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Energy transition overview
By Tsvetana Paraskova
THE ENERGY TRANSITION IS GAINING MOMENTUM
In the wake of the COVID-19 pandemic, governments and businesses around the world have made more pledges to curb their carbon footprint and reach net-zero emissions by the middle of the century.
From the biggest oil and gas companies in Europe to some of the biggest economies in the world, everyone is now committed to help the fight against climate change by reducing carbon dioxide and methane emissions.
A growing number of governments have laid down targets to increase electrification in transport and raise the share of renewable power sources in their energy mix.
Hydrogen and carbon capture and storage (CCS) are no longer vague ideas as the oil and gas industry is betting on them to provide more low-carbon energy to increasingly demanding society and governments.
‘Build back better’ is now in most cases synonymous to ‘build back greener’ with government incentives and programmes to boost the use of renewable and low-carbon energy sources.
Global installations of renewable energy sources hit a record in 2020 despite the pandemic which slowed down economies and delayed some operations in the early months of 2020.
Still, the world needs much more commitment, cooperation of governments, stronger policies, and a lot more investment, if it were to stave off a rise in temperatures well above the ones set in the Paris Agreement, analysts and forecasters say.
Emissions Rebound after PandemicInflicted Slump
In 2020, global emissions saw the largest annual drop on record, but this was due to the lower overall energy demand and the economic slowdown. The world is still far from doing enough to put emissions “into decisive decline,” Fatih Birol, Executive Director of the International Energy Agency (IEA), said in October last year.
the capacity and the responsibility to take decisive actions to accelerate clean energy transitions and put the world on a path to reaching our climate goals, including net-zero emissions,” Birol added.
As economies re-opened at the end of 2020 and economic activity started rising, global energy-related CO2 emissions were 2% higher in December 2020 than in the same month a year earlier, the IEA said in March 2021.
Stronger Policies Needed To Put World On Track To Meet Paris Agreement Goals
Many governments – including the UK, major energy importers in north Asia including China, and the European Union – already have timelines to curb emissions and reach net zero by 2050, and in China’s case, by 2060. Most economies are set to roll out support to low-carbon energy sources and transport electrification. Policies will need to be stronger and investments from the private sector will need to rise exponentially in coming years if the Paris Agreement goals were to be met, international agencies say.
Renewable energy installations are setting records globally, and investment is rising, but a lot more investment is needed for large-scale deployment of electrification in transport, hydrogen solutions, and CCS.
More Low-Carbon Energy Investment Needed To Meet Climate Goals
Capital expenditure for renewable energy projects is set for a new record of US$243 billion in 2021, Rystad Energy said in a recent analysis. Investment in renewables is narrowing the gap with CAPEX on oil and gas projects which is expected at around US$311 billion this year, more or less flat compared to 2020, according to Rystad Energy.
“Last year’s events forced leading oil and gas businesses to look at strategies to reduce exposure to the risky market amid the energy transition. Oilfield service suppliers, for instance, have started a considerable transformation, hoping to be more relevant in a greener market and become a more attractive option for investors,” says Chinmayi Teggi, energy service analyst at Rystad Energy. “One can argue about both the pace and scale of the energy transition but the criticality of metals to its realisation is without question. Put simply, the energy transition starts and ends with metals. If you want to generate, transmit or store low/no-carbon energy you need aluminium, cobalt, copper, nickel and lithium,” said Julian Kettle, Wood Mackenzie Vice Chairman of Metals and Mining.
Despite the pandemic, the world added more than 260 GW of renewable energy capacity in 2020, beating the previous record by almost 50%, data from the International Renewable Energy Agency (IRENA) showed in early April. More than 80% of all new electricity capacity added last year was renewable, with solar and wind accounting for 91% of new renewable capacity, IRENA said.
Still, the agency predicts that energy transition investment in a 1.5 degrees Celsius pathway will have to increase by 30% over planned investment to a total of US$131 trillion between now and 2050, corresponding to US$4.4 trillion on average every year.
Wood Mackenzie has estimated that the key metals necessary for accelerating the energy transition alone will need as much as major oil and gas corporation now has plans $1 trillion in investment by 2035. Investment to boost investment and participation in green in critical energy-transition minerals such as hydrogen, blue hydrogen, and CCS projects. lithium, copper, nickel, cobalt, and aluminium will need to nearly double over the next 15 years compared to the investment over the past 15 years.
“One can argue about both the pace and scale of the energy transition but the criticality of metals to its realisation is without question. Put simply, the energy transition starts and ends with metals. If you want to generate, transmit or store low/no-carbon energy you need aluminium, cobalt, copper, nickel and lithium,” said Julian Kettle, Wood Mackenzie Vice Chairman of Metals and Mining.
The share of electric vehicles (EVs) in global new passenger car sales is set to quadruple in 2026 from 4.6% last year and exceed 50% from 2033 onwards, RystadEnergy said in its latest Energy Transition Report. The increased adoption of EVs in major automotive markets in Europe, North Asia, and North America will boost battery demand for transportation, while battery demand for grid storage, negligible at present, is also set for growth in the next two decades.
“If battery costs continue to decline at current rates, they will comprise an increasing share of the power market and can, together with cheap renewables, potentially displace a significant portion of the current fossil fuel baseload generation,” Rystad Energy said.
Outside the electricity sector, hydrogen and CCS are currently the main solutions on which oil and gas companies are betting for lowcarbon energy solutions, especially for hardto-decarbonise industry sectors. Almost every
major oil and gas corporation now has plans to boost investment and participation in green hydrogen, blue hydrogen, and CCS projects.
These will need scale and more investment to become financially viable solutions in the energy transition.
Who Will Finance the Energy Transition?
Every existing or proposed low-carbon energy solution will need investment to scale up and reduce costs.
According to WoodMac, the world would need a bare minimum of US$30 trillion to US$40 trillion of investment for a 2-degrees-Celsius or lower pathway. Green stimulus worldwide could attract trillions of US dollars of private capital if governments use incentives to draw private capital.
“Governments can promote a wide range of early-stage technologies, setting the ball rolling with multiple pilot plants. As winners emerge, they can set clear goals on technology adoption, drawing in private capital for scaling up, as well as consumer acceptance,” WoodMac’s analysts say.
“We’d expect a private capital multiplier of two to three times to ‘crowd-in’. If the projects are there, that’s a massive US$12 trillion to US$16 trillion that can kickstart the drive towards a 2 °C or lower pathway,” Wood Mackenzie reckons.
Globally, governments are set to inject around US$4 trillion into the green economy over the next year and a half.
