Inflation plagues clean energy. How bad is it?

Wind, solar and batteries have seen steady, fairly predictable cost drops over the last two decades. But now a combination of pressures — supply-chain turmoil, grid constraints, interest rates, labor costs — has raised costs for products and projects. And they’re challenging the commercial viability of emerging sectors such as offshore wind and hydrogen.

So how will the market work through this inflationary blip? And are there other policy interventions to ease pressures? This week, we explore clean energy’s inflation problem.

Then, the International Energy Agency says peak fossil-fuel consumption is upon us. But what does that actually mean? We’ll put the ​“peak” into perspective.

Joining us this week are Katherine Hamilton of 38 North, Michael O’Boyle of Energy Innovation and Maria Gallucci of Canary Media.

Stories we mention in this episode:

• Latitude Media: The ripple effect of rising wind costs
• WSJ: Green power gets pricier after years of declines
• Canary Media: Offshore wind pushes ahead despite industry turmoil
• NYT: IEA forecasts peak fossil fuel demand
• Washington Post: ​“Peak” fossil fuels isn’t what it sounds like

Sign up for Latitude Media’s Frontier Forum on January 31, featuring Crux CEO Alfred Johnson, who will break down the budding market for clean energy tax credits. We’ll dissect current transactions and pricing, compare buyer and seller expectations, and look at where the market is headed in 2024.

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Transcript

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Stephen Lacey: So we've been living in this period of high inflation for a while now. We're all facing high prices for everything in our lives. What's something that got really expensive in your life that you just can't live without?

Michael O'Boyle: Beer is getting expensive, at least in the Bay Area. Maybe it's not the most popular thing that I need beer in my life, but it's just a fact.

Katherine Hamilton: Oh my gosh, eggs got so expensive and my family eats so many eggs. It's like they can't survive without them.

Maria Gallucci: Yeah, another beverage that's getting more expensive is milk, and I never really paid that much attention, or I guess I never really bought cow milk before my toddler started drinking it, and I've noticed every few months or so, the price just keeps going up and up.

Stephen Lacey: The price of candy went through the roof too. Did anyone have to buy candy for their kids or to hand it out? I think candy prices are up 13% since last year.

Michael O'Boyle: My son, we had a good internal rate of return on candy this year. My kids, my kids cleaned up. We have an insane amount of candy at home.

Stephen Lacey: There's a hot resale market for candy.

Katherine Hamilton: Our orthodontist pays the kids five bucks a pound, so they've always been able to turn it into real bucks.

Stephen Lacey: This is The Carbon Copy. This week, how bad is the inflation problem in clean energy? The story for wind, solar, and batteries over the last couple of decades has been one of steady, fairly predictable cost drops, but a combination of pressures, supply chain turmoil, grid constraints, interest rates, labor costs, has raised costs for products and projects, and they're challenging the commercial viability of emerging sectors like offshore wind and hydrogen. So will the market work through this inflationary blip and are there policy interventions to ease pressures then? The International Energy Agency says peak fossil fuel consumption is upon us, but what does that actually mean? We'll put the peak into perspective.

I am Stephen Lacey, I'm the executive editor of Latitude Media, and I have a stellar group here with me this week. Katherine Hamilton is the co-founder and chair of 38 North. She's in DC. Hello, Katherine.

Katherine Hamilton: Hi, happy to be here.

Stephen Lacey: Maria Gallucci is a clean energy reporter at Canary Media and a familiar voice here as well. She's in New York. Hey, Maria.

Maria Gallucci: Hey, Stephen.

Stephen Lacey: And coming back on the show as a second time guest is Mike O'Boyle, the senior director of Electricity at Energy Innovation, and he is with us from the Bay Area. Hey, Mike.

Michael O'Boyle: Hey, Stephen. Thanks for having me.

Stephen Lacey: Welcome back. So we're all here to talk about inflation and not egg prices, milk prices, beer prices. We're going to talk about clean electrons and the equipment that goes into making them.

So after the global spikes in oil, gas, and commodity prices when Russia invaded Ukraine, Europe and America responded with hundreds of billions of dollars in support for clean energy to ease the burden. Biden's big climate bill eventually turned into the Inflation Reduction Act, and it was branded and designed to combat energy inflation. But the biggest short-term threat to maximizing deployment of renewables under the law could actually be inflation.

This summer saw offshore wind projects canceled, delayed and renegotiated in the US and Europe. And just today, right before we started recording, the Danish developer Ørsted said it would ditch two offshore wind farms off the coast of New Jersey because of rising financing and construction costs. And it'll take maybe a five and a half billion dollars write down on the projects. Lithium ion battery pack prices increased for the first time due to raw materials and components costs, according to Bloomberg New Energy Finance, and the International Energy Agency reports that the levelized cost of wind and solar globally is 10 to 15% higher than before COVID thanks to supply chain snafus and the rising price of steel, copper, aluminum and polysilicon.

So how could this impact the trajectory of renewables and could it also derail emerging sectors like hydrogen and carbon removal, which rely on cheap renewable electrons, and what kind of interventions could help? So Katherine, you've been talking to a lot of CEOs out in the market. What are they telling you about this cocktail of inflationary pressures?

Katherine Hamilton: Yeah, I talked to two CEOs of renewable energy developers owners and operators, because they could see the entire cycle. There are kind of three big things. One is the acute inflation issues that happened around COVID are starting to calm down a bit. So it was really stark, especially with batteries, when lithium carbonate went through the roof. Shipping of course was completely stopped. Steel, because of Ukraine, that was a really big issue, and some of that has not gone away. But the acute inflation pressure seemed to have been relieved.

However, a couple of other things, the second thing that they brought up was interest rates. So that's quite inflation adjacent, and they all said that that was affecting the prices and that often the pain of having negotiated a PPA that is now underwater because you didn't hedge for interest rates to go up, that's a real thing.

The third big pressure that they cited was equipment. And FirstLight Power, for example, is a hydropower operator and developer, and they said, transformers three years to get a transformer in place. So if you have something that fails, and hydropower plants sometimes are a little on the older side, if something fails for any reason, a bird flies into it, anything happens, it might take three years to get a new one. The same is true with cable. So just getting cable, and especially if you're citing offshore wind, having to get that energy to shore is really important. So those were kind of the big things where yes, inflation, but to a lesser extent, certainly interest rates and then equipment has been an enormous issue.

Stephen Lacey: And Mike, I know you have been really digging into this. What does the data tell us about what it's doing to the competitiveness of clean energy today?

Michael O'Boyle: Yeah, so we actually published a report recently that we called Tools for Energy Regulators to Manage Power Sector Inflation, where we took a look at what the most recent publicly available data says about renewable energy and storage costs. We found that a lot of the recent cost pressure and increases have to do with the factors that Katherine summarized. And to that I would really emphatically add trade policy, especially with China.

But in summary, the picture for renewable competitiveness in the US remains relatively strong. The price data that's publicly available isn't great, but it's also not uniformly as bad as some anecdotal evidence suggests, or some of the recent stories out of the Northeast or New York where developers are pulling out or threatening to pull out or unless they get price increases in the 50 to 100% range from the contracts that they negotiated. The best data that we found that's publicly available come from two sources, the Lawrence Berkeley National Labs Utility-Scale Wind and Utility Scale solar databases, which aggregate utility contract price data, and then Level 10, which aggregates corporate power purchase agreements. These are kind of two of the main procurement mechanisms in the US. In 2022, and the first half of 2023, average utility PPA prices didn't budge much in the utility scale sector, about 10% on average. They kind of remained relatively flat because you're still getting economies of scale with some of these big purchases and accessing very good resource quality. But corporate purchases in the Level 10 database rose significantly up as much as 50% in some markets since 2021.

But price isn't the whole story. There's also the value that these renewable projects have in the market, and that value's also increased at least in 2022 as fossil fuel prices rose, especially natural gas prices, in response to the Ukraine/Russia gas crisis. So inflation has hit all parts of the energy supply chain, not just the renewables. Katherine touched on transformers and other equipment. And utilities that were invested in renewables did save a lot of money when gas prices spiked. So even now that gas prices have fallen, there's still a lot of value that renewable energy projects provide once they're built.

Katherine Hamilton: Yeah, absolutely. The pricing pressure started with inflation, but then, especially in the wind industry, they didn't have a good grip on their cost structure and so that's having to go through some adjustments. And I think as Mike said, that's going to settle down. That'll settle out, and the pricing will become more realistic, it's just that there was a bit of a shock to the system and you could see a lot of damage that was done.

Stephen Lacey: So Maria, let's bring you in here because you've been following how this has played out in the wind business, specifically the offshore wind business. And it was a really rough summer. We saw a bunch of projects delayed as developers tried to renegotiate contracts. Some are canceled. There were these two projects from Ørsted that I mentioned at the top of the show that were canceled off the coast of New Jersey. And why don't you just walk us through how this played out over the summer and into the fall and how big of a deal it is for offshore wind?

Maria Gallucci: Sure, so a lot of it stems from what Katherine was mentioning with these PPAs, the Power Purchase Agreements, a lot of the developers signed agreements to sell their electricity with states with utilities several years ago, not necessarily factoring in the potential for rising interest rates, inflation, et cetera. So they're locked into these contracts that developers now say are no longer profitable. At the same time, the cost of financing their projects is rising as well. And so in some cases, their developers are making the decision that I'll take the 50 million, $60 million write off and walk away from the project rather than keep sinking money into it.

So it kind of started this summer, we saw Avangrid in Massachusetts, they paid $50 million in fines to walk away from the Commonwealth Wind Project, and Shell and Ocean Wind did the same to walk away from another major project near Martha's Vineyard. And New York developers recently asked the state if they would consider renegotiating these PPAs. The State's Public Service Commission denied that, and so now these companies are kind of considering what to do, and it keeps continuing. And it's interesting though, because there are these two competing narratives with the US offshore wind industry. So the Biden administration just this week gave a key federal approval to a major offshore wind development in Virginia. And so you're seeing these projects move forward at the same time these existing projects are now hitting the brakes.

How big of a deal is this? It will definitely have major consequences. I think many analysts no longer think it's realistic that the Biden administration will meet its goal of deploying 30 gigawatts of offshore wind by 2030. But I don't necessarily think that it's a fatal blow per se, it just means that this long road that we're on toward offshore wind development will take longer, be more expensive for companies and ultimately probably for rate payers as well.

Stephen Lacey: And boy, is it a long road here in the US for offshore wind. Mike, what do you make of these cancellations and renegotiations in offshore wind?

Michael O'Boyle: It's really unfortunate what's happening because we're going to need offshore wind in a big way to meet our climate goals, not just to decarbonize the electricity sector along Biden's 2030 and 2035 goals, but the need for high energy production by renewable energy is going to continue as we electrify transportation buildings and industry into the middle of the century. And while offshore wind might not be a big part of the picture in the next 10 years in terms of renewable energy, we really need it to scale in order to produce enough electricity that's clean that can supply these end uses. So any delay now in the takeoff of the industry is going to have knock on effects that delay the scaling up and the S-curve that the industry is on.

Yeah, it's really quite unfortunate, but I'm still bullish on offshore wind in the long run, and we just need to get a few of these projects in the ground and get the domestic supply chain scaled up. And states really, rather than walking away, should look for ways to double down on their support and make these projects happen.

Katherine Hamilton: Yeah. Maura Healey, the governor of Massachusetts just announced that Massachusetts, Connecticut and Rhode Island are coordinating on the next round of procurements, which I think is really important because if together they can pool their resources and make sure that they create the stable environment for the developers, I think that will certainly help.

Michael O'Boyle: One of the big problems here is if you have a 10-year delay between a contract and development, that's a huge amount of uncertainty as to how much it's going to cost the developers to build the projects. We have to find ways to cut the development timeline down so that developers don't take on so much price risk or we have to find a way to adjust the contracts, at least meeting the developers somewhere in the middle so that inflationary pressures can make their way into the final price that they pay.

Stephen Lacey: And we're starting to see some of these ancillary impacts as well, which you had mentioned in one of your stories, Maria, and Rhode Island regulators are now delaying consideration of a major transmission line to connect these projects. You have a lot of local development to try to accommodate the equipment and staging for these projects. And a lot of that is, it starts to come into question about how much you invest if these projects are not going to go into the water soon. So what are some of the ancillary impacts that you've seen Maria?

Maria Gallucci: Right. Well, you mentioned that proposed export cable in Rhode Island that was connected to the 2.4 gigawatt project near Martha's Vineyard, the developers wanted to run this export cable beneath Rhode Island State waters, and the regulator said there's no reason for them to go through the trouble of reviewing this proposed cable because the offshore wind project is "hypothetical" right now. And I think you see that there's this question of, with supply chain development, workforce development, are they putting the cart before the horse then if these projects aren't going to materialize for a long time? But it's tricky because you need all of those components. You need the skilled workers, you need the supply chains, and the ports need to be massively upgraded to support this infrastructure, that all has to happen too for these offshore wind projects to come to fruition.

Stephen Lacey: And beyond offshore wind, Katherine, there is a push among some solar and onshore wind developers here in the Northeast to open up contracts because of really tight margins, potential fears of potential losses. And now there's this question about whether this will derail state goals if these projects are delayed or canceled or if developers are not allowed to renegotiate contracts. So how is this playing out on the policy front at the state level?

Katherine Hamilton: Yeah, I think a lot of the goals have been very aspirational and did not hedge for inflation and interest rates rising and just some of these projects not having hedged for exactly that. So I do think that we're going to need to kind of look at what are those goals. I don't think we need to take our feet off the gas though. I think that's really important to stay focused. I mean, transmission takes a long time to build too, let's just continue to focus on that, make sure that we get the transmission built and that we continue to build demand. Remember, demand is driving a lot of this, and I think once you do that, the pricing is going to make a lot more sense.

Stephen Lacey: Early in the pandemic, we heard this term transitory inflation a lot. Many economists believed that a lot of the inflation trends that we saw were short term, they were a product of the pandemic and disruptions to supply chains, but things would go back to normal and they did not. So I guess the question for the clean energy industry is how much of this is transitory? How much of it is long term? and I wonder, Mike, as you've dug into it, is this something that we need to be concerned about long-term or does it feel like a little bit more of a short-term phenomenon?

Michael O'Boyle: I think some trends are more transitory than others. So commodity markets, the price of raw materials, I think that's anyone's best guess. People's jobs are to look at the amount of production of lithium and iron ore and things like that. I don't really have any insight there, or prediction, but it is an industry where high prices tend to be the cure for high prices. If it's high enough, then you'll see more production. And we saw lithium prices come way down, which is already helping the competitiveness of utility scale batteries and batteries for EVs.

One of the biggest things that seem to be seldom linked to the energy transition is monetary policy and the costs that it imposes on renewable energy. So interest rates set by the Federal Reserve have a meaningful impact on total cost. We found, for example, if you reduce interest rates 300 basis points from 7% today to 4%, you can reduce the levelized cost of a typical utility scale solar plant by about 20% or about $6 per megawatt hour. So it's kind of ironic, the Federal Reserve's effort to fight inflation is leading to higher prices for states and utilities that want to procure more clean energy. And the Inflation Reduction Act is kind of acting in an opposite way to that. So there's lots of confounding factors that can feel a little frustrating and confusing. But again, anyone's best guess. It's not looking great for international relations and geopolitics around trade with China, for example, which is a big factor here as well.

Katherine Hamilton: Yeah another thing, just to build on what Mike said, is that Basel III is this international regulatory accord that is being developed now, and this is to try to mitigate risk in the international banking sector, keeping banks to maintain certain leverage ratios and reserve capital. And some of the proposed regs are that renewable energy financing would be at a 400 times risk factor than other sectors. And I think that's something that will be fixed, but it's another thing that's just creating uncertainty in the market right now and causing a lot of stress for developers in trying to think about, how do we mitigate for all of these different circumstances.

Stephen Lacey: Maria, as you're talking to companies across the spectrum, you're not just focused on wind, as we discussed in our last show, in our deep dive on industrial decarbonization, you're talking to all these companies that are developing first of a kind projects in cement, in chemicals decarbonization, in hydrogen. And how much of these cost pressures are starting to weigh on the companies that you're talking to? Does it come up in your conversations?

Maria Gallucci: That's an interesting question. I think especially because of these first of a kind technologies, I think I'm sure that they certainly are affected by these cost pressures, but I think right now the main pressure is developing the technology, getting it to scale, getting it out into the real world and finding demand. I think that they have a whole other set of challenges that are probably more front of mind, more pressing right now than the sort of larger supply chain issues. But I do know certainly everybody is affected by the supply chain issues, just delays in getting materials. The rising cost of transportation adds to what is already the expensive step of technology development and proving out first of a kind technology.

Michael O'Boyle: Our big call to action is for policymakers not to sit idly by and wait for inflation to fall. And I don't mean they need to accelerate procurement, I mean, there are certain inflationary pressures that are the result of bad policy that can be fixed. Regulators can prioritize reforms to, for example, transmission interconnection. The cost of transmission access and interconnection has increased dramatically, and that ends up getting passed through to customers when renewable projects connect to the grid and have to pay for transmission upgrades that are long needed and could benefit the whole region. The same goes for proactive transmission planning, monopoly utilities could do a much better job testing the market and doing competitive procurement. State governors and legislatures can take a proactive role in taking advantage of new incentives under the Inflation Reduction Act for domestic manufacturing and take a leadership position and get those jobs to juice up the US supply chain on renewable energy and batteries. So there's a lot policy makers can do to proactively address some of the stickier trends like grid access, trade barriers, and help to drive these costs down in their state.

Katherine Hamilton: Yeah, I would just say exactly what Mike said about the Inflation Reduction Act, but also the Infrastructure Bill is providing a ton of funding to scale, to build manufacturing and drive down capital costs because that's the biggest hurdle to scale. And one of those things would be for batteries. So there are a lot of new battery plants being built. They have not had a liquid market really, there are not a lot of big, huge OEMs just churning out batteries, and there will be as a result of all of this funding. And I think that will change the equation too, because in addition to interconnection, you also need batteries to back up solar and wind and everybody else out there.

Stephen Lacey: To be blunt in our assessment of this problem, how big of a deal is it in your minds? And if we think about where emissions need to go and where they're projected to go under the Inflation Reduction Act, how much of a problem is this inflation issue? So it's acute in certain places. I think offshore wind, it's a serious problem. As we talked about, when you have these delays of these projects, you're not looking at one to two year delays, if you're resetting the process, you could be looking at a lot longer. And there's a ton of infrastructure around offshore wind that needs to get built out simultaneously. So any major delay is a real serious problem on a decade timescale. But in general, how big do you think this problem is in impacting the emissions trajectory for the United States under the Inflation Reduction Act?

Katherine Hamilton: Everybody's affected by inflation, so it levelizes everyone. I think in the end, the clean energy transition provides so many more solutions than the fossil fuel sector that, especially if we look to the future for manufacturing, for jobs, for really creating new growth in communities that have been stagnated because of fossil fuel closures, I think in the end, the cost will level out, but that since it affects everyone, it's not like it's just affecting renewables and not anybody else.

Maria Gallucci: Yeah, that's a great point. Even gas prices are rising, fossil fuel prices are rising domestically. Yeah, those industries are, as Katherine was saying, are exposed to the same economic factors as well.

Michael O'Boyle: This is a big deal insofar as it turns into a widespread narrative that renewables are not cost-effective or not worth the price that we are now have to pay for them, but that would be a big misrepresentation of where the market's at and where it's likely to go. Economies of scale are still hitting this industry. When it comes to production, I tend to think that we're not going to be talking a ton about inflation in the renewable sector in a couple of years. And like I said before, the value of these projects is there in spades.

You can look at what renewables are doing in Texas, which is arguably the most free electricity market in the country, and they're adding so much solar that they're about to, or perhaps even have passed California in terms of utility scale solar deployment, with no mandate whatsoever. So that to me is a leading indicator that we're already sort of on the friendlier side of this problem. The big issue will be can policymakers figure out how to expand grade capacity fast enough to allow these projects to interconnect at the pace that the market would absorb them? So I'm looking to policy actions to fix transmission planning and interconnection more so than I'm looking to the price trends in the renewable industry.

Stephen Lacey: Yeah, so if any regulators or people in the power sector out there want to dig deeper into what those solutions are the report that Mike referenced that he played a role in, from Energy Innovation it's called Tools for Energy Regulators to manage Power Sector Inflation, and we'll provide a link to that in the show notes along with some of the other stories that we referenced.

All right, let's turn now to the world energy outlook. This is a major report that always gets a ton of press attention when released, and this year was no different. The World Energy outlook examines how the energy transition is playing out in every region of the world across renewables, electric vehicles, fossil fuels, hydrogen and carbon removal. And people have paid a lot more attention to it because of how the IEA is starting to track the transition in a more proactive way. And this year's report made a headline grabbing projection that fossil fuel use will likely peak by the end of the decade. So there is a lot wrapped up in that projection, what does that peak actually mean and where are we in the transition? Let's dig into some of those findings and then we'll kind of look at what's playing out on a sectoral level.

So Katherine Fatih Birol, who's the executive director of IEA, wrote in an op-ed, that the world is on the cusp of a historic turning point, and that this is the first time that a peak in demand is visible for each fossil fuel this decade earlier than anticipated. So what does IEA say is pushing us toward peak fossil fuel consumption by 2030?

Katherine Hamilton: Yeah, for decades, we've been stuck at about 80% fossil fuels no matter what. But it looks like based on the steps, which are the stated policy scenarios for all of the countries, that internal combustion engine sales are down, they're below where they were before COVID, additions of coal and gas plants are down 50%, sales of residential gas boilers is down, heat pumps are up. There's a real momentum toward electrification, so the clean energy transition has really taken hold. And when we talk about a peak, that means after 2030 we'll still be at about 73% fossil, it just means we will then start the decline. It doesn't necessarily mean we're going to meet our net-zero energy goals at all, or that we'll meet the 1.5 degrees centigrade targets, but it does mean that we're on a trajectory where eventually the clean energy transition will take over where the fossil fuel industry was.

Stephen Lacey: Uh-huh. Maria, any thoughts on that peak and what it means? It's not this rapid drop off, as Katherine said, it's this slow decline. So what does the world look like after the peak according to the IEA?

Maria Gallucci:

Right. Well, I saw a one great analogy I liked by the Bloomberg Opinion columnist, Javier Blas. He says he's an amateur mountaineer, and he described this process as rather than having sort of this steep descent like you would on an alpine mountain, it's more like a high altitude plateau. So you reach the peak, and as Katherine was saying, it's still years, decades of a slow descent, which is not what we would like to see in terms of reducing carbon emissions, limiting global temperature rise. But it makes sense, right? Because all of the sudden at 2030, it's not like magically all of the fossil fuel infrastructure we have will disappear. It will just sort of begin the slower phase out, which obviously faster is better for the climate.

Michael O'Boyle: Could we call it the beginning of the end? That's a more optimistic take perhaps from a climate perspective. But when industries stop growing, that's when the financial industry starts to get bearish on things and it can create a kind of negative feedback loop on the value proposition to investors that that industry has. And in the IEA's report, you can see how in the last few years, the spending and the investment in clean energy technologies is starting to exceed fossil investment by a widening margin. And that's the trend I'm looking at just as much as the actual peak end use, because if people's decisions hinge on profit and they're investing less in fossil fuels and more in renewables, that to me is a sign that clean energy is winning over fossil fuels.

Stephen Lacey:

And this report from IEA and some of the earlier reports have been grabbing because of how IEA has shifted in its projections, and they've been historically very conservative about the growth of renewables and batteries and EVs, and now they've really caught up with and are very proactive about what the growth of those sectors looks like. Mike, to you first, does this represent a pretty significant shift in how IEA views the world?

Michael O'Boyle: Yeah, I think it is significant. This shift has been happening over time. IEA did its net-zero pathway analysis, which to me was a real groundbreaking report that an organization that was created in 1974 to help coordinate a collective response to major disruptions in the supply of oil is now looking at how to phase out the use of oil and giving direction and leadership to developed and developing countries on the pathway they need to take.

I mean, IEA's role is not to be on the leading edge of technology, and this pivot means that the data is just staring them right in the face, it's undeniable. Some of the figures about electric vehicle deployment and solar power investment in particular, these are called out in their report as exponential trends that are now forecast to meaningfully eat into the growth of fossil fuels. I think their projections may even still be conservative, especially when it comes to the continued use of coal power at scale, particularly in China and developing countries. Not only is doing so untenable under a country's Paris Agreement commitments, but China in particular is adding clean energy at an absolutely mind-boggling pace.

They're expected to add 150 gigawatts of solar in 2023, that's roughly five times what the US is projected to add. And they're projected to top a terawatt of total installations by 2026. I mean, they added 15 to 20 gigawatts this year of battery storage more than they've built this decade. They're planning a 40 gigawatt offshore wind farm. I mean, the sheer investment happening in China is enough to make me bullish that, at least when it comes to coal, we're likely to see a steeper drop off than the IEA expects.

Stephen Lacey: This particular report did set up a clash between OPEC and IEA and there were these dueling op-eds between IEA and OPEC. And of course the oil industry and the countries representing major oil producers are going to say this, but the OPEC Secretary General said that this sets up the world to fail spectacularly because it will encourage underinvestment in fossil fuels. Katherine, any response to how oil producers are reacting?

Katherine Hamilton: It's OPEC. I mean, it's OPEC. That's their job. Their job is to sell oil, and it's the combination of the... Saudi Arabia around Iraq, Kuwait, UAE, all those folks, that's their job and that's their business model. So of course when they say your business model is going to peak in 2030, it doesn't appeal to them. But I would just note that it's not enough that we stop investing in oil and gas by then. It really does mean we have to, as Mike said, exponentially increase everything else and reach a tipping point then that that is where the cool kids are. That's what everybody is going to be focused on rather than, why are we worried about OPEC?

Stephen Lacey: I thought it was notable that OPEC felt the need to pen an op-ed in response to this report, which tells you a lot about the significance of this projection.

Katherine Hamilton: Yep, definitely.

Stephen Lacey: So let's look at how this will play out on a sectoral level. I asked each of you to pick a sector that grabbed you and talk about the shifts that we're seeing according to IEA. Maria, why don't you go first? What was a sector that you identified?

Maria Gallucci: I was interested in the numbers that they shared around electric cars. So in 2020, there were about 10 million electric cars on the road, and by 2040 IEA says we could have 650 million electric cars on the road. And just another data point, the IEA says that electric vehicles are on course to make up 40% of all new car sales by 2030 up from just 15% of sales today. So it's really just rapid growth and certainly there'll still be internal combustion engine cars on the roads, but a vast majority or a much larger share of them will be battery powered.

Stephen Lacey: Katherine, what did you dig into?

Katherine Hamilton: Yeah, so renewables are set to contribute about 80% of new power capacity by 2030 with PV, solar PV alone, counting for more than half. So using 70% of that anticipated solar PV manufacturing capacity would bring deployment to the levels projected in the net-zero scenarios. Of course, this means it has to be effectively integrated and it would definitely cut fossil fuel, mostly coal, but this means that storage will also be on the hook to make sure that it's there for solar. So I was struck by the amount of solar. I think it's interesting because SEIA says they want to have 30% by 2030, and I've always said, "I think that's low." I think we have potential for more than that. And this report sort of confirms that to me.

Stephen Lacey: Mike, what caught your eye?

Michael O'Boyle: Well, I was looking at their projection of gas and especially coal use after the peak, and I think maybe they are underestimating the negative feedback loops of declining coal use. Like using the US as an example. The peak of US coal consumption for power was 2007, and it kicked off an ugly battle and ultimately a very ugly march toward the death of the coal industry in the US that we're still seeing today.

I think countries could learn a lot from this experience where we didn't think about the politics of transition and the distributional impacts of it back then, nor were coal communities proactive about taking any sort of government help or planning for a just transition from coal to clean energy. So clean energy resources as well as manufacturing to meet the new climate aligned industries they could be means to revitalize and help many of these coal communities transition if there was an intentional community led push that could actually on the backend help accelerate that decline in coal. So we have entrenched interests in other countries where coal hasn't yet peaked or is on the verge of peaking. And those countries would be, I think, well advised to try to devise just transition strategies now and learn from the mistakes of the US policy on coal.

Stephen Lacey: All right. So we've highlighted a bunch of positive trends here. I don't want to end on a negative note, but I do want to get anybody's pessimistic takeaway or any cautionary takeaways. Is there anything that jumped out to you that gives you caution or even pessimism?

Maria Gallucci: Well, with climate change, there's always something to be pessimistic about. And I would just say that even for all of the positive developments that we've been talking about, and we were talking about this earlier, it's still not enough stated policies. The goals, what's happening right now isn't enough to limit global warming to 1.5 degrees, which is the level that climate scientists say we need to stick to avoid catastrophic climate consequences. So that's a negative note.

Stephen Lacey: Totally, that's how I read it as well. Mike?

Michael O'Boyle: I actually was thinking the same thing. The question of how do we deal with all of the long-lived assets associated with fossil fuel extraction and the financial obligations that those infrastructure projects have or the expectation of profit, those are not aligned with the 1.5 degree or even two degree temperature rise pathway. So we still have a lot more work to do to preserve a safe climate for the world, and so much suffering potentially in the future is at stake. But to turn it into a positive note, the fact that we've made this much progress in the face of opposition from incredibly strong forces like the oil and gas industry, like OPEC, gives me hope that we'll continue to make progress. And, like I said before, something to watch is how much is investment in clean energy exceeding investment in fossil fuels? And there's just so many good-hearted smart people working on this, I think for us not to succeed.

Katherine Hamilton: Yeah, I agree. You know, Stephen, I'm not going to be a pessimist about almost anything. Norway produces 2% of the oil in the world in the global market. And yesterday I had the opportunity to have lunch at the Ambassador from Norway's residence with the minister of what was the Minister of Petroleum Energy for Norway that has now been changed to just the Minister of Energy. And he was talking to a small group of us about the Inflation Reduction Act and how it's isolationist. But in the end, we all came up with, what's the art of the possible, and if we can work together. And you take these trends that IEA highlighted and the political will of all of our countries that I still think we're going to be able to go on a good path to save the planet.

Stephen Lacey: All right, let's round out with the forecast. This is when we identify a story, an anecdote, something happening in the world of energy or beyond that gives us a window into the future. And Mike, you're a first time contributor to this segment, so you get to go first.

Michael O'Boyle: Okay, well, what I'm going to be watching next week is a very wonky thing, but it's the Federal Energy Regulatory Commission's Technical Conference on Reliability in the Power Sector. And this year it's extra high stakes and interesting because they're going to dedicate a lot of the program to the EPAs regulations on greenhouse gas emissions from existing power plants and new gas fired power plants. Lots of industry players have raised concerns about reliability. If we limit greenhouse gases from these power plants, Energy Innovation is going to come out with a report that hopefully provides a robust case for why we should be optimistic about reliability under these rules. And I'm really interested to see how FERC handles this issue and also how industry participants respond and build a robust record on this issue.

Katherine Hamilton: Oh, that's must see TV, Mike. And all y'all can stream it on the FERC website in real time.

Stephen Lacey: That's right, forget Netflix, forget Hulu, forget Disney Plus get on the FERC website. Maria, what's yours?

Maria Gallucci: I'm writing about a battery electric locomotive that was announced this week. So most of the world's trains, certainly in the United States, run on diesel engines. And the rail industry is slowly just beginning to start to decarbonize. And one key solution could be using battery electric locomotives, which are the engines that pull the cargo. And so this is what the company WaTech says is the world's first battery electric locomotive that will operate at a commercial scale. It's going to going to be deployed at a mining site in Australia, and it will have a seven megawatt hour battery. So I think this will be, if all goes well, they have orders to deploy dozens more and this could be something that the rail industry starts to pick up in earnest once the technology's demonstrated.

Stephen Lacey: I'm sure the technology will be a lot more sophisticated than my daughter's battery electric Harry Potter train that drives around our living room.

Maria Gallucci: Hopefully it'll still have the choo-choo sounds too.

Michael O'Boyle: I have to give a shout-out here to my friend and collaborator, Dr. Amol Phadke at Lawrence Berkeley lab. They've been doing great research on the economics of battery electric trains and are very bullish on the economics of these projects and potentially a way to move storage from one place to another and provide emergency demand response. That concept I'm not totally bought in on, but who knows, maybe we'll be moving batteries on trains and using it for the grid.

Stephen Lacey: I actually don't even know that concept, I've got some reading to do.

Katherine Hamilton: Amazing, that is a rabbit hole I'd love to go down.

Stephen Lacey: Indeed. Katherine, what's yours?

Katherine Hamilton: Yeah, so this week the Biden administration issued an Artificial Intelligence executive order, which is super interesting. It's trying to create and is working globally to create new standards for AI safety, security, have some standards by which AI is developed in the UK. They're going to resuscitate Bletchley Park, I think, which is the code breaking center in World War II. And I think the world needs to look at AI in this way and in a way that's very standardized. But what I find interesting also is that this definitely has a connection to energy. So if you think about grid management, resilience, demand side controls, electrification, all of this is going to be steeped in AI and it's all going to be impacted by this executive order. So if anybody needs a job who's really smart, they do have real people, not just AI. So you go to AI.gov and there's a ton of jobs and information about this,

Stephen Lacey: And we've been researching how this is going to play out in the power sector. We've been writing a bunch of articles on it at Latitude Media, and our latitude research team has been surveying a ton of utilities and grid operators and vendors to figure out where the near term use cases are, where use cases are farther out, how big the market is and so we'll be dropping a report on that toward the end of the year or into the beginning of next year. And it's an interesting category in the energy space, it's not its own category. It's sort of a subcategory where you're going to see a lot of AI integration into existing products, but there's not going to be this AI only category in climate tech, it's going to be a part of many of the other existing climate tech categories. But that's fascinating, we'll check out that resource.

And I saw a story the other day about the use of drones in offshore wind projects. So a few weeks ago, my neighbors installed the solar system, and about a week or two before that happened, I was in here recording and I heard a buzzing overhead, and then I saw a drone over my neighbor's rooftop and we all went out and I didn't realize what was happening. And I said to my neighbor, "You've got a drone over your house, what's going on?" And then they were like, "Oh, we're surveying the house for solar." And the use of drones is pretty common to identify safety issues on roofs and identify the resource in solar, but they're increasingly being used across the industry to monitor power lines, to monitor the performance and health of large renewable energy projects, and increasingly to deliver cargo to offshore wind farms. And Ørsted just this month deployed a first of its kind drone that we'll be able to carry cargo up to 150 pounds to offshore wind sites, and they're using this to more safely and efficiently get stuff to their developments.

And so I think we have... The reason why I brought this up is because I think, drones aside, there's just a lot of interesting stuff happening to make the development process more efficient, cheaper, and as a counterweight to some of these inflation trends that we talked about. And we're working on a story right now about the use of digital twins to map out foundations for floating offshore wind farms. And there's so much progress still that we can make in how we get this stuff built, both in materials innovations and in construction techniques that I really remain bullish about, the continued cost reductions that we will see in this industry as we deploy more of those technologies.

Katherine Hamilton: That's super cool. With drones and AI, we've got it all solved.

Stephen Lacey: Do you want to be an investor in my drone based AI Bitcoin climate company?

Katherine Hamilton: Yes, I'll send you a proposal written on ChatGPT.

Michael O'Boyle: What are the prevailing wage requirements for the robots? I need to know. Treasury hasn't issued guidance on that one yet.

Stephen Lacey: Yeah, exactly.

That's going to do it for the show. A big thank you to Mike O'Boyle, Katherine Hamilton and Maria Gallucci. It was a real pleasure. And this is The Carbon Copy. We are co-production of Latitude Media and Canary Media. You can again, check out many of the resources that we talked about in the show. We're going to have a bunch of links in the show notes. Check out Maria's reporting over at Canary Media, and our team at Latitude Media is also covering many of these trends, particularly as they intersect with some of the emerging categories of climate tech, like carbon removal and hydrogen, but also in renewables. So we'll have links to a bunch of the stories that we're covering on this front. And again, we'll have a link to Mike's report on some of the policy solutions for these inflationary factors here in the US.

And this episode was produced by me and Dalvin Aboagye, who is our producer for this show. Sean Marquand is our engineer, and he also mixed the show and he wrote our theme music. And Latitude Media is supported by Prelude Ventures, a venture capital firm that supports entrepreneurs and climate tech companies across a range of sectors like energy, food, ag, transportation, logistics, materials, manufacturing, and advanced computing. And give us a rating and review on Apple or Spotify if you like this show. We love to hear your feedback. We've got a lot of takes in these round tables, so hit us up on social media and let us know what you think and we'll catch you next week. I'm Stephen Lacey, this is The Carbon Copy.