Energy transition - a bird’s eye view
Whether to heat our homes, to cook our food or to get from A to B, for most of us it is unimaginable to do this without the use of energy. Depending on where we live, the source of energy varies hugely, but globally over 80% of our energy and 64% of electricity still comes from fossil fuels, such as coal, oil and gas1.
Since the industrial revolution, consumption of energy has steadily increased and our demand for energy will continue to grow. While we observe an increase in the share of renewable energy consumption, we are only just at the beginning of the energy transition.
Driven by ambitious goals
While the Paris Agreement requires to reduce emissions by 45% by 2030 compared to 2010, and to reach net-zero carbon emissions around mid-century, this is easier said than done. To reach this goal, governments have set their National Defined Contributions, and many of them are in the process of defining national policies to get there. Decarbonisation of power will be key and it is encouraging to see an increasing number of countries setting renewable energy2 goals.
For example, proposals from the European Commission in its Fit For 55 plan (as the EU has a target to reduce its emissions even more, by 55% in 2030) seek to produce 40% of the region’s energy from renewable sources by 2030 . Similarly, the Biden administration in the US wants to raise its ambitions to generate 80% of clean electricity by 2030 up from 12% in 20203.
Companies and countries impacted
The risks associated with the transition will of course vary, based on the speed of the transition. We already see, however, that policy tools including carbon pricing, coal phase outs, or renewable energy targets are accelerating and impacting businesses. Similarly a push for electric vehicles and low-carbon buildings will require companies to adapt to make sure they remain relevant. The theory that oil and gas reserves might become stranded assets (lose their value) is now well known, but the risks of the transition go far beyond the oil and gas sector.
Countries as varied as France and China have announced targets to end the sale of fossil-fuel cars and vans by 2035. Although this leaves more than a decade for car manufacturers to adapt, these targets can still be brought forward4. An example of accelerated transition was in the Netherlands where the government came under pressure of the Supreme Court and decided to phase out coal completely by 2029, despite some of the remaining plants in the country having been built in 2015 and 2016. This means they will operate for less than half their expected lifespan5.Utilities and electrification are key
Energy and electric utilities play an obvious part in the transition, while electrification of manufacturing processes, industrial activities and the transport sector are another necessary component of this transition.
A remarkable example is Orsted, a Danish company, that has already successfully made the transition. In 2017, it sold all its oil and gas fields and is now focussing on onshore wind farms. The small remaining coal assets will also be phased out in 2023.
We also look at companies that enable the transition through their products. First Solar is a good illustration of the enabling role companies play. This US business produces photovoltaic solar modules for energy generation, with the additional benefit that it uses 90% of recycled materials in its manufacturing process.
Knock-on effects
Finally, we also see a knock-on effect, given that many companies are setting ambitious targets. For instance, Microsoft is one of the largest players in the renewable-energy power-purchasing agreement market in the US. The company’s portfolio amounts to more than 1.2 Gigawatts of renewable energy. For clarification, 1 Gigawatt can supply about one to one and a half million households with electricity. Corporate procurement is therefore also increasing its demand for clean energy, contributing to an acceleration of the transition.
We believe companies that offer products and services that support and accelerate the energy transition are well positioned to benefit from this change. All sectors, however, can and will have to play their part, if we truly want to transition in an ambitious manner that allows us to meet the goals of the Paris agreement.
1 BP Statistical Review of World Energy 2021 Primary energy | Energy economics | Home (bp.com)
2 EU economy and society to meet climate ambitions (europa.eu)
3 Science-based targets: US power sector trails behind Europe - Science Based Targets
4 What is the Inevitable Policy Response? | Thought Leadership | PRI (unpri.org)
5 Coal Exit Tracker - Europe Beyond Coal : Europe Beyond Coal (beyond-coal.eu)