I’ve been enjoying watching global economies sputter this year, between Evergrande and China’s staggering real estate crisis, supply chain snafus from East Asian trade to the US and other western consumer economies, and, most recently, the most-feared, most-disastrous, so-called “energy crunch.” Industrialized nations, sleeping from a COVID-induced economic coma, have again reawakened. In the US, we want our consumer goods from China in time for Christmas. Consuming massive amounts of things we don’t need, as we know from Liberal Economics 101, is the cornerstone of a strong economy! But the whole narrative of the energy crunch betrays the problematic reality that it’s actually just a fossil fuel crunch. To quote Kai Ryssdal, we’ll have more details– when we do the numbers.
The Basics: Global Energy Markets
Oil is, of course, a commodity. Prices go up. Prices go down. It’s also what economists and B-school bros like myself call a relatively “inelastic” good. This means that if prices skyrocket, it’ll reduce demand a little bit, but it won’t completely eliminate demand. Why? Well, because of our car addiction, of course! We saw this in 2008 when the oil bubble paralleled the mortgage-fed economic bubble. But interestingly, we saw things like public transit ridership increase by substantial margins as fuel prices increased. We also saw those high ridership numbers stick around– at least for a little while- even as oil prices dipped following the 2008-2010 crash.
Coal is a little bit different because it is primarily used as a fuel for industrial production (steel, mostly), and power generation. And as we know, the power grid is pretty darn complicated, so there’s not a coal power equivalent of just getting on the bus instead of driving. Well, not exactly. Across the US, coal plants have retired in recent years in large numbers, like petulant police officers protesting vaccine mandates. Part of this is because of more stringent rules from the EPA around emissions, which coal plants produce in spades (the “war on coal,” according to fossil fuel worshippers). Another cause is the broadening reliance on wind and solar. Wind is becoming more efficient and larger in scale, while solar is becoming far cheaper per installed watt, and its deployment more sophisticated and easier to finance.
COVID vs. Everybody
So, when COVID hit and everyone shut everything down, it was a downward shock to the system. Remember when oil futures were briefly trading in the negative? This meant that you had to pay someone else to take a barrel of oil from you. Of course, plenty of folks profited off this drop, and within a year and change, COVID-beleaguered economies are rebooting– with a vengeance. They’re like my roommate, who goes out at least a couple of times a week to make up for the parties and shows he wasn’t able to go to during COVID. FOMO, plus some catch-up on the industry side from pent up demand for everything ranging from construction materials to whatever the 2021 equivalent of a Furby is. (I’m old and haven’t finished my coffee yet, leave me alone).
The problem with the “shock to the system” narrative is that it only focuses on fossil fuels. One could argue that, well, of course it only focuses on fossil fuels– that’s the energy source du jour! It’s true in places like China, which, try though it might, is really struggling to reduce its coal consumption. The country recently halted plans to build coal plants abroad– more likely a matter of trying to stabilize supply and markets rather than anything else. But as the above chart shows, photovoltaics have decreased so much in price that it doesn’t even make sense to lament the fossil fuel spike if it’s possible to switch.
A big “if”? Maybe. It certainly strengthens the case for electrification of things like cars and home heating. I’ve been very clear that electrification is a good thing for cars and buildings– just so long as we’re reducing VMT in the process. If the fossil fuel crunch accelerates any of these things, great! If it encourages more solar development, also great. Contrasting nicely with China, we’ve got a great example from Appalachia to highlight how ridiculous the whole narrative is, and how it plays out in a state utility regulatory jurisdiction.
The West Virginian Example
West Virginia provides a nice glimpse of how the fossil fuel crunch is playing out in realtime. It’s increasingly visible in no small part because the state’s Senator, coal multimillionaire Joe Manchin, is stonewalling Democratic efforts to, oh, I don’t know, actually get some legislation passed before the Republicans retake the House and the Senate next year. A conservative Democrat, Manchin agrees with his party on relatively few issues– among them, the need to tax the rich (like him), or the need to preserve affordable healthcare access.
But he’s made headlines recently for pushing back against proposals in the Build Back Better act, a sprawling, $3.5 trillion bill that includes numerous hallmarks of the Biden agenda. Manchin in particular is notable for fighting proposals that would emphasize alternatives to fossil fuels— the man owns some seven-figure sum of stock in a coal company, for crying out loud. And so it’s also notable that his own state continues to dig in deeper– literally- on coal reliance.
The Public Service Commission in the state recently approved a plan to keep a number of coal power plants open until 2040, the date by which many other jurisdictions are aiming to decarbonize their economies. It’s not simply a regulatory matter of allowing or prohibiting the operation of the plants, though. It includes a rate increase— inevitably a huge burden in one of the poorest states in the union. But the rate increase isn’t to decarbonize the power grid– it’s to fund $448 million in improvements to the coal power plants.
Coal vs. Solar
If you do the math on WV’s energy demand, though? If you spent that money instead on solar power, $448 million could fund 10% or more of the state’s total coal generation capacity. $448 million over 20 years vs. PV cells with a life of at least that long? Prices on PV have been dropping, not only on the consumer side but also on the utility-scale side, as utilities go big on solar farms (which I have some questions about if they are occupying otherwise productive farmland) and rooftop solar. Napkin math can get you to that 10% easily if utility-scale solar is something like 70 cents per installed watt, and you get to 640 megawatts of installed solar capacity compared to 6000-some megawatts of coal generation.
So, no. It’s not an energy crunch. It’s a fossil fuel crunch. Utility regulators, investor-owned utilities, energy and energy-adjacent companies, and consumers all have a part to play in forming and challenging these narratives. The numbers seem to speak for themselves.
The author’s views are his alone and do not represent the views of his employer, clients past or present, or other affiliates, nor would he ever make such a preposterous representation to the contrary.