Driving Renewable Energy Growth: Creating Virtuous Cycles

1. The Renewable Energy System Can Drive Itself – But We Must Act To Get The Ball Rolling Trae Wallace and Christina Ingersoll – MBA 2010, MIT Sloan with Dr. John Sterman, MIT Sloan and Andrew Jones & Stephanie McCauley, Climate Interactive

2. We know we need to rapidly develop a renewable energy system The way we generate energy for our economy has exposed us to a wide range of problems: • Global Climate Change • Devastating local environmental impacts (oil spills, mountaintop removal mining, etc.) • Unstable foreign oil supplies • Highly volatile energy prices • Reduced air quality We know what we want – a clean, renewable, secure energy system that will support growth in our economy for decades to come – but how do we create it?

3. We think that growth in the renewable energy system will be driven by virtuous cycles Imagine a snowball rolling down a hill – it picks up speed and more snow, getting bigger and faster and picking up even more snow These sorts of self-reinforcing dynamics exist in a wide range of systems. When they result in a beneficial outcome, we refer to them as “virtuous cycles”.

4. These virtuous cycles can lead to explosive growth in renewable energy Virtuous cycles – once they get started – can lead to explosive, exponential growth Market-based virtuous cycles have driven development of every technology system since the Industrial Revolution. These same forces can push the renewable energy system to the level it can support our economy.

5. These virtuous cycles can lead to explosive growth in renewable energy – once we get the ball rolling These cycles cannot get going without a support infrastructure There is currently little market incentive for the private sector to build this infrastructure RENEWABLE ENERGY SYSTEM EXISITING ENERGY INFRASTRUCTURE Existing “dirty” energy infrastructure provides an economic disincentive to build renewable energy infrastructure Cap-and-trade or another system to establish a price for carbon is a necessary step that will make renewables more competitive. However, given the lock-in caused by existing infrastructure, it won’t guarantee a vibrant clean energy system.

6. These virtuous cycles can lead to explosive growth in renewable energy – once we get the ball rolling Public support can bypass these disincentives and get growth started RENEWABLE ENERGY SYSTEM PUBLICSUPPORT EXISITING ENERGY INFRASTRUCTURE To kick off these virtuous cycles, we have to get the ball rolling with public support. This support need not be permanent – we only need to get it over the hill and it will run by itself.

7. Virtuous cycles driving market growth:Down the “experience curve” We’ll discuss these dynamics in the context of battery-powered electric cars, but they exist across the renewable energy landscape Start with the cost to make a car Cost

8. Virtuous cycles driving market growth:Down the “experience curve” Sales Lower costs of production lead to lower prices for customers Demand Cumulative Experience Price Cost

9. Virtuous cycles driving market growth:Down the “experience curve” Low prices lead to high demand Demand Price Cost

10. Virtuous cycles driving market growth:Down the “experience curve” Sales Demand Higher demand increases sales Price Cost

11. Virtuous cycles driving market growth:Down the “experience curve” Sales Demand Cumulative Experience Price As sales go up, so does the experience of the industry Cost

12. Virtuous cycles driving market growth:Down the “experience curve” Sales Demand Cumulative Experience Price Finally, as experience increases, the cost to create an item decreases Cost

13. Virtuous cycles driving market growth:Down the “experience curve” 4 … higher sales… 3 … which means higher demand… Sales Demand 5 … and thus more experience. Cumulative Experience Price 2 … means a lower price to consumers… Cost 1 6 Lower cost per unit… Which further lowers unit cost

14. More cost reduction through virtuous cycles: Economies of scale Over time, increased sales turn small operations… Sales Demand Cumulative Experience Price Cost

15. More cost reduction through virtuous cycles: Economies of scale … into large ones that enjoy a wide range of advantages and efficiencies… Sales Demand Cumulative Experience Price … which economists refer to as “economies of scale” Cost

16. More cost reduction through virtuous cycles: Economies of scale Sales Demand SCALE These efficiencies help to drive down per-unit cost… Cumulative Experience Price Cost … increasing the power of this virtuous cycle

17. Research and development can both drive down costs and improve quality Strong sales allow for investment in R&D Sales Demand SCALE Cumulative Experience Price These investments can result in steady improvements, as well as breakthrough discoveries! Cost

18. Research and development can both drive down costs and improve quality Sales Demand SCALE R&D Cumulative Experience Price Cost R&D can drive down costs

19. Research and development can both drive down costs and improve quality Sales Demand SCALE R&D Cumulative Experience Price Cost Additionally, it directly improves the quality of what’s being produced Quality

20. Research and development can both drive down costs and improve quality Sales Demand SCALE Which, in turn, increases demand… all of which further reinforces the system R&D Cumulative Experience Price Cost Quality

21. This is an impressive set of virtuous cycles… why haven’t they started rolling for renewable energy? Sales Demand SCALE R&D Cumulative Experience Price Cost Quality

22. Competition is between systems, not products Which car would you buy? VS. Internal Combustion Engine Battery-based Electric Imagine these cars had the same power, same range, same safety, and same comfort (even the same number of cup-holders). Would electric cars then be fully competitive with gasoline-powered cars?

23. The cars aren’t the whole picture; there are entire systems of infrastructure needed to support them VS.

24. The cars aren’t the whole picture; there are entire systems of infrastructure needed to support them The system of infrastructure to support battery-based electrics is simpler and cleaner VS.

25. The cars aren’t the whole picture; there are entire systems of infrastructure needed to support them Unfortunately, this system doesn’t exist yet… … but this one does VS. It’s been developed by over 100 years of virtuous cycles – optimized for cost and performance, but not for low emissions

26. This system-wide view leads to a final – and critically important – virtuous cycle INSTALLED BASE Since things like cars are durable goods that last a long time, each unit of sales above the rate at which existing cars wear out increase the total number of cars on the road – the “installed base” Sales Demand Cumulative Experience Price Cost

27. This system-wide view leads to a final – and critically important – virtuous cycle INSTALLED BASE RENEWABLE INFRASTRUCTURE Sales Demand SMART GRID As the size of the installed base increases, it will be more attractive to invest in the infrastructure system to support it Cumulative Experience Price Cost

28. This system-wide view leads to a final – and critically important – virtuous cycle INSTALLED BASE Sales RENEWABLE INFRASTRUCTURE Demand Not only does a larger installed base make it more attractive to create infrastructure to support electric cars, but also more infrastructure makes using the electric cars more attractive, increasing demand… another virtuous cycle Cumulative Experience Price Cost

29. The existing system of gasoline infrastructure keeps this critical cycle from getting started INSTALLED BASE Sales RENEWABLE INFRASTRUCTURE Demand The existing system keeps this cycle from getting going by depressing demand for both the cars themselves and the infrastructure to support them. This “lock-in” can’t be broken by individual economic decisions Cumulative Experience Price INTERNAL COMBUSTION CARS AND GASOLINE INFRASTRUCTURE Cost

30. Individual economic decisions won’t break the lock-in caused by the existing system VS. Even with an extremely high price for carbon emissions, it won’t make sense for a consumer to choose an electric car without a system to support it

31. Individual economic decisions won’t break the lock-in caused by the existing system And it won’t make sense for investors to build the system until there is an installed base VS. VS.

32. Individual economic decisions won’t break the lock-in caused by the existing system VS. VS. No cars without a system of infrastructure and no system without an installed base of cars… how can we escape this “Catch-22”?

33. Public support can influence these economic decisions until the renewable system becomes self-sustaining INSTALLED BASE RENEWABLE INFRASTRUCTURE Sales Demand SCALE INTERNAL COMBUSTION CARS AND GASOLINE INFRASTRUCTURE R&D Cumulative Experience Price COST Quality

34. Public support can influence these economic decisions until the renewable system becomes self-sustaining Resistance from the existing system is so strong the virtuous cycles of growth can’t get going for the renewable energy system INSTALLED BASE RENEWABLE INFRASTRUCTURE Sales Demand SCALE INTERNAL COMBUSTION CARS AND GASOLINE INFRASTRUCTURE R&D Cumulative Experience Price COST The ball can’t roll itself to the top of the hill Quality

35. Public support can influence these economic decisions until the renewable system becomes self-sustaining Public support will allow the renewable system to start running free from influence of the existing system. This will most likely come in the form of subsidies for electric cars and other incentives to build renewable infrastructure INSTALLED BASE RENEWABLE INFRASTRUCTURE Sales Demand PUBLICSUPPORT PUBLICSUPPORT SCALE INTERNAL COMBUSTION CARS AND GASOLINE INFRASTRUCTURE R&D Cumulative Experience Price COST Public support can help get the ball to the top Quality

36. Public support can influence these economic decisions until the renewable system becomes self-sustaining Over time, the natural virtuous cycles will strengthen the renewable system… INSTALLED BASE RENEWABLE INFRASTRUCTURE Sales Demand PUBLICSUPPORT PUBLICSUPPORT SCALE INTERNAL COMBUSTION CARS AND GASOLINE INFRASTRUCTURE R&D Cumulative Experience Price COST Quality

37. Public support can influence these economic decisions until the renewable system becomes self-sustaining … until we can remove public support and let the system run on its own INSTALLED BASE RENEWABLE INFRASTRUCTURE Sales Demand SCALE INTERNAL COMBUSTION CARS AND GASOLINE INFRASTRUCTURE R&D Cumulative Experience Price COST Once at the top, the ball will roll down naturally –gaining speed and power along the way Quality

38. There are very powerful industrial dynamics ready to get to work on renewable energy – if we’ll let them • Experience curves, economies of scale, and innovation on cost and quality can all work to make renewable energy competitive • These market-based solutions will lead to outcomes we can’t plan or even imagine today BUT • The massive installed capital base of fossil fuel infrastructure holds back these developments • Isolated economic actors working in their own best interest will choose to build from this base rather than jumping to something new Within the existing market structure, even necessary and important changes like a price for carbon emissions will not be sufficient to kick off a vibrant market for renewable energy

39. Free market dynamics are great at selecting firms and products, but often fail to create industrial systems • All major industrial systems – from the transcontinental railroad to the internet – started with significant support from public institutions • Once they got started, these systems developed and expanded into the vibrant free market industrial systems we see today • Public support can help us to select the things we want – clean, secure, renewable energy – and leave behind the things we don’t – dirty, expensive energy If we get the ball rolling with significant but directed public support, we can begin to enjoy the benefits of cheap renewable energy sooner rather than struggling to make do with increasingly expensive and harmful fossil fuels

40. This is an enormous system-wide issue, but individuals can take action on many levels • National level: Contact the White House and your representatives in Congress to let them know you’re behind legislation to provide public support for the renewable energy system – legislation like the “American Power Act” recently introduced by Senators Kerry and Lieberman • State level: Support the various subsidies and other programs states are considering and enacting to get the ball rolling on renewable energy • Personal level: Make investments (a new car, improvements to your house, or even picking companies to invest in) with an eye to their impact on the broader system, not just the immediate return