Oct 11, 2021 • 1HR 3M

Volts podcast: the good news about clean energy, with Kingsmill Bond

The transition to a system based on renewables is accelerating and unstoppable.

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David Roberts
Volts is a podcast about leaving fossil fuels behind. I've been reporting on and explaining clean-energy topics for almost 20 years, and I love talking to politicians, analysts, innovators, and activists about the latest progress in the world's most important fight. (Volts is entirely subscriber-supported. Sign up!)
Episode details

In this episode, longtime carbon market analyst and strategist Kingsmill Bond explains why he is so optimistic about the future of renewable energy. Though it remains a small portion of total global energy, its rate of growth and declining costs indicate that it is on the precipice of enormous, rapid expansion. Markets and geopolitics will be transformed by it. (There is also an abridged version of our conversation available on Canary.)

Full transcript of Volts podcast featuring Kingsmill Bond, October 11, 2021

(PDF version)

David Roberts:

It seems like good news is difficult to come by in the US these days, what with democracy on the verge of crumbling and the last big chance to address climate change held in the fickle and ill-informed hands of the Senate’s most conservative Democrat, who lives on a yacht and literally makes money off of coal plants.

As it happens, I have a stash of good news I’ve holding in reserve — a guest I’ve been meaning to talk to forever, but have been treating like a break-glass-in-case-of-emergency thing. I felt grim enough this week that I finally called him up.


His name is Bond. Kingsmill Bond. (Sorry, had to do it.) He’s an energy strategist at the think tank Carbon Tracker, where he arrived after decades of doing market analysis and strategy for big financial institutions like Deutsche Bank and Citibank.

Kingsmill Bond (Photo: CarbonTracker)
Kingsmill Bond (Photo: CarbonTracker)

Bond’s experience and research have led him to the conclusion that the shift to clean energy has become unstoppable and that it will be the dominant force shaping financial markets and geopolitics in the 21st century. He argues that we are on the front end of a massive, precipitous wave of change to rival the industrial revolution — one that will unfold even if policy support is weak and erratic, purely on the strengths of economics and innovation.

We need to update our mental model of climate mitigation, he says. It’s not about pain, about how to distribute extra costs and who will be the most altruistic. It’s about gain, about which countries will benefit most and fastest from the tapping of almost limitless new markets and opportunities for growth.

There are no fundamental limits to the spread of zero-carbon energy. There’s more than enough renewable energy, accessible with today’s technology, to supply the world’s energy needs. Not only do we know how to get there, it is where we are headed, based on current market and technology trends. The key to succeeding on climate change is simply accelerating what is already underway, pushing a rolling boulder a little faster.

Like I said, I’m in need of good news like this, so I was excited to talk to Bond about the cost of renewable energy, the peak in fossil fuel demand, and the inevitability of a 100 percent clean-energy system.

Without further ado, Kingsmill Bond, welcome to Volts.

Kingsmill Bond:  

Thank you for having me on the show, David.

David Roberts:   

Kingsmill, I've been following you for years and you've been a reliable source of good news. You recently published an article arguing that we need to flip our story on climate change mitigation: It's not one of pain, about distributing costs and sacrifice and who's going to be more altruistic; it's about gain, about who's going to claim the giant rewards that are waiting. So before we dive into the specifics, give me the elevator-pitch version of why people confronting the daunting task of addressing climate change should feel better than they generally do.

Kingsmill Bond:  

Well, thanks very much for putting it in those terms. The point here simply is that we have got this new, enormous, cheap energy resource in solar and wind that we've unlocked with technology, and we're just starting to be able to apply it.

As we apply it, it gets cheaper, because it's on learning curves. Therefore, we've unlocked an enormous cheap source of energy that can be used to provide all of our current energy demands and, indeed, the energy demands of those who have very limited amounts of energy. It's an exciting opportunity and moment to do that.

David Roberts:   

The center of that story is the learning curves for renewable energy. You single out four different technologies on steep learning curves that, if we project them continuing, bear all kinds of good news. Tell us what those technologies are and what the curves look like right now.

Kingsmill Bond:  

The four most clear technologies which are on established learning curves are solar PV for producing electricity; wind for producing electricity; batteries for storage; and electrolyzers to convert that electricity into hydrogen. All four of them have been the subject of a recent paper by Oxford University looking at their learning curves, that is to say, the amount that their costs drop for every doubling in deployment. All of their learning curves are between 16 and 34 percent, which was already fairly well known. 

But the additional point that's being made by this paper is that when technologies get onto learning curves, they tend to stay on them for very long periods. When you're trying to project future costs of these technologies, the most logical assumption is that those learning curves will continue. This is extremely significant, because we all know that they are growing very quickly, and if you assume that that growth continues — and there's no reason why it shouldn't — these technologies will get incredibly cheap. 

This is kind of an academic debate, because you're already getting solar PV being produced between $10 and $20 per megawatt hour in certain favored locations, so it is, in fact, already incredibly cheap. That cheap energy source is a) going to get cheaper, b) going to spread globally, and then c) be followed up by these other technologies, also on learning curves, which will then provide us with the energy that we need at much lower cost.

David Roberts:   

The electrolyzers seem like the newest of those four technologies. Solar and wind and batteries are pretty established, but electrolyzers have just recently come in for a lot of innovation. How confident are we in that particular learning curve? What's the state of our knowledge there?

Kingsmill Bond:  

In the paper that the Oxford team did, they looked at about 500 or 600 different technologies over long periods and they noted that, actually, very few of them get onto learning curves. As you say, the electrolyzer data set is shorter, but it still goes back a couple of decades, I believe. This is, from their analysis, another technology also on learning curves, and it seems to be already exhibiting the same learning characteristics that we've witnessed in solar, wind, and batteries. 

First of all, in order to make green hydrogen, you need solar or wind electricity, so half the story is already on learning curves. Then the question simply is, can you get the electrolyzer itself onto learning curves?

What's special about this technology is that it's also what they call granular and discrete. That is to say, you can have very small pieces of equipment, they're easily replicated, and they can be built at any size. Many people can innovate, and that's indeed what they're now doing, as we now see huge amounts of capital flowing into hydrogen strategies across the world, from Chile to China to Morocco to the United States. It seems extremely reasonable to imagine that the costs of electrolyzers will also continue to fall.

David Roberts:   

As a snapshot of the present, where is clean energy relative to fossil fuels? Is it still too glib to say clean energy is cheaper than fossil fuels? How nuanced is that story right now?

Kingsmill Bond:  

The debate goes like this: Advocates of clean energy such as myself say, look, it's incredibly cheap, its price is down to $10 or $20 per megawatt hour; the global average, depending how you calculate, is between $40 and $50. This is the LCOE we're talking about. And this is a great story.

The counterargument is, people say, well, you're only talking about the LCOE, you’re not thinking about intermittency. OK, it's cheap in certain locations, but there are other locations, most notably parts of sub-Saharan Africa, where it remains extremely expensive, because the cost of capital is high. Therefore it's not a fair comparison and it's not a substitute for fossil fuels. 

The way to reconcile those two perspectives, I would suggest, is this point about learning curves. As the costs get lower and lower, this debate kind of fades away. It is fair to say that LCOE is not necessarily the best way to calculate costs, and there are other issues to account for in intermittency, but when costs get incredibly low and you can overbuild, then that debate becomes much less significant. 

Furthermore, as this Oxford paper points out, the country on the 10th percentile of cost today — that is to say, the most expensive countries today — will have the same price solar and wind electricity as the cheapest countries today in 10 years, because they're on these learning curves. So I would suggest that these learning curves solve the problem.

David Roberts:   

They brute force it, in other words. It gets so cheap that you can start being profligate with it.

Kingsmill Bond:  

You can be profligate with it, but in fairness, there are also other solutions. There are certain countries and regions which today have penetration of variable renewables of over 50 percent — most notably Denmark, South Australia, and northern Germany — and are aspiring, as in the case of California, to 100 percent renewable energy-based systems.

What's been notable throughout this debate, for the last 20 years, is that the ceiling of the possible is constantly rising. 

If you go back to how the debate was being held about 20 years ago, you'll see these very fancy letters from the Irish and German grid operators saying that variable renewables could never be more than 2 percent of the system, for a whole series of technical reasons which are beyond me. But what's happened continuously is that people have come up with new solutions, be they demand-side management, supply-side management, bigger grids, batteries, interconnectors, better software, digitalization, smart meters, so on and so forth. There have been a whole series of different solutions. The point we really want to make is that that ceiling is a rising ceiling.

David Roberts:   

Intermittency is the number one mental block people have about this, in my experience. So you're right: one obvious point is that the amount we're allegedly going to be able to integrate onto the grid keeps rising. People set these very confident limits, and the limits get busted through. But looking out, the conventional wisdom is that the closer you get to variable energy providing the majority of your energy, the higher the cost of that variability, and the more difficult it is to address. How confident are you that that gap from 80 to 100 percent is bridgeable at reasonable cost?

Kingsmill Bond:  

There are two answers to this. The first is that this is an absolutely academic debate, because today, solar and wind are 10 percent of the global electricity supply. To worry in 2021 about how we go from 80 percent to 100 percent is completely academic.

I often use the analogy that it's like sending my daughter to kindergarten, aged five, and worrying about how she's going to pass her university maths finals. Sure, she's going to have to get there eventually, but there's an awfully long way between now and then. History suggests that we will keep on coming up with ways of solving this. So I think the first answer is, it's not a fair question. 

The second point is that, if you assume these learning curves continue and we do get incredibly cheap sources of renewable electricity, then it's absolutely inevitable that we will find ways of using it.

Perhaps I can step back for a second. It's often worthwhile going back a century and asking yourself: Had you been trying to think about the future in 1921, when we were on the cusp of a quadrupling of global population and a 10-fold increase in energy development and so on and so forth, could you ever have predicted all of the new technology innovation that was going to come? People sit in darkened rooms in Paris in 2021 and seriously think they can forecast the innovation genius.

David Roberts:   

But in fairness, we're a lot farther away from 1920 than 2050 is from us. We definitely need to compress the amount of time in which we have to do this. You might say that the solutions ought to at least be visible by now. 

Kingsmill Bond:  

Actually, that’s the point: the solutions are visible. You do have detailed plans being made in Australia and California, in Northern Europe, for electricity systems based on 100 percent renewable electricity. You also have work done by people like the great Mark Jacobson: he's basically tried to figure out the solution for every single country in the world.

So it's not like there are no solutions ahead of us; there are plenty of solutions, at different levels of granularity.

David Roberts:   

This story depends on the cost curves continuing, as you’ve said. On the one hand, you can look at history and say, cost curves tend to continue once they start. But you can come up with all kinds of stories about things that might impede or slow these cost curves: materials shortages, lithium becoming problematic, mining becoming more problematic, supply chain problems (maybe even caused by climate change), space constraints, NIMBYs who want to stop construction.

How confident are you that none of those will gain enough purchase to slow things on a macro level?

Kingsmill Bond:  

I always smile when people talk to me about limits to growth, because renewable energies are essentially, by definition, limitless, absolutely enormous. The real limits to growth are to the fossil fuel system, which is constrained in terms of the amount that we have, and incredibly constrained in terms of our capacity to burn it.

So it's worth standing back for a moment and recognizing that the real limits to growth are with the current system, not with the new system. 

The second question is, well, are there limits that are insurmountable, that the talent and capital of the world cannot handle? I think the answer to that one is absolutely, obviously no, because we have continuously solved each of these problems as we have encountered them. 

Then, if I can answer this very specific question about mineral shortage: it's an absolutely bogus problem. You need, for example, 200 kilograms extra of minerals in order to have an electric vehicle, which is more than an ICE car. That sounds quite scary until you think, well actually, an average ICE car uses 15,000 kilograms of oil over its lifetime. Those 200 kilograms extra that you require of minerals by definition can be recycled, whilst fossil fuels, obviously, you burn them once and you never use them again. 

Let me give you a couple more stats. There is enough lithium, for example, in known reserves today to be able to satisfy more than a century of current demand. There's enough cobalt in the world for 1,000 million cars. If the answer is, that's really scary because we might need 2,000 million cars, then again, it’s an absolutely fake debate. First of all, we can and are engineering technologies to reduce cobalt, as Elon Musk is doing. But even if we weren't, we build the mines as demand increases. Prices go up a bit and people build new mines and reserves increase. These are absolutely fake problems.

David Roberts:   

Are there no social or moral aspects to this, though, in expansion of mining?

Kingsmill Bond:  

Undoubtedly. This is why people are saying, I think quite rightly, that we shouldn't make the same mistakes this time as we made last time. In our expansion of these mines to build out the new renewables world, we shouldn't be trashing nature with impunity the way we have done in the past. We should be recycling this stuff in order to minimize our impact on the planet.

But let me just come back to the main point, which is that it's a question of degree, right? If you require 100 — or in the case of coal-fired generation versus a solar panel, 1000 — times less stuff in order to generate your electricity, by definition, you're going to be having a dramatically lower impact on the planet.

David Roberts:   

In your discussion of S curves, you mention something about a 5 percent “salience threshold.” When a product reaches 5 percent market penetration, certain dynamics take hold. Can you say more about that?

Kingsmill Bond:  

This is actually quite an intuitive observation. We see it, all of us, in our own lives. If you think back to when you got your first smartphone, or the internet, or your first mobile phone, what happens is that, as new technologies get adopted, they move up these S curves.

It takes a long time to get the technology good enough for people to adopt it, so to go from 0 percent penetration to around 5 percent takes a long time. But then, when it gets good enough, everyone wants it, demand goes through the roof, learning curves start driving costs down further, it goes very, very quickly from about 5 percent market share to about 80 percent market share. That's the nature of S curves. 

This is something that is very well documented for many technologies over the course of a century or more. It goes all the way back to cars and electricity in the United States in the early 20th century, and then all the great stuff we've had since then: microwaves and toasters and TVs and now the internet. It's a well-appreciated observation that stuff moves very, very quickly from low penetration to high penetration — when it's cheap enough and when it's good enough. Therein lies the debate.

David Roberts:   

So where is renewable energy? Do you think it's crossed that threshold? You think we're on that S curve now?

Kingsmill Bond:  

If you look at the history of deployment of, for example, solar panels, what you will see if you chart it is exponential growth taking place: high growth of between 25 percent and 40 percent growth per annum over the last two decades.

There are many other people, including the great Ray Kurzweil, who pointed this out: solar deployment’s been doubling every two years roughly for the last couple of decades, and that's an exponential growth curve. Just empirically, that's exactly what is happening. 

What's also notable is that some experts who try to forecast future solar deployment get it completely wrong, the way the IEA famously has done for the last 20 years. They imagine it's linear growth. If you go back 10 years, demand growth was at 10 gigawatts a year and the IEA was projecting forward growth of 10 gigawatts a year for the next 20 years. Then the next year it's 14 and the year after it’s 20, because we're on this exponential growth curve. 

David Roberts:   

This is a subject of some fascination to me. Is this new Oxford paper really the first model that projected cost curves simply continuing in the shape that they currently exhibit? It's remarkable to me and everybody I know that the modelers have gotten these cost projections so wrong in such a consistent way over and over again for 20 years now. What are we to make of this? What's going on there?

Kingsmill Bond: 

You're right. It’s absolutely shocking, and it's not just the IEA, it's almost all modeling of the future. It's interesting: I ask people about why they don’t do this. There’s a series of answers, but the first answer basically is well, it's too complicated. We can't put these learning curves into our models because it’s too complicated. OK, fine, why don’t you just get a bit more computing power, surely it can be done. But anyway, that seems to be one answer. 

The second answer, linked to that, is that these models are incredibly complex. If you're trying to forecast kerosene demand in Madagascar in 2070, you have to think a lot about that, and you're not necessarily thinking about what's possibly a little bit more important, which is the learning curve of the technology. So, they overcomplicate it. This is why, for me as a strategist, it’s second nature to simplify. That's what the Oxford paper’s done: they've got to the kernel of what's driving change, and it’s those learning curves.

Then the third reason why incumbent models have been so reluctant to incorporate these learning curves is that so many of them are, in fact, made by fossil fuel incumbents, and turkeys don't vote for Christmas. That is to say, if you're working for Exxon or Shell or whoever it is, there's very little incentive for you to say, you know what, those battery costs might fall a little bit faster than we think, and EVs’ growth might be a lot faster than we think, and oil demand might be a lot lower than we think, and therefore, I might not have a job. People don't forecast that stuff. 

The final point is that — and I'd like to come back to this, because it's a completely fake argument — people say, “We want to be conservative. Solar costs have dropped 20 percent a year for the last 20 years, but in the future, we don't want to be too aggressive. We can't forecast the detailed solution, so we're going to be conservative and we're going to say they're going to fall at 2 percent a year.” This is just intellectually incoherent, because why would it suddenly stop falling? Just because you can't see in detail, why would you suddenly forecast a drop in cost declines? 

The other reason why it's intellectually incoherent is because, as a result of the failure to recognize reality in these fast-growing technologies, people have to make their models balance. They go, “Well, in order to make my model balance to 2050 net zero, I'm going to pop in CCS and BECCS, and Martians coming from space to take away our carbon” and other completely idiotic ideas, which have absolutely no basis in empirical fact. That's the point: You've got to try and rely as closely as you can on the facts.

David Roberts:   

It seems like, intellectually speaking, the most conservative thing you could do is assume that things are going to continue happening the way they're happening. That's almost by definition Occam’s Razor. And if the learning curves continue the way they're going, then all these forecasts are going to get blown away. It’s a bizarre situation. 

Kingsmill Bond:  

Yeah, it is. Sorry to lean so heavily on Doyne Farmer and his Oxford paper, but it’s great work, and they make exactly this point. They say, look, mathematically, the future is unknown. There's a whole continuum of options between basically no change and incredibly fast change. But the business-as-usual scenario, which is central to so much current thinking, is mathematically a complete outlier. It might happen, but it's incredibly unlikely. We might suddenly stop innovating, costs might stop falling, deployment might stop happening, governments might give up, people and companies and the financial markets might stop trying to do anything, we might decide that we want to go over the cliff of catastrophic global warming — maybe we will, but that's pretty unlikely.

David Roberts:   

The other area that people tend to cite as a limit, or worry, or outstanding problem is these so-called difficult-to-abate sectors — heavy transportation, industrial processes, steel, concrete. Is the story there the same, that clean energy is going to get so cheap it's just going to bulldoze through those problems? What do you see happening in those sectors?

Kingsmill Bond:  

The hard-to-abate sectors have been a very loud debate for the last three years. The argument people make is, “Well, you can't get renewable energy into airplanes and cement and steel and shipping, and therefore there will be no energy transition.” 

There are two problems with this argument. The first one is the point I made earlier, which is that this is the final area that needs to be solved. Today, if we look at the entire energy system in terms of primary energy supply, solar and wind — these variable energy sources on these very fast growth rates — are only providing around 4-5 percent of global supply.

These hard-to-solve sectors are about a quarter of global primary energy demand. So this is a very long-term problem which we will need to solve, but it's quite a long way in the future before we actually have to solve it. 

Then the second point — and this is an argument that we and many other people have been making for four or five years, actually a much more practical observation — is that solutions are already starting to materialize for these hard-to-solve sectors. You have organizations like the brilliant Energy Transitions Commission that identify prospective solutions for every single one of these hard-to-solve sectors.

For example, the steel sector three years ago seemed to be a completely impossible-to-abate sector. Now you already have people like Andrew Forrest in Australia talking about taking his iron ore, putting up solar panels and wind turbines in the Australian desert, using that to create hydrogen, using the hydrogen to make steel out of the iron ore, and then shipping that steel all around the world. There are now lots of other companies talking about hydrogen-based steel in the same way. In the shipping industry, we have Maersk now talking about using ammonia as a shipping fuel, which is basically a hydrogen-based solution. 

This is why we're so excited about electrolyzers being on cost curves. Ultimately, the way that we, humanity, are going to solve this problem is we're going to decarbonize electricity. We have solutions for that. We're going to electrify whatever we can, and new solutions materialize every day.

Then the stuff that we can't, we'll use some variant of hydrogen. That very clearly is becoming the answer. So when hydrogen also gets onto cost curves, and people are starting to think about how to put hydrogen into steel and shipping and indeed airlines and so on and so forth, you can see the contours of the new world that will emerge.

David Roberts:   

Let's shift to another source of good news. I'm not talking about national and international politics, which both seem dismal at the moment. But states and cities and corporations and financial institutions and other subnational entities seem to really be taking the lead in a way that gets more and more glaring every year. So let's talk about some of the things that you see happening at that level that give you hope. 

Kingsmill Bond:  

I think the wider point is that we have to realize that politics follows technology. That is to say, as new technology solutions materialize, politicians use them. The best example of this, famously, is Boris Johnson in the UK, who 20 years ago was laughing at all this green technology and was extremely skeptical about it. Now that you can buy an EV in the UK for more or less the same price as a conventional car, he's already put into place the prospect of bans of the sale of conventional cars. He keeps on bringing forward the date by which, in the electricity sector, we're going to have a renewable system. So politicians will use the technologies that materialize. 

It's great that it's happening on a local level first, but it also does need to happen on a national level. This is the absolutely key point. When I attend conferences and talk to developers in the field, they don't talk about a lack of capital, they don't talk about technological problems — what they do talk about, all the time, is the fact that the policies are tooled up for the fossil fuel system, not for the renewable system.

This is the key point that needs to get through to policymakers: Can they please stop fiddling around, talking about these wonderful strategic visions, and actually do their job, which is detailed amendment of policies, and detailed changes to support regimes for renewables? It's really hard, difficult stuff, and it's not happening. 

David Roberts:   

One of the other perpetual debates in this area is how big the policy lever is, how necessary it is, and how much of the transition has a momentum of its own, just from economic development and technology innovation. I think you have claimed that this transition is inevitable, no matter what governments do at this point, so how big of a space is there for policy? How much can policy do to slow or speed it down? How much does it have a life of its own at this point?

Kingsmill Bond:  

We recently put out a report which tries to encapsulate this in a very simple framing. The first observation is that everywhere is different, and every sector and technology is a little bit different, right? To state the obvious. Then, secondly, you need different policies at different stages in the life cycle of change. 

At the start, you do need technological innovation, and government's very good at that. Then, after that, as costs start to fall, you do need government support to these growing industries, as the Germans very kindly did the solar industry 15 years ago. But then, as the costs start to fall towards price parity with the fossil fuel system, the role of government actually changes very significantly. Rather than, as it were, trying to push water uphill, they need to remove the blockages to allow it to fall downhill. 

That's, I think, where we've now got to, certainly in the electricity sector, and to a degree in the transportation sector: the role of government now is to remove the blockages which are stopping change.

I'll give you a good example. I was talking to an incredibly frustrated wind developer in northern England a couple of months ago, and he was saying, I've got a huge offshore wind project I want to bring to bear but I can't do it, because there's one landowner who won't allow my cable onshore, and it's lasted for two years.

David Roberts:   

A very familiar story all across the world. 

Kingsmill Bond:  

I mean, this is ridiculous. Are we really going to allow our future to be mortgaged for the sake of people who want to block it for whatever bizarre reason? That's exactly now the role of government. Before you accuse me of trying to trample over people's rights, it actually goes deep into the heart of many systems. For example, there was an extraordinary report written by the Institute of Fiscal Studies in the U two weeks ago about how the government taxes electricity at, I think, effective cost of about 100 pounds a ton of CO2, but subsidizes gas use to the tune of 20 pounds per ton. This is just idiotic. Why is it that we give $500 billion a year of subsidies to the fossil fuel industry? There's an awful lot of very detailed work that governments now need to do to remove these barriers to change, and I would suggest that's actually the cutting edge. That's what now needs to happen.

David Roberts:   

There's a lot of talk these days about financial institutions and the Fed pushing for more pricing of carbon risk, etc. How big of an influence do you think that's having, the discussion that's moved into the financial world?

Kingsmill Bond:  

The financial world somewhat belatedly is waking up to the systemic risk of carbon, and they should, because we did this study which suggests that about a quarter of equity markets and half of bond markets are in sectors which are either fossil fuel producers, or heavy fossil fuel users. So it's incredibly deeply ingrained inside financial markets. As change happens, as new technologies materialize, you're going to get disruption; you're already getting disruption right across these sectors, and that creates financial risk. So it's quite right, I would suggest, for financial market regulators and participants to look at this risk. 

What somewhat disappoints us thus far is that, like the IEA modeling we talked about earlier, they’re still fiddling around at the margin, they're not really getting to the heart of the risk. A good example is from the banks. If you talk to most global banks today, and we talked to a few, they will say, “We've got this covered, we totally believe in all this green stuff, we've decarbonized our head office, and we're getting renewable electricity — and furthermore, we continue to lend tens of billions to the coal center and the oil center for their expansion. But don't worry, we've got it covered, because our risk models tell us that there's no risk from this stuff.” 

You then probe a little bit and it turns out that they've got risk models built up over 40 years of ever-rising fossil fuel demand. So they're doing bad modeling. They don't understand where the risk is, they're not taking account of it. Ceres, for example, has analyzed the U.S. financial sector and figured out that half of the syndicated loans are to fossil fuel linked sectors. They figured out that actually, the banking capital of the US banking system would be wiped out in the event of a disruptive energy transition. So there's a lot of risk which is not necessarily being accounted for. 

It's great financial markets are starting to wake up to this, starting to think about pricing it in. But let's be clear, there's a very long way to go. 

David Roberts:   

The world knows how to accommodate the rapid growth of a new industry, but it almost seems like the decline of fossil fuels is going to be more disruptive in a lot of ways. You talk about fossil fuel demand peaking in various places already and approaching peaks other places. Tell us a little bit about that: Where have you seen it? Where do you expect to see it? What can we expect those peaks to look like over the mid-term?

Kingsmill Bond:  

This looks like a very mad argument on our part. Here we are with fossil fuel demand booming, a shortage of coal in China, record high gas prices and coal prices, and so on and so forth. But I will nevertheless stick to my guns because, at the end of the day, this is just maths. 

What's happening is, you have an energy system which is growing and dominated by fossil fuels. Then you have this new kid on the block of these fast-growing renewable energy technologies. They're moving up the S curves, and, just mathematically, at some stage it will be conceded that the demand for the incumbent technology with 80 percent market share in a low-growth system inevitably must peak. As you get this fast-growing new challenger coming into the market, it must peak and then decline. Mathematically, it will and must happen. 

The question then is, well, how does this play out? We still argue that you got to peak fossil fuel demand for coal and oil and gas in 2019, and COVID has damaged them so significantly that by the time demand comes back, it won't go significantly beyond that 2019 peak. That's the overall argument. 

David Roberts:   

You’re talking about global fossil fuel demand? You think it peaked in 2019?

Kingsmill Bond:  

We think it peaked in 2019. The reason why this is a credible argument: If you imagine a global energy system, growing at 1 percent a year, and the challenger of renewables is 5 percent of that system, growing at 20 percent a year — 5 percent times 20 percent is 1 percent. So the moment that solar and wind get to a 5 percent market share in a 1 percent growth system, they will take all of the growth. That's the moment for the peaking of the fossil fuel system. 

COVID basically brought that moment forward. We had forecast that moment for the mid-2020s; COVID brought it forward basically to 2019. So in 2021, in certain areas, you might get back close to where you were back in 2019. In 2022, 2023, two or three years of bouncing along the top; but as this stuff keeps on growing, you do inevitably get a peak and a decline.

To put the current state of affairs into that context, you’ve got a crash, you’ve got a bounceback, and you’ve got lots of bottlenecks and this demand for stuff that people didn't buy that are suddenly twice as much, so you’re inevitably going to get spikes. We had exactly the same thing, famously, back in 2010. But that shouldn't detract from the wider observation that continued growth of this stuff is going to drive a peak. 

To try and make this more apparent as an argument, it's worth thinking about two mountains. So you've got the Matterhorn, which famously is a V-shaped peak; the Matterhorn’s what happens to discrete individual goods like mobile phones. Nokia's sales can fall off a cliff like the Matterhorn. However, when you think about systems, where you've got embedded demand in a billion cars, then your peaking is going to look a little bit more like Mount Fuji — that is to say, you've got a long, slow slope up; a plateau at the top, for, let's say, five to 10 years, depends a little bit on the detail; then you've got a long slope downwards. 

That roughly is the pattern for what you see in other technology shifts. If you go back to what data we have for the UK for the shift from coal to gas in heating, or the shift from steam to electricity in power generation back at the start of the 19th century, you see these plateaus. They last for a bit, because it takes time for the new technology to get big enough to really kill the old one. But that's nevertheless the pattern.

David Roberts:   

So you think we're on the bumpy plateau right now? 

Kingsmill Bond:  

I think we're on the plateau at the top of Mount Fuji. (Although of course, having climbed it myself, I know perfectly well that it is in fact a volcano and you go down again, but let's not go into that.) It is a plateau at the top. The point to me is that people should not mistake a little hillock at the top of the plateau for another mountain ahead. That would be the error right now, to do that. This is one of the reasons why Carbon Tracker talks so much about stranded assets, because the fossil fuel system and its loyal attack dogs persist in seeing continuous growth, then build for that growth, and as the growth fails to materialize, they get stranded assets.

David Roberts:   

Along those lines, you make the point that you don't have to take substantial market share away from the incumbent to start hurting the incumbent. You just have to stop their growth, then that peak triggers all sorts of other market dynamics. So what happens once the peak sinks in and it's more widely realized what's happening?

Kingsmill Bond:  

Once you reach that peak, you kickstart a series of positive feedback loops for the challengers and negative feedback loops for the incumbents. We put out this paper where we run through seven areas and then delve into a couple of them in a bit more detail. So you see it happening in costs, technology, expectations, financial markets, society, politics, and geopolitics. Those are the seven. 

To focus on the first one, think about this. If you are making cars today, go back five years ago. You were sitting pretty. There's 1,000 million cars in the world, sales are $100 billion a year, you're expecting ever-rising growth, and what could possibly disturb that?

What disturbs it is Elon Musk and Tesla. They come in and they don't have to replace the 1,000 million; they don't even have to replace the 100 million, because what's happening is that 100 million is growing at, let's say, 2 percent a year. So when Musk and the EV sector take that 2 million a year, you as a car manufacturer suddenly realize that your growth is over in the old system.

You then look at the cost curves of the new stuff, and you realize that you're going to have to change. You have to reallocate your capital out of ICE cars and into electric vehicles. Meanwhile, you figure out that you've got continuous decline now coming for your ICE car sales, so suddenly, your ICE factory is a liability, not an asset. Furthermore, as your sales of ICE cars start to drop, you've got to allocate the same fixed-cost structure over a smaller number of cars, and your cost per unit increases. This is economics 101. 

That's what happens to the old people. What then happens to the new people, Tesla and BYD and the EV makers, is, as they produce more cars, the costs of the batteries fall because of these learning curves. As costs fall, demand increases, and as demand increases, they're taking more market share, and they can then go to the second feedback loop, which is the financial markets.

Tesla can go to the financial markets and in an afternoon they can raise several billion dollars and build a new factory in Berlin, which increases their capacity to build at the same time the fossil fuel sector is finding it very difficult to raise capital, and is obliged by investors to change their strategic direction — as we saw, famously, with Engine No. 1.

David Roberts:   

When this dynamic is underway — when the large incumbent fossil fuel or car companies are dragging around this giant legacy system which can pretty rapidly become a liability — what can we learn from history about the chances that they successfully pivot vs. flame out? 

Kingsmill Bond:  

We don't have to do any original thinking here. It's extremely well-documented analysis over decades. There's even a famous book about it by Christensen, The Innovator’s Dilemma, which says that incumbents struggle with disruptive change and few of them make it.

There's another book that I often like to refer people to, by a very respectable financial analyst called Sandy Nairn, called Engines That Move Markets recently re-released, but it's quite an old book. He looks back at technology shifts and what incumbents did. 

The answer is, incumbents, first of all, try and resist change. Then they struggle to put capital into these new technologies, because they're not sufficiently profitable. You saw lots of examples of the oil center saying that over the last decade: we're not going to put our money into solar and wind because we can get a 20 percent IRR on oil against a 5 percent IRR on solar. Why would we? The problem, then, is that by the time this stuff does get profitable and starts to eat into their old business, it's too late, and other people have moved into this area. That's exactly what's happening now in the energy system. 

It's the risk, of course. It's not just a question of solar, wind, and so on challenging the current enormous coal, gas, and oil system. It's also all of their users, don't forget. So we talked about the car companies, but it's the steel companies, the shipping companies, the airlines — they are going to get disrupted by new people coming in with new technology and new ways of doing stuff. They struggle because, precisely as you say, they have this enormous tail of legacy assets. But it's also a problem, as Christensen points out, of legacy thinking. When you've spent your entire life digging holes in the ground to hoik out stuff, you find it very difficult to do something new.

David Roberts:   

Mostly I'm pretty optimistic about the electricity sector, but one of the reasons I worry about it is that … car companies can flame out and EV companies can replace them; fossil fuel companies can flame out, clean energy companies can replace them; but in electricity, we’ve got these utilities that are basically stuck there by law and regulation that can't just flame out and go out of business. Any business that thought as slowly and conservatively as utilities would probably go out of business, but they can't. So it's hard to see how those dynamics bite as much in that sector.

Kingsmill Bond:  

I agree with you in theory, but what has been notable is that it's actually been the electricity sector which got disrupted first, most notably and famously in Europe. My former boss Martin Lewis tells a story about how he was working for one of these electricity companies in Europe back in the early 2000s, and they talked the talk and they put turbines on their annual reports, but in private they dismissed this as a threat.

Lo and behold, you have the combination of the crisis and politicians putting increasing pressure on them and this new stuff materializing, driven by new players — then they found that they were indeed completely stuck with the old technologies and had to write down, famously, 150 billion euros of assets in the 2010s. So, somewhat to my surprise, it can happen and it is happening. 

What it does need is political push. Why would a politician push a conservative electricity company to change, and why would they change? The only reason why is if you have incredibly cheap alternatives, and your neighbors are deploying them, and you're starting to get rumblings from the people that not merely do they have polluted air and electricity outages, but they're also having to pay 25, 30 cents per kilowatt hour for their electricity, and their mate in the neighboring country’s getting it for 10. That's what forces change.

David Roberts:   

Let's talk about geopolitics. I think the line in international negotiations used to be between developing and developed countries, as they used to be called, but you draw this line between fossil fuel producers and consumers, and you say, per geopolitics, those are the two relevant groups. What's happening that's creating that divide?

Kingsmill Bond:  

When it comes to fossil fuels, you've basically got two groups of countries: 80 percent of the world lives in countries that import their fossil fuels, and 20 percent of the world lives in countries that export fossil fuels. It's actually even more concentrated than that — basically 10 percent of the world lives in countries that are very highly fossil fuel dependent. So the Middle East, Russia, Australia, which have got very large fossil fuel exports.

It's a really, really small group of people, 10 percent of the world, living in these fossil fuel dependent countries. Then there's the rest of us who have to import the stuff. 

Furthermore, the geopolitical environment at the moment confers a lot of power upon the owners of the fossil fuel. There's this very significant geopolitical power conferred upon Russia and the Middle East as a result of their fossil fuel reserves. They’re generating these very large rents of roughly 2 percent of global GDP every year, and they're failing to pay for the externality cost of, call it $3 trillion a year that has been picked up by the poorest in society. So the current system we have is very unfair, and massively favors the fossil fuel producers.

Lo and behold, the fossil fuel users — 80 percent of the world, and it’s all of the areas of growth: China and India, most of Southeast Asia, large chunks of Africa are major importers of fossil fuels — are almost all of the expected growth in demand over the next 40 years.

They now suddenly have got their own domestic, eternal, clean resource, and it's cheap, so of course they're going to use it. They're going to be very delighted to use their own homegrown source, because what you're ultimately doing is trading rents paid to oligarchs and foreigners for local jobs. Of course they're going to do that. 

There are many other people writing about the geopolitics of this energy transition, but if you stand back for a second, it's pretty clear that it's going to benefit the big fossil fuel importers and damage the big fossil fuel exporters. The question then is, well, where does the power lie?

Right now, in October 2021, the power clearly lies with the fossil fuel exporters, because not enough of this stuff has yet been built. Give it another five years, and the power is going to shift. That's, of course, another reason why people need to get on with building this new energy world, because otherwise, they're going to continue to be subject to the whims of the fossil fuel exporters.

David Roberts:   

Why do I hear all of this hand-wringing about a new wave of coal plants in China and Vietnam and in developing countries? I feel like I read this headline every few years: despite climate promises, there's a surge of coal plants. How real is that?

Kingsmill Bond:  

Don't worry too much. First of all — not to belittle the problem, because it is a bit of an issue — it's not as dramatic as it sounds in the headlines. In fact, in spite of these new coal plants which have been built, global coal demand peaked in 2013. So people have been building them and they haven't actually been using them. Global coal utilization rates have now fallen to about 50 percent. So the thing to focus on is not the new capex going on. 

The second point is that, thanks to the incredibly hard work of millions of people, this tail of new coal plants is constantly being reduced. It used to be hundreds of gigawatts, and now it's being reduced to dozens. So it has fallen a long way and it continues to fall. 

When it comes specifically to Vietnam, there are things changing literally as we speak, because of the incredible success of their deployment of solar and wind. They're already now canceling their coal plants and stopping their plans for expansion of coal.

When it comes specifically to China, the rumor is at COP we might see a bringing forward of that 2030 peaking fossil fuel demand date, but the point nevertheless remains that China is very close to peak demand for fossil fuels. I hesitate to say it right now, but it is incredibly close.

To give you a stat, Chinese demand for electricity today, per capita, is the same as Europe. So that incredible ramp of moving from very low demand to develop level demand, that's happened — that's not going to happen again. China is the world's largest producer of solar and wind and all these other new energy technologies, and they're still growing at 20 percent a year. You play with the maths a bit and it's clear that we're very, very close to peak fossil fuel demand in electricity generation in China. 

When I look at the rest of the world — we recently did a report on this — in 99 percent of developed markets, we've already seen peak coal demand in electricity. Interesting enough, in 63 percent of emerging markets, like China, we've seen peak demand for fossil fuels for electricity. It's not surprising, because there's a new opportunity in town.

We have a lot of legacy problems, and we have some inertia, and we have systems which are tooled up for the past, not the future, and so on and so forth — I understand all of that. But as the financial analyst, you need to look forward and look at what's most likely. What’s most likely now, increasingly, is that people will be deploying these new technologies.

David Roberts:   

You describe the dynamic in financial markets where once you shave off the growth of an industry, it sets all these dynamics in motion. I wonder if there's an analogy in geopolitics. You think of Russia's power and African countries’ lack of power: How much would global energy have to shift away from Russia's natural gas to this plentiful solar that Africa has to set off these feedback loops in terms of geopolitical power and influence?

Kingsmill Bond:  

Therein lies a question beyond my level of expertise, but it certainly is worth noting that the year of the peak of the British Empire was just after the Treaty of Versailles in 1919, just before it collapsed. Things always look great at the top, and you don't need actually that much; what you need is people to realize that the future is different, and that they can get their own energy. 

I should have mentioned, incidentally, that one of the reasons we’re so enthusiastic about this story is that if you look at the technical potential of solar and wind, which has been a lot in the last five years, it's 100 times our global energy demand today. Africa, as you just mentioned, is an incredible renewable superpower; they've got 1,000 times as much supply from solar and wind as their current energy demand.

When countries are looking for new development tools, rather than reaching to the old playbook of “we must have coal and gas and oil in order to get development,” it’s considerably simpler now. You've got this wonderful distribution system called the sun, which will get you this energy anywhere in the country, and you can harness it pretty cheaply. That, then, becomes the development tool. 

For me, this is another aspect of the incredibly powerful justice which is driving this energy transition: people who haven't had a lot of energy in the past now can have it and can harness it. That eventually will change the geopolitical calculus.

But as I said earlier, we're at the top of Mount Fuji; we're bouncing around, the old is still powerful. The new is yet to be born in sufficient size to really challenge it. But we can't be long.

David Roberts:   

Biden's goal is to decarbonize electricity by 2035, and for the US to be net zero carbon by 2050. Do you think those are within reach given the amount of policy that's likely to be devoted to them? 

Kingsmill Bond:  

If they're not achieved, the US will be buried by China. If the US wants to continue to be a serious player in the modern world, wants to remain a superpower, then it has to embrace superior, cheaper technologies. It's as simple as that.

What's really shocking and embarrassing for me as a fellow Westerner is that for the last decade, China has leapt ahead and is dominating all of these new technologies. How can that be when the US has got all of that incredible industrial, intellectual base?

It's pretty simple. If the country wishes to remain serious, then it has to do it. If not, then like the UK before it, it will descend into irrelevance.

David Roberts:   

How much of that is baked in? Are you willing to put any kind of numbers on how much you think is already inevitable, or how much requires more policy from Biden? I need faux precision here.

Kingsmill Bond:  

OK, I'll give you faux precision. It’s absolutely achievable. Again, as this Oxford paper points out, the more you do, the cheaper it gets. From their calculations, the cost of the transition, just in purely financial terms, is cheaper than the cost of business as usual. As they and many others have pointed out, technically all of this stuff is completely feasible, but you do need very powerful political action to break through the logjams of the incumbents and the inertia of the current system.

I salute Biden and his team, because that seems to be exactly what they're now trying to do. You do need very powerful policy, because this ultimately will happen by 2100, but by 2100, it may well be too late. So in order to drive it faster, and for that to be cheaper and fairer and better distributed, you need to get on with it.

David Roberts:   

All right. That sounds like a great place to wrap up. Thanks for taking all this time, and for cheering me up.

Kingsmill Bond:  

Well, thanks, David. I hope I didn't overstate my brief there — it just seems pretty clear to me.

David Roberts:   

Well, you're making bold short-term predictions. Maybe in a decade, we can do another podcast and check your numbers.

Kingsmill Bond:  

It's funny because we put out this note in 2018, in a little conference room in San Francisco, talking about peaking fossil fuel demand coming in the 2020s. It got fairly well picked up, but it was one of those completely out-there ideas. Then lo and behold, you get COVID and it's starting to look like actually what is happening, notwithstanding what's happening right now. So, we'll see.

David Roberts:   

So far, so good. All right. Thanks so much for coming on.

Kingsmill Bond:  

Thanks so much for the call and for the opportunity. 

David Roberts:   

All right. Bye now.