Generation RENEW:  The Virtuous Cycle of Renewables Adoption

 

On September 23rd California Governor Gavin Newsome announced a plan to halt sales of new gasoline-powered passenger cars and trucks in the state by 2035, a move he says will cut greenhouse gas emissions by 35%. This came two days after Tesla’s much-anticipated Battery Day, during which Tesla announced plans to manufacture “tabless” batteries which will improve its vehicles range and power.  Further, Tesla teased a $25,000 electric vehicle.

The timing of these two events so closely together caused us to revisit the inter-dependence of public policy, technological innovation, and cost efficiencies that drive the Clean Energy Transition.  

 

 

Public Policy Sets the Stage

Free markets are often very good at allocating capital.  Exceptions can occur when there is a societal cost that private markets fail to consider.  Governments have many tools at their disposal to more efficiently allocate the costs of carbon emissions.  One set aims to make carbon emissions more expensive.  Examples include carbon taxes and cap-and-trade systems.  Others give economic incentives to the development of low carbon energy sources.  These include tax incentives, renewable portfolio standards, and loan guarantees.  Used in different variations and scale by different policy makers around the world, these policies have the net effect of making low carbon energy sources more cost competitive and serves to inspire technological innovation.

 

Policy Incentives Drive Innovation

Technological innovation plays a crucial role in the Clean Energy Transition by lowering costs and accelerating deployment.  Examples of technological innovations in Renewables include artificial intelligence and digitalization of the power grid, energy storage, advances in solar panel efficiency, and larger, lighter and more efficient wind turbines.  Economists sometimes refer to the learning curve of technology, which incorporates technological improvements, developer experience and scale, and industry maturity. 

 

Innovation Reduces Costs

The rapid adoption of new technologies combined with developer experience and scale and industry maturity have driven costs of solar power, wind power, and battery storage lower.  Lower costs induce more adoption but also importantly provide a positive feedback loop to public policy.  When policy makers see desired results (lower costs, higher adoption rates) they enact more policy, which then encourages more innovation, which lowers costs and starts the virtuous cycle all over again.

This brings us full circle to the near-simultaneous announcements by Governor Newsome and Tesla founder Musk.  We can’t help but think that Tesla’s pledge to deliver a $25,000 EV and comments on “tabless” batteries played a role in California’s policy initiative to ban the sale of new gas-powered vehicles in the state after 2035. 

 

 

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Michael Cerasoli, CFA

Michael leads the Renewables effort at Eagle Global Advisors, including the development of active and passive strategies, and portfolio management. He is also the Co-Head of the Energy Infrastructure team and Co-Chair of the Energy Infrastructure Investment Committee.  He shares Portfolio Manager responsibilities for the firm’s four separate Energy Infrastructure strategies. Prior to joining Eagle in May 2014 Michael was employed by Goldman, Sachs & Co. for ten years where he covered Midstream for seven years and small/mid cap Oil Services for three.  Prior to Goldman, Michael worked for three years as a sell-side equity trader at various Wall Street firms. He earned bachelor’s degrees in Economics and History from Union College, and an MBA from the Hagan School of Business at Iona College. Michael holds the Chartered Financial Analyst designation.

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Curt Pabst

Curt is a Managing Director of the Energy Infrastructure Business, a member of the Energy Infrastructure Investment Committee, and co-head of the Renewable Energy Business at Eagle Global. Prior to joining Eagle, Curt held a similar position at an Midstream Energy-dedicated asset management firm in Dallas, Texas. He has 39 years of investment experience. He has served as a partner/principal in both a hedge fund of funds and a venture capital fund. Curt earned his BA in Economics from Grinnell College and a professional certification in Energy Innovation and Emerging Technologies from Stanford University.

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