It is the hottest topic of all time for the energy industry. The energy transition that began more than 25 years ago is now central in the battle to curb and reverse runaway climate change within 30 years.
No one can escape the impacts. Major environmental disasters are happening at greater frequency.
Global warming, degrading ecosystems, air pollution and the potential for pandemics such as Covid-19 present closely interconnected challenges.
Moreover, the scale of losses stemming from these global crises is ever more frequently counted, registering strongly on stock markets and with the increasingly concerned insurance sector.
The cost of climate risk is moving up the financial world’s agenda as listed fossil fuel companies especially are discovering, with pressure from shareholders mounting.
This is already proving powerful with meaningful action being taken. Indeed, recommendations from the Taskforce on Climate-related Financial Disclosures (TCFD) are streamlining energy and carbon reporting, and providing transparent market information on climate-related financial risks.
And what’s at risk is massive.
Supporters of the TCFD are in control of assets worth $138 trillion.
It means climate risk will increasingly be priced and climate innovation rewarded, accelerating the environmental, social, and governance (ESG) trend. In effect, Big Money is driving positive change in perhaps unexpected, not yet acknowledged ways.
Covid-19 and record-low fossil-fuel prices put further focus on the transition risks, and green stimuli in the wake of the crisis could further accelerate this trend. And yet, Covid 19-related stimulus packages “could favour existing sectors due to their present economic importance and job preservation”.
Alarmingly, the current pace of decarbonisation does not meet the target of the COP 21 Paris Agreement.
DNV GL makes this claim in its recently published Energy Transition Outlook 2020, and so too do the B20 nations in concert with the International Energy Agency.
B20 represents the global business community across all G20 member states.
On September 18, B20 and the IEA issued a joint statement that was clearly critical of efforts being made by the G20.
They said: “The aggregate Nationally Determined Contributions submitted by the G20 Members are not in line with the Paris Agreement and other international climate goals.”
They warned that G20 members should accelerate the deployment of existing low-emissions and emissions-neutral technologies and boost innovation in crucial technology areas including hydrogen, batteries, and carbon capture utilisation and storage.
It has been estimated that 40% of the needed reductions rely on technologies not yet commercially deployed on a mass scale, which points to huge manufacturing opportunities over the coming decades.
It is increasingly widely accepted that the status quo cannot be allowed to continue. It is the view of DNV GL that there is scant room for half-way measures, notably the option of using natural gas as a bridging fuel.
DNV GL says: “Although purported to be a low-cost solution for decarbonising heat in buildings, and also in manufacturing, as it enables re-use of existing infrastructure, we currently do not foresee gas being a more viable long-term solution compared to boosting renewable electricity.”
Biomethane is currently in vogue as a carbon-neutral fuel, and many cities around the globe require that a significant share of their buses run on such fuels.
But DNV GL says production costs of biomethane are two to three times higher than those of natural gas and envisages only modest uptake.
Gas aside, when it comes to fuelling power generation for domestic and industrial consumption and in transportation, the emphasis will be squarely on photo-voltaics (PV) and wind.
According to DNV GL, electrification will more than double through to 2050, which will in turn lead to an increase in overall energy system efficiency.
Some end-use efficiency gains will be modest, like switching from gas to electric cooking.
Other electrification-linked improvements will be dramatic, such as switching to heat pumps for heating, or installing electric powertrains in road vehicles.
DNV GL forecasts that by 2050 almost all new cars will be EVs.
Another huge win is that heat losses in current predominantly fossil-fuelled electricity generation will be reduced.
Although renewables convert only a small fraction of solar or wind energy hitting the panels and the turbines to electricity, they are assumed to be 100% efficient as they do not consume any other energy carrier.
DNV GL says this means a huge leap in power generation efficiency from the average of 40% for fossil-fuel-fired power stations. As highlighted below, electricity generated more than doubles, while losses reduce in absolute terms.
Efficiency of energy systems is key.
“Efficiency is in effect our greatest resource. It should be the top priority for authorities and other stakeholders in the industry,” says DNV GL.
However, there are some rather large spanners out there, tools that politicians and other vested interests appear only too ready to use.
Let’s take policy unpredictability for starters. Indeed fragility is perhaps the watchword and the emergent risk model sketched by DNV GL fits the UK perfectly.
Peter Raftery, global head of technical and commercial asset management at of Blackrock, spoke at DNV GL’s 2020 transition report launch, expressing his concern regarding the impacts of risks that are poorly understood, but are expected to grow greatly.
“Emergent risk is a very key one and we are strong believers in low-cost but reliable prices for renewables generation,” said Raftery.
“A lot of the tendering mechanisms going on, particularly in Europe, we think are excellent ways to achieve cost reduction, but also to deliver stability.
“The second key risk is the same as its always been, which is regulatory and government stability. Big investors have great difficulty with changes, and particularly retrospective changes, in policy and so that is very high up on our radar.”
Although clean-energy technologies are becoming less dependent on government support, it is clear that decarbonisation projects face continued transition risks related to policy-making and implementation.
Only New Zealand, Sweden, France, the UK overall and, in its own right, Scotland have climate laws for net-zero emissions by mid-century. However, as the headlines regularly attest, UK progress is clearly threatened by the current government.
The next big threat is those in industry who don’t want change and are prepared to lobby governments to at least slow inevitable transition. Big Oil is a classic example.
“Incumbent industries are pressurising national policy makers to throttle back change, avoid the retirement of uneconomic assets, and prevent new entrants,” says DNV GL.
Forbes reports that the world’s five largest publicly owned oil and gas companies spend about $200m annually on lobbying to control, delay, or block climate-motivated policies, especially in the US.
Vested interests are linked to huge investments of the past and fossil fuel investors are not going to take kindly to imposed changes.
They also possess an advantage. They own assets such as pipelines that are necessary to enable a faster, lower cost energy transition than would be otherwise possible.
The energy transition depends on adequate infrastructure, such as using existing grids to move renewable electricity beyond local use, and on using gas-pipeline infrastructure to transport hydrogen.
Also, inertia is amplified by vested interests, both industrial and unionised labour, that prefer the status quo.
Policy and economics on the ground reflect the scale and legacy of technological systems, for example, early write-offs are undesirable for long-life assets.
We should not forget that today’s backbone infrastructure was designed for a different era and to some extent this is still going on, like thermal power stations for example.
“Rigidity in natural gas nomination processes and lack of co-optimisation of power and gas grids contribute to inflexibility within current market designs and undermine the benefits of load-following generation,” says DNV GL.
“New market designs with volatile pricing are needed to manage volatility in supply, to integrate flexible resources, to obtain a higher share of variable renewables in electricity mixes, and to encourage sector coupling.”
Carbon capture, usage and storage also poses threats and opportunities. As many in the North Sea oil and gas industry know, the UK’s CCS/CCUS lead has been squandered, mostly because of government.
And yet, alongside wind, solar, hydrogen, energy efficiency and other low carbon/carbon reducing options, CCUS is now being touted as critical to achieving Paris Agreement targets.
In its carbon sequestration report published on September 24 the IEA claims: “CCUS is the only group of technologies that contributes both to reducing emissions in key sectors directly and to removing carbon dioxide from the atmosphere to balance the emissions that are the hardest to prevent – a crucial part of reaching the net-zero emissions goals that a growing number of governments and companies have set for themselves.
IEA executive director Fatif Birol said at the report’s launch: “Carbon capture is critical for ensuring our transitions to clean energy are secure and sustainable.
“Action from governments will be essential for establishing a sustainable and viable market for CCUS.
“But industry must also embrace the opportunity. No sector will be unaffected by clean energy transitions – and for some, including heavy industry, the value of CCUS is inescapable.”
But to achieve deep emissions reductions in heavy industry, innovation in current process technology is required and the IEA says CCUS and hydrogen are two critical technology families for achieving deep emissions reductions.
However, their applications in heavy industries like steel and cement are not yet commercially available.
Though the agency lists 30 CCUS projects scattered around the globe, progress has so far been slow and costly. Contrast this with battery technologies.
Between 2005 and 2018, patenting activity in batteries and other electricity storage technologies grew at an average annual rate of 14% worldwide, four times faster than the average of all technology fields, according to a new joint study just published by the IEA with the European Patent Office.
The joint study shows that Japan and Korea have established a strong lead in battery technology globally and that technical progress and mass production in an increasingly mature industry have led to a significant drop in battery prices in recent years.
Prices have plummeted nearly 90% since 2010 in the case of lithium-ion batteries for electric vehicles and by around two-thirds over the same period for stationary applications, including electricity grid management.
And yet the EPO/IEA warn that developing better and cheaper electricity storage is a major challenge for the future.
For the world to achieve climate and sustainable energy goals, close to 10,000 gigawatt-hours of batteries and other forms of energy storage will be required worldwide by 2040 – 50 times the size of the current market.
Birol added: “IEA projections make it clear that energy storage will need to grow exponentially in the coming decades to enable the world to meet international climate and sustainable energy goals. Accelerated innovation will be essential for achieving that growth.”
All in all its going to be a long haul.
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