The Best of All Returns - August 21, 2022

There is no doubt that the transition to sustainable energy will occur in this century. The question is whether it will occur in our lifetime. 

These delays in our transition to sustainable energy are frustrating, especially since they are not necessary. 

Some of you may have invested in home solar. The cost of solar power equipment has now fallen to less than a dollar per watt of power capacity. Such an investment pays for itself in about 2000 days of sunshine. Homeowners are also entitled to upwards of 75% in tax credits in some areas, which further reduces the cost to about a year of sunshine. Finally, the installed equipment may also be tax deductible, which results in payoffs of well less than a year. 

There are caveats, though. There are not the same economies of scale in installation capacity as there is for equipment manufacturing. If one must hire contractors to install the solar equipment, costs triple or more, and the payback period rises substantially. 

The reason why solar equipment costs have dropped a hundred-fold in the last four decades is because of economies of scale. This economic term refers to the advantages gained as knowledge is improved through research and manufacturing technologies advance in development. There remain additional economies of scale to be realized, and this affects some decision-makers. 

For instance, the photovoltaic panels in a typical residential installation are now twice as powerful per square foot of space and a fifth the price over a decade. If one waited until now, the install costs would be cheaper and the output would be twice as high. However, one would have also been unable to extract the benefits of solar for a decade were a homeowner to delay. 

The economics then suggest that one should make the plunge and invest now, assuming residents live in a jurisdiction that allows them to bank excess electrical energy during the day to then use at night. The economics are sound if one can find a contractor able to do the job affordably or if one can do some or all of the installation themself. 

Not only do a lot of residents wait until technology becomes even cheaper, but politicians seem to be of that mindset as well. The argument is that we should wait to invest public money until more economies of scale are realized. 

This defies the logic of economies of scale, though. These economies result solely because people were willing to invest so that research and development can scale up and costs can come down. In other words, somebody must make these first investments. In the whole scheme of things, then, couldn’t that “somebody” be government? Regardless of who makes the investment, the investment must be made over time. Someone pays. We’d be better off if we all pay through public investment, and we can then all share the benefits as that Marshall Plan brings costs down for all of us and for all eternity. 

Another big Marshall Plan idea is to create a Sustainability Corps much like the Peace Corps or the workers in the Works Progress Administration (WPA) who help build and rebuild villages and towns around the world and during the Great Depression. We can round up those who are displaced by the loss of manufacturing labor demand, and those graduating high school but not college destined to be trained to install sustainable energy, especially solar power. 

This development of an installation cadre would then go far toward creating a much more competitive installation base and bring installation costs down. 

Even without the economy of scale effects discussed above, a researcher at Stanford University noted that investments in sustainable energy have a six year return. A thousand dollars invested today would save us a thousand dollars over six years. But, unlike many other investments, once those six years are up, we can enjoy the resource for free for decades to come. 

Professor Jacobson’s study not only concluded that the investment is perhaps the best payoff of any possible public investment, but that it would also produce 28 million more jobs than are lost in the transition away from fossil fuels. Only the handful of countries that produce the most fossil fuels tend to see job losses rather than gains. 

These advantages arise in a couple of ways. First, energy costs decline and, second, mitigation of global warming becomes less costly. The investment is large, in the range of tens of trillions of dollars globally for a handful of years, but so is our current spending on extracting and consuming fossil fuels. If our global economies can pay forward these investments to eventually capture the savings resulting from the replacement of fossil fuel usage, our economies can reap benefits for eternity. 

But, the scale is enormous. They may represent upward of 10% of our GDP in the transition as we invest in sustainable energy, institute better energy conservation, redesign and optimize the grid, and develop the technologies of energy storage. 

Were we a corporation that could at once capture the monetary gains of such investments and avoid the global warming costs, and if the corporation had access to such long term capital at affordable rates, this would be a no-brainer investment decision. 

Unfortunately, Dr. Jacobson and I seem to agree that our public infrastructure is not viewed in such dollars and cents sensibility. Such investments in public money into infrastructure is fraught with political obstacles, as we see in the momentous but rather insubstantial green investment contained in the since renamed Inflation Reduction Act.that took more than a year and a great deal of dilution to pass Congress. 

Perhaps the biggest challenge is the built-in headwind biased against any modification of the status quo. The fossil fuel industry is a good example. Tens and hundreds of millions of dollars are spent annually in lobbying to protect their diversion of the economic pie. Corporations are willing to spend freely to protect an interest, but the same funds are not available to educate our leaders for a new sustainable energy investment for which surplus profits sufficient to pay lobbyists are not yet forthcoming. This is the challenge of change.

Mark Jacobson concluded “Many additional uncertainties exist. One of the greatest is whether sufficient political will can be obtained to affect a transition at the rapid pace needed. However, if political will can be obtained, then transitioning the world entirely to clean, renewable energy should substantially reduce energy needs, costs, air pollution, mortality, global warming, and energy insecurity while creating jobs, compared with Business As Usual. 

It’s painful to see such transformative efficiency gains left laying on the table, all in the often self-serving interest of BAU.