Heliocentrism: Objects may be further away than they appear - Eye On The Market

Summary

Eye On The Market Podcast: "Heliocentrism: Objects May Be Further Away Than They Appear" Hosted by Michael Cembalest | Release Date: March 4, 2025

Introduction

In this thought-provoking episode of Eye On The Market, host Michael Cembalest delves into the intricate dynamics of the global energy transition, drawing parallels with the historical paradigm shift of heliocentrism. Titled "Heliocentrism: Objects May Be Further Away Than They Appear," the episode explores the rapid growth of solar power, the challenges of decarbonizing the global economy, and the realistic pace at which these transformations can occur.

Solar Power's Meteoric Rise

Cembalest begins by highlighting the explosive growth in global solar capacity. He shares a compelling visual of solar installations, emphasizing that "global solar capacity, both utility scale and rooftop, is exploding" ([02:15]). Forecasts suggest a doubling or tripling of solar capacity within the next two to three years, making it two-thirds of all new generation capacity, potentially reaching three-quarters for the remainder of the decade. This unprecedented surge underscores the remarkable transition towards renewable energy sources.

The Reality Behind Solar Growth

Despite the impressive expansion, Cembalest urges a cautious perspective. He notes that current solar installations have a capacity factor of 15 to 20%, translating to around 6% of global electricity generation—a figure expected to double in three years ([05:10]). However, when contextualized within the entirety of global energy consumption, solar accounts for merely 2% of final energy consumption, projected to grow to 4-5% by decade's end. This discrepancy reveals the limited impact of solar power on overall energy needs, especially considering that electricity constitutes only a third of global energy consumption.

Industrial Dependence on Fossil Fuels

Cembalest underscores the indispensable role of fossil fuels in maintaining modern prosperity. He asserts, "modern prosperity... relies on certain kinds of industrial products... Very difficult to find a prosperous country that doesn't have those things" ([07:45]). Approximately 80% of energy used in industrial processes stems from fossil fuels, whether directly or indirectly through electricity generated from coal or natural gas. This heavy reliance presents a significant hurdle in achieving comprehensive decarbonization.

Pace of Decarbonization: Beyond Optimism

Addressing the speed of the energy transition, Cembalest introduces the metaphor of heliocentrism—"objects may be further away than they appear"—to illustrate that the perceived rapid progress in renewable energy deployment is misleading. He presents the "Scorpion Bowl Chart" ([12:30]), a comprehensive visualization encompassing all facets of renewable energy integration, including wind, solar, storage solutions, and various decarbonization technologies. Despite $9 trillion invested globally since 2010, the chart reveals a linear and sluggish growth trajectory: half a percent per year in Europe and 0.3% per year in the US. This slow pace contradicts the S-curve acceleration often touted by green tech advocates, emphasizing the need for realism in expectations.

Challenges in Electrification

Cembalest elaborates on the practical impediments to widespread electrification:

Transmission Infrastructure: He points out that while electrification requires robust transmission networks, the addition of new transmission lines has plummeted from 4,000 miles per year to less than 1,000 in recent years ([15:20]). This reversal hampers the ability to fully capitalize on increasing electricity generation capacity.
Cost Disparities: Electricity remains significantly more expensive than natural gas. Even with the efficiency gains from electric heat pumps, the operational costs can be two to five times higher than traditional gas-based heating ([16:05]). This economic barrier poses a substantial challenge to the adoption of electric solutions across industrial, commercial, and residential sectors.
Supply Chain Constraints: High inflation rates in components like transformers and power regulators reflect the strained supply chains. Additionally, the shortage of electrical engineers and specialized equipment further complicates the electrification efforts.

System Operators' Concerns

Cembalest cites the alarm bells ringing from independent system operators in the United States. He explains, "Our reserve buffers during peak summer demand are shrinking because as we retire baseload power and replace it with renewables..." ([17:10]). Regions such as the Midwest, Northwest, California, and New England are particularly vulnerable to potential brownout situations by the decade's end. This highlights the fragility of over-relying on renewables without adequate support from traditional energy sources.

Electricity Demand and Efficiency

The discussion turns to electricity demand forecasts, where estimates vary from a 7% to 20% increase by 2030, driven by data centers and the electrification of vehicles and heating ([17:45]). Cembalest contrasts this with the historical context of the US electricity demand, which remained flat for 20 years following a period of substantial growth fueled by large natural gas and nuclear plants. He underscores the importance of efficiency gains, noting that improvements can offset increased demand, as evidenced by past trends where EIA projections overshot actual electricity growth.

US Energy Policies and Independence

Cembalest highlights the shift in US energy policy, particularly under the current administration focused on achieving energy independence for the first time in 40 years. Unlike China and Russia, the US is leveraging its energy policies to prioritize national security, reducing reliance on foreign energy sources. This strategic pivot is crucial for understanding the underlying motivations driving current energy investments and policies.

Performance of Renewables vs. Traditional Energy

A critical evaluation of renewable investments reveals a composite index performance lagging behind traditional energy sources. Cembalest notes, "The renewables crushed everything else in 2020 during the free money period from the Fed and has been getting absolutely decimated ever since" ([18:10]). Over the past few years, renewables have underperformed by approximately 40% compared to oil, gas, and pipeline investments. This underperformance raises concerns about the fundamental viability and long-term sustainability of certain renewable projects.

Sustainable Aviation Fuels: Hype vs. Reality

Addressing the buzz around sustainable aviation fuels (SAFs), Cembalest presents a spaghetti chart illustrating the myriad pathways to produce SAFs, including using food oils, corn, cellulose, biomass, and electrolysis ([18:30]). Despite the excitement, he emphasizes the economic and energy challenges:

High Costs: SAFs remain significantly more expensive than traditional jet fuel.
Energy Deficits: Many production pathways exhibit a negative energy balance, where more energy is consumed in production than is obtained from the fuel.

Cembalest concludes, "Renewable jet fuel cost estimates... are much higher than traditional jet fuel estimates, which is why so many of the biofuel companies have been getting crushed." The sustainability and economic viability of SAFs are thus questionable, leading to diminished investor confidence.

Overview of the 15th Annual Energy Paper

Cembalest provides a comprehensive overview of the 15th Annual Energy Paper, outlining its extensive coverage of the energy landscape:

Executive Summary: Focus on heliocentrism, solar power, and the transition's pace.
Comments from Experts: Insights from figures like Falklav Smil.
Energy Transition Charts: 70 essential charts updated annually.
Policy Analysis: Examination of Trump's energy policies and their impact.
European Decarbonization: Analysis of Europe's leadership and the high costs involved.
Nuclear Renaissance: Renewed interest in nuclear energy within OECD countries.
Grid Optimization Model: Introduction of a new model to assess deep decarbonization costs in US grids.
Climate Change Impacts: Case study on the LA fires, exploring environmental and political dimensions.
Methane Tracking: Progress in monitoring methane emissions using satellite technology.
Hydrogen Economy Prospects: Critical assessment of hydrogen's future role.
Superconductivity: Exploration of advancements in superconducting technologies.

Cembalest encourages listeners to peruse the executive summary and delve into specific sections of interest, offering a comprehensive resource for understanding the multifaceted energy transition.

Conclusion

Wrapping up the episode, Cembalest emphasizes the complexity and slow pace of the global energy transition. While renewables like solar power are advancing rapidly in installation capacity, their impact on overall energy consumption remains limited due to systemic challenges in electrification, infrastructure, and economic viability. The reliance on fossil fuels for maintaining modern industrial prosperity further complicates the path to comprehensive decarbonization. As the world grapples with these challenges, Cembalest calls for a balanced and realistic approach, recognizing both the achievements in renewable energy and the persistent dependencies that hinder a swift transition.

Notable Quotes

On Solar Growth: "Global solar capacity... is exploding. We're going to get another doubling or tripling of global solar capacity over the next just two to three years." ([02:45])
On Industrial Energy Needs: "Modern prosperity is highly reliant on fossil fuels, as we all know." ([07:30])
On Decarbonization Pace: "The progress is very slow, which results in a lot of important discussions about the other kind of energy systems that you need to simultaneously be investing in." ([12:50])
On Electrification Challenges: "Electricity is a lot more expensive than gas... that's another important impediment to electrification." ([16:20])
On Renewable Performance: "The renewables crushed everything else in 2020... and has been getting absolutely decimated ever since." ([18:10])
On Sustainable Aviation Fuels: "Renewable jet fuel cost estimates... are much higher than traditional jet fuel estimates." ([18:35])

Final Thoughts

Michael Cembalest's insightful analysis in this episode offers a balanced perspective on the energy transition. By juxtaposing the rapid growth of renewables with the challenges of decarbonization, he provides listeners with a nuanced understanding of the complex energy landscape. Whether you're an investor, policymaker, or simply interested in the future of energy, this episode serves as a valuable resource for navigating the realities and misconceptions surrounding the global push towards sustainability.

Transcript

Michael Semblist (0:00)

This podcast has been prepared exclusively for institutional, wholesale, professional clients and qualified investors only as defined by local laws and regulations. Please read other important information which can be found on the link at the end of the podcast episode.

Unknown Host (0:24)

Good morning everybody and welcome to the March 2025 Ion the Market podcast. This is one is entitled Heliocentrism. This is our podcast for the 15th annual I on the Market Energy paper. And I want to start with a picture that I took of the red crab migration in Christmas Island, Australia a few years ago. Millions and millions of crabs traverse the island every year. Nobody knows exactly why, but it's a kind of remarkable thing to see. And the whole island is overrun with these migrating red crabs. And I'm showing this because I started writing this energy paper 15 years ago. Also, for reasons that are unexplained, I just decided to do it. So, like a red crab, every year I go through this three to four month migration process of researching energy and talking about energy and writing about energy. And so I enjoy it hopefully as much as the red crabs do. And this, this year's piece is called Heliocentrism. Heliocentrism refers to the belief a few hundred years ago which finally emerged that the world does the earth revolves around the sun rather than the sun revolving around the earth. And the reason I picked it as a topic is because there's a lot of people that are now so focused on the growth in solar power that they believe that solar power, typically bolted on with some energy storage, can represent the dominant share of where we get our energy from. So let me just show you a few pictures and then we can explore that thesis. One thing's for sure, global solar capacity, both utility scale and rooftop, is exploding. And if the forecasts from several places are correct, you can see here on the first chart that we're going to get another doubling or tripling of global solar capacity over the next just two to three years. And if, if we think about it as a percentage of all the capacity that's being installed, it's already about two thirds of all new generation capacity and expect it to reach about three quarters of all generation capacity for the rest of the decade. So it's kind of a remarkable transition to see solar advancing this much and this quickly. Okay, this. Now this is the part of the podcast when the buts start. So first solar, based on all the installations that exist to date, has a capacity factor of 15 to 20% in most places around the world. Not all, but in most places where it's been installed. So if we translate that into shares of electricity generation, solar accounts for around 6% of global electricity generation. That number probably doubles over the next three years, which is impressive. But as we've talked about in this energy paper endlessly, electricity is roughly only a third of all the energy that gets consumed. A lot of countries are electrifying at a very slow pace. So if we translate this solar power into the share of final energy consumption around the world, it's only 2%, probably growing to 4 to 5% by the end of the decade. So while that's impressive growth from a low base, we obviously need to be more focused on the other 95% of where we're going to get our final energy consumption from, and, and rather than just the solar on its own. So impressive growth in solar power, declining costs, declining cost of storage. But some of the narratives about heliocentrism have gotten a little carried away. And because some of those people don't believe that we need to either invest in or either existing or new gas capacity, for example, which I think is a difficult argument to make. So one way to think about this and why it's so important to understand the rest of the ecosystem is modern prosperity, in almost all places where it thrives revolves around certain kinds of industrial products. Chemicals, iron, steel, cement, food, paper, machinery, metals, textiles, and other kinds of industrial products, glass, rubber, things like that. Those are the components of modern prosperity. It's very difficult to find a prosperous country that doesn't have those things in, in terms of either producing them or buying them from people that do. And if we look at the energy of that is used to create those industrial pillars, 80, roughly 80% of them of the en of the input energy is from fossil fuels, whether it's oil, natural gas, or coal directly, or the coal or natural gas that's used to make electricity, that is then used to produce those things. So as things stand now, modern prosperity is highly reliant on fossil fuels, as we all know. But it's interesting to kind of see the numbers and see the graphs laid out like this so that you can appreciate just how the whole piece fits together. And so it's. While we should be trying to decarbonize as much as we possibly can, we have to be realistic about the pace at which this can be done. And one of the subheaders of this year's piece is that objects may be further away than they appear. It's the opposite of the thing that you see in your rearview mirror. And so here's a chart that we've shown several times. And every year the renewable share of electricity generation goes up in the US and in many other countries, right? So every year the renewable share of electricity generation is going up, but the share of electricity used in final energy consumption is in budget. In the US China is making a lot of progress. A few other countries are making some progress, but in a lot of more countries are like the US than like China in terms of somewhat stagnant or very slow growth. It in electrification of energy consumption. So, and so that's a challenge in terms of decarbonization. And the most important chart, I think, in this year's energy piece is this one, and I call it the Scorpion bowl chart. If anybody remembers. The Scorpion Bowls were these things that you could get at the Hong Kong bar in Harvard Square, and they had tequila and rum and gin and all sorts of things in them. I call this the Scorpion bowl chart because it also has everything in it. So when we produce a chart that says the renewable share of final energy consumption, it's got everything. It's got wind and solar displacing coal. It's got lithium ion battery storage, rooftop solar. It reflects electrification of cars, trucks, buses, motorcycles, electrolytic gene, hydrogen, carbon capture, decarbonized production of steel and ammonia and cement. It includes electric heat pumps, displacing residential, commercial industrial furnaces and boilers, biofuels, biomass, deep geocritical, supercritical, geothermal, synthetic fuels, hydro, et cetera, et cetera. So everything's in here. And how's it going? Well, after about $9 trillion of investment globally since 2010, what we have here is a linear transition. In Europe, this, this share is growing at about half a percent a year. In the US it's growing about 0.3% a year. So there's progress being made. And for people that say that there's no progress at all, they're wrong. But the progress is very slow, which results in a lot of important discussions about the other kind of energy systems that you need to simultaneously be investing in order to maintain your prosperity. So for me, this chart's very important because it's, it's important to understand the pace at which these things can change. A lot of the stuff I read on green tech media sites and things like that and from the Rocky Mountain Institute are constantly talking about S curves and accelerating geometric adoption of renewables. When you look at it from this perspective, it's not happening at that speed. Now, there can be industrial transitions that occur more quickly. One example is this very rapid energy Saving steel transition that took place in the 60s and 70s, and within around 20 years, almost all of the global steel production processes shifted from something called open heart furnaces to basic oxygen furnaces. But why did this happen so quickly? You can't just look at this chart and say, okay, sometimes industrial transitions can be rapid. It happened because the new technology cuts steel production times to a tenth of what they used to be, allowing for 80 to 90% savings in energy costs. So when you have a transition that can pay for itself like this, it can happen rapidly. But that's not the case with the transition that we're currently experiencing. Now. Just a few more exhibits and then I'll let you go. I mean, the piece is 50, 54 pages. There's a lot in there. And I would encourage anybody who wants to learn about energy. Start with the executive summary, which is seven pages, and then pick the different topics that you find interesting. But just a few charts here. It's hard to electrify a country when the country itself is having so much trouble building transmission lines. And we've gone from about 4,000 miles of transmission lines being added each year to less than a thousand over the last couple of years. So this is going in the opposite direction of electrification. The other thing to remember, too is electricity per unit of energy costs a lot more than natural gas. So for people that are focused on electrification of heat by industrial or residential or commercial users, yes, you can swap out your furnace or boiler for an electric heat pump that operates much more efficiently and uses less energy, but the energy that it uses can be anywhere from two to five times more expensive than the energy that you used to use, because electricity is a lot more expensive than gas, not just in the United States, but in most countries. So that's another important impediment to electrification. And by the way, just for good measure, if you looked at all of the 47 categories in the producer price basket in the United States, practically the highest rate of inflation over the last few years has been transformers and power regulators. And we're barely on this electrification journey. Right. So there's a lot of supply chain questions related to the equipment, and do we have enough electrical engineers, et cetera, et cetera, to implement a lot of these electrification visions that people will talk about? Now, the, the people that run the independent system operators in the United States disagree with the heliocentrists. Remember, the heliocentrists we've defined as the people that believe that you just need more solar, more storage, and you don't need to invest in natural gas. The the people that run the independent system operators are screaming from the other side like please pay attention. Our reserve buffers during peak summer demand are shrinking because as we retire baseload power and replace it with renewables, we're getting more and more close to the point where we might have some kind of brownout situation. And the Midwest, Northwest, California, New England are places where you're seeing the most acute squeeze by the end of this decade. Now there's a lot of discussion about data centers. I'm not going to get too hung up on it here. I just want to show you a couple of different forecasts that are out there. If you add up data centers, electrification vehicles and electrification of heat through heat pumps, you can pencil some people are penciling in a combination of a 20% increase by 2030 in electricity demand or as low as 7%, but it's probably going to go up. What's the important context? The important context is that electricity demand in the United States been flat for around 20 years. But for the 20 years before that, the United States was more than capable of adding a lot of electricity generation capacity. The difference was at the time those were large natural gas and nuclear plants that were being added rather than today's smaller renewable facilities. I also want to remind you about this green dotted line for all the people that are really hung up on the data center issue. In 2007, the EIA made a projection of US electricity demand going up a ton, and since then actual electricity band's been flat. There are times when people don't appreciate increased efficiencies and how that can sometimes offset increased demand and population growth. I'm not going to spend too much time focused on the Trump policies. We have a couple of pages in the piece on what those energy policies are, but at the core of them it's important to understand that the US has achieved energy independence for the first time in 40 years and unlike China and unlike Russia. And this chart here looks at the imports of net imports of oil, gas and coal in common energy terms. And this administration is extremely focused on energy policy, which is paying very close attend attention to energy independence and national security. And obviously those priorities have have shifted a lot versus the prior administration. And, and it's important to understand why. And this, this chart helps explain that. And I'm just going to enclose I'm going to close this podcast by showing you a chart on the performance of renewables versus traditional energy. So this looks at the performance of a composite of different renewable indices compared to traditional oil, gas and pipeline investing. The renewables crushed everything else in 2020 during the free money period from the Fed and has been getting absolutely decimated ever since. And somewhere around roughly around a 40% underperformance since the beginning of this chart. And I wish sometimes people would pay more attention to the fundamentals behind the energy things they invest in. So I want to show you just a couple things on sustainable aviation fuels and then we'll close. This spaghetti chart gets people very excited because when they see the individual pieces of this on a term sheet or in a, in a green energy blog or in a YouTube video, they get all excited about the ability to create sustainable jet fuel. Of course, who wouldn't want sustainable jet fuel to replace traditional jet? According to this diagram, there's lots of different ways using food, oils, corn, cellulose and biomass. Or you can use electrolysis. There's a lot of different pathways through which you can create sustainable aviation fuel. The problem is they're all really expensive and, and they, and then a lot of them have an energy deficit. One of the things that we discuss in here is that one of these, one of these pathways, if people were just paying attention, the thermodynamics are clear. It takes 150 megajoules of energy to go into the thing, and you get 50 megajoules of energy out of the thing. So there aren't too many successful businesses that our clients run that have a negative energy deficit like that. And so I just think that people should pay more attention to that kind of thing. The renewable jet fuel cost estimates across the board, no matter how you do it, are much higher than traditional jet fuel estimates, which is why so many of the biofuel companies have been getting crushed. Because once their process and costs meet the light of day, investors don't like them quite so much. Anyway, the our 15th annual energy paper starts with an executive summary on heliocentrism and solar power and the speed of the transition. We have some comments from Falklav Smil and a lot of charts on how the planet is changing. We have a long section with 70 essential charts on the energy transition that we update every year. A section on Trump's energy policies and how the pendulum is swinging again. We have a section on the high cost of European decarbonization. Europe is the world's transition leader, but it's also paying the highest price for that decarbonization. We discuss the nuclear renaissance of interest in nuclear that's happening in the oecd. We introduce our new grid optimization model to understand how you can deeply decarbonize US grids and how much it would cost. There's an important section on the LA fires. Climate change is an important part of understanding why it took place with respect to wind and rain and drought, but that's not the whole story, particularly when you look at the breadth and depth of the damages. There's a lot of political issues as well that's important to understand. Again, we have a section on renewable jet fuel. We look at methane tracking from US basins and how satellites are helping on that effort. We have yet another section on the disintegrating prospects for the hydrogen economy, an important discussion on superconductivity, and then a brief review of topics that we might get into detail on next year. So that's the end of this podcast. Please enjoy the energy piece and thank you for listening and look forward to connecting with you in April, probably on healthcare. Thank you. That is, unless I get either measles or polio.