The Energy Transition

Posted: November 18, 2020

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Abstract

As the world continues to consume more and more energy, a sustainable energy source is needed to meet growing demand. As climate change continues to be a hot topic, the world has begun “the energy transition.” This refers to the energy sector’s shift from a fossil-fuel based system of energy production and consumption, namely crude oil, natural gas, and coal, to renewable energy sources like wind, solar, and lithium-ion batteries. As the world continues down this path, it becomes clear that the energy transition should gradually shift allocation for the leading source of power in a cumulative energy mix, and to pursue a single source of energy for the globe is not only foolish but irresponsible.

Key Points

The energy transition refers to a shift from historically fossil-based energy production towards more renewable sources with the aim to reduce energy-related greenhouse gas emissions and incentivize decarbonization. The International Energy Agency (IEA) projects renewable based power capacity to increase by 50% between 2019 and 2024.

A large amount of precious metals and minerals are required to produce essential components for wind and solar power generation. As renewable capacity grows, the amount of feedstock to be mined will also increase. It is estimated the amount of investment needed to mine critical energy-transition minerals over the next 15 years will be double that of the previous 15 years.

Energy storage is another large piece of the puzzle for a renewable transition. Currently 99.3% of available grid-scale power storage is used for pumped-hydro power. Batteries have been getting more efficient, but the technology is still expensive and not feasible for a large scale, consistent power supply. A 300 MW/450 MWh facility being built in Victoria, Australia for $84 million will be able to power half a million homes for one hour. To use lithium batteries as large scale power storage, the amount of lithium extracted would need to be increased by 2,700% which would create its own environmental challenges.

Bloomberg New Energy Finance Limited (BNEF) has projected over the next 30 years that emissions from fuel combustion reached a peak in 2019. Assuming the green energy trend continues, wind and solar will account for 56% of global electricity generation by mid-century. Combined with batteries they will account for 80% of the $15.1 trillion invested in new power capacity plus an additional $14 trillion investment in the power grid.

The energy transition will not happen overnight. Hydrogen fuel cells could help bridge the gap in electricity generation as long as a source of hydrogen fuel is available. Another method to implement efficient, renewable sources in tandem with current fossil fuel technology is hydrogen with natural gas to power the electric grid. An estimated 6 tonnes of CO2 per year could be eliminated if this technology is implemented across the entire UK alone.

The energy transition comes with major costs of note for switching away from fossil fuels. The obvious costs exist for expanding solar and wind generation capacity and storage, plus modifying the grid to support an increased portion of energy demand. There also appear to be other half-hidden costs that are not just financial but also social and environmental. The point of the energy transition is to gradually shift the leading source of power in a cumulative energy mix, and the pursuit of a single source of energy is not only foolish but irresponsible.

Introduction

The conversation about climate change has been a hot topic around the world in recent years, but it has recently been a focal point of conversation in the United States during a highly contested election. Propelled by climate activism, strikes, and social movements like Extinction Rebellion, a number of governments have declared a climate emergency, and progressive political parties are making plans for a rapid transition to clean energy under the banner of the Green New Deal [1]. But what exactly is the energy transition?

The energy transition refers to the global energy sector’s shift from a fossil-based systems of energy production and consumption, namely crude oil, natural gas and coal, to renewable energy sources like wind and solar, as well as lithium-ion batteries [1]. As more investors and companies seek greater clarity and confidence in accounting for long-term climate risks and opportunities, businesses are adapting to the energy transition [1]. Switching from nonrenewable energy sources like oil, natural gas, and coal to renewable energy is made possible by technological advancements paired with a societal push toward sustainability. The increasing penetration of renewable energy into the mix, the onset of electrification, and improvements in energy storage are all key drivers of the energy transition. Spurred by structural, permanent changes to energy supply, demand, and prices, the energy transition also aims to reduce energy-related greenhouse gas emissions through various forms of decarbonization [1]. While the dramatic rise in renewable energy is certainly fueled by individuals’ desire for a sustainable future, federal subsidies are certainly the icing on the cake to incentivize companies to take action. Although the billions in federal subsidies for wind and solar energy are set to expire in the near future, the demand for renewable energy, driven primarily by corporations’ large-scale renewable energy purchases, will likely remain high.

*Figure 1: NextEra Surpasses Exxon and Chevron [20]*

The transition has been underway for years but is rapidly picking up the pace. In fact, the International Energy Agency forecasts the world’s total renewable-based power capacity to increase 50% between 2019 and 2024 [1]. Such rapid changes has allowed solar and wind producer NextEra Energy to become the largest energy company, eclipsing both Exxon and Chevron in terms of total value [5]. The skyrocketing market capitalization of NextEra Energy then begs the question, what is the cost of the energy transition? Opinions are mixed but one thing is certain: the transition will be costly. Bloomberg New Energy Finance Limited (BNEF) estimates the amount of investment dollars needed for new power capacity globally over the next three decades to be $15 trillion [2]. No one ever said going green would be cheap. Yet the amount of investment dollars to be directed towards expanding wind, solar, and associated systems will not be the only costs to be borne during the transition. There will be steep environmental costs as well.

Mining

What many individuals do not realize is renewable power sources like wind and solar require a lot of metals and other minerals to produce essential components for the installations. Therefore, as the demand for wind turbines and solar panels jump, so will the demand for the metals they are sourced from. As the mining expansion becomes even more substantial, it adds economic, social, and environmental costs to the energy transition. Last month, Wood Mackenzie estimated the energy transition will require $1 trillion in investments in several key metals alone [6]. To give a more detailed picture, the world will need nearly twice as much investment in critical energy-transition minerals over the next 15 years as it has invested over the past 15 years [6]. Then, 20 to 25 years later, many of the installations made from these metals will need to be retired. This means going into landfills because not all solar and wind equipment can be recycled. Wood Mackenzie is not the only firm to note the costs of such a transition. In 2017, the World Bank questioned the required metal extraction to generate seven terawatts of energy by 2050, or an estimated 50% of the world’s energy. Their findings uncovered that it would lead to dramatic increases in the extraction of precious metals like silver going up by as much as 100% or indium increasing 920% [7]. Such extensive amounts of mineral extraction for components essential to creating solar panels would require the commissioning of 130 mines the size of the Mexican Penasquito mine, the largest silver mine in the world, which spans 40 square miles [7]. Therefore, the transition to renewables is going to require a dramatic increase in the extraction of metals and rare-earth minerals, with real ecological and social costs.

Transmission and Batteries

In addition to the costs of mining minerals to create renewable sources, there are also associated costs with energy storage. Without storage, the transition will simply not happen. The World Bank estimated in 2017 that grid-scale storage capacity would need to rise from 100 GW in 2015 to up to 305 GW by 2050 and a 2014 IEA report made an even higher estimate of up to 500 GW in storage needed [2]. The problem is 99.3% of the available grid-scale storage is used for pumped-hydro which has severe limitations. Batteries appear to be the alternative, but at a cost. Tesla and Neoen, a French company, recently announced they would build a 300 MW/450 MWh battery in Victoria, Australia [8]. Capacity on its own, however, tells little to the everyday individual. For context, the 300-MW facility would be capable of storing enough renewable energy to power half a million homes…for one hour. And it will cost $84 million [8]. There are lithium batteries that could supply power to households for more than an hour and more are being developed. While primarily used to run vehicles at the moment, their capacity still remains limited to a few hours, which has made some observers compare them to the so-called “peaker plants” which are power plants that generally run only when there is a high demand for electricity [9]. The problem with lithium batteries is the fact that lithium extraction would need to increase 2,700% which creates an ecological disaster as discussed earlier [7]. For a consistent power supply relying predominantly on renewable energy, battery storage is not yet feasible. Currently monetary and sustainability costs are associated with the storage and transmission of pure renewable energy. That is why the energy transition must take place over the course of many years. It will be impossible to switch immediately over to a purely renewable grid without the investment of trillions of dollars and implementing technology that is not yet available.

Carbon Emission Reductions

Clearly there are monetary, ecological, and societal costs associated with the energy transition, but what are the benefits? There is no denying society has decided climate change is a real threat to the planet. Either human population growth has to subside, which it won’t, or carbon emissions will need to be significantly curtailed to avoid disastrous outcomes for the planet. This is the goal of the energy transition by moving away from heavy carbon emitting energy sources to low or zero carbon sources in the future. Luckily, BNEF’s latest 2020 New Energy Outlook projection for the evolution of the global energy system over the next 30 years shows that emissions from fuel combustion peaked in 2019. Down approximately 8% in 2020 as a result of the COVID-19 pandemic, energy emissions are set to rise again with economic recovery, but never again reach 2019 levels [3]. From 2027 on, they will then fall at a rate of 0.7% per year through 2050 [3]. In fact, the report finds that the stark drop in energy demand due to the pandemic will remove about 2.5 years worth of energy sector emissions between now and 2050 [3]. This prospect is based on a huge increase in wind and solar power, the surge of electric vehicles on the road, and improved energy efficiency across industries. As stated earlier, the increase will require a major expansion in mining. Mining is an energy-intensive and not particularly environmentally friendly way of getting finite resources out of the ground. Assuming the green energy trend continues, wind and solar will account for 56% of global electricity generation by mid-century, and combined with batteries will account for 80% of the $15.1 trillion invested in new power capacity over the next 30 years, not including an additional $14 trillion invested in the power grid [3].

*Figure 3: U.S. CO2 Emissions By Sector (1980-2019) [4]*

As a result of the energy transition, energy-related carbon dioxide emissions in the United States dropped 3% last year after rising by 3% in 2018, according to the U.S. Energy Information Administration’s (EIA) U.S. Energy-Related Carbon Dioxide Emissions analysis [4]. CO2 emissions from the U.S. electric power sector hit their peak in 2007 and have since dropped 33%, mostly attributed to more electricity generated from natural gas and other non-carbon sources as opposed to coal [4]. While a small portion of these reductions in emissions can be attributed to the global pandemic decimating hydrocarbon demand, various countries around the world have made zero-carbon emission goals for the near future. Companies like BP, Total and Royal Dutch Shell have announced plans to reach net-zero emissions by 2050. Some states have mandated emission goals, and recently cities like Cleveland, Ohio voted to implement even bolder goals of supplying 100% of their electricity from renewable sources by 2023 [17]. While wind and solar seem to be the most popular carbon emission reducing technologies on the market, they are not the only ones available for these lofty environmental standards.

A Cool Alternative

According to the IEA’s Renewables 2020 report, renewable power generation capacity will increase by 7% this year despite a 5% forecasted decline in global energy demand [10]. These developments paint the renewable energy sector as a lot more resilient to the pandemic than the fossil fuel industry. It is of course supported by governments and companies striving for a net-zero future and throwing their weight behind wind and solar projects. But what about a happy medium? In addition to the traditional renewable sources of wind, solar, geothermal, hydro, tidal, and biomass, there is another emerging player in the clean energy sector with the potential to strike a balance between hydrocarbons and renewables. That is where hydrogen, the simplest and most plentiful element in the universe consisting of only one proton and one electron, comes in. Although simplistic and abundant, hydrogen doesn’t occur naturally as a gas on the Earth, it is always combined with other elements like water for example. It is also found in many organic compounds, notably the hydrocarbons that make up many of our fuels, such as gasoline, natural gas, methanol, and propane [11]. Hydrogen can be produced from a variety of domestic resources, including natural gas, nuclear power, biomass, and renewable processes like solar or wind which make it an attractive fuel option for transportation and electricity generation [12]. Hydrogen can be separated from hydrocarbons through the application of heat, a process known as reforming, or by sending an electrical current through water, a process known as electrolysis. Currently, most hydrogen is made from natural gas through reforming [11].

*Figure 4: Process Diagram of a Hydrogen Fuel Cell [19]*

But why is hydrogen so important to the energy transition? Hydrogen is high in energy, but an engine that burns pure hydrogen produces almost no pollution and is a technology that has been around for years. In fact, NASA has used liquid hydrogen since the 1970s to propel the space shuttle and other rockets into orbit [11]. A hydrogen fuel cell combines hydrogen and oxygen to produce electricity, heat, and water [11]. Fuel cells are often compared to batteries as both convert the energy produced by a chemical reaction into usable electric power. However, a hydrogen fuel cell will produce electricity as long as hydrogen fuel is supplied, never losing its charge [11]. The only issue with hydrogen fuel cells is the fact that hydrogen does not occur naturally and therefore has to be extracted and then compressed in fuel tanks.

Another possible use is the addition of hydrogen to natural gas which has shown to have a beneficial effect in terms of improving combustion properties while reducing polluting emissions. The UK became one of the first countries to successfully implement grid injection of hydrogen, essentially blending hydrogen gas with natural gas in a 1:4 ratio [13]. The application of hydrogen to natural gas allows customers to continue using their existing natural gas appliances with no need for major adjustments. ITM Power estimates that a natural gas/hydrogen blend of similar proportions rolled out across the entire country could save up to ~6 million tonnes of CO2 emissions every year, comparable to taking 2.5 million cars off the roads [13]. Although not entirely carbon free, the process utilizes an abundant source of fuel both to create hydrogen and generate energy, reduces overall emissions, and has little societal or ecological impacts.

*Figure 5: BP’s Lingen Refinery, Germany [21]*

Even as the UK became one of the first countries to successfully implement grid injections of hydrogen, the hype around hydrogen as an energy source has made headlines in recent months. Back in July, the European Union unveiled a hydrogen strategy that immediately captured the imagination of the renewables world and was hailed as the most ambitious hydrogen plan ever. This strategy laid out plans to install 40 gigawatts of electrolyzers within the region’s borders and also support the development of another 40 gigawatts of green hydrogen in nearby countries that have the capacity to export to the regional powerhouse [14]. In November, Australia announced that it had awarded “major project status” to the Asian Renewable Energy Hub (AREH) to accelerate the development of 15,000MW wind and solar power for the production of hydrogen and ammonia [15]. The products would be exported to the Asia-Pacific region with plans to scale that up to 26,000MW, making it the largest of its kind in the world [15]. Talk about an energy mix! Even Germany is hopping on board with their recent commitment to invest €9B, about $10.2B, towards hydrogen technology in a bid to decarbonize the economy and cut CO2 emissions. While still members of the EU, the German government alone has proposed to build an electrolysis capacity of 5,000MW by 2030 and another 5,000MW by 2040 to produce fuel hydrogen [16]. Not only are entire countries jumping aboard the hydrogen train, but supermajor oil and gas company BP is also joining the club. In November, BP announced their plan to jointly develop an industrial-scale electrolyser project with Danish energy giant, Ørsted, for green hydrogen production. The plant will be powered by Ørsted offshore wind and will initially replace 20% of natural gas-?based hydrogen used at BP’s Lingen refinery ?[18]. The excitement behind hydrogen lies in its infancy of technology, but it is not a new idea. A hydrogen fuel cell combining hydrogen and oxygen to produce electricity, heat, and water remains inefficient due to the fact hydrogen must be created before its use. Injecting hydrogen into natural gas to increase combustion efficiency and reduce carbon emissions is already taking the world by storm due to the element’s abundance and progress towards improved emission reductions.

Conclusion

The sustainable answer to the future suggests an energy mix that is neither 100% renewable nor carbon based. The dependence on fossil fuels must decline and nuclear needs to become a bigger part of the mix. To believe that the world can run 100%, or even 50%, on purely renewable sources is just short-sighted. Regulation and commitment to decarbonization has been mixed, especially in developing countries, but the energy transition will continue to increase in importance as investors prioritize environmental, social, and governance (ESG) factors. Even more so, the beauty of the energy transition is there is no paved path forward. The world is still determining what is the best course of action as they continue to forge ahead.

Modern economic growth has not shown a single instance of a country successfully developing without the use of fossil fuels, and ordinary people across the world are fully aware of this. As societies begin pushing for more management of carbon based resources, the energy mix will continue to change. During this crossover, fossil fuels will begin their journey to the rear of the portfolio as other more sustainable forms of energy enter into the mix. Unfortunately the energy transition, as urgent as many claim it may be, will not be cheap. The obvious costs exist for expanding solar and wind generation capacity and storage, plus modifying the grid to support an increased portion of energy demand. There also appear to be other half-hidden costs that are not just financial but also social and environmental. That is where a middle ground approach must be reached. The point of the energy transition is to gradually shift the leading source of power in a cumulative energy mix, and the pursuit of a single source of energy is not only foolish but irresponsible. The world needs all of the energy it can get as humans continue to develop the globe. Every single energy source is valuable, and people must find the most efficient way to integrate each of them into the global energy portfolio to create the most progress into the future.

References

[1] https://www.spglobal.com/en/research-insights/articles/what-is-energy-transition

[2] https://oilprice.com/Energy/Energy-General/The-True-Cost-Of-The-Global-Energy-Transition.html

[3] https://about.bnef.com/blog/emissions-and-coal-have-peaked-as-covid-19-saves-2-5-years-of-emissions-accelerates-energy-transition/

[4] https://pennbizreport.com/news/18124-emissions-from-carbon-dioxide-fall-3-percent/?amp

[5] https://seekingalpha.com/article/4382875-clean-energy-vs-oil-gas-biggest-lie-of-2020

[6] https://www.woodmac.com/press-releases/lme-week-2020-%241-trillion-needed-for-key-energy-transition-metals-by-2035/

[7] https://seekingalpha.com/article/4382875-clean-energy-vs-oil-gas-biggest-lie-of-2020

[8] https://newatlas.com/victoria-big-battery-tesla-300mw/

[9] https://pv-magazine-usa.com/2020/07/29/pge-tesla-begin-construction-on-the-worlds-largest-battery-for-now/

[10] https://www.iea.org/reports/renewables-2020

[11] https://www.renewableenergyworld.com/types-of-renewable-energy/hydrogen/tech/#gref