By Albert Cheung, Deputy CEO, Head of Global Transition Analysis, BloombergNEF
Last year ended on a positive note for the global energy transition, as several key agreements were reached at COP28: to pursue a tripling of renewable energy by 2030, to transition away from fossil fuels, and to accelerate energy efficiency improvements and methane-emission reductions. Yet there is a daunting energy-transition to-do list that must be addressed in 2024, if we are to get on track for net zero by 2050.
First, however, let’s consider what is going well. The goal of tripling renewable capacity, according to the analyst team at BloombergNEF, looks like the right one. Our Net Zero Scenario envisages a global installed fleet of 10.5 terawatts (TW) of wind, solar, hydro and other renewables in place by 2030 – almost a three-fold increase from 2022 – to put the world on track for net zero by mid-century. This is a steep ramp-up, but it is achievable: our forecasts indicate the world is already set to see a 2.5x increase, and greater policy action could lift that closer to the threefold goal.
Zero-emission transport is on a roll, too. It looks like electric-vehicle sales in 2023 will have jumped some 33% from the prior year, to 14 million. By 2026, EVs could account for almost a third of global auto sales – not a million miles from the trajectory needed for net zero. Reports of ‘softening demand’ for electric vehicles from some industry participants don’t seem to be reflected in the data, and may instead be a reminder that not every automaker will be successful in the switch to EVs. This isn’t just a wealthy country story either: EVs are making rapid progress in markets like India and Thailand. Sales of electric vans and trucks are booming as well. More than 500,000 were sold last year, and BNEF is forecasting a million sales for 2024.
Finally, the costs of clean technologies seem to be back under control. Solar PV module prices fell by 45% in 2023 and are now cheaper than at any time in history. Lithium-ion battery prices have reversed their 2022 uptick and are now also at an all-time low. Wind turbine prices are an exception: they remain elevated from their pre-pandemic levels outside China. Still, they have not risen markedly (in US dollar terms, at least) in the last two years. Chinese companies have played a crucial role in this effort: both the solar and battery price trends can be attributed to a wave of investment in the supply chain in China over the past two years. This has led to a supply overhang and intense price competition, which may be an unsettling picture for competitors setting up shop in the West, but is great news for buyers of clean energy technology everywhere.
These positive developments come after two years of energy crisis, supply-chain disruption and macroeconomic volatility – as well as geopolitical turbulence – and we could be forgiven for allowing ourselves a moment of satisfaction, or even optimism for the progress that is being made.
But the work of getting on track for net zero is not even half-done, and the to-do list remains daunting. Here are three items that must top the agenda for this year:
1. Get a grip on wind power and grids
The wind power industry last year had to endure a steady drip of high-profile offshore project cancellations on both sides of the Atlantic, and a failed UK auction. The proximate causes were sudden cost increases that had not been priced into revenue contracts or auction parameters. There are lessons to be learned here: project remuneration mechanisms could better reflect changes in costs (or increases in power prices), and work could be done to shorten the risky period between a project securing a revenue contract and getting the final go-ahead for construction.
Fortunately, this combination of circumstances looks unlikely to repeat in the near future, and will not threaten much of the existing wind project pipeline. Indeed, offshore wind tenders have continued in 2023 in Japan, Korea, Taiwan, Germany and the Netherlands.
Yet there is a persistent issue that needs to be discussed: wind energy deployments are not keeping up with the rates of growth needed. Comparing wind and solar tells a clear story: the annual rate of wind power installations has roughly doubled since 2014, to an estimated 103 gigawatts (GW) in 2023. In contrast, the solar industry deployed about 400GW last year – roughly nine times the total installed in 2014, and four times what the wind industry achieved.
Looking ahead, BNEF’s recent outlooks see wind power capacity reaching 1.9 terawatts by 2030 – well under the 3.6TW included in our Net Zero Scenario. Much more action is needed to accelerate wind power construction.
Power grid investment is similarly falling short. If we are to successfully connect terawatts of new clean power generation and millions of new endpoints in the form of EVs, heat pumps and distributed energy resources, then we are going to need a bigger, smarter, more interconnected power network. In 2022, utilities invested about $300 billion in expanding, refurbishing and improving their power networks, and our upcoming Energy Transition Investment Trends report will reveal whether this number increased in 2023. Whatever the result, it will not be enough: we estimate that annual grid investment needs to hit $600 billion per year by 2030.
Our report, Tripling Global Renewables by 2030: Hard, Fast and Achievable, details many of the actions needed to get both wind power and grids back on track. For grids, there is a clear role for greater central planning, since these are national-scale, decadal investments that you only build once. ‘Anticipatory investment’, which is when utility companies expand networks ahead of time, to areas where they will be needed in future, will allow the grid to ‘skate where the puck is going’. Enabling private sector investment into networks, particularly in developing economies, and streamlining connection queues for renewable projects, are other recommendations.
For wind power, and other renewables, further government action is needed to reform and expedite permitting processes, ease the acquisition of land for development, reduce barriers to market access and continue to improve power-market designs. All of these measures will help to accelerate investment toward the tripling goal.
2. Unleash clean energy deployment in emerging economies
The second challenge is to unleash clean energy at scale in emerging markets and developing economies, or EMDEs, unlocking all of the economic, security and energy access benefits that this will bring. So far, progress has come in fits and starts. EMDEs’ share of global clean energy investment has actually fallen in recent years, to 14% in 2022 (excluding China), though the absolute total has risen modestly to $85 billion.
Of course, EMDEs are a varied bunch, including rapidly growing economies in the Asia Pacific region, fossil-fuel states in the Middle East, and a diverse set of nations across the Americas and Africa. Since many of these countries expect significant energy demand growth, or are still at early stages of their low-carbon transitions, we are not just talking about tripling their renewable energy capacity. For some developing countries, it is a fourfold increase that is needed, such as in India. Others will need a five-, six- or sevenfold increase, as in the case of Indonesia.
Renewable energy is already changing the outlook for these economies, and accounted for 74% of net power generation capacity additions in EMDEs in 2022. In that same year, nearly half of these countries installed more solar than anything else. As solar and storage costs return to a deflationary trend, the economic dividend from choosing renewables will increase for emerging markets, making them the default choice – but only if the right enabling conditions are in place, including finance.
On this front, a growing number of proof points show what good looks like. Our recent paper, Mobilizing Capital in and to Emerging Markets, commissioned by the Glasgow Financial Alliance for Net Zero, highlighted examples from economies as diverse as Argentina, Brazil, Egypt, South Africa, India and Vietnam, where combinations of smart policymaking, risk mitigation mechanisms and concessional finance helped unlock substantial clean-energy investment.
The continued development and expansion of Just Energy Transition Partnerships will add more useful proof points to this list, as will a greater focus on expanding the role of multilateral financial institutions such as the World Bank. But none of these developments can substitute for local policy and regulatory measures that increase market access for renewable energy and create viable offtake opportunities to attract private capital. It is here that EMDEs’ energy ministers must focus their undivided attention.
Electrified road transport is also on the cusp of a breakthrough in EMDEs. Adoption of electric cars and two-wheelers in India and parts of Southeast Asia is growing rapidly, aided by fiscal incentives and charging infrastructure development, while electric bus procurements are also rising thanks to national and local tender programs.
BNEF’s work, such as our published scenarios for India, Indonesia and South Africa, shows that there are feasible net zero-compatible trajectories available to EMDEs. We will add new scenarios this year showing what is possible if Brazil and Vietnam pursue a determined net-zero transition.
3. Lock in demand for clean industrial materials
Industry – especially steel, cement, fertilizers and chemicals – accounts for about a quarter of anthropogenic greenhouse gas emissions. And it is well understood that a combination of electrification, circularity, hydrogen and carbon capture will be needed to mitigate and ultimately eliminate this contribution.
Most of the technologies required are well understood and available, but they are yet to be deployed at scale. That said, the pipeline of projects is growing rapidly. For example, clean hydrogen production projects totaling some 50 million metric tons per year are now proposed by 2030. This would be enough to replace half of the (entirely fossil-based) hydrogen in use in the world today, and is ahead of the growth required in our Net Zero Scenario. For carbon capture and storage, or CCS, more than 400 million metric tons per year of capture capacity is proposed by 2030. That is roughly 10 times what was installed at the start of the decade.
There is an urgent imperative to move more of these projects to final investment decisions, since most are still merely proposals. There is no shortage of government policy aimed at this challenge, including government funding opportunities (which now exceed $300 billion globally for hydrogen), carbon prices and carbon border adjustments (most notably in Europe). These measures are helping to reduce the ‘green premium’ – the additional cost embodied in the final product, whether it is a ton of green steel, cement or fertilizer.
Yet most projects remain unfinanced – and the problem is a lack of demand-side pull. In the case of clean hydrogen, only 10% of the production volume proposed by 2030 had identified a customer as of September 2023, and of those, only 13% secured binding offtake contracts. This is not a question of intransigent industrial companies resisting green: they face numerous pressures that need to be addressed. For example, an investment in converting to green hydrogen-based steel production, or cement production with carbon capture, is one that must pay off over decades. But most buyers of steel and cement operate on much shorter-term purchases, making it impossible to guarantee the volume and price of demand for green products.
In addition, taking the plunge first carries some risk. Later adopters may be able to take advantage of better, cheaper technologies, making them more competitive. And even though a carbon border adjustment may protect from carbon leakage (when dirtier production elsewhere undercuts clean domestic production), that does not help much if a company operates in a geography where, say, hydrogen production is uncompetitive, or CCS is expensive.
Ultimately, these challenges can only be overcome if industrial companies can lock in long-term demand for green products at a premium that pays for the additional costs they will incur. Of course, there may come a point at which this green premium disappears, but we will only get there after a large scale-up, not before.
For this reason, both policymakers and buyers of industrial materials, subject to antitrust rules, must find ways to lock in demand for green steel, fertilizers, chemicals and cement – and ultimately other products too. Considered use of green product mandates and quotas (such as those being introduced in the EU and US), and long-term corporate commitments could ultimately drive adoption of green materials, in the same way that renewable portfolio standards, fleet-wide vehicle emissions standards, and campaigns like the RE100 have helped scale up the adoption of renewables and EVs. Our recent report, Scaling Technologies for Greening Heavy Industry, highlights some of the key policy solutions already in development or in force.
Approaching half-time
This year, much time and energy will be spent predicting and then poring over the results of the many government elections due to be held around the world, and their implications for energy, climate and geopolitics. Those implications will, of course, be substantial – yet from a climate standpoint, we cannot afford for 2024 to be a year of watching and waiting.
In 12 months we will reach the midpoint of the 2020s, and we will have used up half of this most critical decade for low-carbon transition, when emissions must reach an absolute peak. If we want to look back with any satisfaction, we will need to have seen substantial progress on these three challenges: getting a grip on wind and grids, unleashing clean energy deployment in emerging economies, and locking in demand for clean industrial materials.
To all our fellow travelers in this global energy transition, here’s to your continued success in 2024!