Reality Check: The Green Inflation Myth

The Myth

The latest myth of the energy transition is that green technologies are driving inflation because they are expensive and rising in price. Some fossil fuel advocates argue that renewable technology costs have stopped falling, and the costs of installing them can only add to our energy bills. Surely, the myth claims, it would be better to pause this green rollout for a few years, buy more fossil fuels, and help to reduce inflation.

The Reality

The reality is in fact the opposite. The faster the world deploys renewables, the more money we will save in energy costs.

Electricity bills are rising because the costs of fossil fuels have risen, as the IEA noted. Solar and wind are already the cheapest form of new electricity generation in 90 percent of the world, and they are saving consumers from the rising costs of fossil fuels. According to Lazard, the average cost per megawatt hour (MWh) of solar electricity in the United States is $36 and wind is $38. Even before the spike in fossil fuel prices, the cost of electricity from coal was $108 and gas was $60. And at today’s gas price of $5 per MMBTU, the average electricity costs from gas will be above $70 per MWh.

Over the past decade, the costs of solar power and wind have fallen by 90 and 60 percent respectively. Because these are scalable granular technologies, innovators across the world have been able to find better ways of producing and deploying solar panels and wind turbines. As a result, the technologies enjoy experience curves, whereby their costs fall by around 30 and 16 percent respectively for every doubling in deployment. Importantly, experience curves have been proven to persist through time. A group of academics at Oxford University have modeled likely future prices of solar on a probability distribution curve, and their central forecast is that they will reach around $10 per MWh by 2050. Moreover, they note that the faster we deploy renewables, the quicker the costs will fall.

Meanwhile, fossil fuel prices exhibit no learning curve. After all, fossil fuels are a commodity not a technology. Their prices fluctuate over time and have recently set new highs because superior extraction technologies are having to fight against the continuous depletion and burning of the most accessible reserves. Because fossil fuels still dominate energy supply, suppliers are able to extract very high profits when demand bounces or when they are able to curtail supply.

Just like everything else affected by COVID, renewable costs have increased over the course of the year as the result of the global bounce back in energy demand amid supply chain disruptions. But there is nothing to suggest that the longer-term structural drivers of falling costs have weakened. Efficiencies continue to rise, deployment technologies continue to improve, expertise continues to shift from leaders to laggards, and governments continue to support deployment by leveling the regulatory playing field.

Short-term hikes in material prices are a common feature of rapid growth, and as prices rise, firms build more capacity. For example, the limited supply of polysilicon (a high purity form of silicon key to manufacturing solar panels) has been a factor in the recent increase in solar panel prices; but Chinese companies are planning to increase polysilicon production capacity enough to make 900 GW of solar panels annually by 2023, more than three times the expected demand this year.

Renewables are a profoundly disinflationary force that will reduce energy expenditures from their current levels of 3.2 percent of GDP to less than 1.6 percent of GDP by mid-century according to DNV. They make cheap local energy available to the 80 percent of the world living in fossil fuel importing countries, and account for around 90 percent of the expected deployment of electricity to those who have none.

The challenge now is to grow solar and wind fast enough such that they can remove the power of the fossil fuel cartels to set energy prices. So, the future of energy is a choice between a technology or a commodity; harvesting energy under increasing or decreasing returns; deflationary or inflationary energy economics. We should be accelerating the renewables rollout, not slowing it down.