Choosing Technology Investments

A kick to clean energy technologies could trigger feedbacks that make the energy transition cheaper and faster. If costs fall predictably with deployment, as they have in the past, investment in specific clean technologies would push them past the tipping point where they become economically competitive with nonrenewable incumbents, even without a carbon price. Although the transition to renewables has so far only made a small reduction in emissions, it has the potential to accelerate decarbonization, providing a good example of a SIP.

A SIP strategy would seek to better understand the causal mechanisms of technological improvement, and then favor technologies where evidence supports the likelihood of rapid, investment-driven cost declines to outcompete incumbents. By raising the very real possibility that intelligent investments in the green energy transition could be financially profitable as well as environmentally beneficial, this SIP could accelerate progress by neutralizing resistance to change based on perceived economic costs.

 

Actor(s)

Policy makers; companies; finance; technologists

 

Impulse (trigger)

Which technologies should we invest in? In standard portfolio theory, investments do not affect outcomes, and diversification is strongly favored. In contrast, technology investments strongly influence outcomes, making the portfolio allocation problem highly nonlinear and causing outcomes to be sensitive to investments. Too much diversification means that nothing makes much progress; rapid progress requires concentrating resources.

 

Criticality

Solar PV and wind have now been supported (or “kicked”) to the extent that they are at, or near, the tipping point where they are competitive with the cheapest alternatives. If their deployment continues to increase at its present rate, by 2030 the prevailing cost of electricity will very likely become cheaper than it has been during the last century. This could pay handsome returns and substantially lower the cost of the green energy transition. To realize these gains, we must make intelligent choices about developing the energy storage technologies that are essential to deal with the intermittency of renewables.

 

Feedback Dynamics

History suggests that in the long run, some technologies are much more responsive to investment than others. For energy technologies, the real costs of oil, coal, and natural gas have not changed much in more than a century. Nuclear power costs at least as much as it did 60 years ago. In contrast, renewable energy sources such as solar photovoltaics (PV) and wind have experienced rapid, persistent cost declines. The real cost of solar PV modules has dropped by more than a factor of 6000 since their inception in 1956. Since 1990, costs have dropped at 10% per year, on average, while deployment has increased an average of 26% per year. Despite far greater investment and subsidies, fossil fuel costs have stayed within an order of magnitude for a century. Unless technological change is somehow “purely exogenous,” this suggests that the cost of solar PV is, in the long run, more responsive to investment than fossil fuels or nuclear power.

 

Timescale and scaleability

These dynamics are currently unfolding. The question is whether they will unfold with sufficient speed to constrain warming to Paris-Agreement aligned levels.

 

Resistance

When there is a cheap incumbent and an initially expensive challenger (as is the case with fossil fuels and solar PV), a marginal investor solely focused on cost will always choose the incumbent. This creates a danger that the incumbent becomes stuck. A far-sighted public investor, in contrast, can invest in the most responsive technologies to make them cheaper. The optimal strategy is to invest heavily in the challenger early on.

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