The potentially transformative effect of leapfrogging
Over the past few decades, many developing countries have leapt directly to building mobile telecommunications and distributed financial services networks run on digital technology (entirely skipping the build-out of landline telephone networks or brick-and-mortar banks). The reason they were able to do this has to do with the electronics cost curve. As the computing power needed to run mobile devices became faster and more efficient, associated costs fell. The analogy holds true for renewable energy, relative to fossil fuels.
The current cost to generate energy from hydrocarbons (coal, gas, and oil) is about the same as it was 150 years ago, after adjusting for inflation. There have been massive technological advancements in drilling, mining, and power generation, but because fossil fuels are a finite resource, the more they are extracted, the scarcer they become. As a result, prices remain elevated. Renewable technologies have a dramatically different cost trajectory for two reasons. First, their power sources (sun and wind, for example) are infinite; second, they are modular and can benefit from economies of scope and scale. Over the past decade, the costs to produce solar and wind energy have dropped by 89% and 70%, respectively.2 As their associated technologies improve and market penetration accelerates, it is likely that cost declines will continue.
In the medium to long term, the economic benefits of the leapfrog path to decarbonization (particularly for countries that don’t use very much energy today) could be transformational. Economists refer to energy infrastructure as general-purpose technology, with vast applications. Transitioning the energy system, along with complementary advances in communications, data processing, and artificial intelligence could lead to a medium-term economic transformation that is hard to imagine today. Future industrialization could be powered by energy systems characterized by low-carbon sources whose costs decrease with scale.