Volts podcast: the good news about clean energy, with Kingsmill Bond

In this episode, longtime carbon market analyst and strategist
Kingsmill Bond explains why he is so optimistic about the future
of renewable energy. Though it remains a small portion of total
global energy, its rate of growth and declining costs indicate
that it is on the precipice of enormous, rapid expansion. Markets
and geopolitics will be transformed by it. (There is also an
abridged version of our conversation available on Canary.)


Full transcript of Volts podcast featuring Kingsmill Bond,
October 11, 2021


(PDF version)


David Roberts:


It seems like good news is difficult to come by in the US these
days, what with democracy on the verge of crumbling and the last
big chance to address climate change held in the fickle and
ill-informed hands of the Senate’s most conservative Democrat,
who lives on a yacht and literally makes money off of coal
plants.


As it happens, I have a stash of good news I’ve holding in
reserve — a guest I’ve been meaning to talk to forever, but have
been treating like a break-glass-in-case-of-emergency thing. I
felt grim enough this week that I finally called him up.


His name is Bond. Kingsmill Bond. (Sorry, had to do it.) He’s an
energy strategist at the think tank Carbon Tracker, where he
arrived after decades of doing market analysis and strategy for
big financial institutions like Deutsche Bank and Citibank.


Bond’s experience and research have led him to the conclusion
that the shift to clean energy has become unstoppable and that it
will be the dominant force shaping financial markets and
geopolitics in the 21st century. He argues that we are on the
front end of a massive, precipitous wave of change to rival the
industrial revolution — one that will unfold even if policy
support is weak and erratic, purely on the strengths of economics
and innovation.


We need to update our mental model of climate mitigation, he
says. It’s not about pain, about how to distribute extra costs
and who will be the most altruistic. It’s about gain, about which
countries will benefit most and fastest from the tapping of
almost limitless new markets and opportunities for growth.


There are no fundamental limits to the spread of zero-carbon
energy. There’s more than enough renewable energy, accessible
with today’s technology, to supply the world’s energy needs. Not
only do we know how to get there, it is where we are headed,
based on current market and technology trends. The key to
succeeding on climate change is simply accelerating what is
already underway, pushing a rolling boulder a little faster.


Like I said, I’m in need of good news like this, so I was excited
to talk to Bond about the cost of renewable energy, the peak in
fossil fuel demand, and the inevitability of a 100 percent
clean-energy system.


Without further ado, Kingsmill Bond, welcome to Volts.


Kingsmill Bond:  


Thank you for having me on the show, David.


David Roberts:   


Kingsmill, I've been following you for years and you've been a
reliable source of good news. You recently published an article
arguing that we need to flip our story on climate change
mitigation: It's not one of pain, about distributing costs and
sacrifice and who's going to be more altruistic; it's about gain,
about who's going to claim the giant rewards that are waiting. So
before we dive into the specifics, give me the elevator-pitch
version of why people confronting the daunting task of addressing
climate change should feel better than they generally do.


Kingsmill Bond:  


Well, thanks very much for putting it in those terms. The point
here simply is that we have got this new, enormous, cheap energy
resource in solar and wind that we've unlocked with technology,
and we're just starting to be able to apply it.


As we apply it, it gets cheaper, because it's on learning curves.
Therefore, we've unlocked an enormous cheap source of energy that
can be used to provide all of our current energy demands and,
indeed, the energy demands of those who have very limited amounts
of energy. It's an exciting opportunity and moment to do that.


David Roberts:   


The center of that story is the learning curves for renewable
energy. You single out four different technologies on steep
learning curves that, if we project them continuing, bear all
kinds of good news. Tell us what those technologies are and what
the curves look like right now.


Kingsmill Bond:  


The four most clear technologies which are on established
learning curves are solar PV for producing electricity; wind for
producing electricity; batteries for storage; and electrolyzers
to convert that electricity into hydrogen. All four of them have
been the subject of a recent paper by Oxford University looking
at their learning curves, that is to say, the amount that their
costs drop for every doubling in deployment. All of their
learning curves are between 16 and 34 percent, which was already
fairly well known. 


But the additional point that's being made by this paper is that
when technologies get onto learning curves, they tend to stay on
them for very long periods. When you're trying to project future
costs of these technologies, the most logical assumption is that
those learning curves will continue. This is extremely
significant, because we all know that they are growing very
quickly, and if you assume that that growth continues — and
there's no reason why it shouldn't — these technologies will get
incredibly cheap. 


This is kind of an academic debate, because you're already
getting solar PV being produced between $10 and $20 per megawatt
hour in certain favored locations, so it is, in fact, already
incredibly cheap. That cheap energy source is a) going to get
cheaper, b) going to spread globally, and then c) be followed up
by these other technologies, also on learning curves, which will
then provide us with the energy that we need at much lower cost.


David Roberts:   


The electrolyzers seem like the newest of those four
technologies. Solar and wind and batteries are pretty
established, but electrolyzers have just recently come in for a
lot of innovation. How confident are we in that particular
learning curve? What's the state of our knowledge there?


Kingsmill Bond:  


In the paper that the Oxford team did, they looked at about 500
or 600 different technologies over long periods and they noted
that, actually, very few of them get onto learning curves. As you
say, the electrolyzer data set is shorter, but it still goes back
a couple of decades, I believe. This is, from their analysis,
another technology also on learning curves, and it seems to be
already exhibiting the same learning characteristics that we've
witnessed in solar, wind, and batteries. 


First of all, in order to make green hydrogen, you need solar or
wind electricity, so half the story is already on learning
curves. Then the question simply is, can you get the electrolyzer
itself onto learning curves?


What's special about this technology is that it's also what they
call granular and discrete. That is to say, you can have very
small pieces of equipment, they're easily replicated, and they
can be built at any size. Many people can innovate, and that's
indeed what they're now doing, as we now see huge amounts of
capital flowing into hydrogen strategies across the world, from
Chile to China to Morocco to the United States. It seems
extremely reasonable to imagine that the costs of electrolyzers
will also continue to fall.


David Roberts:   


As a snapshot of the present, where is clean energy relative to
fossil fuels? Is it still too glib to say clean energy is cheaper
than fossil fuels? How nuanced is that story right now?


Kingsmill Bond:  


The debate goes like this: Advocates of clean energy such as
myself say, look, it's incredibly cheap, its price is down to $10
or $20 per megawatt hour; the global average, depending how you
calculate, is between $40 and $50. This is the LCOE we're talking
about. And this is a great story.


The counterargument is, people say, well, you're only talking
about the LCOE, you’re not thinking about intermittency. OK, it's
cheap in certain locations, but there are other locations, most
notably parts of sub-Saharan Africa, where it remains extremely
expensive, because the cost of capital is high. Therefore it's
not a fair comparison and it's not a substitute for fossil
fuels. 


The way to reconcile those two perspectives, I would suggest, is
this point about learning curves. As the costs get lower and
lower, this debate kind of fades away. It is fair to say that
LCOE is not necessarily the best way to calculate costs, and
there are other issues to account for in intermittency, but when
costs get incredibly low and you can overbuild, then that debate
becomes much less significant. 


Furthermore, as this Oxford paper points out, the country on the
10th percentile of cost today — that is to say, the most
expensive countries today — will have the same price solar and
wind electricity as the cheapest countries today in 10 years,
because they're on these learning curves. So I would suggest that
these learning curves solve the problem.


David Roberts:   


They brute force it, in other words. It gets so cheap that you
can start being profligate with it.


Kingsmill Bond:  


You can be profligate with it, but in fairness, there are also
other solutions. There are certain countries and regions which
today have penetration of variable renewables of over 50 percent
— most notably Denmark, South Australia, and northern Germany —
and are aspiring, as in the case of California, to 100 percent
renewable energy-based systems.


What's been notable throughout this debate, for the last 20
years, is that the ceiling of the possible is constantly
rising. 


If you go back to how the debate was being held about 20 years
ago, you'll see these very fancy letters from the Irish and
German grid operators saying that variable renewables could never
be more than 2 percent of the system, for a whole series of
technical reasons which are beyond me. But what's happened
continuously is that people have come up with new solutions, be
they demand-side management, supply-side management, bigger
grids, batteries, interconnectors, better software,
digitalization, smart meters, so on and so forth. There have been
a whole series of different solutions. The point we really want
to make is that that ceiling is a rising ceiling.


David Roberts:   


Intermittency is the number one mental block people have about
this, in my experience. So you're right: one obvious point is
that the amount we're allegedly going to be able to integrate
onto the grid keeps rising. People set these very confident
limits, and the limits get busted through. But looking out, the
conventional wisdom is that the closer you get to variable energy
providing the majority of your energy, the higher the cost of
that variability, and the more difficult it is to address. How
confident are you that that gap from 80 to 100 percent is
bridgeable at reasonable cost?


Kingsmill Bond:  


There are two answers to this. The first is that this is an
absolutely academic debate, because today, solar and wind are 10
percent of the global electricity supply. To worry in 2021 about
how we go from 80 percent to 100 percent is completely academic.


I often use the analogy that it's like sending my daughter to
kindergarten, aged five, and worrying about how she's going to
pass her university maths finals. Sure, she's going to have to
get there eventually, but there's an awfully long way between now
and then. History suggests that we will keep on coming up with
ways of solving this. So I think the first answer is, it's not a
fair question. 


The second point is that, if you assume these learning curves
continue and we do get incredibly cheap sources of renewable
electricity, then it's absolutely inevitable that we will find
ways of using it.


Perhaps I can step back for a second. It's often worthwhile going
back a century and asking yourself: Had you been trying to think
about the future in 1921, when we were on the cusp of a
quadrupling of global population and a 10-fold increase in energy
development and so on and so forth, could you ever have predicted
all of the new technology innovation that was going to come?
People sit in darkened rooms in Paris in 2021 and seriously think
they can forecast the innovation genius.


David Roberts:   


But in fairness, we're a lot farther away from 1920 than 2050 is
from us. We definitely need to compress the amount of time in
which we have to do this. You might say that the solutions ought
to at least be visible by now. 


Kingsmill Bond:  


Actually, that’s the point: the solutions are visible. You do
have detailed plans being made in Australia and California, in
Northern Europe, for electricity systems based on 100 percent
renewable electricity. You also have work done by people like the
great Mark Jacobson: he's basically tried to figure out the
solution for every single country in the world.


So it's not like there are no solutions ahead of us; there are
plenty of solutions, at different levels of granularity.


David Roberts:   


This story depends on the cost curves continuing, as you’ve said.
On the one hand, you can look at history and say, cost curves
tend to continue once they start. But you can come up with all
kinds of stories about things that might impede or slow these
cost curves: materials shortages, lithium becoming problematic,
mining becoming more problematic, supply chain problems (maybe
even caused by climate change), space constraints, NIMBYs who
want to stop construction.


How confident are you that none of those will gain enough
purchase to slow things on a macro level?


Kingsmill Bond:  


I always smile when people talk to me about limits to growth,
because renewable energies are essentially, by definition,
limitless, absolutely enormous. The real limits to growth are to
the fossil fuel system, which is constrained in terms of the
amount that we have, and incredibly constrained in terms of our
capacity to burn it.


So it's worth standing back for a moment and recognizing that the
real limits to growth are with the current system, not with the
new system. 


The second question is, well, are there limits that are
insurmountable, that the talent and capital of the world cannot
handle? I think the answer to that one is absolutely, obviously
no, because we have continuously solved each of these problems as
we have encountered them. 


Then, if I can answer this very specific question about mineral
shortage: it's an absolutely bogus problem. You need, for
example, 200 kilograms extra of minerals in order to have an
electric vehicle, which is more than an ICE car. That sounds
quite scary until you think, well actually, an average ICE car
uses 15,000 kilograms of oil over its lifetime. Those 200
kilograms extra that you require of minerals by definition can be
recycled, whilst fossil fuels, obviously, you burn them once and
you never use them again. 


Let me give you a couple more stats. There is enough lithium, for
example, in known reserves today to be able to satisfy more than
a century of current demand. There's enough cobalt in the world
for 1,000 million cars. If the answer is, that's really scary
because we might need 2,000 million cars, then again, it’s an
absolutely fake debate. First of all, we can and are engineering
technologies to reduce cobalt, as Elon Musk is doing. But even if
we weren't, we build the mines as demand increases. Prices go up
a bit and people build new mines and reserves increase. These are
absolutely fake problems.


David Roberts:   


Are there no social or moral aspects to this, though, in
expansion of mining?


Kingsmill Bond:  


Undoubtedly. This is why people are saying, I think quite
rightly, that we shouldn't make the same mistakes this time as we
made last time. In our expansion of these mines to build out the
new renewables world, we shouldn't be trashing nature with
impunity the way we have done in the past. We should be recycling
this stuff in order to minimize our impact on the planet.


But let me just come back to the main point, which is that it's a
question of degree, right? If you require 100 — or in the case of
coal-fired generation versus a solar panel, 1000 — times less
stuff in order to generate your electricity, by definition,
you're going to be having a dramatically lower impact on the
planet.


David Roberts:   


In your discussion of S curves, you mention something about a 5
percent “salience threshold.” When a product reaches 5 percent
market penetration, certain dynamics take hold. Can you say more
about that?


Kingsmill Bond:  


This is actually quite an intuitive observation. We see it, all
of us, in our own lives. If you think back to when you got your
first smartphone, or the internet, or your first mobile phone,
what happens is that, as new technologies get adopted, they move
up these S curves.


It takes a long time to get the technology good enough for people
to adopt it, so to go from 0 percent penetration to around 5
percent takes a long time. But then, when it gets good enough,
everyone wants it, demand goes through the roof, learning curves
start driving costs down further, it goes very, very quickly from
about 5 percent market share to about 80 percent market share.
That's the nature of S curves. 


This is something that is very well documented for many
technologies over the course of a century or more. It goes all
the way back to cars and electricity in the United States in the
early 20th century, and then all the great stuff we've had since
then: microwaves and toasters and TVs and now the internet. It's
a well-appreciated observation that stuff moves very, very
quickly from low penetration to high penetration — when it's
cheap enough and when it's good enough. Therein lies the debate.


David Roberts:   


So where is renewable energy? Do you think it's crossed that
threshold? You think we're on that S curve now?


Kingsmill Bond:  


If you look at the history of deployment of, for example, solar
panels, what you will see if you chart it is exponential growth
taking place: high growth of between 25 percent and 40 percent
growth per annum over the last two decades.


There are many other people, including the great Ray Kurzweil,
who pointed this out: solar deployment’s been doubling every two
years roughly for the last couple of decades, and that's an
exponential growth curve. Just empirically, that's exactly what
is happening. 


What's also notable is that some experts who try to forecast
future solar deployment get it completely wrong, the way the IEA
famously has done for the last 20 years. They imagine it's linear
growth. If you go back 10 years, demand growth was at 10
gigawatts a year and the IEA was projecting forward growth of 10
gigawatts a year for the next 20 years. Then the next year it's
14 and the year after it’s 20, because we're on this exponential
growth curve. 


David Roberts:   


This is a subject of some fascination to me. Is this new Oxford
paper really the first model that projected cost curves simply
continuing in the shape that they currently exhibit? It's
remarkable to me and everybody I know that the modelers have
gotten these cost projections so wrong in such a consistent way
over and over again for 20 years now. What are we to make of
this? What's going on there?


Kingsmill Bond: 


You're right. It’s absolutely shocking, and it's not just the
IEA, it's almost all modeling of the future. It's interesting: I
ask people about why they don’t do this. There’s a series of
answers, but the first answer basically is well, it's too
complicated. We can't put these learning curves into our models
because it’s too complicated. OK, fine, why don’t you just get a
bit more computing power, surely it can be done. But anyway, that
seems to be one answer. 


The second answer, linked to that, is that these models are
incredibly complex. If you're trying to forecast kerosene demand
in Madagascar in 2070, you have to think a lot about that, and
you're not necessarily thinking about what's possibly a little
bit more important, which is the learning curve of the
technology. So, they overcomplicate it. This is why, for me as a
strategist, it’s second nature to simplify. That's what the
Oxford paper’s done: they've got to the kernel of what's driving
change, and it’s those learning curves.


Then the third reason why incumbent models have been so reluctant
to incorporate these learning curves is that so many of them are,
in fact, made by fossil fuel incumbents, and turkeys don't vote
for Christmas. That is to say, if you're working for Exxon or
Shell or whoever it is, there's very little incentive for you to
say, you know what, those battery costs might fall a little bit
faster than we think, and EVs’ growth might be a lot faster than
we think, and oil demand might be a lot lower than we think, and
therefore, I might not have a job. People don't forecast that
stuff. 


The final point is that — and I'd like to come back to this,
because it's a completely fake argument — people say, “We want to
be conservative. Solar costs have dropped 20 percent a year for
the last 20 years, but in the future, we don't want to be too
aggressive. We can't forecast the detailed solution, so we're
going to be conservative and we're going to say they're going to
fall at 2 percent a year.” This is just intellectually
incoherent, because why would it suddenly stop falling? Just
because you can't see in detail, why would you suddenly forecast
a drop in cost declines? 


The other reason why it's intellectually incoherent is because,
as a result of the failure to recognize reality in these
fast-growing technologies, people have to make their models
balance. They go, “Well, in order to make my model balance to
2050 net zero, I'm going to pop in CCS and BECCS, and Martians
coming from space to take away our carbon” and other completely
idiotic ideas, which have absolutely no basis in empirical fact.
That's the point: You've got to try and rely as closely as you
can on the facts.


David Roberts:   


It seems like, intellectually speaking, the most conservative
thing you could do is assume that things are going to continue
happening the way they're happening. That's almost by definition
Occam’s Razor. And if the learning curves continue the way
they're going, then all these forecasts are going to get blown
away. It’s a bizarre situation. 


Kingsmill Bond:  


Yeah, it is. Sorry to lean so heavily on Doyne Farmer and his
Oxford paper, but it’s great work, and they make exactly this
point. They say, look, mathematically, the future is unknown.
There's a whole continuum of options between basically no change
and incredibly fast change. But the business-as-usual scenario,
which is central to so much current thinking, is mathematically a
complete outlier. It might happen, but it's incredibly unlikely.
We might suddenly stop innovating, costs might stop falling,
deployment might stop happening, governments might give up,
people and companies and the financial markets might stop trying
to do anything, we might decide that we want to go over the cliff
of catastrophic global warming — maybe we will, but that's pretty
unlikely.


David Roberts:   


The other area that people tend to cite as a limit, or worry, or
outstanding problem is these so-called difficult-to-abate sectors
— heavy transportation, industrial processes, steel, concrete. Is
the story there the same, that clean energy is going to get so
cheap it's just going to bulldoze through those problems? What do
you see happening in those sectors?


Kingsmill Bond:  


The hard-to-abate sectors have been a very loud debate for the
last three years. The argument people make is, “Well, you can't
get renewable energy into airplanes and cement and steel and
shipping, and therefore there will be no energy
transition.” 


There are two problems with this argument. The first one is the
point I made earlier, which is that this is the final area that
needs to be solved. Today, if we look at the entire energy system
in terms of primary energy supply, solar and wind — these
variable energy sources on these very fast growth rates — are
only providing around 4-5 percent of global supply.


These hard-to-solve sectors are about a quarter of global primary
energy demand. So this is a very long-term problem which we will
need to solve, but it's quite a long way in the future before we
actually have to solve it. 


Then the second point — and this is an argument that we and many
other people have been making for four or five years, actually a
much more practical observation — is that solutions are already
starting to materialize for these hard-to-solve sectors. You have
organizations like the brilliant Energy Transitions Commission
that identify prospective solutions for every single one of these
hard-to-solve sectors.


For example, the steel sector three years ago seemed to be a
completely impossible-to-abate sector. Now you already have
people like Andrew Forrest in Australia talking about taking his
iron ore, putting up solar panels and wind turbines in the
Australian desert, using that to create hydrogen, using the
hydrogen to make steel out of the iron ore, and then shipping
that steel all around the world. There are now lots of other
companies talking about hydrogen-based steel in the same way. In
the shipping industry, we have Maersk now talking about using
ammonia as a shipping fuel, which is basically a hydrogen-based
solution. 


This is why we're so excited about electrolyzers being on cost
curves. Ultimately, the way that we, humanity, are going to solve
this problem is we're going to decarbonize electricity. We have
solutions for that. We're going to electrify whatever we can, and
new solutions materialize every day.


Then the stuff that we can't, we'll use some variant of hydrogen.
That very clearly is becoming the answer. So when hydrogen also
gets onto cost curves, and people are starting to think about how
to put hydrogen into steel and shipping and indeed airlines and
so on and so forth, you can see the contours of the new world
that will emerge.


David Roberts:   


Let's shift to another source of good news. I'm not talking about
national and international politics, which both seem dismal at
the moment. But states and cities and corporations and financial
institutions and other subnational entities seem to really be
taking the lead in a way that gets more and more glaring every
year. So let's talk about some of the things that you see
happening at that level that give you hope. 


Kingsmill Bond:  


I think the wider point is that we have to realize that politics
follows technology. That is to say, as new technology solutions
materialize, politicians use them. The best example of this,
famously, is Boris Johnson in the UK, who 20 years ago was
laughing at all this green technology and was extremely skeptical
about it. Now that you can buy an EV in the UK for more or less
the same price as a conventional car, he's already put into place
the prospect of bans of the sale of conventional cars. He keeps
on bringing forward the date by which, in the electricity sector,
we're going to have a renewable system. So politicians will use
the technologies that materialize. 


It's great that it's happening on a local level first, but it
also does need to happen on a national level. This is the
absolutely key point. When I attend conferences and talk to
developers in the field, they don't talk about a lack of capital,
they don't talk about technological problems — what they do talk
about, all the time, is the fact that the policies are tooled up
for the fossil fuel system, not for the renewable system.


This is the key point that needs to get through to policymakers:
Can they please stop fiddling around, talking about these
wonderful strategic visions, and actually do their job, which is
detailed amendment of policies, and detailed changes to support
regimes for renewables? It's really hard, difficult stuff, and
it's not happening. 


David Roberts:   


One of the other perpetual debates in this area is how big the
policy lever is, how necessary it is, and how much of the
transition has a momentum of its own, just from economic
development and technology innovation. I think you have claimed
that this transition is inevitable, no matter what governments do
at this point, so how big of a space is there for policy? How
much can policy do to slow or speed it down? How much does it
have a life of its own at this point?


Kingsmill Bond:  


We recently put out a report which tries to encapsulate this in a
very simple framing. The first observation is that everywhere is
different, and every sector and technology is a little bit
different, right? To state the obvious. Then, secondly, you need
different policies at different stages in the life cycle of
change. 


At the start, you do need technological innovation, and
government's very good at that. Then, after that, as costs start
to fall, you do need government support to these growing
industries, as the Germans very kindly did the solar industry 15
years ago. But then, as the costs start to fall towards price
parity with the fossil fuel system, the role of government
actually changes very significantly. Rather than, as it were,
trying to push water uphill, they need to remove the blockages to
allow it to fall downhill. 


That's, I think, where we've now got to, certainly in the
electricity sector, and to a degree in the transportation sector:
the role of government now is to remove the blockages which are
stopping change.


I'll give you a good example. I was talking to an incredibly
frustrated wind developer in northern England a couple of months
ago, and he was saying, I've got a huge offshore wind project I
want to bring to bear but I can't do it, because there's one
landowner who won't allow my cable onshore, and it's lasted for
two years.


David Roberts:   


A very familiar story all across the world. 


Kingsmill Bond:  


I mean, this is ridiculous. Are we really going to allow our
future to be mortgaged for the sake of people who want to block
it for whatever bizarre reason? That's exactly now the role of
government. Before you accuse me of trying to trample over
people's rights, it actually goes deep into the heart of many
systems. For example, there was an extraordinary report written
by the Institute of Fiscal Studies in the U two weeks ago about
how the government taxes electricity at, I think, effective cost
of about 100 pounds a ton of CO2, but subsidizes gas use to the
tune of 20 pounds per ton. This is just idiotic. Why is it that
we give $500 billion a year of subsidies to the fossil fuel
industry? There's an awful lot of very detailed work that
governments now need to do to remove these barriers to change,
and I would suggest that's actually the cutting edge. That's what
now needs to happen.


David Roberts:   


There's a lot of talk these days about financial institutions and
the Fed pushing for more pricing of carbon risk, etc. How big of
an influence do you think that's having, the discussion that's
moved into the financial world?


Kingsmill Bond:  


The financial world somewhat belatedly is waking up to the
systemic risk of carbon, and they should, because we did this
study which suggests that about a quarter of equity markets and
half of bond markets are in sectors which are either fossil fuel
producers, or heavy fossil fuel users. So it's incredibly deeply
ingrained inside financial markets. As change happens, as new
technologies materialize, you're going to get disruption; you're
already getting disruption right across these sectors, and that
creates financial risk. So it's quite right, I would suggest, for
financial market regulators and participants to look at this
risk. 


What somewhat disappoints us thus far is that, like the IEA
modeling we talked about earlier, they’re still fiddling around
at the margin, they're not really getting to the heart of the
risk. A good example is from the banks. If you talk to most
global banks today, and we talked to a few, they will say, “We've
got this covered, we totally believe in all this green stuff,
we've decarbonized our head office, and we're getting renewable
electricity — and furthermore, we continue to lend tens of
billions to the coal center and the oil center for their
expansion. But don't worry, we've got it covered, because our
risk models tell us that there's no risk from this stuff.” 


You then probe a little bit and it turns out that they've got
risk models built up over 40 years of ever-rising fossil fuel
demand. So they're doing bad modeling. They don't understand
where the risk is, they're not taking account of it. Ceres, for
example, has analyzed the U.S. financial sector and figured out
that half of the syndicated loans are to fossil fuel linked
sectors. They figured out that actually, the banking capital of
the US banking system would be wiped out in the event of a
disruptive energy transition. So there's a lot of risk which is
not necessarily being accounted for. 


It's great financial markets are starting to wake up to this,
starting to think about pricing it in. But let's be clear,
there's a very long way to go. 


David Roberts:   


The world knows how to accommodate the rapid growth of a new
industry, but it almost seems like the decline of fossil fuels is
going to be more disruptive in a lot of ways. You talk about
fossil fuel demand peaking in various places already and
approaching peaks other places. Tell us a little bit about that:
Where have you seen it? Where do you expect to see it? What can
we expect those peaks to look like over the mid-term?


Kingsmill Bond:  


This looks like a very mad argument on our part. Here we are with
fossil fuel demand booming, a shortage of coal in China, record
high gas prices and coal prices, and so on and so forth. But I
will nevertheless stick to my guns because, at the end of the
day, this is just maths. 


What's happening is, you have an energy system which is growing
and dominated by fossil fuels. Then you have this new kid on the
block of these fast-growing renewable energy technologies.
They're moving up the S curves, and, just mathematically, at some
stage it will be conceded that the demand for the incumbent
technology with 80 percent market share in a low-growth system
inevitably must peak. As you get this fast-growing new challenger
coming into the market, it must peak and then decline.
Mathematically, it will and must happen. 


The question then is, well, how does this play out? We still
argue that you got to peak fossil fuel demand for coal and oil
and gas in 2019, and COVID has damaged them so significantly that
by the time demand comes back, it won't go significantly beyond
that 2019 peak. That's the overall argument. 


David Roberts:   


You’re talking about global fossil fuel demand? You think it
peaked in 2019?


Kingsmill Bond:  


We think it peaked in 2019. The reason why this is a credible
argument: If you imagine a global energy system, growing at 1
percent a year, and the challenger of renewables is 5 percent of
that system, growing at 20 percent a year — 5 percent times 20
percent is 1 percent. So the moment that solar and wind get to a
5 percent market share in a 1 percent growth system, they will
take all of the growth. That's the moment for the peaking of the
fossil fuel system. 


COVID basically brought that moment forward. We had forecast that
moment for the mid-2020s; COVID brought it forward basically to
2019. So in 2021, in certain areas, you might get back close to
where you were back in 2019. In 2022, 2023, two or three years of
bouncing along the top; but as this stuff keeps on growing, you
do inevitably get a peak and a decline.


To put the current state of affairs into that context, you’ve got
a crash, you’ve got a bounceback, and you’ve got lots of
bottlenecks and this demand for stuff that people didn't buy that
are suddenly twice as much, so you’re inevitably going to get
spikes. We had exactly the same thing, famously, back in 2010.
But that shouldn't detract from the wider observation that
continued growth of this stuff is going to drive a peak. 


To try and make this more apparent as an argument, it's worth
thinking about two mountains. So you've got the Matterhorn, which
famously is a V-shaped peak; the Matterhorn’s what happens to
discrete individual goods like mobile phones. Nokia's sales can
fall off a cliff like the Matterhorn. However, when you think
about systems, where you've got embedded demand in a billion
cars, then your peaking is going to look a little bit more like
Mount Fuji — that is to say, you've got a long, slow slope up; a
plateau at the top, for, let's say, five to 10 years, depends a
little bit on the detail; then you've got a long slope
downwards. 


That roughly is the pattern for what you see in other technology
shifts. If you go back to what data we have for the UK for the
shift from coal to gas in heating, or the shift from steam to
electricity in power generation back at the start of the 19th
century, you see these plateaus. They last for a bit, because it
takes time for the new technology to get big enough to really
kill the old one. But that's nevertheless the pattern.


David Roberts:   


So you think we're on the bumpy plateau right now? 


Kingsmill Bond:  


I think we're on the plateau at the top of Mount Fuji. (Although
of course, having climbed it myself, I know perfectly well that
it is in fact a volcano and you go down again, but let's not go
into that.) It is a plateau at the top. The point to me is that
people should not mistake a little hillock at the top of the
plateau for another mountain ahead. That would be the error right
now, to do that. This is one of the reasons why Carbon Tracker
talks so much about stranded assets, because the fossil fuel
system and its loyal attack dogs persist in seeing continuous
growth, then build for that growth, and as the growth fails to
materialize, they get stranded assets.


David Roberts:   


Along those lines, you make the point that you don't have to take
substantial market share away from the incumbent to start hurting
the incumbent. You just have to stop their growth, then that peak
triggers all sorts of other market dynamics. So what happens once
the peak sinks in and it's more widely realized what's happening?


Kingsmill Bond:  


Once you reach that peak, you kickstart a series of positive
feedback loops for the challengers and negative feedback loops
for the incumbents. We put out this paper where we run through
seven areas and then delve into a couple of them in a bit more
detail. So you see it happening in costs, technology,
expectations, financial markets, society, politics, and
geopolitics. Those are the seven. 


To focus on the first one, think about this. If you are making
cars today, go back five years ago. You were sitting pretty.
There's 1,000 million cars in the world, sales are $100 billion a
year, you're expecting ever-rising growth, and what could
possibly disturb that?


What disturbs it is Elon Musk and Tesla. They come in and they
don't have to replace the 1,000 million; they don't even have to
replace the 100 million, because what's happening is that 100
million is growing at, let's say, 2 percent a year. So when Musk
and the EV sector take that 2 million a year, you as a car
manufacturer suddenly realize that your growth is over in the old
system.


You then look at the cost curves of the new stuff, and you
realize that you're going to have to change. You have to
reallocate your capital out of ICE cars and into electric
vehicles. Meanwhile, you figure out that you've got continuous
decline now coming for your ICE car sales, so suddenly, your ICE
factory is a liability, not an asset. Furthermore, as your sales
of ICE cars start to drop, you've got to allocate the same
fixed-cost structure over a smaller number of cars, and your cost
per unit increases. This is economics 101. 


That's what happens to the old people. What then happens to the
new people, Tesla and BYD and the EV makers, is, as they produce
more cars, the costs of the batteries fall because of these
learning curves. As costs fall, demand increases, and as demand
increases, they're taking more market share, and they can then go
to the second feedback loop, which is the financial markets.


Tesla can go to the financial markets and in an afternoon they
can raise several billion dollars and build a new factory in
Berlin, which increases their capacity to build at the same time
the fossil fuel sector is finding it very difficult to raise
capital, and is obliged by investors to change their strategic
direction — as we saw, famously, with Engine No. 1.


David Roberts:   


When this dynamic is underway — when the large incumbent fossil
fuel or car companies are dragging around this giant legacy
system which can pretty rapidly become a liability — what can we
learn from history about the chances that they successfully pivot
vs. flame out? 


Kingsmill Bond:  


We don't have to do any original thinking here. It's extremely
well-documented analysis over decades. There's even a famous book
about it by Christensen, The Innovator’s Dilemma, which says that
incumbents struggle with disruptive change and few of them make
it.


There's another book that I often like to refer people to, by a
very respectable financial analyst called Sandy Nairn, called
Engines That Move Markets — recently re-released, but it's quite
an old book. He looks back at technology shifts and what
incumbents did. 


The answer is, incumbents, first of all, try and resist change.
Then they struggle to put capital into these new technologies,
because they're not sufficiently profitable. You saw lots of
examples of the oil center saying that over the last decade:
we're not going to put our money into solar and wind because we
can get a 20 percent IRR on oil against a 5 percent IRR on solar.
Why would we? The problem, then, is that by the time this stuff
does get profitable and starts to eat into their old business,
it's too late, and other people have moved into this area. That's
exactly what's happening now in the energy system. 


It's the risk, of course. It's not just a question of solar,
wind, and so on challenging the current enormous coal, gas, and
oil system. It's also all of their users, don't forget. So we
talked about the car companies, but it's the steel companies, the
shipping companies, the airlines — they are going to get
disrupted by new people coming in with new technology and new
ways of doing stuff. They struggle because, precisely as you say,
they have this enormous tail of legacy assets. But it's also a
problem, as Christensen points out, of legacy thinking. When
you've spent your entire life digging holes in the ground to hoik
out stuff, you find it very difficult to do something new.


David Roberts:   


Mostly I'm pretty optimistic about the electricity sector, but
one of the reasons I worry about it is that … car companies can
flame out and EV companies can replace them; fossil fuel
companies can flame out, clean energy companies can replace them;
but in electricity, we’ve got these utilities that are basically
stuck there by law and regulation that can't just flame out and
go out of business. Any business that thought as slowly and
conservatively as utilities would probably go out of business,
but they can't. So it's hard to see how those dynamics bite as
much in that sector.


Kingsmill Bond:  


I agree with you in theory, but what has been notable is that
it's actually been the electricity sector which got disrupted
first, most notably and famously in Europe. My former boss Martin
Lewis tells a story about how he was working for one of these
electricity companies in Europe back in the early 2000s, and they
talked the talk and they put turbines on their annual reports,
but in private they dismissed this as a threat.


Lo and behold, you have the combination of the crisis and
politicians putting increasing pressure on them and this new
stuff materializing, driven by new players — then they found that
they were indeed completely stuck with the old technologies and
had to write down, famously, 150 billion euros of assets in the
2010s. So, somewhat to my surprise, it can happen and it is
happening. 


What it does need is political push. Why would a politician push
a conservative electricity company to change, and why would they
change? The only reason why is if you have incredibly cheap
alternatives, and your neighbors are deploying them, and you're
starting to get rumblings from the people that not merely do they
have polluted air and electricity outages, but they're also
having to pay 25, 30 cents per kilowatt hour for their
electricity, and their mate in the neighboring country’s getting
it for 10. That's what forces change.


David Roberts:   


Let's talk about geopolitics. I think the line in international
negotiations used to be between developing and developed
countries, as they used to be called, but you draw this line
between fossil fuel producers and consumers, and you say, per
geopolitics, those are the two relevant groups. What's happening
that's creating that divide?


Kingsmill Bond:  


When it comes to fossil fuels, you've basically got two groups of
countries: 80 percent of the world lives in countries that import
their fossil fuels, and 20 percent of the world lives in
countries that export fossil fuels. It's actually even more
concentrated than that — basically 10 percent of the world lives
in countries that are very highly fossil fuel dependent. So the
Middle East, Russia, Australia, which have got very large fossil
fuel exports.


It's a really, really small group of people, 10 percent of the
world, living in these fossil fuel dependent countries. Then
there's the rest of us who have to import the stuff. 


Furthermore, the geopolitical environment at the moment confers a
lot of power upon the owners of the fossil fuel. There's this
very significant geopolitical power conferred upon Russia and the
Middle East as a result of their fossil fuel reserves. They’re
generating these very large rents of roughly 2 percent of global
GDP every year, and they're failing to pay for the externality
cost of, call it $3 trillion a year that has been picked up by
the poorest in society. So the current system we have is very
unfair, and massively favors the fossil fuel producers.


Lo and behold, the fossil fuel users — 80 percent of the world,
and it’s all of the areas of growth: China and India, most of
Southeast Asia, large chunks of Africa are major importers of
fossil fuels — are almost all of the expected growth in demand
over the next 40 years.


They now suddenly have got their own domestic, eternal, clean
resource, and it's cheap, so of course they're going to use it.
They're going to be very delighted to use their own homegrown
source, because what you're ultimately doing is trading rents
paid to oligarchs and foreigners for local jobs. Of course
they're going to do that. 


There are many other people writing about the geopolitics of this
energy transition, but if you stand back for a second, it's
pretty clear that it's going to benefit the big fossil fuel
importers and damage the big fossil fuel exporters. The question
then is, well, where does the power lie?


Right now, in October 2021, the power clearly lies with the
fossil fuel exporters, because not enough of this stuff has yet
been built. Give it another five years, and the power is going to
shift. That's, of course, another reason why people need to get
on with building this new energy world, because otherwise,
they're going to continue to be subject to the whims of the
fossil fuel exporters.


David Roberts:   


Why do I hear all of this hand-wringing about a new wave of coal
plants in China and Vietnam and in developing countries? I feel
like I read this headline every few years: despite climate
promises, there's a surge of coal plants. How real is that?


Kingsmill Bond:  


Don't worry too much. First of all — not to belittle the problem,
because it is a bit of an issue — it's not as dramatic as it
sounds in the headlines. In fact, in spite of these new coal
plants which have been built, global coal demand peaked in 2013.
So people have been building them and they haven't actually been
using them. Global coal utilization rates have now fallen to
about 50 percent. So the thing to focus on is not the new capex
going on. 


The second point is that, thanks to the incredibly hard work of
millions of people, this tail of new coal plants is constantly
being reduced. It used to be hundreds of gigawatts, and now it's
being reduced to dozens. So it has fallen a long way and it
continues to fall. 


When it comes specifically to Vietnam, there are things changing
literally as we speak, because of the incredible success of their
deployment of solar and wind. They're already now canceling their
coal plants and stopping their plans for expansion of coal.


When it comes specifically to China, the rumor is at COP we might
see a bringing forward of that 2030 peaking fossil fuel demand
date, but the point nevertheless remains that China is very close
to peak demand for fossil fuels. I hesitate to say it right now,
but it is incredibly close.


To give you a stat, Chinese demand for electricity today, per
capita, is the same as Europe. So that incredible ramp of moving
from very low demand to develop level demand, that's happened —
that's not going to happen again. China is the world's largest
producer of solar and wind and all these other new energy
technologies, and they're still growing at 20 percent a year. You
play with the maths a bit and it's clear that we're very, very
close to peak fossil fuel demand in electricity generation in
China. 


When I look at the rest of the world — we recently did a report
on this — in 99 percent of developed markets, we've already seen
peak coal demand in electricity. Interesting enough, in 63
percent of emerging markets, like China, we've seen peak demand
for fossil fuels for electricity. It's not surprising, because
there's a new opportunity in town.


We have a lot of legacy problems, and we have some inertia, and
we have systems which are tooled up for the past, not the future,
and so on and so forth — I understand all of that. But as the
financial analyst, you need to look forward and look at what's
most likely. What’s most likely now, increasingly, is that people
will be deploying these new technologies.


David Roberts:   


You describe the dynamic in financial markets where once you
shave off the growth of an industry, it sets all these dynamics
in motion. I wonder if there's an analogy in geopolitics. You
think of Russia's power and African countries’ lack of power: How
much would global energy have to shift away from Russia's natural
gas to this plentiful solar that Africa has to set off these
feedback loops in terms of geopolitical power and influence?


Kingsmill Bond:  


Therein lies a question beyond my level of expertise, but it
certainly is worth noting that the year of the peak of the
British Empire was just after the Treaty of Versailles in 1919,
just before it collapsed. Things always look great at the top,
and you don't need actually that much; what you need is people to
realize that the future is different, and that they can get their
own energy. 


I should have mentioned, incidentally, that one of the reasons
we’re so enthusiastic about this story is that if you look at the
technical potential of solar and wind, which has been a lot in
the last five years, it's 100 times our global energy demand
today. Africa, as you just mentioned, is an incredible renewable
superpower; they've got 1,000 times as much supply from solar and
wind as their current energy demand.


When countries are looking for new development tools, rather than
reaching to the old playbook of “we must have coal and gas and
oil in order to get development,” it’s considerably simpler now.
You've got this wonderful distribution system called the sun,
which will get you this energy anywhere in the country, and you
can harness it pretty cheaply. That, then, becomes the
development tool. 


For me, this is another aspect of the incredibly powerful justice
which is driving this energy transition: people who haven't had a
lot of energy in the past now can have it and can harness it.
That eventually will change the geopolitical calculus.


But as I said earlier, we're at the top of Mount Fuji; we're
bouncing around, the old is still powerful. The new is yet to be
born in sufficient size to really challenge it. But we can't be
long.


David Roberts:   


Biden's goal is to decarbonize electricity by 2035, and for the
US to be net zero carbon by 2050. Do you think those are within
reach given the amount of policy that's likely to be devoted to
them? 


Kingsmill Bond:  


If they're not achieved, the US will be buried by China. If the
US wants to continue to be a serious player in the modern world,
wants to remain a superpower, then it has to embrace superior,
cheaper technologies. It's as simple as that.


What's really shocking and embarrassing for me as a fellow
Westerner is that for the last decade, China has leapt ahead and
is dominating all of these new technologies. How can that be when
the US has got all of that incredible industrial, intellectual
base?


It's pretty simple. If the country wishes to remain serious, then
it has to do it. If not, then like the UK before it, it will
descend into irrelevance.


David Roberts:   


How much of that is baked in? Are you willing to put any kind of
numbers on how much you think is already inevitable, or how much
requires more policy from Biden? I need faux precision here.


Kingsmill Bond:  


OK, I'll give you faux precision. It’s absolutely achievable.
Again, as this Oxford paper points out, the more you do, the
cheaper it gets. From their calculations, the cost of the
transition, just in purely financial terms, is cheaper than the
cost of business as usual. As they and many others have pointed
out, technically all of this stuff is completely feasible, but
you do need very powerful political action to break through the
logjams of the incumbents and the inertia of the current system.


I salute Biden and his team, because that seems to be exactly
what they're now trying to do. You do need very powerful policy,
because this ultimately will happen by 2100, but by 2100, it may
well be too late. So in order to drive it faster, and for that to
be cheaper and fairer and better distributed, you need to get on
with it.


David Roberts:   


All right. That sounds like a great place to wrap up. Thanks for
taking all this time, and for cheering me up.


Kingsmill Bond:  


Well, thanks, David. I hope I didn't overstate my brief there —
it just seems pretty clear to me.


David Roberts:   


Well, you're making bold short-term predictions. Maybe in a
decade, we can do another podcast and check your numbers.


Kingsmill Bond:  


It's funny because we put out this note in 2018, in a little
conference room in San Francisco, talking about peaking fossil
fuel demand coming in the 2020s. It got fairly well picked up,
but it was one of those completely out-there ideas. Then lo and
behold, you get COVID and it's starting to look like actually
what is happening, notwithstanding what's happening right now.
So, we'll see.


David Roberts:   


So far, so good. All right. Thanks so much for coming on.


Kingsmill Bond:  


Thanks so much for the call and for the opportunity. 


David Roberts:   


All right. Bye now. 


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