Markets - 12/September/2018

Clean energy economy on the way, but serious challenges remain

The energy transition is advancing quickly and peak fossil fuel demand is on the horizon, says a report from Norway-based energy consulting and services firm DNV GL. But it is also warns of the immensity of the task ahead

Peak fossil fuel demand is in sight and the energy transition is rapidly ramping up, says a report released this week by Norway-based energy consulting and services firm DNV GL. While there is much to celebrate, the forecast comes with serious warnings, underlining the size of the task ahead, the massive investment needed to move to a clean energy economy and the fact the world remains on course for dangerous levels of global warming. Commentators welcomed the report, but some questioned certain conclusions, not least the considerable role for gas and the required level of investment in the grid

 

DNV GL forecasts world energy demand will peak in the next 30 years, despite more people having access to modern energy, and the energy produced and consumed will be much cleaner. One of the big game changers will be electrification, with electricity’s share in the global energy consumption mix increasing from 19% in 2016 to 45% by mid-century and solar photovoltaic (PV) and wind supplying more than two-thirds of it. The report forecasts solar PV and wind growing rapidly to represent about 16% and 12% of world primary energy supply respectively by 2050, and taking a 40% (solar) and 29% (wind) share of total electricity generation by the same date. DNV GL also makes it clear renewables, especially solar and wind, are now mainstream energy sources and should be treated as “new conventionals rather than challenger technologies”.

On the fossil fuel side, coal peaked in 2014 and oil will peak in 2023, says DNV GL, though it suggests new investment and oil fields will be needed until 2040. Natural gas is expected to peak in 2036, but not before it has significantly increased its share of the energy market. The report forecasts that by 2023 gas will overtake coal and will then surpass oil in 2027 to become the largest energy source until 2050. Nonetheless by 2050, DNV GL expects a 50/50 split between fossil and non-fossil fuels in the energy mix versus the 80/20 split today.

The other big player will be energy efficiency, notably in terms of transport, buildings and manufacturing. Remi Eriksen, the company’s CEO, describes efficiency as a “defining feature” of the next three decades.

 

 

Gas and grid investment

Jan Rosenow of the Regulatory Assistance Project, a global group of regulatory experts, says he welcomes the critical role the report assigns to energy efficiency and demand response. But calls the extremely significant role assigned to natural gas “questionable”given that many end-uses are assumed to be electrified. “Heat is the one sector standing out here as it is widely believed that this sector will be electrified or switch to hydrogen,” says Rosenow. The report looks at the overall potential contribution of hydrogen to the energy transition, but concludes the technology will not be a game-changer: “The high costs of storage and efficiency losses during multiple conversions will likely limit the uptake of hydrogen to just half a percent of global annual energy use by mid-century.”

Rosenow also questions the report’s forecasts for grid investments. DNV GL claims power grid expenditures will increase from $0.49 trillion in 2016 to a whopping $1.5 trillion in 2050.

“It is clear additional grid investment is required, but the increasing decentralisation of the energy system is likely to limit the need for super-grids,” says Rosenow, cautioning against overstating the required investment because of the “potential for smart electricity use, storage and decentralised energy”.

DNV GL insists that even with such massive investment figures the energy transition is affordable since as a proportion of world GDP, expenditure on energy will be lower in 2050 than today. Given a forecast 130% growth in GDP, energy’s share will decline from 5.5% in 2016 to 3.1% in 2050, it states. Another sea change will be the shift in the costs of the world’s energy systems from operational expenditure (principally fuel) to capital expenditure with more capex going into grids and renewables than into fossil projects from 2029 onwards.

 

 

Peaking and electrification

A report published on Tuesday by watchdog Carbon Tracker backs many of DNV GL’s conclusions, notably the date for hitting peak fossil fuel demand and the importance of digitisation in the transition. Any discrepancies “are not dramatic” and are the result of the questions being asked, says Kingsmill Bond, strategist at the think-tank. “DNV GL is trying to work out the detail of energy demand. We are focused on the financial market consequences of the peak.”

Others, such as the International Energy Agency, have previously suggested a slower pace for the transition from fossil fuels to renewables and energy efficiency. The New Policies Scenario in its World Energy Outlook 2017, based on existing policies and announced intentions, does not see peak oil happening until 2040. “There are a few signs of a shift in direction that would bring an early peak in global demand,” says the agency, refusing to comment further before the launch of its latest outlook report on 13 November 2018.

Transport is one sector where DNV GL is particularly bullish about electrification levels and a decrease in energy use, predicting rapid uptake of light electrical vehicles (EVs). By 2027, half of all new cars sold in Europe will be EVs, with this figure reached in 2032 in North America, Japan, Australia, New Zealand, Korea, China and India, and 2037 in the rest of the world. By 2033, half of all new cars sold globally will be EVs, and the report expects heavy vehicles to follow suit.

The transport sector projections are “optimistic yet achievable”, says Rosenow. For him, it is important that EV charging infrastructure and parking is deployed in cities and along highways “to address remaining consumer anxieties” if these targets are to be met. Likewise, ambitious EU carbon dioxide standards for passenger cars and vans are needed with an agreed minimum share for EV sales, he adds.

While the forecast as a whole leads to a very different world than the one in which we live today, the transition described by DNV GL will not be fast enough to meet the goal of the 2015 Paris climate agreement to keep global warming “well below 2°C above pre-industrial levels”. The forecast puts the world on course for a dangerous 2.6°C rise in temperatures. To move towards a cleaner energy economy even faster, there is “no simple solution, no silver bullet,” said Eriksen, when launching the report in London on Monday, underlining the need for “extraordinary effort”.

 

 

Financial consequences

Ingrid Holmes, associate director of Hermes Investments Management, suggested, during the report’s launch, there was hope for a quicker transition because of pressure from investors, shareholders, banks and consumers for change. She gave the interesting example of heavily fossil fuel-dependent companies, such as the US utility Southern Company, accessing capital through ring-fenced green bonds to support solar investment as fossil-dependent parts of the business were no longer able to access capital markets. She also cited the announcement in April 2018 by the bank HSBC to stop financing coal power stations in many countries, as well as oil sands and Arctic offshore drilling projects. A “slew of French banks” have made similar announcements and insurance companies are refusing to fund pipelines to transport fossil fuels, she added.

A report published this week by Arabella Advisors, a US consultancy, says the sell-off of coal, oil and gas investments by the insurance industry is now worth $3 trillion of funds. “Change is coming,” said Holmes, insisting investors were increasingly focused on “longer-term value based propositions” and being “good stewards of capital”. She added: “There is no point in getting a quick return if we have an unliveable society.”

Despite this change, the financial market consequences of peak fossil fuels are “profoundly concerning”, says Climate Tracker’s Bond. Not only does the fossil fuel sector have $25 trillion of fixed assets which are increasingly vulnerable to becoming stranded as the energy transition progresses, but the world is still building $1000 billion a year of fossil fuel infrastructure, he states.

The energy transition is the “greatest source of risk and opportunity” facing companies and understanding the nature and pace of it a “key strategic exercise”, says Eriksen. Managing this risk and ensuring a timely and successful transition will depend on a combination of technology and policy. Rosenow underlines that markets alone will not take the world where it wants to go. The fact DNV GL’s forecast misses the Paris climate target by a “wide margin shows that without significant regulatory and policy support the energy system transformation will not happen at the pace required”, he states.

 

Writer: Philippa Nuttall Jones

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  • Sergey Klyapovskiy

    I tend to agree with the DNV conclusions about the natural gas having a bigger role in the future. While hydrogen could be an alternative, much more time will pass before the technologies of using it mature and will become widely spread. The fact that it is potentially hazardous, will make it even more difficult to be advertised for people to use. Natural gas, on the other hand, is a well known solution with all the infrastructure for using it in place. The attempt to speed up some processes (like shifting from gas to hydrogen or having 100% renewables) should be performed with extreme caution in order not to create additional problems.

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