September 27, 2023
The California Air Resources Board often speaks of their desire to engage with decarbonization “in everything, everywhere, and all at once”.
Meanwhile, a multitude of lower-carbon technologies can be found in different phases of development, scale up, and commercialization.
In CARB’s view, all are deserving of some form of support to get them to the finish line.
Recent legislation ushered through by the Biden administration—including the unprecedented Inflation Reduction Act of 2022—also provides support for a diverse set of technologies that promote decarbonization at scale while distributing investment across various US communities.
The IRA provides both investment tax credits (ITC) and production tax credits (PTC) allowing taxpayers to deduct a percentage of the cost of building and operating renewable energy systems. The EPA has published a helpful summary of the benefits here.
Importantly, many of these credits can be monetized (i.e., transferred or sold) if the investing or producing entity lacks sufficient tax liability to take full advantage of them.
But what happens if a technology is unable to secure enough private investment to reach scale and economic viability without benefiting from significant federal, state, and local incentives?
Can such technologies ever survive without subsidies?
Much of the conversation at last week’s Argus Biofuels conference in Monterey, California, centered on the “financial additionality” of renewable projects.
A purely market-based approach only rewards the lowest cost producer of low carbon energy, forcing us to find creative ways of supporting other technologies that are not yet viable at their current operational maturity and scale.
Amazon, Microsoft, and others have decided to offer a long-term offtake price guarantee tied to a fixed—typically 8%—rate of return on carbon credits generated. Could this create a viable pathway for technologies to stabilize and become economically viable?
In all cases, decarbonization is expensive and can lead to commercial and country-scale disadvantages.
Germany and Bangladesh provide two stark examples of how things can play out.
(“To throw the sausage after the bacon”, Middle High German Idiom)
Germany has over 150GW of renewable energy capacity installed, supplying an average peak daily demand of about 80GW.
It also operates about 75GW of conventional power generation capacity to handle the intermittent nature of renewable energy production.
When solar and wind fail to deliver—during peak winter demand for nighttime heating, for example—fossil fuel-based generation is required to meet a large portion of the demand.
The war in Ukraine has shone an incredibly bright light on the energy predicament in which the Germans find themselves—one that is affecting them now and will persist for years.
On the one hand, the German energy mix reflects an incredible growth of renewable generation capacity and the (controversial) sunsetting of nuclear power (see live charts here).
On the other hand, German consumers—both domestic and industrial—are forced to bear the incredibly high price of that energy.
Recent developments have pushed the German government to propose subsidizing up to 80% of a company’s power consumption, effectively creating a “bridge electricity price ceiling” of €0.06/kWh.
The primary economic driver for this dramatic move is a loss of competitiveness with China, other Asian, and US manufacturing, coupled with the huge capital burden of renewables installed over the past two decades.
The subsidies may not come into effect due to credible opposition both within and outside the country. A wide spectrum of academics, members of both the governing and opposition parties, renewable power developers, and some EU authorities have pushed back, citing concerns over the distortion of competition that would result.
Alternatives such as CCfDs (Carbon Contracts for Difference) are being considered to provide similar relief for energy intensive manufacturing while continuing to promote investment in low carbon energy production.
This is the situation in a wealthy country, able to make such significant investments in renewable generating capacity, and which has a high tolerance for inflated energy prices.
What about the other end of the wealth spectrum?
Let’s compare the German story to that of a country with a much different economic and energy profile.
Bangladesh consumes far less energy per capita but also has a much lower ability to make the kind of investments required to grow the proportion of renewable energy in its generating mix.
Its national debt rating would not allow it to raise the capital needed to reach a similar level of renewable energy capacity to that of Germany, despite its much lower energy demand.
The Bangladeshi government has made a lot of positive moves for the benefit of its society and is acutely sensitive to the energy poverty its population experiences.
But its exports to the EU will soon be subject to the Carbon Border Adjustment Mechanism (CBAM), a system of tariffs aimed at reducing the risk of so-called “carbon leakage”.
Carbon leakage occurs when companies based in the EU move carbon-intensive production abroad to countries where less stringent climate policies are in place, or when the rising cost of EU products caused them to be replaced by cheaper but more carbon-intensive imports.
CBAM aims to put a fair price on the carbon emitted during the manufacturing of products entering the EU. The carbon price of imports will be set to balance the carbon price of domestic production, ostensibly encouraging cleaner industrial production in non-EU countries.
However, absent the ability to invest in lower carbon sources of energy, this is likely to impair the export of consumable and electronic goods on which Bangladesh is heavily dependent.
This will, in turn, reduce foreign exchange earnings and further limit the country’s ability to borrow and invest.
The push to decarbonize in Europe (and other developing countries) could therefore make matters worse in less affluent countries, rather than better.
Climate justice and energy poverty are real issues that must be addressed when seeking to unilaterally decarbonize the world’s wealthiest nations.
Viewed more broadly, innovations that deliver clean energy to the wealthy can have negative impacts on both the poorest nations and the poorer parts of society in wealthier countries.
This risk is amplified if subsidy mechanisms are not well thought out and are implemented without compassion for other demographic and geographic areas.
We must find ways to minimize and offset the economic impact of carbon reduction mechanisms on the lowest energy consuming citizens of the world who are already among the most financially disadvantaged.
This will include accepting that fossil fuel-based energy remains a necessary ingredient in the energy mix of many countries—and will continue to do so for several decades to come.
As the world navigates an extended energy transition to lower carbon sources, properly developed and managed fossil fuel energy—specifically that derived from natural gas—remains a cost-effective and compassionate solution for nations unable to stomach the cost of renewables.
At Trellis Energy, we believe that a modern natural gas supply chain should be digital, efficient, and easy to manage, ensuring the delivery of clean energy when and where it’s needed. We’re in business to make that a reality for natural gas in North America.
Talk to us about Digital Simplification for your climate, trading, and logistics goals.