Extracted from DNV GL’s report, “Transition Faster Together: Renewables”
The energy industry is evolving dramatically. Prior to the coronavirus pandemic profoundly impacting all counties, all industries, all companies and individuals with immense human and economic suffering, electricity consumption was growing and renewable energy sources, such as wind and solar, were increasing their share of the total energy mix. In the 2019 edition of our Energy Transition Outlook (ETO), we predicted that in 2050, renewables would account for 66% of global electricity production and that total global energy demand will reach a peak in 2033.
COVID-related lockdowns and restrictions on business activity have resulted in significant and rapid drops in electricity demand particularly in commercial consumption; in contrast, residential use increased slightly in areas with more people working from home. As restrictions ease for some countries, electricity consumption is increasing, although not to the same historic levels as we saw pre-coronavirus. Our modelling now shows that the pandemic will reduce energy demand through to 2050 by 8%. This means that the resulting energy demand in 2050 will be at almost exactly the same level as in 2018.
Declining demand in transport and manufacturing is significantly impacting the demand for hydrocarbons. Oil may have already reached a supply plateau, but natural gas will take over from oil as the largest energy source during the 2020s. This drop in the demand for hydrocarbons coupled with the cost effectiveness of renewable energy will hopefully give more traditional investors the push they need to view renewables more favourably. During the coronavirus crisis renewables have demonstrated their reliability. For example, for more than two months in the UK, no coal-powered electricity was generated – the longest period since electricity was first produced in the UK in the 1880s.
With the earlier than anticipated plateauing of oil and the continued decline in use of coal, the preview into the 2020 results of our ETO forecast, which will be released in early September, shows that CO2 emissions have most likely already peaked, as shown above.
This is welcome news from a climate goals perspective. However, the current decrease in carbon pollution is a short-term consequence of our current situation, and the climate crisis will be with us for a very long time, meaning that the transition is still not fast enough. To reach the 1.5ºC ‘safe’ upper limit for a global temperature rise, we would need to repeat the decline in emissions we’ve seen in 2020 so far, every year from now on. Put simply, the impact of the coronavirus crisis on energy demand only buys humanity another year of ‘allowable’ emissions before the 1.5ºC target is reached in 2029.
No silver bullet – 10 measures
We want to change the forecast and reduce a global temperature rise. To do so, we need to transition to a clean energy future faster, much faster. We need extraordinary policies, along with solutions and strategies across the three vital areas of more renewables, future-proofed power grids and more energy efficiency.
Although there is no silver bullet, there are steps that governments, businesses and society can take to close the gap between our most likely forecast of 2.4ºC (as per the 2019 edition of our ETO) down to 1.5ºC.
In the ETO 2019 Power Supply & Use report, we identified a combination of important measures to meet this target, two of which relate specifically to renewable energy sources:
- Grow solar power by more than ten times to 5 TW and wind by 5 times to 3 TW of installed capacity by 2030, which would meet 50% of the global electricity use per year.
- Instigate a 50-fold increase in production of batteries for the 50 million electric vehicles needed per year by 2030, alongside investments in new technology to store excess electricity and solutions that allow our electricity grids to cope with the growing influx of solar and wind power.
- Create new infrastructure for charging electric vehicles on a large scale.
- Invest more than $1.5trn annually for the expansion and reinforcement of power grids by 2030, including ultra-high-voltage transmission networks and extensive demand-response solutions to balance variable wind and solar power.
- Increase global energy efficiency improvements by 3.5% per year within the next decade.
- Use green hydrogen to heat buildings and industry, fuel transport and make use of excess renewable energy in the power grid.
- For the heavy industry sector: increased electrification of manufacturing processes, including electrical heating. Onsite renewable sources combined with storage solutions.
- Heat-pump technologies and improved insulation.
- Massive rail expansion both for city commuting and long-distance passenger and cargo transport
- Rapid and wide deployment of carbon capture, utilization and storage installations.
Drivers and barriers of the transition
|Increasing public awareness of climate change and the need for mitigating action||Changing public regulations creating an unstable investment landscape|
|Sustained reduction in the cost of renewables||Rigid requirements leading to costly supply chains|
|Technological progress||Lack of digital mindset and digital technology skills|
|New markets and business models||Access to adequate infrastructure|
|Energy security||Shifting away from the incumbent oil, gas and coal industries|
Solutions, strategies and policies
More renewables, dynamic power grids and increased energy efficiency are vital to accelerating the energy transition. A faster transition will require high levels of investment in these three areas, including the implementation of new technology and business models, as well as favourable policy and regulation frameworks. We’ve asked industry professionals and DNV GL experts from across the global for their views on what is needed to help accelerate the energy transition at a faster pace than is occurring today. Their insights on renewable energy and related technologies are featured in this report. Power grids and energy use and efficiency are covered in other reports as part of the Transition Faster Together report series.
The last few years has seen a shift in the renewable energy sector. Public awareness of climate change and the need to reduce carbon emissions has grown. Transitioning to renewables is no longer being led purely by renewable energy developers, but by commercial energy customers and consumers who are demanding change. This consensus that renewable energy needs to be front and centre of the environmental agenda is driving the industry forward like never before. It will take a combination of technologies to achieve the energy transition. Wind, solar and energy storage are powerful but need effective power market integration to accelerate the energy transition. The graph below from our 2019 ETO shows the primary energy supply by source to 2050. Our 2020 ETO, to be published in September, will reveal the impact of COVID-19 on this energy mix.
Innovation in renewables is thriving with new business models being developed which accelerate their growth. System operators, utilities and electricity market regulators must provide greater focus on how the increasing volume of renewable energy is to be integrated efficiently while maintaining high levels of grid reliability for consumers. This means more flexibility options, new markets for local ancillary services, V2G and other behind-the-meter services. This kind of transactional energy, based on time of use versus time of generation will need flexible business models and power purchase agreement structures to improve the role that dynamic loads can play in increasing generation from renewables, while maintaining system resilience and reliability.
The rise of the prosumer: To take advantage of innovation we also need consumers to respond to the opportunities. It’s no longer enough to appeal only to the corporate purchaser. By making energy use more tangible, for example by giving consumers the option and encouragement to use their dishwasher or charge their car with renewable power, we can drive widespread change and uptake of new business models that drive the green agenda.
The role of digitalization: Digitalization enables new business models by offering energy demand management solutions for industries, commercial businesses and households, for example, many industry experts see an extended use of blockchain as the enabler of the many transactions that will need to happen between prosumers. For EVs the new business models will stem from the automotive and energy industries coming together. Energy companies are already offering packaged deals for energy supply. Smart charging and V2G will also offer owners, aggregators, energy companies and automotive manufacturers the opportunity to provide grid services.
Spurred on by public demand and government policy, the cost of green energy is falling. This sustained reduction in the cost of renewables is bringing price parity with fossil fuel generation, making it economically and commercially viable for investment.
Many investors are also regarding renewables assets more favourably, as post-COVID price volatility throws fossil-fuel investments into uncertainty. When it comes to tackling the climate emergency, things are heading in the right direction, but this year has seen an unprecedented hurdle, the coronavirus pandemic. As we begin to emerge from the crisis, concerns are being raised about whether long-term economic uncertainty could impact climate initiatives.
The good news is that many governments are working to achieve a sustainable economic recovery, as evidenced in Europe by the €500 billion recovery fund. The recovery fund would offer grants to European Union regions and sectors hit hardest by the coronavirus pandemic, with the money to be spent particularly on investment in the EU’s transition to a more “green” and digital economy and to boost research and innovation. Other regions and countries are also announcing measures aimed at stimulating the economy and have a direct bearing on climate change. For example, South Korea has announced a huge fund to be spent by 2022 to cover the ‘green transformation of living infrastructure’. The plan will create 89,000 jobs and will focus on transitioning state-run facilities, such as childcare centres, medical facilities and public housing to zero emissions.
In the US, large corporations, including Microsoft, Visa and Capital One, have formed a coalition in support of a green recovery and lobbying of congressional leaders from both parties to include climate change in the coronavirus recovery bill has begun.
Despite these positive signals from governments regarding economic support, it would be naïve to assume that the coronavirus pandemic won’t have an impact. Project delays due to supply chain disruption and lender concerns are possibilities. Projects currently under construction could be vulnerable and projects pre-construction may struggle to get financing. Equity investors may have their balance sheets disrupted by the economic uncertainty and may pull out of projects or seek higher returns on their investments. Without incentives for ensuring green initiatives are prioritized, there’s a risk that some countries could turn to fossil fuels to aid their economic recovery.
Subsides have long been an essential element of the renewable energy landscape. The International Energy Agency (IEA) calculated that subsidies to aid the deployment of renewable energy technologies amounted to US$140 billion in 2016. As renewables become increasingly cost competitive, subsidies are becoming less important. In a post-subsidy world, renewable energy developers must seek alternatives for ensuring long-term revenue certainty. For corporate buyers who are conscious about the sustainability of their electricity procurement and are looking for projects which have a secure revenue stream, PPAs are now becoming an attractive option outside North America as well. The global power purchasing market is growing fast, with around 170 corporations worldwide having committed to 100% renewable energy by 2050 at the latest. To make this possible, accurate fact-based, market-led insights are needed to identify the risks and opportunities, enabling corporate buyers to make decisions with confidence.
In the coming years, investors, who initially focus on more stable markets and regulatory regimes that provide relatively guaranteed returns will need to use learnings from those markets in a combination with advocacy for reform to increase investments in emerging markets.
Investment is essential to achieve the many changes needed to drive a faster energy transition: from a steady supply of inexpensive capital for renewables and energy storage projects, to investment in the digitalization of transmission grids and the transformation of distribution networks, to markets and policy changes that enable demand response.
Policy and regulation
Policy is instrumental in deciding how the renewables industry progresses but changing the status quo is not always easy; displacing traditional incumbents takes time and national policy is varied, and not always favourable towards change. Today, it is not the technology risk which holds back cost improvements in the renewables industry. Business risks come from regulators who either do not understand what it takes to scale new industries by securing stable investment frameworks, or who set requirements that are too rigid and therefore restrict competition and economies of scale, leaving the full potential of renewable technologies untapped. The investments needed to drive forward the energy transition are huge and can only be achieved through stable legal frameworks. Today’s regulatory environment is a patchwork of political instability, making it difficult to make infrastructure investments with long-term payback. However, political choices and policies around the world can encourage the correct behavioural changes enabling the most appropriate technology solutions to scale.
We need policies that provide predictable costs which favour investment in renewable energy, by reducing risk and increasing rewards. These policies could include a carbon tax or cap and trade system, which funds subsidies for green energy projects. For example, the Regional Greenhouse Gas Initiative in North America administers a cap and trade system for electric generators, which results in an annual energy bill savings of $129 million, with carbon savings of 438,000 metric tonnes. A scheme planned for the European Union in 2021 will provide a fund to support investments in modernizing the power sector and wider energy systems.
Policy is the main uncertainty as to whether the coronavirus pandemic will speed up or slow down the energy transition. We don’t yet know whether the COVID-19 economic stimulus packages will be spent as intended on green initiatives or on fossil sources in the hope of bringing larger numbers of people back to employment more rapidly.
Policy will also be needed to relax restrictions and support renewable energy projects as they navigate the post-corona landscape. It’s good to see that many countries and governments are taking this into consideration, as highlighted in WindEurope’s COVID-19 information hub; for example, Italian turbine production facilities which faced limitations were amongst the first group allowed to reopen. The Spanish government has lifted some restrictions it had imposed at the end of March including those on manufacturing activity. As a result, Siemens Gamesa, Vestas, Nordex and LM Wind Power have reopened their production facilities in Spain while still applying strict health and safety standards, and the Scottish government has extended the planning permission periods that would normally expire within the next six months
We know we need to change the forecast to prevent a rise in the average global temperature to 2.4°C above pre-industrial levels. To do so, we need to transition to a clean energy future much faster. Although there is no silver bullet, there are steps that governments, businesses and society can take. The renewables industry is at the forefront of driving this change; public appetite for transitioning to a cleaner future has never been stronger and the global coronavirus pandemic has been a collective reality check, reminding us that despite our scientific advances and immense progress as a species, humans are vulnerable and disaster can strike with little warning.
Innovation is thriving and can deliver change at a rapid pace. But we need a combination of measures; technology, business models, policy and investment all working together to move towards a greener tomorrow.
The full report by DNV GL can be accessed by clicking here.