There's been a lot of focus on how we make renewables cheaper than fossil fuels. Usually, we focus on slashing the cost of clean tech itself. What's less well understood, however, is that renewables and other clean tech will also impact the price (and profitability) of fossil fuels themselves — sometimes driving up the costs and reducing the profit margins of the very technologies that they are seeking to replace.

Here's how that may be beginning to happen.

Driving down capacity factors

I recently wrote about how better wind turbines with higher capacity factors were beginning to spell trouble for coal. Basically, taller turbines with bigger rotors are generating electricity more of the time in more regions, making the electricity they produce available to more utilities. A new report from Bloomberg adds an interesting detail to this narrative, explaining how a greater availability of renewables drives down the capacity factor of coal and gas too. (Capacity factor is a measurement of how much of the time a particular asset is generating energy.)

bloomberg capacity factor imageAs more wind and solar is added, coal and gas generators sit idle — driving up the cost per unit of energy generated. (Photo: Bloomberg)
The basic math goes like this: The more wind and solar is available, the more grid operators will be able to buy it. Because the marginal cost of solar and wind energy is pretty much zero, whereas coal and gas operators have to buy fuel for every unit of energy they generate, solar and wind can afford to undercut the competition — meaning gas and coal sit idle, driving down their capacity factors and driving up costs, creating a vicious cycle in which renewables get increasingly competitive. Of course, as environmental regulations begin to bite, grid operators will have other incentives to choose wind and solar over fossil fuels, further increasing the time that coal and gas plants will have to tread water.

Anyone investing in a coal or gas plant today, and trying to calculate their return on investment, will have to think seriously about how much it will be used as the world transitions to a low carbon economy.

Defecting from the grid

As big corporations get increasingly serious about buying green energy and even installing onsite generation, utilities are losing some of their most profitable customers. Meanwhile, cheaper energy storage may result in businesses and homeowners either defecting from the grid entirely, or at least reducing their reliance. All that means fewer (and potentially less profitable) customers who are left to share the load of building and maintaining power plants and electrical grids. And when you have fewer customers, but relatively fixed costs, you have to charge higher prices — further incentivizing others to defect.

Disrupting the economics of supply

While not exactly a "renewable" technology, electric cars may also start disrupting the conventional fossil fuel economy. Though initial sales may have been slow, a combination of air quality concerns, climate commitments, and vastly improving technology and range are making it exceedingly likely that electric cars and plug-in hybrids will become commonplace technology — if not completely replace gas cars — within the next couple of decades. Major automakers like Toyota have said as much, committing to a 90 percent reduction in the fossil fuel its cars use within the next 35 years.

We often talk about what this means for oil companies, but what about the gas stations and mechanics shops that fuel and service our current crop of technology? Presumably, in regions where oil use does fall, gas stations and mechanics shops will get fewer and farther between — further incentivizing the remaining drivers to go ahead and make the switch. (When was the last time you saw a landline payphone?)

But what about supply and demand?

None of this is set-in-stone prophecy, but rather a reflection on how the battle for clean tech to become price competitive with dirty energy will be complex and, at times, unpredictable. After all, as oil demand falls, it's reasonable to assume that this will put downward pressure on oil prices too, potentially reviving the gas guzzler. But then, lower oil prices make exploration, extraction and production less profitable, dis-incentivizing investment and putting upward pressure on prices again. The conundrum was perhaps best summed up in a recent review of "The Winning of the Carbon War" by Jeremy Leggett:

"So either way, high oil price or low, the fossil fuel companies’ business model is under stress. To put it another way, fossil fuels can’t win.To put it another way, fossil fuels can’t win.If the oil price is low, expensive oil projects stop making money and investors pull the plug. If the oil price is high, renewable energy looks more attractive and investors put their money there instead."

Exactly how the fossil fuels versus clean tech battle will play out in the short term remains to be seen. One thing, however, is clear — this is far from a predictable race to a fixed price point of cost competitiveness. As the new energy economy emerges, the market conditions created by and sustaining the current status quo will change. And when that happens, all bets are off.