Energy falling below $100 shows the world a way out

By David Fickling

WORRIED ABOUT the way crude oil has stampeded above and then back below $100 a barrel in a matter of hours this week? What if I told you that another crucial component of energy prices has just slumped permanently beneath the same level?

That’s what’s happening with lithium-ion battery packs. Grid electricity from four-hour batteries cost $78 per megawatt-hour at the end of last year, down from $107/MWh a year earlier, according to BloombergNEF. It’s fallen more than 50% since the eve of the world’s last major energy shock, when Russia invaded Ukraine in early 2022.

The smaller batteries that go in your car have also dropped below a $100 threshold of late. The dominant lithium-iron-phosphate variety now costs $81 per kilowatt-hour, against $97 the previous year and $120/kWh at the end of 2021.

Lithium-ion battery prices don’t get constantly discussed the way crude is, but these declines add up to a decisive shift that will determine the energy landscape of the next decade. Solar and wind have been cheaper than fossil fuels for a while, but the last time we had an energy crisis like this, oil and gas still drove the prices paid by consumers. The falling cost of battery storage changes that.

Consider cars. Four years ago, a vehicle running on gasoline was the cheapest to buy everywhere in the world. Even factoring in savings on fuel, the conventional model typically came out ahead. Crude’s brief spikes above $120/barrel during the initial months of the war weren’t enough to alter that math.

Long before 2022, though, $100/kWh batteries were seen as a tipping point by the auto industry: Below that level, electric vehicles are fundamentally more affordable to buy. That’s the world we’re now in. EVs are far cheaper in China, roughly at price parity in Thailand and Australia, and imminently heading that way in the rest of the world.

My Geely Automobile Holdings Ltd. EX5, purchased for A$42,000 ($29,400) in December, has the feel of a luxurious European marque but charges up for half the cost of an equivalent tank of gas. This advantage will only widen if the current chaos in the oil market goes on. That makes a switch from gasoline to electricity a far more attractive proposition than the last time surging fuel prices started to affect hip pockets.

It’s the same situation on the grid. Until very recently, the cost of electricity in developed markets was typically shaped by gas, due to longstanding rules that set prices based on the most expensive power plant running — known as the “last marginal generator,” and typically a gas-powered plant. Even European countries with plenty of cheap renewables found their electricity priced at the level of LNG, causing bills to surge.

Thanks to those falling costs, batteries are now seizing the role of last marginal generator, and setting market prices at a lower level. Electricity from a four-hour battery is now cheaper in almost every market that depends on LNG, where prices from baseload gas plants typically hover around $100/MWh.* It’s yet more competitive if the battery is charged up from its own solar or wind plant, rather than costlier grid power. Even Saudi Arabia can now provide solar-plus-storage for .

The real-world effects are already showing up. In Australia’s main grid, wholesale prices in the December quarter were the lowest in four years, as rising deployment of renewables and batteries squeezed out gas. It’s a similar picture in California, where peak prices were cheaper than $70/MWh for 97% of the time last year, compared to just .

Pricing shifts activate one of the ground rules of commodity markets: the law of substitution. Any time a raw material grows too expensive or challenging to acquire, users will find an alternative. Substitution is why plumbers switched to PVC the minute copper became too important in electronics to be wasted on pipework. It’s why horsepower collapsed in the early 20^th century as motor cars became the more affordable means of transport.

The same dynamic is now affecting the commodities that have driven the world’s energy flows for more than a century: oil and gas. Even countries that have long slow-walked the energy transition, such as , , and , are now finding that EVs and renewables-plus-batteries are too cheap to resist.

With such an affordable, clean solution waiting in the wings, why would any sane economy hitch its fate to the price of one volatile commodity, when the whims of President Donald Trump and Israeli Prime Minister Benjamin Netanyahu are turning its main producing region into a chaotic disaster zone?

In the past, most of us had no alternative to a world dominated by oil and gas. Cheap solar and wind started to erode that proposition in the 2010s. It’s the plummeting price of batteries since 2022 that will prove the real game changer.

BLOOMBERG OPINION

*This is ultimately determined by the price of crude. In markets dependent on LNG, the price of fuel per MWh is roughly the same as the price of crude, thanks to long-standing linkages between oil and gas prices and the efficiency of combined-cycle gas turbine generators. About $25/MWh of non-fuel costs can be added, coming out to around $100/MWh. Markets with cheap piped gas instead of LNG will be cheaper, while those with carbon pricing will be more expensive.