|This is a transcript of the presentation delivered by Tomas Kåberger, Chair of Executive Board, Renewable Energy Institute, at the "The Energy Crisis and the Role of Renewables" event held on 14 June in Tokyo. In his keynote, he explained how the dramatic drop in the cost of solar and wind power has led to the replacement of fossil fuels not only in the power generation sector, but also in the transportation and industrial sectors, and how the energy transition has been accelerated by the surge in energy prices triggered by Russia's invasion of Ukraine. Furthermore, he notes that Russia, an old energy superpower dependent on fossil fuels and nuclear power, is spreading disinformation to discredit renewable energy development, but that both in the United States and Europe, energy efficiency and renewable energy development are accelerating without being misled by such disinformation. In closing, he points out that Japan and the EU have common interests in the energy transition and that the expansion of renewables should accelerate swiftly in Japan.|
We are at a very special moment in time with fossil fuel prices reaching levels that none of us have seen before. This provides a challenge but also an opportunity for accelerated profitable development of less environmentally polluting energy in the world. The backdrop to this development is the development that has already gone on for a few decades whereby increased deployment of renewable electricity generation technologies have resulted in lower prices, lower costs for renewable energy and, therefore, lower prices.
Solar Power Costs Drop to a Record Low 1 cent/kWhThe global solar development has followed this graph. In the last few years, the dominating country in the development of solar electricity has been China. Japan is still among the top countries in the world, but it is an important issue that China has not only become the major installer of solar PV for electricity generation but also become the industrial leader in producing solar cells and solar panels. This used to be a position held by Japan, and there have also been many American and European companies active, but for a few years China has taken over this industry. I think we may predict that both the United States and Europe will, in the coming years, make major efforts to come back as major suppliers of this technology. I think that is something for Japan to consider as well – given the industrial capacity and knowledge that exist in this country.
I said prices have come down and they did come down in a spectacular tempo in the year 2016. We saw in the world the first procured electricity from solar coming below three cents per kWh in May 2016. It was just a few months later below two-and-a-half, and prices continue to fall below two, and then below one-and-a-half cent. Finally, the still lowest price offered for solar electricity in the world, in Saudi Arabia last year at just about one U.S. cent per kWh. This is remarkably cheap electricity! Fatih Birol of the International Energy Agency said this is the cheapest electricity ever in world history, and I think there is no challenge to that statement.
While these extremely low numbers are achieved in the countries with the most intense solar radiation, countries like Japan or Northern Europe are within a factor two of solar radiation per square meter. So the cost of solar electricity does not need to be more than twice as high, provided we can build as efficiently as they do in this world-leading project. We have the sort of knowledge of building as efficiently.
China Takes the Lead in Wind Power Too
Global wind capacity has increased to just about the same level. Those of you who remember the previous picture of solar saw that also solar was just above 800 gigawatts in installed capacity. It seems as if solar overtook wind power last year in installed capacity, but the difference is so small that the uncertainty of the statistics is in the same range as the difference between the two. However, it is still clear that wind generates more electricity because of the capacity factor. The produced electricity per installed gigawatt is roughly twice as high for wind as for solar globally.
In wind power too, China has become the world leader. There was a remarkable development in China from the year 2005 to 2010, when China went from having virtually no wind power installed to having more than any other country in the world. Over the last 20 years, or 15 years at least, China has installed in the order of two wind power plants per hour, day and night all around the year. This is an area where the U.S., Germany, India, Spain are now the top countries. My home country Sweden does very well if you calculate this on a per capita basis, and we now have in the order of 20% of our electricity from wind power. But Japan is missing in this development, which is a pity because Japan has ample resources, both onshore, especially in Hokkaido, but also offshore. This is one of the areas where Japan also has significant opportunities of increasing the supply to the Japanese electricity system.
Fig.2 Wind power capacity: leading countries 1980-2021
Declining Offshore Wind Costs
Also for wind power, the year 2016 was the year when cost came down rapidly. The first contracts offered in the world between $25 and $30 per MWh to two-and-a-half to three cents per kWh came in Morocco in 2016. In 2017, what is still I believe the world record in low priced onshore wind power was an offer by Enel to produce electricity from wind in Mexico at $17.7 per MWh. Here, the cost levels in Northern Europe are quite similar in this order of magnitude. $0.02 to $0.03 per kWh is now possible, but what is remarkable and particularly relevant for Japan is that the cost of offshore wind power has also come down dramatically. Here too, it was in 2016.
In the summer of 2016, offshore wind was offered off the Dutch coast in Northern Europe by Danish company Dong, now Ørsted that some of you know of and they offered to supply electricity from offshore wind at just above €70 per MWh. Still expensive but at the time, record low.
Only two months later, Vattenfall, the Swedish power company won a bidding process of the Danish West Coast offering to produce wind power, offshore wind power at €60 per MWh. Another two months later, Vattenfall won the Kriegers Flak project off the Danish east coast, with a bid below €50 per MWh. A dramatic decrease in cost in just a few months, mainly driven by better capacity utilization, scale-up of offshore wind in Northern Europe, and the opportunity to assume that you would actually be able to use all the infrastructure, or the people involved in the construction in a continuous manner. So, they would not have to work for a while and then be laid off for a while and then come back but they could continue from one project to another, and so could the equipment, the cranes and things used in the installation of offshore wind power.
When this contract was signed, it was criticized for being unrealistically cheap, but it is enjoyable to note that when this project was completed, this autumn, it was completed before time schedule and below budget. That was possible despite the Corona pandemic, or as the head of wind power at Vattenfall said, "Maybe thanks to the pandemic", because during the pandemic, it was absolutely prohibited for unnecessary visits to the construction sites. So she said, "None of us bosses could go there and disturb them, they could just work."
Though the linear decrease in the cost of offshore wind power could not continue – if that had been the case, offshore wind would have been for free by the summer of 2017. What we saw in the beginning of 2017, however, was the first contract where companies offered to produce offshore wind power without any subsidies. They were confident that they could produce electricity from offshore wind plants and compete with the other electricity generators on the spot market. The market price would be sufficient to cover all the cost of the offshore wind power plant.
In this case, what the bidding companies got was that they were assigned an area in the sea that they were allowed to use, and they did get a connection to the grid. The Netherlands made a similar procurement where they actually assumed that all bidders would be able to produce electricity without subsidy. In this bidding process, it was more of a beauty contest or a competence contest where the bidding companies had to show that they were experienced, that they were trustworthy, that they would actually build, that they could deliver a lot of electricity from a given area at sea. To ensure that their self-confidence was backed up, they also had to pay a large amount of money to the Dutch government, which they would lose if they failed to do what they promised to do. This was not a small sum, it was many millions of Euros.
Recently, in Denmark, there was a similar procurement where many companies offered the lowest possible price, they would have to pay their own infrastructure. The contract was somewhat complicated but it is now expected that the winning company will pay about €400 million to the Danish government for the right to use the sea to produce electricity. So they will earn a profit in relation to the spot market and pay back to the Danish government for the right of using this part of the sea. So not only does wind power at sea in Northern Europe now outcompete other sources of electricity on the market. They do it with such profit that they are able to contribute to the government or to other customers in the system. A surprisingly fast development over the last five, six years.
This development has not only made it possible to substitute other sources of electricity in the electricity generating system. Renewable electricity has now become cheaper than the market price of crude oil, for example. This is not only something that is true today, with the extremely high prices. It was true already a year ago when prices were in the order of $60 per barrel of oil.
The fact that renewable electricity has become cheaper than oil is somehow hidden by the fact that the market price of oil is given in dollars per barrel when the cost and prices for electricity is given in dollars per megawatt hour. So you need to do this conversion that I illustrate in this table, in this diagram. Today, the oil price is around $110 per barrel. If you use this simple diagram, you see that that is the equivalent of somewhere between $65 and $70 per MWh. You just saw in the previous slides that renewable electricity can now be produced at cost in the range of $10 to $30 per MWh, meaning that renewable electricity, the total cost of renewable electricity, is now less than half of the energy cost of crude oil. It's not a matter of competition. Oil based electricity compared to renewable electricity, it’s renewable electricity compared to the energy content of crude oil!
Automobiles, Ships, and Aircrafts can be Electrified
A result of this milestone in the development of renewables being passed is that it's now feasible to use renewable electricity to substitute oil in other sectors. One of the sectors where this development is now very rapid is the electrification in the transport sector. First, in road transport where now the countries with high shares of renewable electricity, is also becoming countries with high share of electric road vehicles. In Norway, the sales of plug-in cars is now in the order of 80% to 90% of new cars sold. A challenge for those car-producing companies that have not been so fast in providing plug-in electric vehicles.
But it's not only private cars, it's also buses. Many countries in the world are now deploying electric buses, partly for climate reasons, for economic reasons, for local air pollution reasons. One of the cities that have come further is this Shenzhen in China, where they have 100% battery electric buses in the city bus system. This article from 2018 talked about 16,000 buses. There is now supposed to be more than 20,000 battery electric buses in Shenzhen. This can also be used for ferries. This was a Norwegian ferry that was built several years ago, originally with significant state subsidies because it was thought that this was something very difficult to do. I've been told by the company operating this ferry that they discovered afterwards this was very profitable, they would not have needed a subsidy. Many other companies operating short-distance car ferries like this have discovered that that is true. Also, some larger car ferries like this one between Sweden and Denmark is now electrified. Even electric aviation is possible.
I must admit that some 15 years ago, I did claim that we would never see battery-electric airplanes because batteries were too heavy. When I said that in front of a large audience, there was a very nice young man in the audience. He didn't protest, but he came up afterwards with a little note and said 'check this website'. I checked the website and that was a link to a Chinese company already -- some 15 years ago offering a two-seater battery-electric aircraft with a range of a couple of hours. This is Airbus, the big European airplane manufacturer offer a two-seater trainer aircraft that's battery electric. We now have several companies in the world developing larger aircrafts. Hot Aerospace is one that is constructing a 19-seater aircraft. They can show that this will be cheaper per seat for ranges up to 500 kilometers than conventional airplanes because electric aircrafts are easier to maintain and control and will provide better safety and lower cost. With smaller airplanes, they will also have more frequent trips between cities and provide a shorter expected traveling time.
As the development of electric transport, battery electric transport required upscaling of battery manufacturing, something where Japan has contributed significantly to the technological development, the scale up has resulted in lower cost of batteries. It's about a decrease by 90% down to 10% of the cost per stored kWh in the last decade, mainly thanks to the upscaling and increased experience accumulating in the industry.
Stabilization of Power Grids through Storage Batteries
As a result, batteries may be used also in the electricity grid to provide short-term grid stability. Old power companies tend to refer to inertia as the way of guaranteeing stable frequency in the grid. But with large low cost batteries and power electronics, this can be achieved at much lower cost with batteries. This South Australian battery that was installed a few years ago by Tesla proved how this reduced cost and now the installation of large batteries in Australia, the U.S., Britain and so on, is going quite fast. It's difficult to keep track of which is the biggest battery in the world now because especially the US and Australia seem to be competing of having the largest batteries installed.
Fig.4 Stabilization of power grids through storage batteries
Many of them are installed where you have at the same time closed fossil-fueled electricity production plants, they have the infrastructure. And sometimes now batteries may substitute gas-fired power stations that were used to regularly just a few hours per day because batteries are cheaper to keep and they can store excess solar and wind power to be used during these peak load periods often and typically in the evening where you would otherwise have had to burn expensive gas.
But stabilizing the grid with batteries may not necessarily be done by large batteries dedicated to supporting the grid. In Germany, Volkswagen has formed a power company, a car manufacturer forming a power company with the idea that they will provide the electricity to all owners of Volkswagen plug-in electric cars. They will do so according to an agreement with the owners where the power company will be allowed to use a part of the battery capacity. That part will be used to sell grid stability services to the local grids. It will be used to trade electricity in the way that you will charge the battery when electricity is cheap and sell electricity back to the grid when electricity is expensive. The vision of this company is that they will earn so much by operating the battery that they will be able to give electricity for free to the owner of the car. They have not yet promised to do so, but they have the ambition to be able to do so thanks to the efficient utilization of the batteries. There are similar ideas floated by companies in the U.S., at the moment offering very cheap battery charging.
Renewable Electricity Replaces Natural Gas
While oil has always been the most expensive fossil fuel per unit energy, the second is usually fossil methane gas. Comparing the price of methane gas with the price of electricity is just as difficult as comparing oil price and electricity price. The often used unit for gas price is dollars per million British thermal units. Some of us brought up with the scientific SI unit system find these British Thermal Units terribly complicated to calculate with. But the typical price of gas per million British thermal units, it was sort of $5 to $10, maybe $12 per million British thermal units. If you looked at that in the diagram, you say, "Oh, it's about $24 per MWh. Yeah, some of the better solar and wind projects in the world will produce cheaper." But there's still a bit of competition in this area.
But then came this war in the Ukraine, and the difficulties in getting gas from Russia. Suddenly, things have changed dramatically. We're now off scale compared to what I and others had in our diagrams just a year ago. Today, with gas prices, being much higher than they used to be. Renewable electricity is much cheaper than fossil gas, and we will come back to the consequences of that later.
Fig.5. How Russia's invasion of Ukraine is affecting gas prices
Coal is the cheapest of all fossil fuels, it's difficult, it's dirty. To transform it into useful energy is usually quite expensive, and the efficiency is not so high, but the price has been low. With the typical coal price of $60 per ton, that is the equivalent to about $8 per MWh, and it's difficult for renewable electricity to compete directly if you disregard the efficiency and environmental issues. But coal too has gone through a dramatic price increase in the last few months.
Green Hydrogen Replaces Coal in Steel Production
Again, we have a situation where the old diagrams are no longer relevant, and renewable electricity is so much cheaper than coal. Again, note, it's not a matter of renewable electricity being cheaper than electricity produced from coal, it's renewable electricity being cheaper per unit energy than the energy content of the coal. This opens up for more substitution of fossil fuels in industry with electricity. One of the early attempts in Europe was a consortium formed by the Swedish steel manufacturing company SSAB, the mining company LKAB, and the power company Vattenfall. They had the idea that they would use electricity to produce hydrogen and then use hydrogen instead of coal when reducing the iron ore, chemically reducing it, into sponge iron.
The first demonstration that this process worked, took place last summer when the pilot plant produced the first sponge iron. This was the hybrid plant that they built together, then SSAB produced the first steel from this sponge iron two months later in August. Another two months later, the vehicle manufacturer Volvo had produced the first vehicle using this fossil free steel.
Hybrit, as well as a competing company H2 Green Steel, are now enjoying a situation where there are many customers who are willing to sign contracts to buy this fossil free steel, even if they have not yet built their own production plants. The demand for fossil free steel in the world is clearly significant. One of the major group of companies that are interested in fossil free steel is the automotive industry making vehicles. Their rationale behind this desire for carbon-free steel or coal-free steel is that when you have electrified vehicles, the steel is one of the main, maybe the most important source of greenhouse gas emissions in the lifecycle of the vehicle. It is actually the production of the steel that makes up a large part of the vehicle itself. So they want to have good lifecycle performance and, therefore, they want fossil free steel.
You see here some examples of companies that are contracting these, the expected production from these future fossil-free steel plants even before the plants have been built. For those of you who are involved in new industrial project, it's very nice to have sold the product before you need to raise the finance to build the plant. It's easier to raise money when you're in that situation.
Ukraine War Will Accelerate Global Decarbonization
Now let's come back and talk a little about the crisis that have developed over the last half a year because of the Russian invasion in the Ukraine, in particular. The price increases that I just illustrated, have had a dramatic effect on the world's energy markets. One could say, in a constructive way that Putin by launching his war, has achieved what climate policymakers in the world have failed to achieve, and that is a global increase in the cost of burning fossil fuels. The market effect of the war is similar to the effect of a global carbon tax. This makes energy efficiency and renewable energy more profitable than ever before. Most satisfying for those who have already invested, if they did so for environmental reasons, or they did so for policy reasons, for whatever reason they had, they are now greatly reimbursed and the gratification of the profits made is wonderful for them.
Fig.7 Fuel price increase: same effects as global carbon tax
But these prices will also last for some time, if we look at the future markets for fossil fuels, they will stay high. It's also a great opportunity now to invest in improved energy efficiency and renewable electricity. One may say that the price increase of fossil fuels is of such a magnitude that almost anything that even the most ambitious climate policy people have talked about, is now profitable for purely market economic reasons. It's a wonderful opportunity for those who have prepared investments and measures motivated by climate policy reasons to do them now and earn money on the pure market benefits of these endeavors.
Russia is an "Old Energy" Superpower
The difference between what we see today and the result of global carbon tax is that we also have a price increase of uranium. Nuclear power is not getting the benefit that nuclear power would get from just a global carbon tax, because Russia is also major sources of uranium fuels. Understanding how the war Russia launched, and the geopolitical attitudes toward Russia, affects the energy system, and Russia's incentives, is to look at Russia as a superpower of old energy. You can describe them as the world's largest exporter of fossil gas, even as the world's largest net exporter of oil. Together with the other countries in the so called Commonwealth of "Independent" States, Kazakhstan and Uzbekistan, they are providing more than half of the uranium in the world. Their importance in the nuclear sector can also be illustrated by the fact that all nuclear construction projects started outside China since 2019 are projects where Rosatom, the Russian nuclear industry is supplying the technology. They're not so many, not much happens in the nuclear industry. But all that happens outside China is by Rosatom, and even some of the plants in China.
Fig.8 Russia: an "old energy" superpower
If you compare Russia to other fossil fuel exporting countries in the Middle East, it is also noteworthy that when I showed you the pictures earlier about the progress in renewable electricity, especially in solar, you saw that many of the large oil exporting countries in the Middle East are now the pioneers to develop solar electricity. In some of these countries where they have very well-educated leaders, they say we are going to continue to be energy superpowers, maybe even more successful developing low cost solar and "attracting energy intensive industry from the rest of the world to our part of the world where we can get a much more economic benefit out of our energy status than we could when we just exported the fuel. Now we can attract industries to the Middle East."
Russia has no such strategy, no such experience, no such industrial capacity. Russia is totally dependent on the continuation of the old-fashioned fossil fuel and nuclear industries. You can understand with that background, why Putin says what he says where he is making major efforts to discredit the development of renewables. Saying wind power is "harmful to birds and worms". He's saying that with "a zero carbon society we will be sent back to the caves". He's ridiculing the German decommissioning of nuclear saying it "doesn't make any sense," and he claims that it is renewable electricity that is responsible for the price hikes in Europe.
Russia Spreading Misinformation about Renewable Energy
Most of you can understand that this is just rubbish that he is talking, but it's serious at the same time, because it's not only Putin himself who says this in public. It's also something that the Russian information war in the world is focusing on, to spread, often false, sometimes partly correct, but mostly false information intending to discredit renewable energy development. Fatih Birol of the International Energy Agency did go out earlier this year with a very strong statement saying that this disinformation claiming that the European price increase and volatility was due to renewables. He said "it is not a renewable or clean energy crisis. It's a natural gas market crisis." Of course, those of us who are in the sector, we could say it's obvious, who could even believe anything else. But it is still a problem, that this kind of information that is penetrating the rest of the world via –so called – social media, and often inspired by Russian interest, is creating confusion and delaying the development.
Biden Invokes Defense Production ActHowever, the governments of the world is not easily fooled by such disinformation, and we can look at a couple of the strategies described in public. The U.S. President Biden gave a speech in the very end of March where his strategy to counter the economic effects of the Russian invasion was in the short term to release some of the oil stored for emergency purposes. That's a way of keeping down the domestic oil price.
In the midterm, he was providing incentives for American companies that did have concessions to extract more oil and gas from federal lands to do so quickly, not wait. This is, of course, also a fairly short-term solution. In the long term, he provided a very aggressive, ambitious plan to increase energy efficiency, to increase renewable electricity production and to electrify the transport sector and heating. Heating that in many countries in the world, including Japan, is to a significant extent based on burning fossil gas, which is now terribly expensive.
What's even more significant is that in his speech, he was clear saying, this is no longer just a climate issue or an environmental issue. This is now a matter of national security. As a result, he claimed he was going to use the Defense Production Act, a law passed during the Korean War to give the President the right to actually tell industry what to do. He was going to use that to secure supply chains for critical materials that go into batteries, vehicles and the storage of renewable energy, such as lithium, graphite, graphite, nickel, and much more. He's also talking about doing it to increase the production of heat pumps for heating, electric heating to substitute gas and other technology areas. This is a quite dramatic shift because saying its national security means that other pieces of legislation on state aid and some environmental legislation will no longer be allowed to delay the introduction of these new energy solutions.
Germany and EU Strategies
Similarly, in Germany, which has been pioneering in development, renewable energy, some thought initially that Germany would say, "Okay, we give up, we will increase use of domestic lignite coal for electricity generation, and we will give up the idea of renewable electricity, or give up the decommissioning of nuclear." But on the contrary, what the German said was, we're just going to accelerate what we're already doing, we're going to speed up the development of wind and solar, and we're going to do so with similar arguments that this is now national security, it's not just climate policy. It will be of quite some interest, interesting to see how these statements, for example, that it's "an overriding public interest and serve public security" will impact the way regulatory procedures that were making such efforts slow, how they would change now to accelerate the development in Germany.
Fig.10 German Strategy
The European Union has also launched the so-called REpowerEU project or program to cut the dependence on Russian energy, especially gas. It's a matter of making solar rooftops compulsory, just like in Tokyo, speeding up renewable permitting, saying that projects must be approved within 12 months. I can tell you, I know Japan, Japanese processes are tedious and time consuming, but it's not always perfect in Europe either. Some processes for permissions take more than a year.
They would diversify gas supplies in the short run, meaning they will compete with Japan of Middle Eastern and Qatar LNG for example, decarbonisation of industry, the fossil free steel as one example, increase the ambition to produce biogas from biomass wastes, and start to produce domestic hydrogen from renewable electricity. This is extremely important because this is also a way of stabilizing the electricity on timescales longer than what can be achieved with batteries.
Common Interests of Japan and the EU
The IEA a couple of days ago went out and said that the world now needs to "turbocharge energy efficiency action". Turbocharged meaning now really putting pressure on energy efficiency measures to be fast because this is the way that we can decrease the demand for LNG and thereby decrease the price of LNG. Even if we decrease the use of LNG, we cannot very quickly do away with all the demand for LNG. So, what we can do is by reducing the demand for LNG, we will decrease the price per unit LNG of the LNG we still need to import. That's extremely important for the European Union and it's important for Japan. So we have a common interest between Europe and Japan in particular, that the high fuel prices call for improved energy efficiency quickly.
It's also making rapid deployment of renewable source of energy very profitable and urgent. Using these opportunities will make it possible to avoid fossil fuel prices escalating even further.
This is a very interesting opportunity in time where collaboration between Japan and the European Union may be very desirable and where our complementary experiences and skills in technology and in system development can be used to help each other to reach this common goal of reducing the demand for fossil fuel and keep down the prices. It's interesting to compare how the previous plans in the EU and Japan compare and this diagram published by Ember a few weeks ago, show that we see a clear difference that Japan still has the idea of increase in the share of nuclear and a moderate increase in the use of renewables whilst the emphasis is slightly different in Europe. The emphasis on low cost renewables is much stronger in Europe where that will roughly be doubled from an already high level, and the nuclear share of electricity will decrease. This is not really politics, it's more economics in Europe. The cost of new renewables are at the same level as the cost of continued operation of existing nuclear power plants. The new power plants being built in Europe are far too expensive and far too slow to be relevant to achieve these targets of reduced fossil fuel dependence.
Fig.11 Common interests for EU and Japan
That's what Ember says in their conclusion, "Japan needs more homegrown clean energy and more ambition on solar and wind", which is easy to agree with. It's a dramatic period in the energy industry. Price is higher than ever and the interest of those of us who live in parts of the world that import fossil fuels is to reduce the demand in order to reduce the price and make our economies able to survive this dramatic price increase.
I hope that those of you are here and those who listen on the web and so on will contribute to the acceleration of this development that had started already before this crisis.