Countdown to COP26: Energy Transition
Electricity consumption and GDP growth have long been linked to each other with high positive correlation in many countries across the globe, backed by a long time series of historical data. Therefore, to the extent that this relationship stays intact, and our collective acceleration to decarbonise the world through the Paris Agreement and with 137 countries (and growing) now committed to carbon neutrality, 90% of them by 2050, and increasingly, enshrined in law: we find ourselves in a hopeful duplexity of both prospering societies at large, whilst accelerating the preservation of our planet at the same time.
Accelerating technology, business model, regulation and grid stability solutions continue to evolve as we ramp up multi-sector decarbonisation and this has never felt so immediate and sure a trajectory, a “true north,” where “coopetition” and “collaboration” may become increasingly the markers of successful decarbonised development and execution. More locally, and in non-electricity generation sectors, we have new developments such as the North Sea Transition Deal.
The opportunities of renewables and storage, whilst moving away from fossil fuels have push and pull factors. Of the push factors we have divestment from coal which has been an observed behaviour for some time now, divestment from gas may be faster than coal as it comparatively “feels” more dislocated from the legacy supply chain surrounding it (there are no coal mines), society has an increasingly discerning voice backed by action in favour of our planet and legal frameworks are setting long term investment signals.
Of the pull factors there are the well documented learning curves of the reducing capex of wind, solar PV and battery storage, the impact of auction behaviour, as well as new capital entering on the cost side of the equation. Sitting alongside this are attenuating levels of subsidy on the one hand but a growing nonsubsidised corporate power purchase market in line with burgeoning ESG momentum on the other. Shorter term storage can access a growing grid balancing market on the revenue side to balance the increasing intermittency caused by more renewables deployed on the power system. We observe new entrants and oil and gas majors becoming quasi clean energy companies – with additional and increasing impetus on hydrogen (various colours) and carbon, capture, use and storage – as well as increasing momentum and capital behind the clean energy innovation ecosystem. Interestingly, change, challenges and discussions abound in legacy thermal centric regulation and business models with road maps being identified to better enable net zero outcomes.
Europe, and now the US forge ahead with net zero ambitions. Asia is one to watch as a continent that can move the needle of ultimate net zero success but there are encouraging signs of learning in China and India and support for clean energy.
There is, and always has been, a timing element to seizing the huge opportunities of cheaper renewables and storage, with early adopters harvesting the rewards of earlier subsidy mechanisms being paid for generation and export as well as potential future option value in conversion to hybrid renewables and repowering the portfolio asset base as they age. New capital and new entrants may have to collaborate in existing opportunities in the market. However, at the same time, we do see a significant rise in the development pipeline for onshore wind and battery storage, almost doubling in the past 6 months in the UK for example.
Further afield, we also see the European Commission advocating ambitiously with net zero by 2050:
“The transition to a climate-neutral society is both an urgent challenge and an opportunity to build a better future for all. All parts of society and economic sectors will play a role – from the power sector to industry, mobility, buildings, agriculture and forestry. The EU can lead the way by investing into realistic technological solutions, empowering citizens and aligning action in key areas such as industrial policy, finance and research, while ensuring social fairness for a just transition.”
In the US, President Biden is pushing a staggering proposal of some $US2.3trillion in infrastructure including clean energy and climate resilience, with US$174billion earmarked to enable the electric vehicle sector, amongst others. Biden is proposing the US will reduce greenhouse gas emissions by 50–52% of 2005 levels by 2030, the energy sector reach net zero by 2035 and the US economy by 2050 with an “all of government” approach to climate change. What does the size of the opportunity look like? According to BloombergNEF’s (BNEF) New Energy Outlook 2021 (NEO) achieving net zero by 2050 will require between US$92 trillion and $US173 trillion in investments in a range of scenarios in the energy transition. On an annual basis this will need to increase from $US1.7 trillion a year today to $US3.1 and US$5.8 trillion per year on average over the timeline to 2050 with this decade being the crucial one that sets the trajectory. On the other side of the equation, and according to an insurance company view from Munich RE, the global losses from natural disasters in 2020 came to US$210 billion, of which US$82 billion was insured.
In relation to Environmental, Social and Governance (ESG) there is increased momentum around climate-related disclosures. The mandate to consider the impacts of climate change can seem daunting to businesses but the Task Force for Climate-Related Financial Disclosures (TCFD) framework can be broken down into manageable steps and navigated easily which we describe more fully here.
It would appear from the evidence, that perhaps now, more than ever, we are on an intractable pathway to net zero. The near-term challenges may be in the financial margins, legacy regulations, legacy grid charging regimes (in some countries), balancing and stabilising legacy century old grid design built for stable thermal generators, the disconnect of where clean natural resources are located versus the load centres, the cost to the end consumer, the extent of coopetition achieved in execution and how these all evolve together in a holistic fashion within a “systems thinking” mindset in the near term. We are clearly moving away from fossil fuels (in developed and developing nations), and there are huge energy transition opportunities if we are to get there in time with respect to the size of the investment needed and if we successfully overhaul some of the much-needed historic thermal centric design and regulation for a net zero trajectory. Do you agree?