Tech Energy vs Commodity Energy
Change is always difficult. Whatever system we are trying to change has evolved, adapted and solidified its behavior, vision, tendencies, bad habits and much more to a point of blind dependency. The more complex the system, the more linkages and tentacles of rootedness are working to keep things as they are.
This makes it hard to envision how a new system could work, even if our organizations are committed to system change in the face of multiple crises. Especially given the evermore specialization and compartmentalization of our current global system, change gets bogged down. Every time we look at a new, better sub-component of the system we notice how it doesn’t fit well with the other older components and deem it unsustainable, uncompetitive, etc. The problem lies in that we are focusing on improving the existing system instead of developing a new way of achieving a old goal.
We will be examining how this plays out in the energy sector and the vision towards a carbon-free future in the midst of the global climate crisis. Due to the length and diversity of the issues, we will be addressing it in a series of articles during the next few months, but for this article we would like to explore the notion of ‘Tech Energy’ and ‘Commodity Energy’, and the world of differences between them.
In large part, traders see energy as energy, and both are often traded in tandem. In general, most energy experts come from a commodity-based background and as alternative, clean, tech energy started appearing, they just added them to the list of options for achieved their energy goals. This was and continues to be a big mistake, because the economics of the two energy types are vastly different and require very different skill sets to deal with their obstacles, projections, feasibility, growth and general assessments for how to make each function.
To explore these differences, we will use the example of solar (tech energy) and oil (commodity energy). A photo-voltaic (PV) solar panel is, in simple terms, electrical circuitry embedded in a silicon wafer, a definition that could also be used to define a computer chip, hence PV manufacturers have been at times (misleadingly) defined them as “semiconductors”. However, even though using this definition for both fails short, it makes sense to use the same economic model for both, because PV solar panels and computer chips behave in similar ways economically, hence our use of the term ‘tech energy’. To highlight this reality, see the Graph 1 below.
It is clear to see the similarity of drastic price declines in solar PV in cost per Watt (green line) and in computing power in cost per GigaFLOP (blue line) over a period of almost 4 decades. This decline is driven by increasing demand of new technologies, massive scaling up, and the ever-evolving technological frontier.
In comparison, oil follows the usual pattern of commodities that fluctuate in price according to demand and supply factors. Even though graph 1 shows that the cost PV solar has decreased by 170 times, if we compare it to oil, solar has improved its cost basis by 5,355 times relative to oil since 1970 (T. Seba ). Oil gets expensive when economies are growing, but PV decreases due to its sensitivity to demand/ scaling and its independence from a finite resource like oil which needs to be extracted from the ground. PV is also less geographically dependent and therefore more resistant to Geo-political risk, the threat of which will further increase when climate change impacts start causing more migration, water scarcity, land loss and ecological crashes.
Actually, technology is so sensitive to demand and scaling that it mainly gets cheaper over time. The other factors that make commodities fluctuate usually affect technologies in the rate of decrease, but the decrease is certain. Imagine the benefits if the global economy could apply this tech cost dynamic to energy. The more commodity-based energy we use, the more expensive it will get, always placing a weight on the growth, but with tech energy it gets cheaper the more we use.
Then there are the unavoidable costs of a commodity energy like oil. Oil costs a lot to explore, costs a lot to extract, costs a lot to refine, costs a lot to transport and if you consider the endless list of impacts at every level, it costs a hell of a lot to consume. In 2014 the world had one of the lowest levels of new fossil fuels discoveries in recent history (less than 5 months of global consumption), yet it was the highest cost ever for developing new oil supplies (almost 700 billion USD). Not only are these costs constantly increasing for lower returns, even when the barrel and pump prices are low or high, but these costs are transferred to all of us in numerous ways such as government subsidies, health costs, ecological costs and climate change.
For example, in 2013 for every $1 that any of the top 20 global oil and gas producers invested in new fossil fuel exploration, more than $2 were subsidized by the G-20 governments. In total, the G-20 provides $452 billion a year in subsidies to fossil fuel production, which is almost 4 times what the ENTIRE world provides in subsidies to renewables ($121 billion). We may think its only a rich country tendency, but no, in sub-Saharan Africa, energy subsidies (especially petroleum but also coal and gas) eat up on average around 5% of our GDP (IMF). Here in Mozambique we pay 1%-1,5% of our GDP for just petrol and diesel fuel subsidies alone and during the recent economic crisis our fuel debt was increasing at $7-10 million USD per month (IMF). Just to put this spending into perspective, at an African level, the percentage of GDP that goes to health is around an average of 6% based on the 2013 data for 51 African countries.
One additional interesting fact linked to health, the estimated cost of the impacts of fossil fuels on health, not only is it not covered by the fossil fuel sector, but is a huge part of the national health cost of many countries. In the US, 1/3 of healthcare costs are from burning fossil fuels ($9000/person/year, totaling to almost $900 billion) and worldwide 30-40% of deaths are due to pollution (A.Lightman 2014). In Europe it has been calculated that the health cost of burning coal are as high as 42.8 billion Euros per year (Heal 2013) and when you consider that the dirtiest power plants, industrial parks, mines, etc are in the global south we can only imagine the scale of the health impacts and their associated costs. However, we will cover the true cost of fossil fuels in a future article on the issue, including ecosystem loss, climate change and more.
All of this information is not new or unknown to our political elite, or at least it shouldn’t be. The truth of the matter is that the transition has been slow because the system doesn’t want it to happen. Research has shown that the biggest obstacle for clean energy to succeed is the lack of political will and proper polices, not technology, not costs and not economics. Another issue is that we often hear people discussing how to fix the system, the problem is that there isn’t anything to fix. The capitalist system and one of its founding pillars “fossil fuels” has been working the way it has been designed to, and very efficiently to the benefit of a small group of elites. Lets not forget the fact that “Just 8 men own same wealth as half the world” (Oxfam report 2017). So when we hear the excuses that solar is too expensive, not competitive, it isn’t reliable, can’t cope with big demand, etc, etc, please understand that either the person hasn’t done their home work, or has vested interests in fossil fuels, or has come from a commodity energy understanding of the economics. In the case of the last one, we can empathize, because at quick glance we also underestimated the power of tech based economics.
We remember when the cellular network was starting in Mozambique, we just couldn’t understand how it would work given the then super high cost for installation of the network, the air time cost and the extremely high cost of cell phones, etc. Especially in a poor country like Mozambique, with a small group of elites. The market seemed too small, but when we learned that the strategy was also focusing on the lower income urban population, and even rural areas, we were even more confused of how it could be sustainable. Luckily, we learned from a friend who was a telecommunications expert and had a good understanding of how the tech-based economics works, and when that person explained to us step by step, it was amazing how these obstacles are overcome and it was the first time we became aware of how sensitive technology based economics are to increasing demand, massive scaling and technological advancements.
For clean alternative energy to succeed we need to have the people with the right economic understanding for the unique differences that tech based energy brings, and if we continue to use the experts that come from dirty energy and commodity-based mindset, we will continue to delay, at a huge cost, the inevitability and necessity of a carbon-free future. Now, we understand that the use of the word inevitable may seem strong to some, but it is actually not.
As the cost of solar energy continues to decrease it will gain market shares from fossil fuels. Already in 42 of the 50 biggest U.S. cities, solar power is now cheaper than electricity from the power grid (G. Jabusch 2015). The higher cost for lower returns of exploring and extracting new fossil reserves, the pressure to mitigate climate change, the decreasing of subsidies and take up of the cost associated of the numerous impacts caused by fossil fuels, and more, are all trends that are gaining support and these pressures will sooner or later slowly strangle this monster called fossil fuels. Let us be humane and give this monster a quick death and move on to a new clean energy system, but this time we must also make it socially just. This topic we will cover in detail on one of our upcoming articles of our series around Good Energy.