As world leaders prepare to gather at the COP26 climate summit in Glasgow on 31 October – 12 November 2021, disruptions to global energy markets that have led to price surges and power shortages in parts of the world have focused attention on the delicate balance policymakers must strike between decarbonisation and energy security as they work to set the global economy on a path to net zero emissions.
Beyond COP26, we expect the focus will quickly shift to how global policymakers plan to deliver on targets to reach net zero emissions. Although many of the world’s largest economies have now announced ambitious net zero targets – with the latest major commitments coming from Russia, Saudi Arabia, and the United Arab Emirates – businesses and investors will want to see detailed roadmaps on how they intend to achieve these long term climate goals. We expect a key pillar of these plans will be how to manage the energy transition within their respective economies.
Broadly, the energy transition refers to the shift away from the production and use of fossil fuels such as oil, natural gas and coal to less polluting and renewable energy sources such as solar and wind, as well as expansion of supporting infrastructure such as electrical grids, batteries and other technologies for energy storage.
Underlying this shift is the urgent need to reduce greenhouse gas emissions released when fossil fuels are burned, to limit global warming.
Worldwide, energy transition spending reached a record USD501 billion in 2020 despite the pandemic, according to BloombergNEF data.
Increase in Global Spending on the Energy Transition
We expect this to accelerate further, and we see new opportunities emerging in clean energy, green technologies and enabling infrastructure such as electric vehicles, wind generation and hydrogen fuels for years to come.
However, recent disruptions to global energy markets that have resulted in surging energy prices in Europe and widespread power shortages in China serve as a powerful reminder that this transition is complex and must be carefully managed by global policymakers.
Even as the world moves towards net zero emissions, “ensuring adequate supplies of both fossil fuels and low emissions fuels is essential to maintain energy security and reduce price volatility during energy transitions”, the International Energy Agency (IEA) said in its latest World Energy Outlook report.
Our view is that the disruptions will not derail the energy transition. Indeed, the pain inflicted by the current energy crisis may spur policy changes that encourage an even more rapid transition to clean energy over the next decade.
Notwithstanding emergency measures taken to ease energy shortages in China and Europe, we expect to see a progressive shift away from new investment in fossil fuels, and a significant increase in investment in renewable energy sources.
In China, President Xi Jinping recently pledged to accelerate the development of wind and solar power in a mid-October 2021 speech, adding that construction had begun on a 100 million kilowatt wind and solar power project. Separately, China’s National Development and Reform Commission said that it would liberalise the current electricity pricing framework, allowing power producers to pass on higher costs to industrial and commercial users. Though this would likely increase production – and thus emissions – in the short term, the pass-through of higher costs to end users is likely to moderate longer term energy consumption.
We expect the rapid decline in the cost of renewable energy over the past decade to drive increasingly widespread adoption of clean technologies. Among newly commissioned projects, the cost of utility-scale solar photovoltaic electricity generation fell by 85% to USD0.057 per kilowatt hour (kWh) in 2020 from USD0.381/kWh in 2010, based on the global weighted average levelised cost of energy used to compare different methods of electricity generation, according to a recent report by the International Renewable Energy Agency (IRENA). Over the same period, the cost of electricity from onshore wind projects fell by 56% to USD 0.039/kWh from USD0.089/kWh.
Global Additions of Renewable Generation Capacity
Source: International Renewable Energy Agency (IRENA).
A record 260 gigawatts (GW) of renewable generation capacity was added globally in 2020, despite the shock from the pandemic.
Solar and wind are already the cheapest source of new bulk electricity generation in countries representing over two-thirds of the world population, three-quarters of global GDP and 90% of electricity demand, according to an analysis by BloombergNEF.
This year, renewables are expected to account for 70% of the USD530 billion spent on all new generation capacity in 2021, according to IEA projections.
Overall, the energy transition over the coming decade is likely to be highly non-linear, as increasingly robust climate policies intersect with technological advancements and falling costs to propel low-carbon alternatives to the forefront across a wide range of economic activity, triggering a cascade of tipping points in industry adoption and rapid shifts in consumer behaviour.
The transition to renewable and low-carbon energy sources lies at the heart of global efforts to set the global economy on a path to net zero emissions by mid-century for two key reasons:
Decarbonising the power sector will likely involve a mix of policy initiatives introduced progressively over the coming decade, including phasing out coal production, ending fossil fuel subsidies, and the further expansion of carbon pricing schemes globally.
Across multiple sectors of the economy, businesses are increasingly positioning themselves for this energy transition.
At the forefront of the transition, many utilities and other energy firms are pivoting towards renewables or increasing their renewable energy portfolios.
In property, some companies are increasingly competing to burnish their green credentials by developing buildings with lower carbon footprints and greater energy efficiency.
In other sectors such as technology, businesses are paying more attention to heightened regulatory risk, as well as opportunities to develop and support the energy transition, including developing software and automation systems to reduce wastage and improve energy efficiency in buildings or manufacturing facilities.
We expect investments in clean technologies to drive improvements that expand commercial deployment opportunities across multiple sectors of the economy, attracting more investment that leads to further technological advancements –creating a virtuous circle that accelerates the energy transition over the coming years.
Today, spending on wind and solar energy deployment produces four times more electricity than the same amount of spending on such technologies a decade ago, due to rapid improvements and cost reductions, according to the latest IEA assessment.
To speed up the energy transition and decarbonisation of the global economy, we believe that policymakers will also progressively impose higher costs on carbon emissions over the coming decade.
Currently, there are over 60 carbon pricing initiatives worldwide, covering an estimated 21.5% of global greenhouse gas emissions, according to World Bank data.
Embedding the cost of carbon pollution into business and investment decisions will provide a much-needed boost to global efforts to align economic activity worldwide with climate goals.
Today, global carbon emissions from fossil fuel use and industry remain a long way from net zero, despite last year’s decline due to the Covid-19 pandemic. Indeed, with the reopening of the global economy, emissions have rebounded. Energy-related carbon emissions from the G20 group of the world’s largest rich and emerging economies are expected to rise 4% this year, after declining 6% in 2020 due to the pandemic, according to the G20’s latest Climate Transparency Report published on 14 October 2021.
“Rebounding emissions across the G20, the group responsible for 75% of global greenhouse gas emissions, shows that deep and fast cuts in emissions are now urgently needed to achieve net zero announcements,” said Gahee Han, one of the report’s lead authors.
Almost half of this year’s surge in G20 emissions is being driven by the power sector. In 2021, emissions from the power sector are projected to rebound by 5% due to increased demand, after falling 5% in 2020. The power sector accounts for the biggest share (38%) of G20 energy-related CO2 emissions, with fossil fuels such as coal, natural gas and oil used for 60% of electricity needs, according to the report.
Our longstanding view is that global efforts to pursue sustainable, climate-resilient development paths and mitigate the threat of climate change will drive profound structural changes to the global economy for years to come, creating both significant disruption and new opportunities for businesses.
We continue to advocate a prudent strategy of adding diversified exposure to a wide range of potential beneficiaries of the global transition to a carbon neutral economy, given the all-encompassing nature of decarbonisation efforts worldwide, and the fast-evolving and uneven rollout of supporting policies and regulations across the world.
Global Energy Supply Investment (by sector)
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