January 11, 2019 — Company
Hydrocarbons are fuel, wind & solar is technology
Over the weekend I read an interesting blog post entitled "Help wanted: the clean energy industry could really use the skills of tech executives" that got me thinking.
The key takeaway being that industries such as aviation and telecommunications are very different today compared to fifty years ago. Energy is not. Substations of today are pretty similar to substations of yesteryear.
Sources of electricity such as nuclear power and burning hydrocarbons show incremental improvements over time or even setbacks in terms of cost / MWh – some say nuclear is more expensive now than it used to be. Renewables on the other hand have shown cost improvement characteristics more similar to semiconductors than the internal combustion engine.
The log graph below shows the historic cost improvement for solar photovoltaics and batteries.
That looks a lot like cost improvements for semiconductors.
The massive decline in cost has enabled wind and solar to now be the cheapest way to generate electricity.
The decreasing cost of solar panels is leading to massive adoption. Even though the data in the graph below is from 2015, I really like the visualization, which shows massive adoption following decrease in cost. In 2018 there were close to 500 GW of solar worldwide.
This is creating the largest opportunity in business history.
And with this scale and rate of change the Schumpeterian force of creative destruction will create massive shifts in the industry.
Incumbents and new entrants riding on the wave of rapidly decreasing cost will need to think more like the FANGs (Facebook, Amazon, Netflix, Google) than Shell or Exxon i.e. they need to be able to try new things and create moats using network effects to protect themselves against becoming obsolete by the decreasing cost of input factors.
The manufacturers of solar panels and batteries, i.e. the input factors, would probably like to think like Intel – a very successful manufacturer of semiconductors; But they would be wrong to do so. Because the cost reductions in solar and batteries have not been driven so much by innovation in technology – as was largely true in semiconductors. Cost reductions in solar have been driven by economies of scale and process improvements. It may continue to be difficult to create highly profitable companies in the manufacturing space of solar photovoltaics and batteries.
Zooming out and thinking – can these industry dynamics lead the world to transition to a sustainable world powered by renewable energy? I think yes. In fact, I would argue the industry dynamics in this space is what can save us from doom and gloom powered by hydrocarbons. The ease of entry into the renewables space and the hyper competitiveness in production of input factors will be good for consumers seeking to buy cheap renewable energy and ultimately, it will be good for humanity seeking to survive past 2100.