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The biggest challenges to decarbonization are still ahead

To achieve a clean and affordable energy supply, we will need the right balance of technology and regulation, writes Chris Midgley, global director of S&P Global Platts Analytics. This is the second article in a series looking at key energy sector trends, ahead of the S&P Global Platts Global Energy Awards.

The Extinction Rebellion protests and the passionate pleas of Greta Thunberg for world leaders in politics and industry to take action on what they describe as the unprecedented global climate emergency have brought a greater sense of urgency to the energy transition.

There can be no doubt that the cycle of significant climate events is increasing and that emissions of CO2 or greenhouse gases (GHGs) are rising at alarming rates. However, in a world where over 1 billion people still lack access to simple electricity and many more still live in poverty, the dual challenge of providing affordable clean energy and tackling the impacts of climate change remains complex.

Addressing the challenge of climate change will require us to find a balance between regulation and government policy, technology, and consumer behaviour. Government policy can come with unintended consequences and tends to use taxpayers’ money inefficiently.

The German Renewable Energy Policy or Energiewende, for example, has successfully grown renewable energy in the country from less than 4% in 1990 to 40% today, but has also meant high electricity bills. However, CO2 emissions in Germany have been impacted by marginal dispatchable electricity coming from carbon-intensive lignite (low quality coal).

So has the Energiewende been a failure? Far from it. Without Germany effectively subsidizing the renewables industry, it would have not created the scale of demand that has seen technology and manufacturing processes bring down the cost of renewables to below the cost of thermal (oil, gas or coal) power generation.

Technology often needs a helping hand to gain momentum before it can compete with traditional fossil fuels. But policies cost money. We may have movements like Extinction Rebellion pushing for change, but we have equally passionate ones protesting about the cost of change, such as the gilets jaunes in France, or the protests in Iran, Ecuador and Chile over reductions in fuels subsidies and increases in transport costs.

Regrettably, consumers are strongly motivated by their personal welfare, which is determined by their disposable income or relative wealth. Lower energy costs over the last five years have resulted in an increase in energy consumption as the world economy has created wealth and jobs, leading to what I have previously described as consumer hedonism. Taking away this privilege is hard, and with lower energy prices, technology will find it harder to compete with traditional fossil fuels and/or get the financing required.

Regulation and responsibility

However, there is a new pressure emerging that I call “moral regulation” or self-regulation. Corporations are coming under increasing pressure from shareholders to meet environmental, social and governance (ESG) standards, and are being punished for not addressing the impact of their businesses on society.

We have started to see this among International Oil Companies (IOCs) as their strategies, and more importantly capital, have moved away from high-intensity carbon fuels towards less carbon intensive gas and renewables, some even shifting towards becoming electricity suppliers.

At the same time, National Oil Companies (NOCs) are recognizing the risk of reliance on fossil fuels and potentially having stranded assets, and as such are looking to diversify their economies. Saudi Arabia’s strategy to float part of Saudi Aramco in an IPO in order to raise funds to invest in its Vision 2030 is a case in point.

Technology and regulation need to work together effectively to help provide momentum in the right direction but without distorting market forces. Today, subsidizing electric vehicles effectively benefits the wealthy who can afford them. Subsidizing the scrappage of old polluting vehicles instead would enable the less wealthy to be able to afford cleaner, more efficient, vehicles, which can have a bigger impact on emissions than increasing the number of EVs on the road.

S&P Global Platts Analytics Chris Midgley

A counter-argument could be, do EVs need subsidies to help give them the momentum to compete and bring down costs? Road transportation makes up 20% of global carbon emissions, so clearly it needs to be addressed, but electrifying transportation simply moves emissions up the supply chain to power generation, which today produces 40% of GHG emissions. The current trend towards the electrification of everything may not be the optimal solution.

Harnessing technology

Technology will need to provide a range of solutions to tackle the energy transition across the supply chain. Renewables will play a significant role both in liquid fuels and electrons.

The biofuels sector must avoid competing with land for food and adversely impacting ecosystems, by shifting its focus to transforming plant waste to biofuels, or converting used vegetable oils or tallow from animal fat, through bio-refining. This process can provide liquid fuels such as naphtha (“bio to plastics”), gasoil and, possibly most opportune, jet fuel, in order to decarbonize aviation which contributes over 1 gigaton of CO2 per year.

Go deeper: Learn more about S&P Global Platts Analytics Scenario Planning Service

New renewable electricity has leapfrogged new conventional thermal power in terms of levelized cost of generation but needs to solve the problem of intermittency. In the short term, wind and solar challenge the economics of new combined cycle gas turbine (CCGT) plants and have pushed countries like China and Russia to focus on coal for base-load generation.

Compared with CCGT, traditional coal plants have less turndown, meaning they have to run at higher base-load when ample renewable energy is available. Clean coal power plant with carbon capture and storage (CCS) or use (CCU) can be efficient and have net zero emissions but the right incentives are needed to encourage investment in the technology.

Solving the problem of storing intermittent electricity generation continues to be a significant challenge. Diversifying away from battery storage (and electric vehicles) could be resolved by moving towards a hydrogen economy. When burned, hydrogen emits water, but it requires a lot of energy to produce.

Using renewable net-zero carbon energy to produce hydrogen at scale and in a distributed fashion can provide an affordable solution to first partially decarbonize natural gas, by blending in hydrogen. Hydrogen could then also be used in the road transport sector, in particular as a solution for heavy commercial road transport, in fuel cell vehicles, for which cost and infrastructure are the only current constraints.

Rethinking consumption

Using less energy is something we can and should all be doing today – adjusting our thermostats, buying fewer disposable goods and using more mass transport. Over time we need to recycle, reuse and, most importantly, reduce what we use.

Industry is looking at similar opportunities, such as reusing carbon dioxide in CO2 to petrochemicals. Or reducing the need for energy intensive commodities such as steel and aluminum (even paper), where plastics can be used to lightweight durable products, or, if used responsibly, with the right policies and processes around recycling and reuse, in consumable product supply chains.

Global energy mix scenarios

We will continue to need fossil fuels in our energy mix for decades to come and as such, we need to ensure that the fossil fuels we do consume are of the lowest possible carbon intensity and impact on our planet. With the advent of big data and the Internet of Things (IOT) we can use things like blockchain technology to be able to track and monitor the impact of the carbon we consume. This would enable us to create carbon attributes for the fossil fuels we produce, process and consume.

Today, gasoline and diesel have sulfur and other environmental specifications, and we should also have a specification for the energy (or carbon) used to produce gasoline, incentivizing use of the gasoline with the lowest energy intensity and making inefficient production uneconomic.

Likewise, the energy used to produce and transport natural resources such as gas and oil – and to liquefy LNG – can be measured. Again, by assigning a cost to the energy used we can create transparent tradable markets to incentivize use of only the least energy intensive hydrocarbons.

There are many uncertainties around the future of traditional fossil fuels but there are also many opportunities to make our supply chains more efficient and less energy intensive, to enable the world to achieve its objective of minimizing global warming to less than 2 degrees Celsius.

However, technology alone will not achieve this outcome. We will need well-thought through policies, socially responsible companies and investors, and consumer acceptance to changing behaviours and the cost increase of sustaining our planet for generations to come.

 

More articles in this series:

US utilities race to slash emissions as ESG reporting takes off

Asia’s crude oil buyers pivot towards US crude

 

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