Head of Analysis
There are moments in life when you know that you are watching history unfold. The coronavirus crisis is one of those moments for all of us: we will be telling our children and grandchildren about these days for the rest of our lives.
We don’t yet know what the history books will say. Did humankind rally together and defeat a common threat? Did we show strength, resolve and community-mindedness that ultimately overcame differences in opinion and tribalism? Did we do what was necessary for the common good, even if it wasn’t the easiest course of action for each of us as individuals?
And did business and government leaders respond quickly and effectively enough when the threat became clear? We won’t know until the definitive accounts are written about the Covid-19 pandemic and how nations, companies and individuals responded.
When it comes to energy transition and climate, we know that historians will one day judge us against these same questions.
That day is still some way off. The challenge we have now is to maintain and even accelerate the energy transition momentum built up over the last few years. Let’s not forget: as 2020 dawned, there was an unprecedented level of consensus among scientists, civil society, the financial community, corporations and local and national governments that moving toward a low-carbon economy was the right course of action. This wide consensus – though by no means universal –has not suddenly evaporated due to the emergence of a global threat of a different kind.
If we want historians to look back kindly on us, we need to stay focused on the decarbonization challenges ahead. The 2020s may have started with a nasty shock, but they have only just started – and there is much work to do and much that can be achieved before the decade is out.
Clean power and electric vehicles
The first and most obvious steps are to accelerate the decarbonization of power and road transport. There is a view that these sectors are ‘done’ – that the full decarbonization of power and cars is now achievable, and therefore inevitable. It’s an attractive idea. We can now convince forecasting models (and our imaginations) to carve out a trajectory to high penetrations of EVs and clean power by mid-century. This is a big step forward from just a few years ago.
Of course, the truth is more complicated. Wind and solar are still only 8% of the world’s power generation, and our 2019 New Energy Outlook, based on a least-cost transition, only took us to 50% globally by 2050. (Though some countries get to 80% and beyond.) We still don’t know what sort of market design will deliver a low-cost, renewables-led power system – not to mention the technologies needed to bridge the last 20-odd percent. We need to figure out how to overcome local opposition to onshore renewables and power grid build-outs. We’re still experimenting on how to operate a power system with little physical inertia. We haven’t yet got all the solutions on EV charging – and EV sales still need regulatory support.
These areas represent real opportunities for post-Covid economic stimulus. If the measure of a good stimulus program is that it puts people to work quickly on productive, value-generating projects, then one could do much worse than accelerating the construction of clean power projects (including distributed energy) and electric vehicle charging infrastructure. Both are areas with a developed supply chain, established know-how and developers ready to pounce, often with sites already identified.
This could be complemented by incentivizing the trade-in of old, polluting vehicles for clean new ones – thus super-charging demand for high-value, innovative products, and tapping into the renewed desire for better air quality that Covid-19 has awakened. As people return to work from isolation, some may initially choose personal vehicles over public transport, to avoid exposure to others. A green stimulus program would make it easier for those with the means to buy new vehicles, to choose electric.
Widening our scope
Clean power and EVs will not be enough though. We also need to step up thinking about the rest of the GHG-emitting economy: industry, buildings, agriculture and the rest of transportation (often collectively termed the ‘hard-to-abate’ sectors).
A rapidly growing list of countries and regions is now committed to achieving net zero by mid-century. This brings the hard-to-abate sectors into scope and thus broadens the challenge – but it also narrows the solution space. Back when policy makers were talking about 80% emission reductions, CEOs (and whole sectors of economies) could fool themselves into thinking, “I’ll have a slice of that last 20%”. But if the ambition is zero, that option no longer exists – so the menu of choices gets a little shorter.
None of this has been lost on business leaders. The RE100 group of companies committing to 100% renewable energy is now 230-strong. More than 1,000 companies support the recommendations of the Task Force on Climate-Related Financial Disclosures, and 350 have approved science-based targets to reduce their own emissions in line with Paris.
Such commitments are starting to come from the ‘hard-to-abate’ sectors, too. Shipping giant Maersk plans to be carbon-neutral by 2050, with commercially viable carbon-neutral vessels by the end of this decade. Thyssenkrupp, the industrial giant and leading steel supplier, has made the same commitment, as has ArcelorMittal for its European steel production business. These companies see decarbonization as an opportunity for value creation, not an act of self-sacrifice.
All of this is why we at BNEF are expanding our research scope, to reflect the broadening of the energy transition itself, and to address the expanding set of questions and opportunities that are presenting themselves. As the chart below shows, our new target scope encompasses the technologies and transitions that could decarbonize all of the major emitting sectors of the economy, and the commodity markets analysis that will continue both to underpin and feed off our work on energy transition.
As for opportunities, it is worth reminding ourselves of some of the main ones, particularly in light of the Covid-19 crisis.
Energy efficiency, ever the unsung hero, will continue to have a huge impact on emission trajectories. There is a good case to think of efficiency as being within the ‘buildings & industry’ transition, since this is where there is a real business opportunity around energy management and retrofits. Indeed, our Sustainable Energy in America Factbook highlights $8 billion in annual spending by U.S. utility companies on energy efficiency measures, driven by state-level policies, and another $2 billion in energy performance contracts signed by federal government agencies. New York state is providing $6.8 billion in funding to improve the energy performance of buildings from 2020 to 2025. In many ways, significant investments in building efficiency are a good litmus test for how serious you are about achieving net zero – if you aren’t doing this, you’re probably not serious (at least in colder climes).
Efficiency will drive emission reductions in other sectors too. Our 2019 Electric Vehicle Outlook projects that just over 30% of the global passenger vehicle fleet will be electrified by 2040, as well as a significant share of commercial vehicles. Those EVs, and shared mobility services, displace 14.5 million barrels per day of oil demand by 2040 – but improving efficiency in the remaining internal combustion engine fleet displaces another 9.9 million barrels per day. Without those ICE efficiency gains, fossil fuel consumption in road transport would be about 20% higher in 2040 than it is today. Unlike in the buildings sector, there won’t be a tremendous opportunity in retrofits and services. Automakers will just make better engines – but only if the right regulations are in place.
The same will hold true in other sectors such as aviation, where there are efficiency opportunities not only through the use of lightweight materials, 3D-printed components and engine and aerodynamic improvements – but also through operational changes. Better optimization in the taxi, take-off and landing phases, as well as route optimization, can make a big difference, as covered in our recent Research Note, Jet Fuel: Turbulence Ahead.
Building efficiency is a major opportunity for post-Covid stimulus. Putting thousands of people to work upgrading residential, commercial and public building stock would not only create jobs in local communities, but would also bake in emission cuts and fuel cost savings for a generation.
More could be done too, to encourage greater remote working, through investments in digital infrastructure. The pandemic has focused minds on the value of digitalization in numerous fields including healthcare, logistics and infrastructure monitoring. Maintaining this momentum on digitalization in the recovery could help reduce transportation emissions, air pollution and strain on transit networks in future.
Efficiency should be the ‘first fuel’ that we look for in any decarbonization challenge – but of course, it can never take any sector to zero on its own. So what is the ‘second fuel’?
You guessed it – electricity.
Electrify everything as much as we can
It’s no secret that electrification holds the keys to decarbonizing more of the economy. For road transport, which we have already touched on, we are not alone in predicting that EVs are a major part of the solution: other forecasting groups are increasingly aligned with this view, at least directionally.
But let’s take a wider view: in our recent report, Sector Coupling in Europe, we found that about half of all energy demand from transport, buildings and industry could be electrified under a plausible set of policies by 2050, in a country like the U.K. or Germany. This included the vast majority of road transport, about half of building heat and about a third of industrial energy demand. That’s just direct electrification (heat pumps, EVs and direct electric heating) – hydrogen produced from electrolysis boosts the total even more, and leads to a doubling of power demand in 2050, versus a scenario with no electrification.
Electrification has one obvious advantage over other decarbonization routes, and one less obvious. The obvious one is that it’s very efficient: DC-DC round-trip battery efficiencies are around 90-95%, and heat pumps have coefficients of performance ranging from 3-3.5 for air-source, and 4.5-5.5 for ground-source (meaning they deliver 3-5 times more heat energy than the power they consume). There is significant potential for heat pumps not only for space and water heating in buildings, but also for industrial applications. Industrial heat pumps can deliver temperatures up to 180 degrees Celsius, high enough to address 45% of industrial heat consumption. And large heat pumps could also become the low-carbon energy source for district heating systems – already a highly efficient way of delivering heat.
A more subtle advantage is that electrification is a bottom-up transition that can happen now, starting today. There are of course challenges: switching to a heat pump requires trained installers, of which there are not enough, and incentives, which only exist in some places. But a building owner can make this choice without having to think about the wider energy system, and about where the kilowatt-hours are going to be generated from – he or she will simply benefit as the grid gets greener. The same goes for an EV buyer today.
How far could electrification go? For our European study, we largely excluded electrification in aviation or shipping – but battery energy densities have increased 2-3 times in the last decade, and innovation will continue. Already there is one airline in Vancouver that has committed to switch to all-electric, completing a maiden electric seaplane flight in December – and electric short-range ferries seem to be almost de rigueur now in the Nordics. So I suspect we will see electrification creep into niches we haven’t yet considered, and increased hybridization could also help reduce emissions in the larger target markets of commercial shipping and aviation.
Hydrogen and fuels from electricity
As hinted above, we won’t be able to electrify everything. For applications requiring very high temperatures or high-density energy carriers, hydrogen or synthetic fuels hold more promise.
In our Hydrogen Economy Outlook, we concluded that by 2050, with carbon prices under $100/tCO2e, hydrogen could compete with the cheapest fossil fuels for the production of steel, cement, ammonia, aluminum and glass, and in oil refining. At $115/tCO2e, hydrogen-fired turbines could generate power competitively with cheap natural gas by 2050, providing a possible solution for that last 20-odd percent of electricity that won’t be met by renewables.
These economics sound attractive, but they will be dependent not only on carbon prices, but also on a huge, policy-driven scale-up of infrastructure for hydrogen production, transportation and use – as well as demand pull for green products produced from hydrogen. Using a stick to beat steel and glass makers into producing green materials is one thing, but to support them we will need to have the construction and automotive industries choose those materials for their products. This means a stronger emphasis on labeling and lifecycle emissions policy for vehicles and buildings, as well as other products. In the emissions-accounting world, industry, buildings and transport are three distinct sectors – but in the real world, they are interlinked supply chains that will need to collaborate in the transition to low carbon.
Hydrogen, whether ‘green’ (made from renewable electrolysis) or ‘blue’ (made from fossil fuels with carbon capture), could also play a role in heating our buildings, either through fuel cells or boilers. In most cases, it won’t be competitive with direct electrification via heat pumps (see efficiency arguments above), but its advantage is that it does not exacerbate electricity network and generation constraints, and moves some much-needed green energy carrying capacity over to existing gas networks.
Renewable hydrogen is also a pathway to other fuels from electricity, such as for shipping or even aviation. Our hydrogen special project found that ammonia made from green hydrogen would be competitive against LNG and very low-sulfur fuel oil in marine transport, at a carbon price of $27-145/tCO2e in 2050. If shipping is to decarbonize, and if Maersk is to be successful in hitting its targets, ammonia from electricity will need to play a role.
As for aviation fuels from electricity, it is very early days yet but there continues to be interest and momentum in the world of synthetic fuels or ‘power-to-X’ – the term given for liquid fuels made from electricity. Most recently, Heide refinery in Germany signed a memorandum of understanding to provide synthetic kerosene to Lufthansa. The refiner will use hydrogen produced from local wind power resources and CO2 from cement production to synthesize kerosene, and aims to supply 5% of Hamburg airport’s demand with the cleaner fuel in five years’ time.
Hydrogen and synthetic fuels are not ‘shovel-ready’ in the same sense as renewable power, energy efficiency and electric vehicles, but they still offer a post-Covid opportunity. If these technologies are to make a meaningful contribution to net-zero targets, then this is the decade in which they must start to scale up.
Circularity, bio-based solutions and capturing carbon
Looking beyond electricity altogether, a broader world of opportunities presents itself. The circular economy is one critical piece of the picture. Take plastics: despite public outcry, endless awareness campaigns and years of effort, only 18% of plastic waste is recycled at end-of-life. A quarter is incinerated (creating carbon emissions) and more than half discarded (ending up in landfills or worse, waterways). This is a well-known problem, and one that governments have sought to address over many years: our Circular Economy Policy Database already tracks almost 1,700 policy measures at all levels of government. Clients can find the database here.
Here again there are opportunities in a post-Covid recovery: governments could invest meaningful sums into expanding recycling capacity (creating significant new employment) and incentivize the build-out of circular supply chains. These measures become all the more important as we emerge from a period in which hygiene concerns have led to even greater use of disposable packaging, and as the export of unsorted waste is becoming much more difficult. The EU’s Circular Economy Action Plan could be accelerated for instance, as could draft legislation in the U.S.
Recycling of composite materials could also be accelerated, as could chemical recycling – the use of chemical processes to produce virgin plastic feedstock from (even mixed, dirty) waste. Chemical recycling is growing fast: we think capacity will triple from 2019 to 2025, but even then it will only account for 3% of plastic municipal solid waste, so there is plenty of room for growth.
Bio-based technologies also need to be brought to scale, both for bioplastics and for fuel. There is considerable debate about how much sustainable biomass can be made available for such uses, given land constraints and the biodiversity crisis, competition for food production and other land uses, and limited supply of residues from waste, forestry and agriculture. For this reason, a net-zero energy system will probably need to reserve bio-feedstocks for hard-to-abate sectors, such as ‘biojet’ for aviation and biomethane for space and water heating. For aviation in particular, there are precious few alternatives: biojet is seen as the main challenger to fossil-based kerosene, but it has languished due to high costs and a lack of policy support. And the use of biogas / biomethane is only at a fraction of its potential. This will need to change if we are serious about net zero.
Capturing carbon from energy and industrial facilities – or even from the air – also deserves a second look. After a false start a decade ago, carbon capture, utilization and storage, or CCUS, is seeing renewed interest thanks to investment from oil & gas companies and favorable policies in the U.S. As of last summer, we counted at least $6.7 billion in CCUS investments from eight leading oil companies including Exxon, Chevron and BP – largely for enhanced oil recovery, and capturing only a vanishingly small proportion of these companies’ emissions for now.
The hope is that CCUS will ultimately solve problems other than how to enhance oil production. In the power sector, it offers another option for that last share of generation that won’t be met by renewables. Our recent analysis indicates that gas-fired generation with CCUS could be broadly competitive with renewables plus batteries in the U.S. (where gas is cheap), given access to the right transport and storage infrastructure. CCUS is also an option for decarbonizing industrial processes such as cement and steel production.
Finally, CCUS is also a means to produce low-carbon fuels. Captured CO2, either from waste gases or from direct air capture, is a necessary input to create synthetic fuels with green hydrogen. Moreover, if hydrogen is to scale up to meet its potential, ‘blue’ hydrogen, produced from fossil fuels with carbon capture, will likely play a role.
Combining bio-based energy sources, carbon capture and the concept of circularity can lead to new pathways with net negative emissions, or circular pathways where waste carbon is recycled to synthesize new fuels in a recurring loop (see examples from Drax and ArcelorMittal). These are early-stage concepts, but this is the decade to be experimenting with new approaches for hard-to-abate sectors of the economy. By 2030 there will need to be much greater clarity on the suite of solutions to arrive at net zero by 2050.
Agriculture, food and land use
This year, BNEF will also start to produce research on the transitions taking place in the agriculture, food and land use sectors, which collectively account for around 23% of global greenhouse gas emissions. This is a large number – similar in scale to the power sector and more than all of transport – but the land sector also happens to be the only one that could provide meaningful negative emissions.
The suite of potential solutions here is broad, but so is the challenge. By 2050, the Earth’s land will need to feed around 10 billion people – about 25% more than today – while reducing its emissions by two-thirds to stay in line with a 2 degree trajectory, according to the WRI. To achieve this, massive productivity gains will need to be realized, through more efficient practices and innovations such as better inputs (seeds, additives, feeds and microbes) and digital technologies. Increasing soil carbon through better land management, reducing food waste and dietary changes, including alternative protein products, will all have to play a role. These transitions have already started, and they will impact the energy transition too: in a net-zero world, the Earth’s finite surface will have to host enough clean energy and food production for us to live off, enough built environment for us to live in, the biodiversity upon which we depend, and enough space for carbon sinks too.
Our greatest decade
The Covid-19 pandemic has exposed some of humankind’s weaker tendencies: our reluctance to prepare for systemic risks, the temptation to ignore challenges until they reach our own doorsteps, and worst of all, a need to find someone else to blame. But it has also provided a once-in-a-generation reminder of our finest qualities: the courage and stoicism of frontline workers, the collective will of citizens to defeat a common threat, and above all the sheer, stubborn optimism that tomorrow will be a better day.
If the 2020s are to be our greatest decade, it is these better qualities that will need to prevail, both in the battle against the new coronavirus, and in the much longer battle against climate change.