the existing AC (alternating current) grid.

Night time demand, now about half of daytime demand, could be supplied by wind, mainly in the North, along with biogas, hydro, and would increase when used to charge electric car batteries and run ‘smart appliances’, so day time solar should supply less than twice the night load.

Little storage in addition to the future and much more efficient electric car batteries seems to be needed in this scenario, though storage technology is rapidly improving, and there are other major benefits, and one problem, which have not been sufficiently recognised.

Since internal combustion engines require 2 to 3 times as much energy as electric motors for the same power output, general replacement of the former by the latter would generate massive savings. Electric motors are also much longer lasting, part of the reason why the car industry has resisted them for so long, while the more even distribution of demand between night and day time peaks through the combination of smart grids and appliances would reduce maximum capacity needed.

The problem is that occasional winter high pressure systems with little wind can cover large areas of northern EU for several days. The cheapest back-up option is probably bio or natural gas-powered generation which is flexible and can be quickly fired up or closed down.

Existing gas or even oil powered generation capacity can be retained for this reserve capacity since it will rarely be required and contribute little to total emissions, and the cost is probably much less than the cost of equivalent storage with foreseeable technology, though battery and other storage technologies are now also advancing rapidly.

To avoid the price fluctuations and disruption of local electricity markets observed in Germany and elsewhere as the market share of WS grows, it is essential to expand large scale smart grid connections first in order to smooth local intermittency, implement all possible energy savings and then expand distributed WS capacity while closing the oldest, most polluting coal power generators first.

The major policy failure everywhere has been to reverse this order of priorities and simply allow WS expansion into an outdated grid with large, inflexible coal and nuclear ‘baseload’ power output which exacerbates the impact of intermittent WS, and resulting pricing and capacity problems that have alarmed critics.

As Amory Lovins of the Rocky Mountain Institute has often emphasized, these large, inflexible generators not only hinder the expansion of WS but also increase the vulnerability of the system to terrorist attacks, while new nuclear today is about the most expensive energy of all.

As Lovins and many others have also pointed out, energy saving or ‘negawatts’ is often the most ‘productive’ energy investment, especially in the built sector which is the biggest energy consumer.

Even retrofitting better insulation and heating systems to older structures can yield huge returns in advanced economies where most buildings date from the era of cheap oil and are extremely wasteful energy users. Thus errors in Germany’s ‘Energiewende’ policy were to subsidize early and expensive WS installation, as well as coal (!), while neglecting energy saving and smart grid development.

Insight 1: Combining all the savings from abolishing fossil fuel subsidies, reducing health costs of pollution, increasing energy efficiency, taxing carbon emissions, and gradually phasing out the world’s huge current investment and production expenditure on fossil fuels of around $5 trillion annually would not only generate major local health benefits in the medium term, but also provide a financial surplus more than sufficient to fund the transition.

However, much of the benefit will be delayed, so much new investment is urgently needed to speed up transition and ensure that the majority of lower income consumers do not suffer initial losses, and this could be accomplished by the ‘Green New Deal’ discussed below. The additional and incalculable benefits of averting dangerous climate change represent the ultimate bonus of survival in the long run. Yet the battle for survival is far from won.

Axiom 2: The fossil fuel industry is threatened by transition with stranded assets, losing most of the value of reserves now valued at tens of trillions of dollars, so it will continue to fight transition with lies, bribes and scare stories.

One of the scare stories is a major recession, which could indeed be triggered by too rapidly rising carbon taxes, or a new war in the Middle East and abrupt oil shortages as in the 1970s, neither of which anybody sensible wants.

It is also doubtful whether transition to low carbon can be achieved fast enough to avoid dangerous climate change without massive direct government investment, particularly to build the international smart grids which are essential for progress on every continent.

In fact such intervention — a Green New Deal— was proposed in 2008, as a way out of recession and into a future low carbon and full employment economy, by the New Economics Foundation in London.

Expanding government expenditure when resources are underutilised in recession, or as currently, when most economies are far from full employment and suffer from extensive underemployment and low participation in the labour force, typically generates a larger increase in output than the initial expenditure — the ‘Keynesian multiplier’.

This is now acknowledged by the formerly sceptical IMF to be much larger than unity, so the extra expenditure more than pays for itself, with no danger of inflation in the current economic climate of stagnant or falling real wages for all except the highest earners, and near zero interest rates.

Direct public investment in a Green New Deal thus enables the urgent goal of a low carbon economy being achieved sooner and limits the risk of irreversible climate change, while increasing growth and employment on the way. Bill McKibben compares the required investment to mobilization for WW2, which finally achieved full employment after the 1930s decade of the Great Depression.

Misguided austerity policies and ‘deficit fetishism’ espoused by economically illiterate politicians and journalists, on the other hand, reduce growth and lead to rising debt, while inflicting increasing hardship on the poor whose welfare benefits are being cut in the name of fiscal prudence.

Instead, the preferred policy in recession, ‘Quantitative Easing’ (QE) has mainly benefitted the rich by creating asset booms. Personal debt, now growing rapidly in the UK and US, mainly as a result of stagnating wages for the majority, can indeed be a problem, but sovereign debt held by government in countries with their own currency is not, and is actually at historically low levels in these nations.

Insight 2: Expanding government expenditure in a ‘Green New Deal’ would raise growth and employment and is needed to accelerate the transition to low carbon. This can be funded by issuing debt or just creating money by central banks, with no downside at a time of historically low interest rates and inflation.

To summarize, WS is still rapidly getting cheaper, and already competitive with fossil energy in many situations, while storage is beginning to see major improvement too.

The biggest obstacle to transition to a mainly WS economy is the need for continental-wide smart grids to smooth out fluctuations and integrate southern sun and mainly northern wind.

Large scale government intervention and international cooperation will be needed for rapid progress, but in the EU and elsewhere the pressure from advancing technology and public concern about pollution and climate has not yet generated the political will for decisive action, and rapid penetration of WS into outdated grids dominated by large and inflexible nuclear and fossil generators will continue to cause problems.

As the health and economic benefits from WWS electrification, energy saving and emissions reduction become more widely recognised, it is only a matter of time before policymakers catch on and begin to respond more effectively.

Felix FitzRoy is Professor Emeritus of Economics at the University of St. Andrews. He has been a Visiting Professor at ERMES, University of Paris 2, and EUI-European University Institute, Florence, and a Research Fellow at the WZB, Berlin. Current research includes happiness, relative income, age and economic growth, taxation, redistribution and basic income. His research has been published in journals including the Economic Journal, Quarterly Journal of Economics, Economica, J. of Comparative Economics, J. of Economic Theory, J. of Industrial Economics, Oxford Bulletin of Economics and Statistics, Scandinavian J. of Economics, European J. of Political Economy, Labour, British J. of Industrial Relations, Weltwirtschtliches Archiv, Manchester School, Small Business Economics, Kyklos, Environmental and Resource Economics, International J. of Transport Economics.