Driving Energy Technology Innovation
Navigating Future Energy Supply and Demand
The cost of solar and wind power technologies has been significantly reduced, and a similar trajectory is expected for lithium-ion battery technology. However, as these become more prominent, additional innovation supporting their integration into energy systems (including smart grids and storage) needs to advance. Innovation will be critical to complete the energy transition.
Early-stage research and deployment is also occurring with direct air capture technologies (which would be able to extract CO2 from ambient air), and biomass-based solutions for negative emissions (also known as bioenergy CCS). Taking a more holistic approach to the carbon cycle and developing a “circular carbon economy” that treats carbon as a valuable resource - and not just waste - may be required.
Continued innovation in clean technologies will be crucial for achieving a cost-effective transition to net-zero carbon emissions; many are far from being on track in terms of broad market deployment. In terms of buildings, for example, efficiency improvements and policy reforms are required, as energy demand from cooling, heating, and powered devices grows.
Systemic efficiency and digitalization will be necessary to transition both buildings and the cities where they are built to a net-zero future. Faster progress is also required for applications in the manufacturing and transportation sectors, which have significant barriers to electrification - including high-temperature industrial processes, and the fuels still necessary for maritime shipping, aviation, and heavy-duty transportation.
Hydrogen and advanced biofuels have shown promise for many of these applications, but related costs remain high. And, the search for hydrogen-based technical solutions means it will be necessary to deploy large-scale, clean hydrogen production and generation infrastructure in parallel.
Another technology recognized for its role in addressing the climate challenge is carbon capture, utilization and storage (CCUS). All credible energy decarbonization scenarios foresee a role for CCUS, due to the significant carbon lock-in associated with current infrastructure and the difficulty in decarbonizing some industrial sectors. However, CCUS has so far failed to progress beyond the demonstration stage. Its deployment will depend on sufficient carbon price signals and other support mechanisms to facilitate viable business models by bringing capital costs down.
The idea of net-zero carbon industry clusters has gained some traction; these would co-locate energy- and emissions-intensive industries, and put CCUS in place with shared infrastructure. In terms of the subsequent use of captured carbon dioxide, more research is needed to find viable use cases that go beyond niche applications.
The COVID-19 pandemic has led to large declines in fuel and electricity demand, and an unprecedented, 20% decline in energy investment in 2020 equal to roughly $400 billion. Energy demand is shifting, calling the long-term role of fossil fuels into question. While the long-term impacts of the pandemic remain uncertain, near-term responses can have lasting impacts.
Renewables have shown resilience in the face of COVID-19, with a market share expected to increase by 2% in 2020 compared with the prior year - while demand for coal has plummeted. An ongoing regional shift in energy demand means the locus of demand growth - and investment to meet this demand - is moving to non-OECD countries. While primary energy demand within the OECD has been flat or declining, non-OECD energy demand grew by nearly 4% per year from 2007 to 2017 and accounted for nearly 60% of total primary energy demand in 2018.
Meeting this demand will require a reorientation of investment and supply chains towards markets like China, India, and African nations, and the degree to which this demand is met with carbon-intensive resources will have a major impact on sustainability goals.
Globally, the share of energy demand met by electricity is expected to further increase as the electrification of transportation, heating, and cooling takes hold. Electricity will increasingly be supplied by renewables like wind and solar - which will continue to decline in cost, increasingly displace thermal generation, and increasingly be complemented by flexible resources like energy storage.
Only 33% of the global primary energy consumed is converted into useful energy, with the remainder lost in processes like electricity generation, building operations, the operation of supply chains, industrial processes, and transportation - all of which can be addressed by applying more systemic efficiency. This includes sector optimization, as well as cross-sector optimization.
New supply sources are now needed to reduce the emissions generated by shipping, aviation, steelmaking, and chemicals industries. If it can be scaled up significantly, clean hydrogen produced from renewables or fossil fuels (with carbon capture) could be one of these new supply vectors. Ultimately, efficiency is one of the lowest-cost ways to address energy supply issues, and it can help reduce emissions.
While efforts to expand access have historically been via centralized systems, this is changing as the use of decentralized solar home systems, solar irrigation systems, and microgrids expands. Ensuring universal access to energy is a moral imperative. The United Nations Sustainable Development Goals, established in 2015, helped make energy access a global priority.
It is now clear that access can be provided using a combination of such systems with grid extensions and mini-grids. All of these methods are being incorporated into national policies and strategies; related progress has been made in countries including India, Bangladesh, and Kenya, resulting in a decrease in the global population without access to electricity from 1.2 billion in 2017 to 860 million in 2018 (this marked the first time in history that access spread faster than population growth).
However, roughly three billion people still lack access to clean, safe cooking fuels. Dirty cooking fuels contributed to more than four million premature deaths in 2017 alone, and there is a significant urban-rural divide in terms of access to energy for cooking and electricity; nearly 87% of the people in the world without electricity live in rural areas, according to the International Renewable Energy Agency.
Mini- and micro-grid companies have raised large amounts of private funding, and companies with business models that rely in part on expanding power access - like Facebook and Microsoft - are investing in related initiatives. In total, foreign direct investment aimed at supporting clean energy in emerging markets rose to a record $24.4 billion in 2018, from $22.4 billion the previous year, according to Bloomberg NEF’s report Climate scope 2019.
Reforming utility governance is critical for enabling the long-term financial stability of the industry, and drawing larger capital flows to industrial and other productive uses that can create a positive feedback loop of development and investment. Enabling access to clean energy is imperative; global carbon emissions must peak before 2030, despite a dramatic increase in energy demand in the developing world. The expansion of access needs to be accompanied by institutional reform, however, and by more productive use of energy.
Accelerating Energy Access
Designing the Future of Power Systems
Powerful trends are driving the transformation of global systems. Technology advances resulting from decades of investment in research and development, as well as supportive policies that encourage deployment and learning-by-doing, have led to dramatic cost declines for renewable resources - and increased power generation from renewables (the European Commission’s climate neutrality goals are an example of such a policy).
Some progress has been made - wind and solar accounted for more than half of all capacity additions in emerging markets for the first time ever in 2018. Wind and solar power have started to outperform newly built, fossil fuel-based electricity generation in terms of cost - a trend that will continue. In addition, innovative financing approaches such as corporate power purchase agreements are helping organizations meet their 100% renewable commitments. Replacing existing fossil-fuel plants with cleaner alternatives while meeting growing demand will be a perennial challenge, however, particularly in markets with relatively new fossil-fuel-based plants - as is the case in many Asian markets.
Green technologies can provide developing markets with innovative options to connect the unserved; in Africa, leveraging grid extensions, mini-grids, and stand-alone systems in a coordinated manner will be key to solving the energy access problem by 2030 with cleaner, smarter systems. Meanwhile in developed markets, electricity companies are trying to solve the challenge of integrating greater amounts of variable renewable power into their grids.
Grid reinforcements increased interconnection, and new builds will be a priority for developed power markets in the coming years - amid growing public resistance to new infrastructure. A greater emphasis must therefore be placed on increasing grid flexibility, and on planning new infrastructure that can win public acceptance. Evolving power markets are creating new ways for utilities to buy and sell capacity or flexibility, and fostering business models centered on demand-side management and digital offerings.
Grid resiliency is more important than ever, due to pandemics, increasingly severe natural disasters, and cyberattacks (managing major outage risks for utilities used to mean dealing with component failure or inclement weather, but must now mean carefully designing a cyber resilience strategy).
A further restructuring of power markets will be necessary to facilitate more renewable power generation and to encourage more efficient investment and operations. An increase in renewables could further enable the clean electrification of buildings, mobility, and industry. Systemic efficiency at the intersection of sectors (like ultra-efficient buildings integrated with smart energy infrastructure) will be necessary to achieve the United Nations Sustainable Development Goals, and to deliver on the Paris Agreement on climate change and the New Urban Agenda.
Unlocking Energy Finance
Building Energy System Resilience
Meeting the global increase in energy demand while also reducing emissions from existing infrastructure will require more than $50 trillion in investment by 2035. However, there is a multi-hundred-billion-dollar gap between existing investment and the level needed in order to effectively reduce emissions and enable sustainable development. Global energy investment must be aligned with sustainability and security objectives.
In addition, the International Energy Agency expects the COVID-19 pandemic to cause the largest decline in global energy investment in history - with a 20% drop expected in 2020 compared with the prior year that will further expand the already-significant investment gap. Innovation in terms of both finance and public policy is required to bridge this gap.
In the financial industry, new mechanisms are driving investment in cleaner energy infrastructure. For example, “blended capital” vehicles that bring together investors with varying social and financial return expectations are unlocking new opportunities, from early-stage innovation to the deployment of more mature, commercial technologies. In addition, “green bonds” provide ways for investors to help deploy clean, efficient infrastructure, while financial mechanisms such as tax equity deals, where investors in sustainable energy infrastructure receive tax credits, are now considered commonplace.
In addition to new finance mechanisms, investors are increasingly seeking the disclosure of Environmental and Social Governance (ESG) risks - and taking steps to quantify whether their investments align with their ESG goals. This is fostering corporate investment in clean energy infrastructure, and industry-wide collaboration on reducing emissions. Public policy plays a critical role in guiding private capital allocations; policy and market uncertainty can increase the cost of capital, and the cost of capital is, in turn, a major determinant of the cost of clean energy deployment.
Public-private partnerships are a particularly attractive means to potentially reduce risk for private capital providers - these partnerships can play a key role in enabling the “first few” deployments of nascent but potentially valuable clean energy infrastructure.
Facilitating access to capital and the de-risking of such projects is an important way to encourage their development, and policy-makers are increasingly demonstrating an awareness of this by creating related long-term roadmaps and supportive regulatory frameworks. Policy-makers are also leveraging market mechanisms like auctions to increase competition, while driving innovation and realizing cost reductions.
The 2015 cyberattack on Ukraine’s power grid is considered to be the first known successful attack where hackers were able to remotely access a grid’s substations and temporarily disrupt the supply of electricity to consumers. The WannaCry ransomware incident in 2017, one of the largest global ransomware attacks to date, impacted more than 100,000 organizations worldwide - including utility and energy companies.
Better addressing the global energy system’s exposure to disruption needs to become a priority. Energy systems are expected to become increasingly exposed to disruptions both external and internal in the coming years. External risks come in the form of pandemics, extreme weather events and natural hazards, increasingly sophisticated cyberattacks, and acts of terrorism. Internal shocks include fuel price spikes that result from sudden supply-and-demand imbalances, and other unforeseen reactions to the profound, ongoing transformation of the global energy system now underway.
Devastating wildfires in California in 2019 forced utilities to cut the power supply to roughly 800,000 homes and businesses over several days in order to prevent further spread. Climate change-related severe weather conditions are contributing to more frequent and intense wildfires in a number of places, and pose an increasing threat to electricity and energy infrastructure.
The COVID-19 pandemic has had many implications for the operators of critical physical assets. The disruption of the Chinese economy during the early stages of the pandemic impacted the sourcing of clean energy technologies such as solar panels and wind turbines, and led to a large number of projects facing delays. In addition, the COVID-19 crisis has introduced uncertainty about the energy transition to a low-emissions future.
Damage to critical infrastructure like energy systems will exact costs on consumption, governments, business operations, and investors. Many energy companies and utilities are therefore taking steps to further increase resilience through innovative energy solutions that involve digitalization, decarbonization, and diversification of energy sources - as well as new materials and processes.
Some argue that the crisis will curtail enthusiasm for the transition, while others see an opportunity to accelerate it by adopting conducive policies as part of economic recovery plans. While energy systems are designed to be resilient, the risks posed by disruptions such as the pandemic are increasing in terms of complexity and frequency - and demand a strengthening of resilience in order to avoid disruptions to economies and to general well-being.
Strengthening Energy Policy & Governance
Policies enabled by changing economics and innovation are supporting decarbonization.
“Green New Deal” plans that put economic development and distributional equity at the centre of climate policies have gained popularity in the US and Europe - while their ultimate success remains to be seen, it is clear now that any successful climate plan must consider related impacts on inequality and justice. In addition, the corporate world has not ignored the changing policy landscape. Corporate targets for decarbonization are becoming increasingly popular, and several oil and gas supermajors have pledged to reduce emissions in line with a 1.5°C warming target.
The emission reduction pledges governments made as part of the Paris Agreement on climate change will not suffice to limit global warming to 1.5°C above pre-industrial levels. In addition, the decline in energy-related emissions resulting from COVID-19 lockdown measures is only expected to be temporary.
However, as governments administer pandemic-related stimulus, there are opportunities to invest in clean energy infrastructure in ways that could shape the global energy system for years to come.
Since the signing of the Paris Agreement, progress on climate and energy policy has primarily taken place at the federal, state, and local level - rather than at the international level. For example, the European Union aims to reduce greenhouse gas emissions to net-zero by 2050, and some member states have set even more ambitious net-zero targets.
California, which boasts the world’s 5th-largest economy, has set 100% clean electricity standards together with nine other American states and territories; hundreds of cities and counties have followed suit. This progressive leadership is in part a response to delayed international action, and to increasing pressure from activists and political campaigns around the world.
Policies that spur innovation and reconfigure markets are needed to enable the widespread deployment of clean technologies - and to achieve long-term emissions-reduction targets. Policy-makers can build on an increasingly large body of successful efforts around the world, and send the right signals by removing fossil fuel subsidies, introducing carbon emission pricing schemes, and creating efficiency targets that can be reached using existing technologies.
One example of policies that can reconfigure markets is support for renewable schemes; falling renewable costs have made these resources competitive with alternative technologies, and as a result, policies to procure renewables have evolved into more competitive, market-based mechanisms like auctions.
Re-Mapping Energy Geopolitics
New resources are emerging, and China is becoming a cleantech manufacturing powerhouse. An energy system based on geographically concentrated fossil fuel resources enabled resource-rich countries to exercise geopolitical power related to the distribution of those resources. As a result, governance systems such as the Organization of the Petroleum Exporting Countries (OPEC) were formed, shaping fossil fuel-dominated energy markets for decades.
This dynamic has fundamentally shifted in recent years, however, as the US has re-emerged as a net energy exporter, and as the rise of new clean energy technologies has changed demand dynamics. The emergence of shale oil and gas resources has fundamentally reshuffled the traditional power balance between oil-producing and oil-consuming countries; the US, formerly a large net importer, now has an increased incentive to cooperate with other oil-producing nations like Saudi Arabia and Russia.
The production cuts negotiated between Saudi Arabia, Russia, and the US in response to the supply-demand imbalances and declining oil prices caused in part by COVID-19 restrictions, for example, were unprecedented - and may have substantial long-term impacts. Meanwhile the manufacturing of clean energy technologies like solar and wind remain largely concentrated within just a few nations, even as worldwide installed capacity continues to expand.
Supply dynamics, and concerns about the methods of extracting these resources in certain countries, have already led to industry and political collaborations such as the Global Battery Alliance.
The relative abundance of the natural resources powering renewables, in contrast to oil and gas resources, means they are available globally - enabling many different nations and localities to reduce their dependence on international markets. However, while the geopolitical dynamics of resource extraction may lose relevance over time, even the most renewables-heavy economies remain tied to international oil and gas markets in order to maintain transportation and industrial processes.
In addition, the concentration of renewable technology manufacturing has its own geopolitical impact. As China has emerged as the primary manufacturing centre for clean energy technologies such as solar panels, wind turbines, and batteries for electric cars, new geopolitical realities have formed - and the COVID-19 pandemic has demonstrated that severe disruptions to the few economies that are centers of manufacturing can lead to global supply chain bottlenecks.
In addition, the energy transition to a net zero emissions future is also likely to create a unique geopolitical dynamic, as certain minerals (like lithium and cobalt) and rare earths become increasingly valuable.
Energy consumption and production account for about two-thirds of global greenhouse gas emissions, and 81% of the global energy mix is still based on fossil fuels - a percentage that has not budged in decades.
A transition to a more inclusive, sustainable, affordable, and secure global energy system is imperative. This must be done while balancing the “energy triangle”: security and access, environmental sustainability, and economic development. And, it must now also be done in the context of COVID-19's impact on energy systems.
Related public-policy and private-industry responses will affect supply and demand, as well as the speed and shape of the energy transition to a zero-carbon-emissions future, for years to come.