Twin Peaks: The Fossil Fuel Edition -- Part II

Joseph Tomain

April 22, 2019

Fossil fuels are reaching their consumption peak. By way of example, the United States has a surfeit of coal, but coal use is on the decline as natural gas and renewable resources replace the dirty fuel for generating electricity. Similarly, oil and natural gas are on the same decreasing consumption trajectory as recent data and modeling suggest.

Consider the following market facts that directly impact coal and reveal its consumption peak:

  • In Europe, fossil fuels peaked when renewables reached 3 percent of the market.  
  • The majority of new electric capacity comes from solar, wind, and natural gas.  
  • Today, local wind and solar can replace 74 percent of the coal fleet, and by 2025, it will be sufficient to replace 86 percent of the fleet.  
  • Since 2013, 100 banks have restricted or left coal lending.  
  • In 2016, Peabody Coal, the nation's largest coal company, declared bankruptcy after having been a high flier as recently as 2008.

Those projections indicate that by the mid-2020s, solar and wind will constitute 6 percent of all energy produced in the United States and will account for 14 percent of the country's electricity consumption, far surpassing the magic 3 percent penetration level.

Such market trends should send a clear signal to fossil fuel investors. If those market trends prove to be insufficient warnings, then price information should be more convincing because it confirms the downward trend. Solar, wind, and energy storage firms find that with each doubling of production, they realize a corresponding 20 percent reduction in costs. These resources are the go-to resources for new electric capacity rather than a continued reliance on the use of coal or even natural gas.

To better understand cost comparisons between clean resources and fossil fuels, we should look at what is known as the levelized cost of energy (LCOE). LCOE is the all-in cost of construction, operation, and maintenance over the life of an energy plant. LCOE analysis demonstrates a worrying trend for fossil fuels for two reasons. First, as noted, the cost of clean resources continues to decline and, second and more significantly, the cost is declining to the point at which clean energy resources are cost-competitive with even the cheapest fossil fuels.

The financial firm Lazard estimates LCOEs in terms of megawatt hours. To put these numbers in perspective, 1 megawatt is sufficient to serve 700 to 1,000 homes. Lazard compared wind, solar, natural gas, and coal and derives the following LCOEs for those resources.

  • Wind  = $29-56 MWh
  • Solar = $36-46 MWh
  • Gas   =  $41-74 MWh
  • Coal  = $60-143 MWh

Based on those estimates, wind and utility-scale solar power are becoming cheaper than coal and natural gas to generate electricity, thus lowering not only the cost of production but also consumer bills. More promising for a clean energy transition is that the market share for clean energy resources is expanding. In 2017, solar and wind contributed just 6 percent of global electricity. Yet, those two resources constituted 45 percent of the growth in supply. Remember the innovation mantra: It's all about market share growth and direction; it's not about market size.

Government estimates of the declining costs for clean energy resources underscore the trend toward a clean energy future. Regarding solar power, the Department of Energy had set a goal that utility-scale solar should reach $0.06/kWh by 2020. In fact, utility-scale solar already sells at that price. The department has set a 2030 goal for utility-scale solar at $0.03/kWh, at which point it becomes one of the least expensive sources of electricity generation, costing less than most fossil fuel plants now online. Similarly, the cost of energy from wind power has decreased from more than 55 cents per kilowatt-hour ($0.55/kWh) in 1980 to a national average of $0.046/kWh in 2015, thus enabling the expansion of wind power throughout the country.

Peak consumption will be realized when fossil fuel firms confront falling prices, increased competition from other resources, sector disruption, and the threat of stranded assets. Regarding falling prices, we have already recognized that renewable resource prices, not to mention an increasing deployment of energy efficiency, are falling dramatically. Regarding competition, new resource firms, as well as new sources of electricity generation, are proliferating. And regarding sector disruption, simply consider the expansion of the electric vehicle market.

Transportation and electricity have been separate and independent energy systems. Roughly, only 1 percent of the transportation system is electrified and only 1 percent of electricity is generated by oil. Once EVs become the transportation option of choice, and they will soon become so, the hard divide between the transportation and electricity sectors crumbles. And regarding stranded assets, to the extent that fossil fuel companies continue to invest in fossil fuels, they do so at considerable financial risk.

The twin peaks of the energy spectrum depend upon both the availability of a particular resource and its decline and consumption patterns. The United States has not reached peak oil production; it simply doesn't need as much of the stuff because the peak of fossil fuel consumption is not only on the horizon, it is emerging daily.

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