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In April this year, World Economic Forum’s Global Future Council on Energy wrote a paper titled The A-Z of the Energy Transition: Knowns and Unknowns. The paper received a great deal of attention from energy players around the world.

Smart Energy International’s Pamela Largue spoke to the paper’s lead author, Kingsmill Bond, Energy Strategist at the Carbon Tracker Initiative.

This article was originally published in Smart Energy International Issue 4-2020.
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As the planet moves rapidly towards net-zero, while simultaneously recovering from the COVID-19 pandemic, the industry is asking questions about the energy transition. How will it happen? What impact it will have on energy markets and what will the future hold for energy producers and consumers alike?

“THE ENERGY TRANSITION WILL BE ONE OF THE MOST IMPORTANT DRIVERS OF FINANCIAL MARKETS AND GEOPOLITICS IN THE MODERN ARENA”

The uncertainty is based on the difficulty of forecasting issues such as geopolitical shifts, resistance and response to change, as well as the effects of the interconnected feedback loop of policy, finance, technology, cost and consumers. Kingsmill Bond believes the energy transition will be one of the most important drivers of financial markets and geopolitics in the modern era and as such has created a hotbed of debate and dispute around the key issues.

A need to quell the debate

During the World Economic Forum, the Global Future Council on Energy is tasked with discussing and strategising the future of energy. According to Bond, who sits on the Council, it quickly became apparent that there was an enormous divide in the room concerning the basic facts of the energy transition. The Council, therefore, tried to draw out areas of consensus to minimise the bogus debates that people are still having and focus attention on the areas which merit analysis.

There simply isn’t time to debate when the rate of change is causing such disruption. Bond likens the pace of change within the energy sector to ‘creative destruction’, a term popularised by economist Joseph Schumpeter. It refers to “industrial mutation that continuously revolutionises the economic structure from within, incessantly destroying the old one, incessantly creating a new one.”

It is indeed clear that roles and businesses have had to transition to a new world. Within a period of rapid technological transition, companies are facing new nimble competition with lower prices, and therefore they’re facing a new reality – change or get left behind.

What we do know

The World Economic Forum paper outlines what we already know about the energy transition. Among others, the world needs a transition from energy that emits greenhouse gases to renewable energy to avoid a hothouse earth.

Most know what needs to be done in terms of decarbonisation, electrification and behavioural change. Even though this might be difficult, the forces of transition are likely to prevail.

According to Bond, we also know that the energy transition is just. Fossil fuels are used mainly by the rich and the few, while their costs are shouldered mainly by the poor and the many. In contrast, renewables are everywhere, can be deployed at any scale and are being used to solve last-mile problems and provide electricity to the one billion people who lack it.

The key actors in delivering the transition will include financial institutions, major corporations, civil society representatives and governments. Currently, managers of $120 trillion of assets have signed up to the principles of the Task Force on Climate Related Financial Disclosures (TCFD).

The technology is available and getting cheaper quickly. Key renewable energy technologies of solar, wind, batteries and electrolysers are on technology learning curves whereby their costs fall by 15%-20% for every doubling in capacity.

“THERE SIMPLY ISN’T TIME TO DEBATE WHEN THE RATE OF CHANGE IS CAUSING SUCH DISRUPTION”

Unfortunately, we know that technology comes first and policy second. We need more policy action, assertive and decisive action from policymakers. As stated categorically in the paper: “As change courses through the system, a failure to plan ahead is dangerous.”

Says Bond: “Even the doziest politicians eventually wake up and start to do what’s needed. Five years ago, policymakers had to push water uphill against the economics.

Now they just have to get out of the way and allow these technologies to run downhill. In theory, it’s much easier. As a policymaker, you unbundle your system, you create auctions, you make it possible for anyone to bid and set up stringent systems to maximize the bidding process.”

What we do not know

This section of the World Economic Forum paper has drawn the attention of many, especially in light of the uncertainty of current times, and includes the following insights:

How will the political economy play out in each country?

Every country is different and there is no single solution. Moreover, in some countries fossil fuel interests have been able to seize the reins of government to try to hold back an energy transition.

An anomaly such as Japan, until recently quite staunch in its defence of fossil fuels, versus India, which is totally embracing a green transition.

What are the non-linear impacts of transition?

There are likely to be many non-linear and highly unpredictable consequences of changing the energy system. For example, consumer behaviour may change dramatically as the result of concerns about global warming, climate activism and other social changes such as remote networking and consumer behaviour in response to COVID-19. Beware the models that purport to forecast everything in detail because by definition they will reflect an assumption of ‘business as usual’.

When is peak fossil fuel demand?

The exact date of peak fossil fuel demand depends on so many variables that it is not easy to calculate with any certainty, and there will be differences between coal, oil and gas in each location. At current growth rates of new energy technologies and global efficiency gains, the peak will come in the 2020s.

Which innovations are coming?

It is difficult to forecast innovation. We need to distinguish between those technologies which are proven at scale and cost, such as solar and wind; those which are on clear learning curves which are likely to lead to disruption such as batteries and green hydrogen; and those which are still searching for paths to low costs and mass deployments such as CCS50 or nuclear fusion.

How long is the gas bridge?

Gas is often put forward as a bridge to a renewables future by companies that produce it. However, it faces the dual threat of high fugitive emissions and the rapidly falling costs of renewable alternatives, which are already threatening the profitability of new gas assets. There is uncertainty whether the whole gas system is a bridge. Some argue that the pipes will act as a bridge but filled with different molecules.

How to solve the last part of the energy transition?

Much has been made of the difficulty of providing the last 20% of energy supply with renewables. But this does not impede the start of the energy transition given that non-fossil energy sources today are only 20% of global energy supply. The energy transition, like any transition, will take place in phases — a period of experimentation for new energy, a peaking phase for fossil fuels, a long period of growth for new energy and, finally, an endgame where the last areas of unabated fossil fuel usage are replaced.

And as technology evolves, so it will become easier to solve the more complex areas. The challenge of this decade is to drive a peak in fossil fuel demand.

How to solve the hard-to-abate sectors at scale?

The Energy Transitions Commission (ETC) has put forward a series of solutions for the harder-to-abate sectors such as trucking and petchem, airlines and cement.

It remains to be seen how the shift can be done at scale but, these endgame sectors do not need immediate solutions for the energy transition to begin.

Will emerging markets leapfrog or copy?

Most incumbent energy producers assume that the emerging markets will broadly copy the energy path taken by the developed markets. However, this seems unlikely for those countries that have major pollution problems, high levels of energy dependency and good governance.

Will emerging economies get lower-cost finance?

According to the Council on Energy, Environment and Water (CEEW), the cost of finance is the largest component of presentday renewable energy tariffs in India and even higher shares in other developing countries where the risk premium is higher.

When emerging economies can overcome the availability and affordability constraints for sustainable finance depends on their domestic policy conditions but also on reforms in how the global financial system assesses risk, how premiums are correctly priced and how risks are hedged across many countries.

What will be the impact of COVID-19 and the policy reaction to it?

COVID-19 introduces uncertainty into all forecasts. Some argue that the crisis will curtail enthusiasm for climate-change solutions and that demand for fossil fuels will increase thanks to the much lower prices.

Others argue that the cyclical slowdown will pull forward the peak in fossil fuel demand, create space for policymakers in energyimporting countries to remove fossil fuel subsidies and to tax externalities and thus clear the way for the energy transition.

Bond suggests that COVID-19 has reduced the power of the fossil fuel industry to lobby against change and has placed the power in the hands of governments to allocate the spare resources to society – bringing forward the transition. “The pandemic has brought forward the peak of the old system and sped up change. According to the IEA, fossil fuel demand will fall 8% this year and solar will grow 16%. If these projections are accurate, this means that peak fossil fuel demand was almost certainly in 2019. That also means we have seen peak emissions from the energy sector, so there is new hope that we can hit the targets of the Paris Agreement,” says Bond.

Ultimately, the paper is a call to action for investors, companies, policymakers and civil society. The time has come to seize the opportunity of the energy transition, to prepare for it and to act while there is still time.

About Kingsmill Bond

Kingsmill Bond, CFA is the Energy Strategist for Carbon Tracker. He has worked as a sell-side City equity analyst and strategist for 25 years, including for Deutsche Bank, Sberbank and Citibank in London, Hong Kong and Moscow.

He believes that the energy transition is the most important driver of financial markets and geopolitics in the modern era.