When confidence is not enough - lessons from the Great Financial Crisis
A recent World Economic Forum piece claims that the primary challenge in rapidly scaling climate solutions lies in a lack of confidence. I beg to differ.
In September 2009 I found myself at the World Economic Forum’s “Annual Meeting of the New Champions” in Dalian, China. It was exactly a year after the collapse of Lehman Brothers plunged the world into what is now known as the Great Financial Crisis and the global economy was languishing, with stock markets still down 30% or more from their 2007 peaks.
Nick Gowing (then the very face of BBC news) was moderating a plenary session, asking for ideas on how to accelerate the global recovery. Delegate after delegate took the microphone to explain that the crisis was over and all that was needed was an injection of confidence - confidence to consume, confidence to invest, confidence to spend public money.
I begged to differ. Consumers had lost their savings; companies had devoured their cash reserves; banks had been saved but many were still practically insolvent; countries were drowning in new debt. To me it seemed obvious that the world would spend the next decade rebuilding its balances sheets - and only as that was done would real economic vibrancy return. All the “we have nothing to fear but fear itself” speeches seemed to me a profound waste of time.
I was reminded of this by a recent piece published by the World Economic Forum, entitled “Why accelerating the deployment of advanced energy solutions is not a technology readiness challenge”.
The authors point out that “achieving a path to net-zero emissions by 2030 will need carbon capture and storage (CCS) to scale to 20 times the current capacity, energy storage to 35 times, clean hydrogen production 70 times and SAF 190 times. Additionally, mass deployment of new advanced modular nuclear reactors will be needed.”
So far, so good - they are probably mathematically correct. But then they continue: “While technology development must continue to drive down cost curves and bring new innovations to market, the primary challenge in scaling advanced solutions over the next decade does not lie in their technological feasibility. Rather, it lies in confidence in these solutions.”
This is a prime example of the Clean Quickly Beats Dirty fallacy. Rapid falls in the cost of solar, wind, battery and EV costs have lulled many into thinking that any clean technology, given an initial blast of public support, must inevitably travel down the cost curve so fast that it will quickly become cheaper than its polluting or emitting counterpart.
But this is not the case. For instance, if fossil gas costs $2 per Million British Thermal Units, as it does right now in the US, then clean electricity would need to cost just $7/MWh to compete with it for high-temperature industrial heat. Dispatchable renewable power currently costs at least $30/MWh, and the experience with Nuscale suggests that Small Modular Reactors will struggle to produce power below $100 per MWh. Getting users to switch is going to need a lot more than just confidence.
Nowhere is naiveté of Clean Quickly Beats Dirty more obvious than when it comes to hydrogen. The authors say we need 69 million tonnes of clean hydrogen by 2030 in order to stay on track for net zero (production right now, rounded to the nearest million tonnes is zero). Let’s do some maths.
A recent report by consultancy BCG estimates the cost of clean hydrogen for projects currently reaching Final Investment Decision between $5.40 and $8.60/kg - compared with no more than $2.00/kg for fossil hydrogen. Let’s be super-generous (and make the maths easy) and assume that a cost penalty of just $2.00/kg for clean hydrogen. That means to persuade current users to switch to 69 million tonnes of clean hydrogen someone has to come up with $138 billion of support per year. It could be consumers willing to pay a green premium, tax-payers or investors, but the subsidy has to be found somewhere to close the cost gap.
It is, however, much worse than that: if you want someone to build a hydrogen plant, you can’t just offer them one year of cost support - they will demand at least ten years of offtake or the project is not bankable. So if you want to get 69 million tonnes worth of hydrogen plants built in time to deliver by 2030, you need to be waving around a $1.4 trillion cheque right now.
By the way, if you are thinking of pushing any of those 69 million tonnes into sectors that do not currently use hydrogen, the figure would be even higher: you would be looking at many more hundreds of billions to build hydrogen transport and distribution infrastructure, switch the steel sector from blast furnaces to DRI, build new chemicals plants for eFuels, roll out fuel cell trucks, and so on.
The total amount of subsidy currently committed to clean hydrogen worldwide is around $280 billion as I explained in a more detailed version of the figures in this piece in a piece I wrote at the end of last year for BloombergNEF (Clean Hydrogen’s Missing Trillions). Of this, perhaps $200 billion could conceivably be put to work in time to result in clean hydrogen production by 2030.
If all $200 billion of currently-available hydrogen subsidies were spent on the lowest cost clean hydrogen targeting sectors that can most easily absorb it, you might see 10 million tonnes per year in 2030. If you want to see more than that, you need to put more money on the table - it’s as simple as that. Whether stakeholders are confident or not is of no relevance whatsoever in face of trillions of missing dollars.
Back to Dalian, 2009. What happened when I suggested that hard financial facts, not crowd psychology, would determine the trajectory of the global economy over the following decade? There was some coughing and shuffling of feet. No new hands shot up. Nick Gowing called on to the next contributor, who took the microphone, tapped it portentously, and proceeded to explained that we had nothing to fear but fear itself. It was almost exactly a decade before the stock market recovered to its pre-crash levels.
As Don McLean immortally sang: “They would not listen, they did not know how. Perhaps, they'll listen now.”
Selah.
3 comments / questions: (also referring to your original BEF article):
1. The EU ETS system should shift the incentive pattern somewhat - currently around 1 €/ kg H2 which according to some will rise gradually until mid 2030’s - and then drastically.
2. The ammonia shipping route seams to bevthe preferred for long distances. Do you have a number for the associated cost of synthezing and cracking ( I have seen number around 50% added due to losses.
3. Heat seams to be cheeper than steel in cost - but less efficient in CO2 emission reduction. That is scary because it will redirect subsidized hydrogen to less efficient use.
Yes - you nailed it. For commercial banks and major institutions to invest in hydrogen infrastructure- those $2-5/kg subsidies need to be in place for 10plus years. Other than the IRA tax breaks - I’m not seeing that anywhere except perhaps China (but that’s a bit opaque).