The journey towards Net Zero
In early 2020, the top five risks threatening the global economy according to the World Economic Forum’s 2020 Global Risks Report were all environmental for the first time. In 2021, infectious diseases replaced extreme weather in the top five.
COVID-19 has shown that broad lifestyle and policy changes are possible. By May 2020, central banks and governments across the G10 economies and China had committed an estimated USD 15tn of stimulus to help shield their economies from the pandemic. Just how much of this will be put towards stimulating a so-called ‘green recovery’ is yet to be seen.
The 2015 Paris Agreement is to hold the increase in the global average temperature to “well below 2°C above pre-industrial levels” while “pursuing efforts” to limit the rise to 1.5°C. While uptake of green solutions has progressed slower than environmentalists had hoped, the private and public sectors are taking steps to reduce carbon emissions. The EU, for example, plans to become climate neutral by 2050.
Pathways to decarbonisation
The technological routes to decarbonisation are varied.
The cost of electricity from renewable sources is increasingly competitive. The costs of wind and solar PV have already reached cost parity with fossil-fuel generated power in many countries. By 2030, zero-carbon solutions could be competitive in sectors previously responsible for 70% of global emissions.
The traditional industrialised economy model of large-scale electricity generation and high-voltage transmission networks retains many of its merits in a world of mega solar and wind farms, offshore arrays, hydro-power and nuclear. But green energy platforms also make decentralised local and low-scale generation viable. They also help to facilitate local projects in parts of the world where current networks are lacking or limited, as well as to provide additional flexibility to the overall power system.
Intermittency of renewables presents a major challenge. Investment in energy storage infrastructure will be essential. Combined stationary and transport energy storage is forecast to grow to 2.5-4 terawatt hours per annum by 2030, from a current base of just 800 gigawatt hours. To date debt financings in the battery sector have been few and far between with short tenors, low leverage, more asset finance or cross-collateralisation structures and expensive pricing. Unlocking optimised debt finance is crucial to the future development of the battery storage sector.
Clean power generation is only one component of the energy transition. In the transport sector, electric vehicles are already popular in much of the world, with their popularity driven by changing social attitudes and—in some countries—regulations and incentives. Carbon capture and storage infrastructure will be essential to the success of clean energy transition. These technologies allow greenhouse gas emissions to be removed from the environment in cases where its production cannot easily be avoided, such as in aviation, shipping, construction and agriculture.
Movement towards climate action
Most countries fall into one of three broad categories of climate change action.
Emission Eliminators | Aim to achieve Net Zero carbon emissions by 2050 or before. | Examples include the United Kingdom, France and Hungary, where Net Zero targets are legally binding. More than two-thirds of the world’s GDP by purchasing power parity is currently generated in countries where authorities have set or proposed a Net Zero target. However, many countries have continued to invest further into carbon-intensive activities despite an overarching commitment to decarbonise their economies. |
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Energy Transitioners | Nations with a legacy of fossil fuel led growth that are switching to greener energy sources. | In Saudi Arabia, its Saudi Vision 2030 strategic framework will see the share of electricity it derives from renewable sources increase to 50% by the end of the decade, up from less than 0.05% in 2018. China, the world’s biggest CO2 emitter has set a carbon zero target by 2060. The scope for infrastructure investment in these countries, as they look to reduce their reliance on coal and oil, is vast, with significant emphasis placed on the cost-effectiveness of alternatives. |
Technology Leapfroggers | Looking to low-cost energy, with an emphasis on affordable off-grid solutions and renewables. | Examples include many developing nations in sub-Saharan Africa and South and Central Asia. Their population growth has not always been accompanied by economic growth or an improvement of the historic, often poorly developed electricity transmission networks. This means they are increasingly looking to low-cost options with minimal capital requirements. With three-quarters of a billion people globally without access to energy today, achieving universal energy access by 2030 will require USD 35bn in annual spend between 2021 and 2030. In many cases, these countries will ‘leapfrog’ fossil fuel technologies and build energy systems based on renewables. |
Climate change is a global issue with significant scope for investment across borders. However, we are still a long way from a global solution. Countries have different risk attitudes, different natural endowments and different types of expertise. Yet they all face the challenging task of how to meet growing demand for energy in a more competitive environment while reducing emissions.
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