Opinion - 23/January/2020

Will gains outweigh the risks of an accelerated energy transition?

Carbon emissions must be more than halved to limit global temperature increases to 1.5°C. The rapid rise of renewables is not progressing fast enough to head off catastrophic global warming. Energy companies must reshape themselves and prepare for an accelerated energy transition, says Serge Colle, EY Global Energy Advisory Leader

Energy companies that do not move fast enough and invest more to achieve carbon neutrality will be exposed to new risks in a transformed energy world

 

Fast, but not fast enough. That is the verdict on the pace of the global adoption of renewables which, while dramatic, is not accelerating quickly enough to lower carbon emissions and meet global warming targets.

In 2018, renewables made up around 25% of the world’s total power generation. In Europe, this was even higher at 35%, with 95% of all capacity added in 2019 being renewable generation. Advancing technology and falling costs are making clean energy cost competitive with that generated by fossil fuels in most markets.

Despite over $2 trillion investment in new renewable energy in the past decade —adding a combined 1215 gigawatts — the share of low-carbon technologies in the overall generation mix has, however, not changed. Instead, this new capacity is meeting increasing global energy demand and compensating for the declining role of nuclear.

The aspiration set in Paris to constrain temperature rises will require unprecedented efforts. The problem is what governments commit to and what is actually taking place in our cities is not the same. Despite pledges to phase out fossil fuels, their use is on the rise. Economic expansion and population growth mean coal use is increasing in Asia and gas is booming. As a consequence, emissions and temperatures are increasing too. In 2018, carbon emissions grew at their fastest rate since 2011 – and the peak is not yet in sight.

While some countries have pledged carbon neutrality by 2050, with many others considering it, commitments made by national governments under the Paris Agreement fall far short of what is required. Taken together, they would still condemn the world to an estimated temperature rise of more than 3°C above pre-industrial levels by the end of the century. This huge misalignment between aims and actions is highlighted in the UN’s latest Emissions Gap Report, which concludes that countries must reduce their greenhouse gases (GHG) by about 7.6% a year for the next ten years to stay within the 1.5°C limit.

Scientists say only carbon neutrality by 2050 can avert our current trajectory, but achieving this will require a drastic reduction in emissions from all sectors and an increase in electrification. We must take bolder action, faster.


POSITIVE PROGRESS TOWARDS AN ELECTRIFIED WORLD

As the global electricity system becomes cleaner, cheaper and more efficient, the electrification of transport, heating and cooling and other energy-intensive sectors, is required and will accelerate. This will lead to a doubling of electricity demand by 2050. The value of electrification lies in its efficiency and cost-effectiveness.

  • Electricity is by far the most efficient source of fuel. At around 90% efficiency, losses are far lower than those from gas.
  • It is also increasingly the most cost-effective as the cost of generating renewable electricity continues to drop.

But even as these factors position electricity as the world’s fuel of choice, the pace of electrification must increase if we stand a chance of meeting climate targets. Even under a deep electrification scenario, the best projection is that electricity will cover around 40% of final energy demand. The challenge is to green the remaining 60% of energy demand which is heavily tied to fossil fuels.

The good news is that progress is evident, with a number of forces converging. Economically viable technology, customer demand and growing investor appetite are coming together to accelerate efforts to reach a net zero emissions goal.

  • As technologies reach economic viability, we can expect an acceleration in distributed energy resources and electric vehicles (EVs) within the next three to five years. Battery and solar photovoltaic costs have fallen over 80% since 2010 and are projected to drop further. EVs are within touching distance of reaching price and performance parity with internal combustion vehicles. In Europe, new emissions standards are bringing new models to market.
  • A growing number of global asset managers, sovereign wealth funds and pension funds are increasingly turning away from investments in the oil and gas sector, opting to put more money behind renewable energy and climate-friendly goods and services. As climate change activists turn up the heat, the number of institutional investors committed to cutting fossil fuel stocks from their portfolios have risen to more than 1100 – a group representing more than $11 trillion in total assets. The European Investment Bank recently announced it would end financing for fossil fuel projects from the end of 2021.
  • Sixty-six countries have committed to achieving carbon neutrality, the EU is pledging to make the continent climate neutral by 2050 and momentum is accelerating from the ground up.
      • The public voice for action is growing and climate activism is on the rise. Two dozen European cities will ban diesel vehicles over the next decade and 27 cities have signed agreements to match or exceed EU climate change-related emissions targets.
      • At a corporate level, 212 companies globally are committed to 100% renewable energy targets and corporate power purchase agreements were projected to break new levels in 2019.

ENERGY COMPANIES MUST BALANCE NEW OPPORTUNITIES AND RISKS

This new energy future opens up huge opportunities for energy companies.

  • New demand and load growth from the increased electrification of buildings (particularly heating and cooling), transport and industry. Combined, electrification could double electricity demand in Europe to 6000 terawatt hours by 2050.
  • New value pools from EV adoption, including charging stations, batteries, transitioning fleets and tapping into the potential of EV battery storage to strengthen grid resilience. Backed by the rising economic viability of battery technology and the greater availability of charging points, EV adoption in Europe – including passenger cars, commercial vehicles and buses — is expected to grow to 33% of new vehicle sales by 2030, increasing Europe’s total EV vehicle fleet to approximately 30 million.
  • Advances in technologies including energy storage, hydrogen and carbon capture use and storage (CCUS). Retrofitting a coal plant with CCUS or co-firing with biomass could reduce emissions while increasing flexibility.
  • Increased investment in the digital grid to better monitor, control and optimise electricity flows. Investment in digital grid technologies rose by almost 10% to $35b in 2018, says the International Energy Agency, but is still only around 12% of total investment in the grid.

Energy companies that do not move fast enough and invest more to achieve carbon neutrality will be exposed to new risks in a transformed energy world.

  • Regulation is making financing energy projects more complex and access to capital potentially more expensive. Supportive policy frameworks have been instrumental in encouraging investment in renewables, but there are questions over how these policies will evolve and what this might mean for risk allocation between public and private parties. With fossil fuel subsidies cut and a shorter lifespan for coal-fired plants, challenges for energy investors are increasing.
  • Carbon taxes and pricing initiatives are rising as governments step up climate action. Only 20% of global GHG emissions are covered by a carbon price, however, with less than 5% of these priced at levels consistent with reaching the temperature goals of the Paris Agreement. As commitments to climate change deepen, strategies to strengthen carbon pricing may include increasing prices or stringency and expanding emission coverage.
  • Climate litigation is a global trend with over 1300 lawsuits already filed in 28 countries. More than three-quarters of recorded cases have been filed in the US. Most defendants are governments, but lawsuits are increasingly targeting the highest GHG emitting companies.
  • Competition from non-traditional quarters, including technology and automakers, is challenging energy companies in core areas, such as energy supply, and in emerging fields, such as EV charging.


GOVERNMENTS ARE KEY TO ACCELERATING CHANGE

The energy sector has a major role to play in accelerating the energy transition, but progress will remain limited without unprecedented political will and far greater cooperation across regulators, governments, investors, energy companies and consumers.

Governments must act with more agility to keep up with rapidly advancing technology, industry changes and consumer behaviour and to align policy with climate goals. Climate commitments grab the spotlight, but too often ambitions fade with time and political will. To meet the goals of the Paris Agreement, strong action is needed on multiple fronts to deploy new technologies, invest in energy efficiency and advocate for carbon pricing that is high enough to meet climate mitigation targets.

Decarbonisation will require profound change in almost every part of the economy. To win, we must look ahead beyond the forces that are driving us in the immediate term. The key driver will come from governments accepting the need to meet CO2 targets and having national plans to achieve these goals.

For EY’s latest insights and analysis on the energy transition, visit https://www.ey.com/en_gl/nextwave-energy

The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organisation or its member firms.


The views expressed in this opinion are those of the author and do not necessarily reflect the position of FORESIGHT Climate & Energy

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