By Albert Cheung, Head of Global Analysis, BNEF
2022 marked the end of an era in the low-carbon energy transition, in more ways than one. At the start of the year, it was already clear that clean energy costs were on the rise for the first time in memory, and supply chain issues emerged as a key challenge for the transition. The costs of debt finally began to rise after many years of cheap money and with it the costs of renewable project finance. The global energy crisis and war in Ukraine put an end to the era of low energy and commodity prices that many thought would last for years to come, while inflation, currency fluctuations and looming recessions created a new and challenging investment environment, tightening public purse-strings in many regions.
Geopolitical risk and disruption are now more intertwined with energy transition issues than ever. Russia’s war looks set to continue, and its energy trade with the West will be severely limited long after the happy day when peace does arrive.
2022 also marked the end of a four-year period in which climate ambition on the international stage seemed to climb endlessly higher (as measured by national goals in particular). You can draw a thread from the release of the IPCC Special Report on 1.5 Degrees of Global Warming in 2018, through the UK’s and EU’s pledges to get to net zero in 2019, via Greta Thunberg and the run-up to Glasgow which saw many more countries commit to net zero, and the more than 150 enhanced NDCs throughout 2021 and 2022, to where we find ourselves today: with vastly higher climate ambition, and most of the world’s emissions committed to net zero around mid-century. We are in a much better place than four years ago, but such gains in ambition are going to be harder to come by in the next 12 months, and of course, national commitments are still not sufficient to get on track for 1.5 degrees.
Yet for all of these swirling winds, 2022 still saw a remarkable acceleration in the energy transition, in part because of the energy crisis, with record renewable energy installations and electric vehicle (EV) sales worldwide.
Acceleration to continue in 2023
The outlook for low-carbon transition continues to look extremely bright. Globally, BNEF expects clean power capacity additions to increase by at least 18% in 2023, shrugging off supply chain woes and interconnection delays to hit yet another all-time record at more than 450GW.
Clean energy is more cost-competitive than ever as fossil fuel costs remain elevated, and renewable costs are now resuming their long-term decline, with the global average levelized costs of onshore wind falling 6.3% from 1H to 2H 2022, offshore wind falling 10.2%, and fixed-axis PV falling 1.7%. Supply chain constraints are easing and prices of key inputs, such as polysilicon, nickel and cobalt, are down. Electric vehicle sales are continuing to ramp up, and are projected to hit 13 million in 2023, up from around 10 million in 2022 (more, if you include buses and medium/heavy-duty vehicles). Clean hydrogen will be cost-competitive sooner than expected, thanks to elevated fossil fuel prices.
Sustainability commitments from companies and financial institutions remain at an all-time high, and our conversations indicate that these are here to stay, in spite of a few high-profile controversies. The setting of new Science-Based Targets, in particular, hit a new record in 2022, and many more governments are taking steps to promote corporate climate-risk disclosure.
Clean energy policy-making is alive and well, too. The US Inflation Reduction Act (IRA), the single most consequential development in the global energy transition last year, will direct massive investments into clean energy technologies in the coming years, and help drive scale into nascent technologies like hydrogen and carbon capture. The EU has reached agreement on the Fit for 55, RePowerEU and carbon border adjustment mechanism, setting the scene for faster decarbonization across the bloc. Elsewhere, Brazil ejected its Amazon-slashing incumbent president, Australians continued to vote for faster climate action, and Indonesia and Vietnam are attracting international finance with their accelerated decarbonization plans.
So if 2023 marks the start of a new era in the low-carbon transition, it won’t be an era characterized by any sort of slowdown. Quite the opposite: the transition will only accelerate and expand. But this acceleration will take place against a profoundly changed backdrop, characterized by four new dynamics: countries in competition; energy security at a premium; a more transactional transition, and the delivery imperative. Let’s unpack each of these dynamics.
Countries in competition
As the net-zero opportunity becomes clearer (our New Energy Outlook puts the investment opportunity at $194 trillion to 2050), countries are rightly looking for ways to capture value in the clean energy transition, from raw materials extraction and refining to technology development, manufacturing and deployment. The US, EU and China are now in a much more explicit competition for jobs, economic value, technological leadership and supply chain dominance across clean energy and other technologies, both for economic and security reasons. Other countries are also looking for their slice of the clean-economy pie, notably India. The focus on domestic jobs is leading to protectionist tendencies, and increasingly the gloves will come off when it comes to trade policy relating to energy technologies and commodities.
Countries have been trying different approaches: from restricting raw material exports to promote domestic investment in refining and manufacture (Indonesia), to import barriers and tender programs to allocate subsidies for solar manufacturing (India). But the Inflation Reduction Act is probably the biggest case in point. The subsidies on offer, including some that are explicitly for technologies manufactured in the US and ‘free trade agreement’ countries, will distort the playing field, possibly attracting investment away from other markets and upsetting trade partners. The EU has already expressed its annoyance even while working to boost prospects for its own clean energy manufacturing sector; the US is looking at allowing imported EVs to access tax credits after concerns raised by trading partners such as South Korea, and Norway and Australia have voiced objections to the IRA’s hydrogen tax credits, which could distort any future international hydrogen market. For its part, the EU’s carbon border adjustment mechanism, aimed at preventing carbon leakage, faces similar criticism and will spawn copycat policies in other markets.
BNEF has written in the past about the importance of free trade in lowering barriers to clean technology adoption, and some of the policies implemented in this period will prove counterproductive or raise costs. For example, our solar analysts estimate that the cost of setting up a PV manufacturing supply chain in Europe or the US, from polysilicon through to modules, would be around $560 million per gigawatt of annual production capacity, compared to just $145 million in China. But a world in which countries compete to capture value from the energy transition could still be one that moves faster towards net zero, despite the implied inefficiencies.
The new trilemma: security at a premium
Volatility in global energy markets will remain in 2023, and government policymakers, particularly (but not only) in Europe, will spend much of 2023 trying to keep energy costs down and the lights on, both for citizens and for business.
In this next era of the energy transition, it is energy security, not sustainability, that will come at a premium. In the ‘energy trilemma’ of old, energy affordability and security came as a package – fossil fuels were seen as both dependable and affordable – and it was sustainability that came at a premium. Now, we live in a world where clean energy is the affordable option, and energy security comes with the higher price tag.
The good news is that clean energy deployment also supports energy security, and so the quest for greater energy security will ultimately lead to a faster transition.
However, for the private sector, this adds up to a much more complex picture. Increased country competition, as described above, represents both a significant policy risk and an opportunity to lobby for greater support from receptive governments. Meanwhile, differentials in energy prices across regions will also lead to tricky strategic decisions, particularly for companies in energy-intensive industries. The example of BASF downsizing its European operations, in part due to high energy costs, has already made many sit up and pay attention. Northvolt, darling of the European battery scene, is also looking at rebalancing towards the US, both because of high European energy prices and the attractiveness of the IRA.
Transactional transitions
The era of easy gains in international climate ambition, when countries queued up to ratchet up their climate goals, may be over for now, since much of the developed world has ambitious emissions reduction goals in place. However, there is still plenty more ambition to be unlocked, particularly in emerging markets and developing economies. In our New Energy Outlook, China, India and Indonesia all easily outperform their 2030 climate goals, even if they pursue only the least-cost trajectory mapped out in our Economic Transition Scenario (largely based on economic renewables deployment and consumer-led EV adoption). In other words, these countries should be able to increase their climate ambition without incurring additional costs.
Developing economies have long made it clear that the right amount of international finance will unlock greater action, with a huge emphasis on hitting the $100 billion per year climate finance goal. This still needs to be achieved, as soon as possible. In parallel, the emergence of Just Energy Transition Partnerships looks like one effective route to create momentum, with welcome deals so far in South Africa ($8.5 billion), Indonesia ($20 billion) and Vietnam ($15.5 billion). Each of these partnerships will provide loans and grants to accelerate the transition away from coal and bring forward renewable energy and emissions reduction targets.
But these partnerships also raise the specter of a more transactional approach to the global energy transition in the coming years – a more explicit ‘show me the money’ test to be passed before developing economies will agree to move faster. Even as we rightly celebrate these new partnerships, it is important to remember that country-by-county deals alone will not get us to our climate targets in time. They must be seen as a complement to ongoing efforts, by sectors, companies and yes, countries, to keep re-evaluating what is possible and lifting their goals.
The delivery imperative
Above all, the new era of energy transition must and will be focused on rapid delivery. A year ago, we concluded that total investment in the global energy transition had hit $0.75 trillion in 2021, and that it needed to scale to roughly $4 trillion per year within this decade. The 2022 total will have been a huge increase from 2021 (watch this space: our investment figures are due out soon!) but will not yet be anywhere close to the level required.
We know the transition is going to accelerate. We know the capital is there (albeit pricier than it used to be), and policy makers are shifting their attention away from vision and goals, towards execution and delivery. The signs are good for 2023 and beyond. Implementation of the IRA and the Infrastructure Act are already starting to drive investment in the US. Canada is introducing its own tax credits for clean energy technologies. Indonesian civil servants are busy on implementation of the JETP. The European Council has agreed rules on accelerating the permitting of renewables, a critical bottleneck. Zero-emission vehicle targets now cover 40% of the world’s auto market.
What is needed now is a relentless push to remove barriers to the transition, and the implementation of pragmatic policies that can deliver on the goals we have set. Greater competition among countries could indeed support this: it is a sign that countries see the opportunities in the energy transition more clearly than ever, and are gearing up to take their piece of the pie.
It’s been said that something akin to a wartime mobilization would be needed to successfully tackle climate change. That might just be what we are beginning to witness.