Confronting the “Energy Transition Trilemma”

The US presidential election may be occupying your mind right now, but perhaps a little room can be spared for something even more important. Whichever administration enters office, it will have to grapple with one of this generation’s most consequential challenges: the energy transition. Key decisions can either accelerate, stall, or even reverse the energy transition in the United States.

An actual reversal is unlikely, in my view, as the energy transition is now largely tied to the reindustrialization of America, propelled by the competition with China. It’s an agenda that basically has political buy-in across the board, so long as it is framed as a competition for America’s future prosperity and security.

But accelerate or stall is still very much in play, depending on the desired goals and trade-offs the United States pursues. That calculus necessarily involves determining what competition with China on cleantech actually entails. As it is very obvious now, the energy transition requires an integrated supply chain, from mining and refining to manufacturing, and China is dominant across many nodes in that supply chain.   

This reality, I believe, poses an “Energy Transition Trilemma” for the United States, which I’ve diagrammed below (see Figure 1).

Figure 1. The Energy Transition Trilemma

Note: This loosely adapts the well-known monetary policy trilemma, a concept that posits of the three monetary policy choices—fixed exchange rate, free and open capital account, and independent monetary policy—only two are possible at a time. Others have come up with similar application of this concept to the energy transition choice set, like Rogan Quinn of Rhodium Group.
Source: Author.

At the macro level, the first-order goals are quite simple. The United States ideally would want to achieve all three: a secure, green, and affordable supply chain. But when it comes to making the second-order choices—which determine the execution of those goals—it becomes more apparent that all three cannot be achieved.

Let’s quickly go through the choices to see why.

If security, broadly defined, is the main priority, then the options on the left side of the triangle would be largely “US self reliance” with some involvement of “substitutes (allies)”. To achieve green, relying on the same two options is plausible though difficult without China. Would allies like South Korea or Japan or Germany provide enough batteries, solar panels, and permanent magnets on an acceptable timeline?

But if green is the paramount goal, all three options on the right side of the triangle are in play. In fact, most of the products in the cleantech supply chain have no explicit or strong national security implications. The inclusion of the China option would also satisfy the condition for achieving the cost-effective goal at the right bottom, because it is impossible to get to cost effective with just “US self reliance” + “substitutes.”

In fact, short of dramatic changes in US and allies’ domestic capacities, China is essentially a necessary condition for achieving an affordable energy transition (see Figure 2 on the “China effect” on solar panel prices). Solar panel prices in China have plummeted even further this year to just $0.11/w, according to Wood Mackenzie.

Figure 2. Solar PV Panel Cost as of 2019 ($/Watt) Source: IRENA Renewable Cost Database.

Of course, inclusion of the China option would not satisfy the secure goal for many, especially given the current political climate. Since it is reasonable to assume that the secure goal takes precedence, the United States is likely to pursue some combination of secure and green, thereby forfeiting the cost-effective goal.

Yet abandoning that goal means the United States will likely tilt toward the stall scenario instead of the accelerate scenario on energy transition because cost matters for adoption.

Case in point is the slowdown in electric vehicle (EV) adoption. According to industry consensus, EVs need to reach a sweet spot of $30,000 and 300 miles of range before mass, not just elite, adoption will happen. Without mass adoption, the energy transition will stall.

With the exception of certain Tesla models, Chinese EV manufacturers are the only players that can consistently hit that $30k and below price point without really compromising on quality. (Estimated Chinese manufacturing costs are 41% lower compared to the United States for an EV with similar specs.) Sure, factors like range anxiety and charging infrastructure matter, but the lack of affordable EV options is above all the biggest hinderance to adoption.

Don’t just take my word for it. Ford CEO Jim Farley understands how price will determine the electric transition in transport and just how competitive the Chinese players are (I would watch this terrific and frank interview with Farley). He apparently shipped the latest Xiaomi SU7 EV from Shanghai to Chicago and has been driving it for six months. It’s also why he took the unusual move of building a secretive Skunkworks project in California to produce state-of-the-art $30k EVs.  

But all of this will take time. In the interim, adoption will likely take a hit. Yes EV and hybrid sales are still growing, but they were less than 9% of new car sales in 2023, far from the 50% target the White House set for 2030. In fact, this goal, along with other aspects of the energy transition, are unlikely to be achieved on that 2030 timeline if the United States decides the cost-effective goal is worth the trade-off for the other two goals in the trilemma.  

Damien Ma is the Managing Director of MacroPolo. You can find his work on energy, politics, and other topics here.