Climate change: Is the future brighter than we think?

April 2022

Key points

With China’s recent investment in solar power and renewable energy getting progressively cheaper, is a greener world achievable? Calum Holt investigates.

“When things are getting better, we often don’t hear about them. This gives us a systematically too-negative impression of the world around us, which is very stressful.”

Hans Rosling was largely talking about global living standards when he made that observation in his book Factfulness, but news about climate change is no different. The headlines which inform the public, and by extension most participants in financial markets, leave us stewing in a marinade of short-term environmental disasters that foreshadow long-term existential uncertainty. Academics alert us to the harm we are doing, and governments make grandiose guarantees, but despite the international targets and corporate promises, the trend line of global temperatures ploughs relentlessly on, up and to the right.

There are two ways to interpret this. The first is to say that this genuinely is a doomed enterprise. Despite the action supposedly taken, climate change represents a truly intractable problem. The sweeping arc of history is too inert for us to make a difference, and we must reinvent our entire mode of life or learn to survive the consequences.

Alternatively, one could view the mounting commitments as a build-up of pressure – pressure that will suddenly be released as a dramatic inflection of progress. The wheels are spinning, but until the rubber hits the road, we won’t be going anywhere. When it does, we will.

I’m in the latter camp. There’s no room for complacency or naïveté when the stakes are so high, but the situation presented by the media often doesn’t marry up with the long-term trajectories of the technologies that can offer us ecological salvation. Abe Lincoln once said that if he had six hours to cut down a tree, he’d spend the first four sharpening his axe. We’ve been honing renewable technologies for the best part of 30 years, but their rollout has only just begun. Here are four reasons to be optimistic about climate change:

Green energy is cheap energy

No-one’s views on climate change were formed instantaneously. We learn more as the years go by and build up an understanding of the problem – and its potential solutions – over time. But this is a space where things move quickly. In the solar energy market, a financial or technological aeon for the rest of us can pass in the space of a few months. In 2009, the average cost of utility-scale solar energy was about $360/MWh. By 2015 it was down to around $64/MWh. Last year, Saudi Arabia inaugurated a solar facility at just $10/MWh.

In the minds of most, the terms ‘renewable’ and ‘cost-effective’ mix like oil and vinegar. People know what cheap energy looks like, they know what green energy looks like, and they have always entertained a little-questioned assumption that never the twain would meet. Then, surreptitiously and under the cover of pandemic headlines, they did. In 2021, an understated press release from the International Renewable Energy Agency informed the world that 62 per cent of new renewable energy projects from the previous year were cheaper than the cheapest new fossil fuel option. Even in India, where coal energy prices have historically been rock-bottom, newly built solar energy managed to undercut the price of electricity from coal plants already in operation.

This makes a huge difference. Back when renewables invariably required lavish subsidies, each potential developer had to find a government willing to bankroll them with taxpayer money. Underfunded bureaucracies would run excruciatingly slow auction processes, and fierce competition for the limited subsidy funding would invariably push down returns to the brink of commercial viability.

Now, with each passing year, subsidies are being phased out – not because governments have got cold feet, but because subsidies, along with their accompanying bureaucracy, simply aren’t necessary. As the market price of energy soars – even before carbon credits are phased in – and as the cost of producing renewable energy continues to plummet, the yawning spread between the two represents an unprecedented financial opportunity for companies able to offer cheap, local, decentralised green energy. The sun need not be extracted from the depths of the North Sea nor passed through a global logistics network in turmoil; the wind need not be purchased from tyrants. Now that supply chains are spluttering into gear and projects are being built with increasing scale and experience, renewables look more attractive by the month.

All that remains is a cultural shift. We are still obsessed with the ‘cost’ of the transition, and not with how much money could be saved in the long run by switching to deflationary renewables. As Mark Twain was supposed to have said,

“it ain’t what you don’t know that gets you in trouble, it’s what you know for sure that just ain’t so”.

Build at scale, and they will come

Given the dramatic cost reductions already seen in the renewables market, it’s tempting to think that the best days of cost savings are behind us. When it comes to wind power, the opposite may be true. As the market has developed, there has always been an incentive to build bigger turbines – a 10MW model will deliver twice as much revenue as its 5MW counterpart, but without a proportional increase in raw materials, installation costs, or maintenance expenses.

Yet while the burgeoning size of turbines has brought impressive reductions in costs, it means that few turbine models have ever been manufactured at scale. It can take years to design a turbine, test it, source the components, and forge a robust supply chain. So long, in fact, that by the time a turbine is commercially viable, a bigger and better model has often been designed, and the supply chains must be reconfigured and rebuilt with new components.

Unlike the solar panel manufacturers who can make their products by the tens of thousands, buying components in bulk and spreading development costs, turbine manufacturers have had to absorb high research and development costs without ever getting to mass-produce a single model at a meaningful scale. That may be about to change. Onshore turbines have now reached such a size that transporting them would be impossible if they got any larger: a slight bend in the road or pesky overpass would bring the vehicles carrying blades and towers to a standstill. With a natural limit reached, wind turbine manufacturers will finally be able to produce much greater volumes, and the economics of the 50,000th 8MW model produced are sure to look much more attractive than those of the 500th 2MW turbine.

No technology is an island

Carbon emissions are ubiquitous in the global economy, and the sheer range of new technologies needed to reach net zero can at times be depressing. But few realise the extent to which a few fundamental technologies at the core of the economy can trigger a cascade of solutions. We could pull carbon out of the atmosphere at scale today, but we don’t because the green energy needed is too expensive. We could make green steel the norm by using electric arc furnaces powered by renewables instead of blast furnaces – but again, we don’t, because the green energy cost has historically been prohibitive.

More immediately, we could electrolyse water, splitting it into oxygen and green hydrogen, which we could then use to help decarbonise everything from steelmaking and shipping to heating and heavy industry. The same problem haunts us: while the cost of electrolysers is in freefall as we switch from bespoke, hand-wound units to mass-produced modules, the cost of the green power needed for electrolysis can be as much as 75 per cent of the final cost of the hydrogen. Yet on our current trajectory, green hydrogen may soon be cheap and abundant, ready to burn in natural gas plants, power bus fleets, heat homes, and act as a store of energy for when the sun isn’t shining and the winds lie still.

The internet is just one technology, but its development has transformed the entire economy. Many industries owe it their very existence. The same could be said for semiconductors, fossil fuels, the telephone, railways… even, once upon a time, the humble stirrup. Increasingly affordable green electricity is not an isolated breakthrough, but one with innumerable corollaries.

The east is green

I’ve presented the energy transition here not as a steady linear shift, but as a build-up of pressure that is suddenly released when renewables reach the point of commercial viability. In China, we may be witnessing just such a release.

In November 2020, the Global Wind Energy Council released a paper estimating that over the course of that year, 71GW of new wind energy capacity would be installed worldwide; a record year and a job well done, all things considered. A few months later, China announced that it alone had installed a jaw-dropping 72GW of new wind capacity, significantly more than the rest of the world combined. Most of this was driven by a quantum leap in the level of onshore wind capacity – which many claimed would be a one-off fluke. The following year, however, it was the turn of China’s offshore market to deliver numbers so staggering that the journalists reporting them had to preface their articles by asking their readers to ensure they were sitting down. In 2021, China installed more offshore wind capacity than the rest of the world installed cumulatively over the last five years.

The country now has over three times more hydropower capacity than the next biggest producer, Brazil. It hosts eight of the world’s 10 biggest solar panel producers, and while covid-induced supply chain issues have hammered the western wind turbine manufacturers, their Chinese peers have unblinkingly posted record profits. Few had heard of names like Goldwind or Ming Yang a few years ago. Now they are fast approaching the size of the European champions.

The idea that geopolitical power will increasingly emanate from China in the coming decades is well established – but electrical power and its associated trappings? Less so. The media presents China as a laggard on climate change, chastising it for the so-called gap between rhetoric and reality. Critics note that the country is the world’s biggest emitter, and those who have visited Beijing in the summer will know the stifling smog that lies stagnant in its crowded hutongs. Nevertheless, the country’s trajectory on climate change is becoming crisper with each market update: the emerging picture is one of China not only embarrassing its critics by reducing its emissions much faster than anyone expects but enriching itself by selling surplus panels and turbines to a sluggish, bungling west.

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The views expressed in this communication are those of Calum Holt should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect personal opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.

This communication was produced and approved in April 2022 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking. 

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