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A Bird's-Eye View of the Energy Transition

Updated: Oct 10, 2023

Introduction:


On the 4th of July the average global temperature was recorded at 17.18C - the highest ever recorded temperature measured 2 meters above land and sea surfaces (The Guardian). As the globe keeps getting warmer and warmer, rhetoric of climate denialism is becoming increasingly difficult to back up and discussions surrounding mitigation as well as adaptation policies are - just like the globe - heating up.


Figure 1: Average global temperature. Source: The Guardian

So where are we standing? As pledged in the Paris Agreement 2015, countries worldwide will strive to limit global warming to 1.5C above pre-industrial levels. In 2022, the International Panel for Climate Change (IPCC) presented a simulation of approximately 1202 different climate change scenarios (Hausfather, 2022), which were broadly divided into 8 different “climate categories” (C1-C8) serving to categorise outcomes into 8 different brackets based on their respective resulting temperature increase. Contained within these different climate categories are 7 different “illustrative pathways” (IP) under current policies (Cur-Pol), along with outcomes if 2030 pledges are met but with limited additional enacted climate policies, and 5 different deep mitigation pathways limiting warming to below 2-1.5C.


Figure 2: Climate Pathways. Source: IPCC

Three IPs stands out, which all lead to limiting warming to 1.5C, with no overshoot. These are Shifting development Pathways (SP), Low Demand (LD) and high renewables (Ren). Shifting development pathways are scenarios that deviate from the current policy landscape and go beyond that. It can be unintentional, i.e market forces pushing down prices for renewable energy, or intentional, e.g. combat high emission levels by addressing urban sprawl emerging from access to higher quality education in the cities (Winkler et al.). Low Demand scenarios refers to actively decreasing demand for energy, where emission level reductions are achieved by e.g. decoupling economies from their carbon intensity or altering demand patterns. In high renewables scenarios the current economic system is cleansed from fossil fuel usage almost entirely and replaced by low carbon intense renewable energy sources.


The consequences of failing the climate targets can be severe - in economic terms an up to 18% destruction of the world’s GDP is looming, and potentially already upon us by the year 2050. Winners and losers would emerge from the aftermath, and the pursuit of individuals and industry actors to safeguard profit and welfare would intensify, both prior to and past that point. This is one of many aspects associated with the consequences of climate change, not to mention the many intricate linkages that lie behind the concept of justice in the transitioning to a more sustainable society. For example, the incentive for people to improve living standards could be incompatible with the low demand pathways, and many political aspects may come into play, both on a regional, national and international level. To achieve a transition of prevailing carbon intensive economic systems, many factors have to be taken into account, such as social, economic, and environmental. Measures pertaining to each IP could appear insufficient alone, and synergies between different approaches could prove fruitful. Consequently, it is imperative to carefully craft strategies moving towards a net-zero society.


In this article, which marks the beginning of a series on Renewable Energy, focus will lie on briefly highlighting challenges and opportunities relating to a high renewables scenario, which would enable continued growth following the path of decoupling economies from their carbon intense trajectory.


Demand Shifts & Demographic trends:


The year in which CO2 emission would reach net-zero is illustrated in figure 3. As seen, this would be achieved in 2060 under the high renewables scenario.


Figure 3: CO2 emissions reaching net-zero. Source: IPCC, Illustration: Carbon Brief.

Figure 4 illustrates how the energy mix would evolve under the high renewables scenario. As seen, a serious phase-out of gas, oil and coal has to take place while a big share of the energy supply would come from non-biomass renewables. However, the road to a high renewables scenario and net-zero is not straight forward. Included in the list of obstacles are demographic trends and energy consumption trends, particularly in the developing world.


Figure 4: Necessary evolution of the Energy Mix. Source: IPCC

For example, figure 5 shows that the GDP growth and energy consumption growth have followed the same upward trend from year 2000 to 2014 in the developing world.


Figure 5: Energy consumption & GDP growth per capital. Source: Benoit/Chen derived from World Bank DataBank

Moreover, according figure 6, the trend indicates that this would continue to rise in the next 7 years.


Figure 6: Energy demand projection. Source: Benoit/Chen derived from World Bank DataBank

Figure 7 shows the composition of the energy consumption mix of lower, middle and higher income countries, as well as Switzerland from the year 1965 to 2022. It’s seen that energy consumption is stalling in the developed world, and even decreasing in Switzerland, while it’s steadily increasing across the developing world. Hence, the importance of regulating emissions on a national and transnational basis in these parts of the world would prove pivotal. Not only does it continue on the same upward trajectory in the developing world, but notably, usage of energy sources like oil and coal is becoming more relied upon as these economies grow.


Figure 7: Energy consumption by source. Source: Our World in Data

Figure 8 illustrates the very bad performance of these energy sources when it comes to GHG emissions in electricity generation compared to other renewable energy sources, and this underlines the significance a high renewables scenario would have on combating climate change and reaching the targets set out in the Paris Agreement. Next, an overview of the main channels that brings forth challenges associated with the Energy Transition will be presented.


Figure 8: Greenhouse gas emission per energy source. Source: IPCC

1. Technology & Infrastructure:


Barriers pertaining to infrastructure and technology come in three main channels: Generation, transmission and storage. First, generation of energy based on renewables faces a significantly higher maintenance and installation cost, compared to the fossil based counterpart (Haar, 2023). It is estimated that in the US, a country with a very high carbon footprint, the installation cost for a large-scale solar plant is around USD 2000 per kilowatt. The cost for small scale plants is even higher, around 3700 USD per kilowatt. In contrast, the cost per kilowatt in a new gas-fire plant is around 1000 USD, leaving it the preferred choice for investors and business owners. The challenge is to scale renewables and bring down the costs.


In terms of transmission, there can occur bottlenecks when the renewable energy sources’ grids cannot efficiently be connected to the already existing grids (Haar, 2023). One example is in the US, where the 700.000 miles grid line needs to expand by at least 25%. Renovation of already existing grids is another issue. The leakage of energy in the form of heat increases as grids get older. Efficient use of resources is a crucial strategy for achieving the climate goals set out in the illustrative pathways. To alleviate the pressure on old systems to transport energy through long distances, focus could be put on expanding the possibilities and incentives for households and industry actors to generate their electricity locally.


The intermittency of renewable energy sources poses a major challenge in terms of supply management (Clere, 2023). Consistent supply is an advantage of fossil fuel energy sources, and the infrastructure and grid operating systems which have been built around these traditional energy sources are not adapted to deal with the fluctuating supply patterns associated with renewable energy sources. To deal with this issue, storage solutions would be crucial. In relation to storage, various challenges persist, e.g. increased reliance on mining for minerals used in battery production and technological advancement needed to increase the capacity and efficiency of batteries.


There are also other technological limitations pertaining to renewable energy. For example, certain production practices, such as cement production or steel making, requires high-temperature heat, which is currently challenging to generate just using renewables (Clere, 2023).


2. Financial Barriers:


A crucial element of steering the energy transition is funding. Unfortunately, green energy investments are often limited by their lack of access to funding. This is mostly due to a multitude of market factors. Private actors such as banks looking to lend money to projects and pension funds looking to invest in projects usually forgo green energy projects in favour of fossil fuels because it takes less time to generate profit, hence decreasing the risk (Christophers, 2022). This market inefficiency could be explained by the insufficient internalisation of environmental costs caused by fossil fuel production and consumption, as regulatory frameworks may still favour short term fossil fuel investment.


The immaturity of renewable energy technology and regional grid incompatibility may also keep the initial costs high, hence deterring the stream of investment into renewables and keeping the cost of capital high. Another problem related to the technological immaturity of green energy production is that costs for new technologies have historically always fallen, hence it makes rational sense for investors to wait for costs to fall even further in the future (Taghizadeh-Hesary et al, 2020). This leads to a stalemate, in which investment never actually happens due to this hesitation. The incentive to invest in renewables may be further dampened by large amounts of capital being locked-in in long-term traditional sources of energy projects.


Furthermore, predominantly in emerging economies there is a lack of power purchase agreements, meaning price and quantity purchased can fluctuate greatly over time. Power purchase agreements are contracts between an energy consumer and an energy producer that fix the price for a longer period (Enerdatics, 2023).


3. Analytical Barriers:


The issue of internalising costs of climate change are usually addressed through carbon pricing. There are generally two known ways to price carbon emissions: Cap-and-trade systems, also known as Emission Trading Schemes, as well as carbon taxes. In 2022 according to the IMF, 46 countries are pricing their carbon emissions. Globally, ETSs and carbon taxes cover around 30% of global emissions. To accelerate a transition to a low carbon energy system, the coverage needs to expand, and the current average price of 1 ton CO2 being USD 6 needs to significantly increase. However, one major dilemma is competitiveness concerns, along with other policy relevant questions, such as implementation and actual price levels. One measure to address competitiveness concerns that was put into force at the beginning of October 2023 is the Carbon Border Adjustment Mechanism (CBAM). The mechanism aims to counteract carbon emission leakage resulting from EU companies moving outside EU borders to countries with less stringent climate policies. The first annual report is due in January 2024. Another speculative solution to the competitiveness issue could be an international floor price (ICPF) of carbon, which, however, requires substantial international cooperation. This policy acts to conserve economic growth, conditional upon countries responding with investment in low-carbon energy. The cost of transitioning could also be equitably shared between countries of different income levels through a differentiated price floor, depending on income.


Apart from the lack of coverage of carbon pricing mechanisms, there are also major challenges that come in the shape of analytical barriers. Such barriers arise when mechanisms, such as carbon taxes or trading schemes, become inefficient at distributing costs and benefits of polluting. The main source of this issue stems from heterogeneity and ambiguity of climate impacts (Sovacool, 2011). First, it is a fatal mistake to assume that climate change and all related factors are linear. A simplification of the issue is beneficial when it comes to creating models which then would be used to steer the development towards a net-zero society. However, the non-linearity of the issue contributes to inherent obstacles. One pitfall, for instance, is the grey-area which defines climate tipping points. A climate tipping point is a point at which impacts of a changing climate are irreversible and will lead to serious negative economic impacts, such as the collapse of Greenland’s ice sheets. The ambiguity of this point makes it difficult to establish a valid price for actors to pay if they contribute towards this point. By overestimating when this tipping point would kick in, the price of polluting could be underestimated, hence rendering market regulations, like carbon pricing, inefficient. Not to mention that not all carbon emissions are equal. Some remain in the atmosphere for thousands of years, others can be sequestered rather quickly. Moreover, by creating hydro plants, which generate renewable energy, one may undermine other vital components of a sustainably functioning society. For example, ecosystems and biodiversity may take a hit. In short, global carbon markets and investors operate on the premise that climate change is linear, which is far from the case.


The problem of heterogeneity and ambiguity gives rise to another issue - gaming (Sovacool, 2011). Gaming is a concept used to describe a scenario where certain industry actors take advantage of loopholes in the regulated system to make a profit which should not have been permitted. This would counteract a market regulation, such as a cap-and trade system or carbon tax, to achieve carbon neutral outcomes.


4. Political Barriers:


The green energy transition faces multiple political barriers that make it difficult to reach the end goal of having a completely renewable energy grid. One such challenge is geopolitics, and recent developments illustrate good examples. For instance, since Russia’s invasion of Ukraine most of the world has tried to replace Russian fossil fuels with alternative sources of fossil fuels because sanctions on Russia have caused a spike in the price. This, for example, caused the Biden administration to increase drilling for oil in Alaska and increase natural gas production (Wetzler, 2023). This development could make it more difficult to dial back fossil fuels in the future.


Another geo-political issue is the question of a so-called just transition to clean energy. Developing countries rightly put forward the claim that they never got to use fossil fuels for growth the way western countries did in the 20th century. Developed economies on the other hand claim that it is in the best interest of emerging economies to transition to green energy since they usually suffer the most from the negative consequences of climate change. This causes a stalemate when trying to internationally coordinate the energy transition.


Furthermore, in recent years right wing populism and protectionism have seen a resurgence. This is problematic since green energy technologies rely on complex global value chains in order to be most efficient. Another key issue is the geopolitical tension between the two largest greenhouse gas emitting economies in the world: China and the US. These two combined account for most of the world's greenhouse gas emissions and also have the greatest potential for a transition to clean energy with their natural resources and capital. However, since they are on opposite sides of geopolitical questions such as Taiwan’s status as an independent nation and Russia’s war in Ukraine, they are not likely to cooperate on renewable energy.


Another barrier is the difference in political influence and lobbying power between the more established fossil fuel industry and renewable start ups. According to opensecrets.org the oil and gas industry spends roughly $68 Mio on lobbying in the US government, compared to $27 Mio for renewable energy. This has a big impact on regulation being passed that gives fossil fuel companies an edge by avoiding legislation that would internalise the cost of their pollution. Consequently, subsidies which have a pivotal role for the development of renewable energy technology could be prevented from reaching projects driving the energy transition due to this gap in spending power.


Conclusion:


This article is the first instalment in our series on the energy transition. The purpose of this article is to show the different dimensions of challenges facing the development of green energy projects and to reach the climate goals associated with a high renewables scenario. The coming articles in this series will focus on these different aspects in depth and highlight possible solutions to these challenges. The series will also keep track of recent developments in the field of renewable energy and the goal towards transitioning to a carbon neutral economy.


Writer(s): August Borgstrand & Max Suter


References:


Philippe Benoit. (2019). "Energy and Development in a Changing World: A Framework for the 21st Century." Columbia University Center on Global Energy Policy.

Alex Clere. (2023). "How Can Finance Accelerate the Transition to Renewable Energy?" Fintech Magazine.

Jerry Haar. (2023). "Promise and Pitfalls of the Clean Energy Transition." The Wilson Center.

Farhad Taghizadeh-Hesary et al. (2020). "The Role of Renewable Energy in Sustainable Development." MDPI - Energies Journal.

Multiple Graphs, Intergovernmental Panel on Climate Change (IPCC).

Multiple Graphs, Our World in Data.

Benjamin Sovacool. (2011). "Four Problems with Global Carbon Markets: A Critical Review." Sussex Research Online.








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