The Energy Transition Part 1: Climate Change and Emissions

As the consequences of climate change become increasingly visible, so too does the debate around how best to tackle the threat. The scientific data points to the need for urgent action, yet a concerted response globally is still lacking, and the road to success remains a rocky one. The UN estimate that between 1998 and 2017, climate-related and geophysical disasters created ca. $3 trillion in direct economic losses and claimed the lives of ca. 1.3 million people.

So what are the key enablers that could allow us to successfully transition to a sustainable path? A sustainable climate requires us to ‘decarbonise’ – reducing our combustion of fossil fuels, increasing our pace of adoption of green technology and successfully commercialising carbon capture and storage.

Over the next two decades, shifting to sustainable energy sources and improving energy efficiency will, undoubtedly, be fundamental in creating a viable model for our future, and in sustaining global biodiversity. However, this ‘energy transition’ will require a monumental shift in the way we currently produce and consume energy.

Current observations: what is the data telling us?

Scientific evidence suggests that the climate is changing faster now than at almost any point in history, due to the increase of CO2 and other Greenhouse gases (GHGs) in the earth’s atmosphere. This can be largely attributed to the burning of fossil fuels used to power our electricity and transport, and heat our buildings or industrial processes, but also relates to how we use our land, for example, tropical deforestation and intensive agricultural practices.

The Paris Agreement on climate change includes two important goals: firstly, to hold average global temperatures to well below 2°C above pre-industrial levels by 2100 and, secondly, to pursue efforts to limit the increase to 1.5°C. This is paramount in order to reduce the forecasted impacts on ecosystems and their biodiversity, human health and well-being, and the functioning of economic activity.

Since the start of Industrialisation, global temperatures have risen by 1°C, leaving little wiggle room to avoid breaching a 1.5°C rise. The trajectory of emissions implies that global average temperatures could rise between 3°C and 5°C by 2100.

The UN-created Intergovernmental Panel on Climate Change (IPCC) was set up to review all scientific studies on climate change. Their reports highlight that a 2°C warming would exacerbate extreme weather conditions – leading to a higher propensity for flooding and water stress – thereby impacting food and ecosystem health. We may also be approaching tipping points of major ecosystems that regulate regional temperatures (such as the polar ice caps, permafrost and tropical rain forests). Sea levels are forecast to rise by between 30cm and 130cm by 2100[1] – a troubling projection given that more than 50% of the world’s population lives within 3km of a body of surface water today, predominantly in urban areas (typically built on water resources, either a river or a river delta/coastline)[2], [3].

We are consuming our Natural Capital at an alarming rate. The predictions of ecosystem transformation and habitat loss are startling too:

To limit this rise in global average temperatures, in line with the Paris Agreement, requires ’net zero’ GHG emissions from 2050. Achieving this will only be possible with material changes in behaviour, coupled with accelerated investments enabling the transition to a low-carbon economy.

Primary energy demand: where are we today?

Primary energy (e.g. coal, oil, gas, wind and solar) is ‘unconverted’ energy in its raw form before any losses in conversion to secondary energy (e.g. electricity). Primary fossil energy sources (e.g. coal, oil and gas) drove71% of global energy consumption 2018[4].

GHG emissions are intrinsically linked to the combustion of ‘fossil fuels’. CO2 is a main bi-product of the combustion process, with coal generating almost twice the emissions intensity of natural gas.

In October 2018, the IPCC formalised the notion of a total carbon budget for the world, to limit warming to +1.5°C. At current emission rates we have an estimated 10 years of emissions left.

Electricity will have a key role to play. It can be cleanly supplied by renewables generation, and is habitually consumed each day. In order to meet the 1.5°C  target, renewables would grow from 17% today to 70-90% of electricity generation, and electricity would supply 40-50% of all our energy demands (20% currently).

Carbon Capture & Storage (CCS) will need to rapidly ramp up to offset hard-to-eliminate emissions, such as in aviation and shipping, and to compensate for any growth in primary energy demand. Yet CCS progress to date has been slower. Currently there are ca. 20 pilot CCS projects under construction, far from what is required to meet its budget.

With the end in mind, we can construct a view of what the ‘energy transition’ could look like. Some elements of the transition are beginning to take shape rapidly and are widely accepted (e.g. renewables and grid investment), whereas others are in early-stage commercial development (e.g. hydrogen and energy storage solutions, CCS).

The illustration below forecasts the stages of the ‘energy transition’ as we see them today. To achieve ‘net zero’ emissions by 2050 and mitigate global warming, the majority of this transition will need to occur over these next two decades. In the absence of large-scale CCS, front-loading GHG mitigation is essential.

Energy consumption and emissions trends

In 1965, fossil fuels dominated the energy spectrum, coal having a leading share at 37%. Gas and nuclear grew share over the next 25 years to 1990, whilst coal lost share. Since then coal has maintained its share, supported by its prevalent use in fast-growing economies such as China and India. Oil has lost share over the long run.

In developed markets, clean air acts and environmental regulation have supported the growing share for gas and renewables over the decades. Yet, renewables still only accounted for a mere 4% of global primary energy supply in 2018 (excluding hydro).

The transition from coal to gas helps the CO2 intensity of energy fall, but we are far from where we need to be by 2050 – far from ‘net zero’, far from renewables representing 70-90% of electricity generation, and far from electricity supplying half of our energy needs.

This illustrates that the development of energy sources has historically followed a slow adoption curve. The exception in the data was the rapid adoption of oil from 1962-72 (rising from a 7% share to 49%), before backtracking during the 1972-82 oil crises. Renewables have been on an 11% growth rate, and accelerated to 16% p.a. from 2008-2019. The inertia of energy usage in the shorter and medium term is reflecting the typically-large capital and infrastructure investments required, along with a relatively stable global cost structure of competing technologies through history. Generating power from coal had been cheap for decades. It only became relatively more expensive as some of the negative external costs were internalised.

Finding and harnessing cheap energy sources has been a key driver of early-phase industrialisation and economic growth. Post-Industrialisation Western economies are now witnessing slower energy demand growth rates while, in the emerging markets, we continue to witness very solid energy growth rates as countries use this template for growth.

Since 1990, Asia Pacific (APAC) has grown from having a 22.3% share of world primary energy consumption to a 43.2% share by 2018. China’s share alone has risen from 8.4% to 23.6% over this same period.

China, the US, Europe, India, CIS and the Middle East are the top five energy consumers worldwide, collectively accounting for ca. 73% of today’s global consumption. Energy consumption growth in 2018-19 has been led by China and India, but also the US (with the abundance of cheap shale gas substituting for coal). Fossil fuels have supplied this growth, and we are yet to reach a point whereby renewables power all of the growth in our energy consumption.

There is a need to save energy. Target 7.3 of the UN Sustainable Development Goals (SDGs) is to double the rate of improvement in energy efficiency by 2030. If energy is conserved with greater efficiency of use, there are fewer other resources required to build generation. Indeed energy-saving investments tend to be financially beneficial across the economy. Requiring less energy will increase the likelihood that thermal power generation assets will drop out of service. However, in emerging markets this is challenging, against a backdrop of robust energy demand growth.

Given the current economic models of many emerging markets, and as their populations grow and assume western-style consumption habits, it is unsurprising to see CO2 emissions still expanding.

However, it’s worth noting that due to the build out of global supply chains, and with China becoming the ‘world’s factory’, the pace of emissions transfer from West to East has grown. As production capacity has been exported to the East, the West has, to some extent, shifted emissions ‘responsibility’ for GHG emissions over past decades. Production, industry and jobs have shifted continents fulfilled by cost, ease and reliability.

Given the disruptions to these supply chains from COVID-19, and ongoing trade disputes, we are yet to see if this model of economic growth has reached an end point. It is no surprise that China is rapidly supporting new renewable energy industries such as solar, wind and batteries; aiming to gain pole position in the future. While Europe’s response in the form of the Green Deal recovery plan is envisaged to be a ‘Man on the Moon’ moment.

So where are we making progress?

The growth of renewables has consistently outpaced analyst expectations, and estimates have been revised upwards year-on-year. Modern renewables (solar and wind) have been installed in all regions since 1990 and, as mentioned, have compounded growth rates of +11%. However, notably, this rate has accelerated since 2008 to a compound annual growth rate (CAGR) of +16%.

The chart below shows the widespread adoption of renewables across geographies, and the growth trajectory over the past decade or so, particularly in Europe and across Asia.

…but there’s more to be done

Today, we stand at a crossroads – climate change poses a risk to our way of life, biodiversity and the ecosystems that we draw resources and services from. Despite the spectacular growth rates of renewables, it seems almost inevitable that we will fail to limit anthropogenic warming to +1.5°C. In doing so, we run the risk of having to react to future crises. The ‘energy transition’ route map involves profound changes. Yet, these modifications are highly interdependent on all stakeholders, ranging from governments to businesses to consumers and our ecosystems. If we fail to prepare, we are, undoubtedly, preparing to fail.





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