5 Jan 2022

The Time is Ripe for the Energy Transition and for the Economy, Too

ENERGIA

Humans are incredibly adept at learning new skills and adapting to different situations as circumstances change. However, we are also prone to adhering to deeply held beliefs long after the evidence has suggested we should have changed our world view.

It’s possible to suggest – alright, I am suggesting – that the skyrocketing fossil fuel prices and negotiations in Glasgow for COP26 last year have exposed these two sides of our collective nature. On the one hand, our complacency around the volatility of fossil fuel prices and our continued dependance on these fuels to power our economies is an indictment of how myopic investment horizons and other failings around how to best assess the risks of volatile fossil fuel prices with respect to investment decisions has perpetuated policy settings and investments that are sub-optimal from an economic and environmental perspective. All this, despite having ample evidence that there is an increasing disconnect between investments needed in renewables and energy efficiency needed to avoid dangerous climate change.

On the other hand, COP26, despite having fallen short of providing a clear pathway to achieving the Paris Agreement goals, showcased not just innovative technology solutions, business models, areas of research, and development that hold promise in the future, but also our ability to learn from what has worked and what has not in our efforts to develop commercial solutions to help us avoid dangerous climate change. We have learnt important lessons in terms of technology innovation, commercialization, and policy needs to drive down costs, and there were a plethora of stakeholders advocating for policies based on this knowledge and kickstarting initiatives to achieve them. It’s clear that if we are going to avoid the overwhelming human and economic cost of climate change, we need to harness our adaptability and ability to learn from the past in order to keep the Paris Agreement goals in play. In short, we need to shake off the presumption that fossil fuels are the cheapest option and look at the evidence that shows the energy transition is a net benefit for all of us.

The “Investing in the energy transition: A solution to the economy’s vulnerability to volatile fossil fuel prices IRENAs World Energy Transitions Outlook” (WETO) (IRENA, 2021a) outlines a pathway for the world to achieve the Paris Agreement goals and halt the pace of climate change by transforming the global energy landscape. The analysis presents options to limit global temperature rise to 1.5°C by bringing energy sector CO2 emissions to net zero by 2050.

The detailed analysis shows that over 90% of the solutions shaping a successful outcome in 2050 involve renewable energy through direct supply, electrification, energy efficiency, green hydrogen, and bioenergy combined with carbon capture and storage (BECCS). The technological avenues leading to a decarbonised energy system have crystalised, dominated by solutions that can be deployed rapidly and at scale. Technologies, markets, and business models are continuously evolving, but there is no need to wait for new solutions.

 

Figure 1: Carbon emissions abatements under the 1.5°C Scenario (%)

Source: IRENA, 2021a

 

The idea of ‘cheap’ fossil fuels has always relied on a willful dismissal of the economic costs that stem from the health and environmental damages (both local and global via climate change) caused by the combustion of fossil fuels, but with the recent skyrocketing of natural gas and coal prices, they are not cheap by any measure today. Since January, the prices of thermal coal and natural gas have skyrocketed in Europe and around the world. In Europe, the cost of fossil gas increased by a factor of 6.5 from EUR 18 at the beginning of the year to EUR 117/MWh on the 5th of October, before dropping back to € 96/MWh at the beginning of December. At the same time, in Europe, the cost of CO2 emissions allowances in the European Emissions Trading ETS) scheme have also increased, from EUR 33.7/t CO2 to EUR 76.8/t CO2 at the beginning of December. For natural gas, the purchaser’s price for sectors covered by the ETS has risen from EUR 25/MWh at the beginning of the year to EUR 132/MWh at the beginning of December.

Even before this year’s fossil fuel price shocks, the energy transition made economic sense, falling renewable power generation costs have made decarbonizing the electricity grid a competitive option, also opening up the direct electrification of end-uses as a viable decarbonization strategy. The costs for reducing emissions vary by technology and sector, with hard-to-abate sectors like aviation and certain industrial processes that are still estimated to be costly. However, even prior to this year’s price spike, the overall incremental costs of achieving the 1.5°C Scenario were estimated to be exceeded by the benefits, with every USD 1 spent on the energy transition yielding benefits of between USD 2 and USD 5.5 from the reduced externalities for human health and the environment. In cumulative terms, the additional USD 30 trillion cost implied by the 1.5°C scenario by 2050 will result in a payback of between USD 61 and USD 164 trillion.

If higher, expected long-term fossil fuel prices become the new normal, then the upfront costs of the energy transition will be even lower and the ratio of benefits-to-costs higher.

However, the policy and regulatory frameworks necessary to drive the incremental investments needed for the energy transition are not fully finalised yet or, if they are, they are not sending sufficiently strong investment signals. Current government strategies already envisage significant investments in energy amounting to USD 98 trillion by 2050. Nonetheless, to achieve the 1.5°C scenario not only will USD 24 trillion of that need to be redirected from fossil fuels to renewables, but an additional USD 33 trillion ought to be invested in renewables, end-use technologies, and associated infrastructure (Figure 2).

Figure 2: Total average yearly investment by source and type of financing: 2019, PES and 1.5°C Scenario (2021-2030 and 2031-2050)

 

It’s crucial that measures to eliminate market distortions that favour fossil fuels and incentives for energy transition solutions are implemented as soon as possible to create a level playing field to facilitate the necessary changes in funding flows required to achieve the 1.5°C scenario. Getting the price signals right is vitally important: as such, phasing out fossil fuel subsidies and changing fiscal systems to reflect the negative environmental, health, and social costs of the fossil fuel-based energy system need to be prioritised. However, such interventions should be accompanied by a careful assessment of the social and equity dimensions of the transition: mitigating policies ought to be put in place to ensure low-income populations’ conditions are  not worsened but rather improved.

Collectively, we have been slow to realise that we are not a prisoner to periodic fossil price spikes, because we thought there were no viable alternatives. Belatedly, we have learned something vitally important: there is a pathway to break our dependency from fossil fuels and it is one that will collectively make us all better off economically and environmentally. The lessons learned from the stunning success in driving down the costs of solar PV, offshore wind, and Li-ion batteries – to name but a few examples –provide a template for how the energy transition can be achieved economically.

We cannot afford to ignore this knowledge: our collective tardiness in combatting climate change has left us exposed not only to the negative economic consequences of yet another fossil fuel price shock, but also with little time to achieve a transformation that will avoid dangerous climate change.

We have a plan and we know the benefits it will bring. It’s time to act decisively to accelerate the energy transition.

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