Building the Climate Risk Case for Renewable Energy Development

Renewables have long been promoted as cleaner technologies that can help provide energy independence from foreign gas and foreign oil. Climate change has been part of the picture, but not a very prominent one.

Shale gas, which has become an important source of natural gas in the United States in recent years, is a game changer for renewables. It effectively takes the whole energy independence argument off the table, which has been a key argument in favor of renewables. An increasingly prevalent frame for our energy future is:

Wind and Solar vs. Cheap Gas Today = Gas

There are a number of ways one can argue this frame is wrong:

  • One can argue that wind will get cheaper; there are data to support that.
  • One can argue that gas will get more expensive again, but opinions differ widely.

Here’s where climate risk comes in: Climate risk is the strongest argument for continuing to incentivize renewables in a worldview dominated by cleaner and cheaper gas.

There’s a general sense in the United States that switching to gas is good from the perspective of climate risk, because gas emissions are lower than coal. There is some concern that a massive push to gas could leave utilities and others exposed to future CO2 regulations, with far fewer reductions available to them, but that concern is currently on the back burner.

But what happens if society does decide to take serious action on climate change? While one can argue with near-term legislative prospects for climate policy and the price of carbon (poor and very low, respectively), it’s difficult to credibly argue that society will never turn current climate science into policy. Basic risk management suggests skepticism of such a hypothesis; indeed, there is virtually no question that material climate policy is plausible (or even likely) during the useful life of new energy infrastructure.

What would have to happen to achieve a dramatic reduction in CO2 emissions (e.g., 50 percent) over a short time period (e.g., 15 years)? The answer is—especially in the electricity sector—a lot! This likely includes carbon capture and storage for gas (a challenging prospect for gas plants, but almost certainly necessary in the context of really large-scale CO2 reductions).

Of course, the more progress we make in reducing renewable energy costs in the meantime, the more we are able to integrate renewables into the grid through smart grids, microgrids, and other means, the less costly and disruptive that future climate policy would be. A risk-based approach to thinking about energy futures (even in today’s low-gas-price world) suggests a much greater continuing role for renewables than many advocate today, when observers are increasingly proposing to scale back renewable energy targets and programs.

To come to this conclusion, all you have to accept is that society might take climate change seriously in the foreseeable future. That seems like a pretty easy case to make. Whose risks would be managed by continuing to focus on renewables?

  • Ratepayers—faced with higher energy price outcomes under sudden climate mandates
  • Utilities—faced with the risk of not being able to recover costs as part of sudden climate mandates
  • Renewable energy firms—faced with the significant market challenges of today.

We’ve made too much progress with renewable energy and related sustainability technologies to reverse the course now because of perceptions that gas is almost too cheap to meter. Staying the renewables course makes energy risk management sense for just about everyone.

Renewables have long been promoted as cleaner technologies that can help provide energy independence from foreign gas and foreign oil. Climate change has been part of the picture, but not a very prominent one.

Shale gas, which has become an important source of natural gas in the United States in recent years, is a game changer for renewables. It effectively takes the whole energy independence argument off the table, which has been a key argument in favor of renewables. An increasingly prevalent frame for our energy future is:
Wind and Solar vs. Cheap Gas Today = Gas

There are a number of ways one can argue this frame is wrong:

  • One can argue that wind will get cheaper; there are data to support that.
  • One can argue that gas will get more expensive again, but opinions differ widely.

Here’s where climate risk comes in: Climate risk is the strongest argument for continuing to incentivize renewables in a worldview dominated by cleaner and cheaper gas.

There’s a general sense in the United States that switching to gas is good from the perspective of climate risk, because gas emissions are lower than coal. There is some concern that a massive push to gas could leave utilities and others exposed to future CO2 regulations, with far fewer reductions available to them, but that concern is currently on the back burner.

But what happens if society does decide to take serious action on climate change? While one can argue with near-term legislative prospects for climate policy and the price of carbon (poor and very low, respectively), it’s difficult to credibly argue that society will never turn current climate science into policy. Basic risk management suggests skepticism of such a hypothesis; indeed, there is virtually no question that material climate policy is plausible (or even likely) during the useful life of new energy infrastructure.

What would have to happen to achieve a dramatic reduction in CO2 emissions (e.g., 50 percent) over a short time period (e.g., 15 years)? The answer is—especially in the electricity sector—a lot! This likely includes carbon capture and storage for gas (a challenging prospect for gas plants, but almost certainly necessary in the context of really large-scale CO2 reductions).

Of course, the more progress we make in reducing renewable energy costs in the meantime, the more we are able to integrate renewables into the grid through smart grids, microgrids, and other means, the less costly and disruptive that future climate policy would be. A risk-based approach to thinking about energy futures (even in today’s low-gas-price world) suggests a much greater continuing role for renewables than many advocate today, when observers are increasingly proposing to scale back renewable energy targets and programs.

To come to this conclusion, all you have to accept is that society might take climate change seriously in the foreseeable future. That seems like a pretty easy case to make. Whose risks would be managed by continuing to focus on renewables?

  • Ratepayers—faced with higher energy price outcomes under sudden climate mandates
  • Utilities—faced with the risk of not being able to recover costs as part of sudden climate mandates
  • Renewable energy firms—faced with the significant market challenges of today.

We’ve made too much progress with renewable energy and related sustainability technologies to reverse the course now because of perceptions that gas is almost

This blog post was originally published by Dr. Mark C. Trexler at DNV Kema Utility of the Future Blog, Oct. 10, 2012.

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