How would an energy transition delay affect the trillions spent?

In this week’s edition of Smart Energy’s Power Playbook, Yusuf Latief looks into an analysis of the financial impact of a potentially delayed energy transition, how much money is needed across segments for net zero and where our priorities should be when we consider raising capital.

Last week Wood Mackenzie released an analysis - A delayed energy transition - on the implications of a five-year delay to the energy transition, both on CAPEX spending across segments as well as on the penetration of global warming.

The long and short of it is that, should a five-year delay occur, global warming surpasses 3°C pre-industrial levels and energy transition financing finds itself in a sludge.

The timing of Wood Mackenzie’s analysis is apt. Elections in the EU and the US have our industry waiting with bated breath to see the next guard of political agendas take the scene and usher in policy updates – all at a critical time as 2025 and 2030 deadlines for our planet approach.

Let’s assume the worst here and that the delay does happen – how will spending be affected?

$48 trillion, 55% off target

According to Wood Mackenzie’s report summary, the delayed energy transition would cause annual average spending across the sector to fall to $1.7 trillion, 55% lower than the consultancy’s net zero 2050 scenario, which maps out what’s required to meet the Paris Agreement targets.

In total investment, this drums up to $48 trillion, far below the needed $75 trillion.

By segment, they state, with the delays, the oil and gas sector’s CAPEX rises to 31% while power sector spending remains at its current level of 60%.

Spending could fall to under 10% in the net zero scenario if the power sector gets 80% of the total spend. For metals and mining, CAPEX is the most resilient and remains around 6% of the total cross all scenarios.

In contrast, despite their key role in the overall energy transition, investment into hydrogen and CCUS drop to 2%, compared to 8% in Wood Mackenzie’s net zero scenario.

In a release detailing their analysis, Prakash Sharma, author of the report and Wood Mackenzie’s vice president of Scenarios and Technologies, commented:

“With half of the global population heading to polls in 2024, political realities and climate scepticism in the major emitting countries, such as the US and Europe, could reduce the support for the transition as voters seek economic security and price stability.

“The global stocktake at COP28 in December 2023 also confirmed that no major country was on track to meet the Paris-aligned commitments and that strong policy action and capital investment were necessary to accelerate the transition. Indeed, Europe and the UK have already pushed back 2030 climate goals and other countries may follow suit.”

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Breakdown: How much money is needed and where should it go?

To better appreciate the ramifications of such a delay to the energy transition, it helps to understand just how much money each segment of the energy and power sectors will need to decarbonise.

According to estimates from the Energy Transitions Commission, which operates across developed and developing countries globally, $110 trillion in capital investment will be required between 2021 and 2050, implying an average annual level of $3.5 trillion.

In their March 2023 report, Financing the Transition: How to Make the Money Flow for a Net-Zero Economy, they outline the different segments globally that will need the most attention.

Taking the biggest chunk is the power system to support the dramatic increase in electricity generation and use.

Breaking this down, it annually equates to $1,300 billion to develop zero-carbon power generation capacity, $900 billion to extend, upgrade and replace transmission and distribution networks and $200 billion to improve grid flexibility, including battery and seasonal storage capacity. No small numbers.

In detail, the per year remainder includes:

• For hydrogen, $40 billion to develop large-scale global production of green hydrogen, to produce greenfield blue hydrogen and retrofit grey hydrogen with CCS, as well as $40 billion per year to build pipelines, refuelling stations, import and export terminals, and storage capacities.
• For buildings, $230 billion to retrofit, $130 billion to install renewable heating and $150 billion r to install heat pumps.
• For transport, $130 billion to develop charging and refuelling infrastructure, $70 billion in sustainable aviation fuel production plants and new hydrogen and battery-electric aircraft and $40 billion yearly to decarbonise shipping
• For industry, $10 billion to decarbonise steel, $10 billion to apply CCS to cement plants, $40 billion to develop and integrate CCS, pyrolysis and other technologies in chemical industry processes and $10 billion to build and deploy low-carbon technologies at aluminium smelters and refineries.
• For carbon removals, $130 billion to remove carbon dioxide from the atmosphere.

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So how would a delay affect this?

Going back to Wood Mackenzie’s analysis, in a delayed scenario, the remaining carbon budget for a 1.5°C world will be used up by 2027, further weakening countries’ ability to deliver the Paris Agreement goals in time by 2050.

The prospects of renewables-led electrification become more challenging, with near-term additions slowed due to transmission bottlenecks.

Unabated thermal supply, they state, would provide much of the flexible generation to balance power grids while expensive renewables costs will further delay low-carbon hydrogen cost declines.

Additionally, the report adds that a slower transition means carbon capture and removal tech need to play a dominant role in restoring the carbon balance and achieving long-term climate goals. CCUS uptake will reach 225Mt by 2030 in Wood Mackenzie’s delayed transition and continues to scale as policy incentives expand and storage infrastructure is built.

Wood Mackenzie’s delayed scenario is just that, one potential scenario. But its outcomes nonetheless call for consideration, especially as many of us head to the polls this year.

What are some election outcomes that you think you need to be wary of and how will they affect clean energy financing?

Reach out and let me know.

Cheers,
Yusuf Latief
Content Producer
Smart Energy International

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