By Michael Liebreich, Senior Contributor, BloombergNEF
The transition to a net-zero carbon economy will be straightforward: we just roll out cheap clean energy technologies, become more energy efficient every year, keep innovating and stop chopping down forests. What could be easier? The transition will also be brutally challenging: every sector of the economy will have to switch to new technologies, consumers will have to change behaviors, new supply chains will have to be built, and all this has to happen in every major economy, in just a few decades, and at the cost of a whole generation’s savings. What could be harder?
It is easy to swing between extremes of optimism and pessimism. This is the first of a two-part article in which I’ll explore the bull and bear cases for the net-zero transition. First, to get the bad news out of the way, I’ll lay out the reasons why it is going to be extraordinarily hard. In the second part, I’ll look at why we should not lose heart, because the transition will in fact be easier than may appear.
So, let’s meet what I call the Five Horsemen of the Transition: five reasons why anyone hoping for rapid global decarbonization is kidding themselves.
Horseman 1: It’s the economics, stupid
Over the past decade, wind and solar have become the cheapest sources of power generation almost everywhere on the planet. Saudi Arabia’s 600 megawatt Al-Faisaliah solar plant will deliver electricity at just $10.40 a megawatt-hour, tantalisingly close to the 1 US cent per kilowatt-hour that conventional energy analysts thought would not be achieved even by 2050. In more and more regions, it is becoming economic to shutter existing fossil-fuel plants and replace their output with new renewables.
Wind and solar are, of course, intermittent, but battery costs too are plummeting, to the extent that they often underbid so-called peaking plants burning natural gas. Cheaper batteries (along with lower maintenance costs) also mean that electric vehicles – two-wheelers, cars, buses and soon trucks – have become largely competitive with internal combustion vehicles.
Despite this extraordinary progress, the first Horseman of the Transition is cost – for three reasons.
First, in a future economy deeply dependent on electricity, resilience really matters (as I explained in this March 2022 blog). While getting to 90% clean power should be affordable, the last 10% could cost as much again as the first 90%. There are times when wind and solar fall away almost completely for weeks, under-deliver for months, or weaken for years. To provide real resilience, batteries alone won’t cut it: we will need a combination of renewable overcapacity, multiple long-distance interconnectors, much more bio-energy, nuclear power and pumped-hydro storage, and long-duration storage of either hydrogen or its derivatives. As of today, we have neither the regulatory frameworks nor the political support to fund these solutions.
The second reason why cost is the First Horseman is that dramatic reductions in wind and solar costs have lulled us into thinking that any clean technology, given an initial boost, will storm to market dominance under its own economic steam. I myself have made the argument, most recently in last quarter’s blog, that burning stuff will lose out to electrification. It will, just not fast enough. Left to its own devices, the process of decarbonizing the economy could take the rest of this century.
Take the example of natural gas – which is an extraordinarily cheap source of heat. For high-temperature industrial heat, to match today’s benchmark Henry Hub gas price of $2.70 per million British thermal units with clean electricity would require a wholesale price of just $9 a megawatt-hour – around a third of the price in many markets before the recent spike – not just when it’s windy or sunny, but continuously. To displace the same natural gas with hydrogen, its cost would need to be 31 cents per kilogram. While the cost of electrolysers is surely set to plummet, they constitute only one cost driver for green hydrogen among many; no serious forecaster expects hydrogen at 31 cents per kilo.
So, to be optimistic about clean energy displacing natural gas on the economics alone, you have to hope clean power costs drop by another factor of five, or green hydrogen costs drop by a factor of more than ten. Alternatively, you have to hope carbon prices will reach $200 per ton of CO2 equivalent – not just in Europe and California, but in every country of the world. Put your hope in so-called direct air capture? Current costs are between $600 and $1,100 per ton of CO2 and they are largely driven by thermodynamics. I simply don’t believe they can be reduced below $200 per ton of CO2 any time soon.
The third reason cost is such a problem is that in much of the world, even cheap wind, solar, batteries and EVs are still a mirage. Clean energy, which almost always involves higher capital costs followed by lower fuel and maintenance costs, is only cheap if you have access to cheap capital. That’s fine if you are in Europe, Japan, South Korea or the U.S. and your cost of capital is 6%, but not if you are in the Global South and your cost of capital is 15%. The IEA has pointed out that investment in the transition in developing countries excluding China needs to increase from $770 billion to $2.8 trillion per year by the early 2030s to keep the world on track for 1.5C. Where is that money to come from?
Multilateral financial institutions have deployed tens of billions of dollars of concessional finance and employed all sorts of clever blended finance structures to increase the figures, but they still provide a fraction of what is needed. Reforms of the multilateral finance institutions being proposed via the Bridgetown Initiative may help eliminate the interest-rate differential between developed and developing countries – but you can’t eliminate a risk premium where there is a real difference in risk.
Horseman 2: We’re going to need a bigger grid
Getting to net zero will require a dramatic expansion of our electrical infrastructure and a commensurate amount of investment: $21.4 trillion in the Net Zero Scenario of BloombergNEF’s New Energy Outlook. To put that figure in perspective, it would be one dollar out of every seven managed by the signatories to the Glasgow Financial Alliance for Net Zero. Spread across transmission, distribution and high voltage DC lines, underground and overground, the Global North and the Global South, we are talking about a network double the size of today’s – one that would reach all the way to the sun and part-way back.
Why so many wires? Any future net-zero economy will be much more deeply electrified than today. The ultimate depth of electrification will depend on many factors, but there is general agreement that it will need to increase from the current 20% to at least 70%. Subtract around a third for demand-side energy efficiency improvements, but add it back for economic growth, and that’s around three times more power than today that will need to be moved around.
In addition, a much more substantial proportion of power in future will be met by wind and solar. Conventional power stations are built along coasts or rivers, while the vast majority of grid-scale wind and solar power will be imported from rural areas, deserts and oceans. That’s a lot of new cable routes. Plus, wind and solar are variable – so just as we will need surplus generating capacity to ensure there is always supply somewhere on the network, we will need surplus grid capacity to transport its output to users.
Right now, according to BloombergNEF, 600 gigawatts of wind and solar projects, equivalent to 130% of all capacity installed to date, are waiting for connection in Europe. In the US, Berkeley Lab puts the current interconnection backlog at more than 1.4 terawatts, equivalent to 120% of the entire capacity of the current US power-generation system. ChargeUp Europe, an association representing EV charge-point operators, reports that the largest bottleneck currently holding back the build-out of charging infrastructure across Europe is “the amount of time it takes to establish a grid connection point, the complexity of the process to get one, and access to sufficient grid capacity”.
The scale of the challenge is almost inconceivable. As an example: in May 2023, the UK’s National Grid estimated that meeting the Government’s 2035 net-zero power target would mean building five times more transmission lines by 2030 than it had built over the past three decades. Under the UK opposition Labour Party’s promise to bring net-zero power forward to 2030, the challenge becomes even more extreme.
Any country that embarks on delivering on the net-zero commitments made at COP26 in Glasgow is going to run up against the same issues. The power engineering supply chain simply cannot cope – it is short of cables, short of transformers, short of project managers and short of engineers. The only thing preventing it from being completely overwhelmed is the convoluted and lengthy planning process for additional transmission, with new routes often languishing in regulatory limbo for well over a decade.
Worst of all, politicians do not yet seem to have grasped the scale of the problem or the fact that, as Allan Andersen, associate professor at the University of Oslo, said ten years ago: “without transmission, there is no transition”.
Horseman 3: The material world
Clean energy rocks – a lot of rocks. Overall, BloombergNEF estimates in its Net Zero Scenario the energy sector will use five times more minerals by 2040 than it does today. Electric vehicles use six times more minerals than internal combustion vehicles; renewable and nuclear power between three and 12 times as much as fossil power; enormous amounts of copper and aluminium will be needed to build out the grid.
Last year, Simon Michaux, associate professor at the Geological Survey of Finland, published a report saying, “there are not enough minerals in the currently reported global reserves to build just one generation of batteries for all EV’s and stationary power storage”, instantly becoming a pin-up for the anti-renewables crowd. It is only when you dive in that you realize he assumes every wind and solar plant has to be paired with four weeks of battery storage. All Michaux did was postulate a grid-connected storage figure between 90 and 450 times higher than many energy modelers – and then point out it was impossible to deliver.
Even when you set this sort of silliness aside, meeting BNEF’s fivefold growth in mineral demand from clean energy technologies looks challenging. To reach net zero, demand from the energy industry for lithium will increase by a factor of 14 by 2050. Demand for rare earths used in wind turbines and electric vehicles will grow by 11 times. Copper demand will increase by six times and cobalt will double.
Investment in the mining sector has doubled over the past two years, but even if all the projects on the drawing-boards could enter production by 2030, according to the IEA, that would still deliver just 75% of the minerals required to keep the world on a 1.5C pathway. The average new mine has been taking no less than 16 years to get from resource characterization to production. That can most likely be accelerated, but at what risk to the environment and social justice?
Horseman 4: Politics
The Fourth Horseman is that, even in the rich world, society’s commitment to climate action is still fragile.
In a survey in March this year, the Pew Research Center found that the overall percentage of Americans who view climate change as a major threat had dropped from a 2018 peak of 58% to 54%. More significantly, however, just 23% of Republicans now see climate change as a major threat. Meanwhile, 98% of Republicans aged 65 and older are against the U.S. eliminating the use of oil, coal and natural gas. If you think that doesn’t matter, think about who owns most investments in the US, who donates most to politicians, and who might win the Presidency in 2024.
So, although the Pew Research Center did find that more than two thirds of Americans support wind and solar power, and say they are in favor of net zero by 2050, when it comes to things that might actually cost them money it’s a very different story. The US could find the momentum created by its landmark Inflation Reduction Act extremely hard to maintain over the long term.
In the UK, despite an unusual level of bipartisan agreement on climate change and a Climate Change Act that has enshrined net-zero-by-2050 into law, both major political parties appear to be tempering their support for climate action. The Labour Party has watered down an early pledge to spend £28 billion ($36 billion) per year on “green energy”. The ruling Conservatives are reconsidering the dates for bans on internal combustion engine cars and gas boilers (even in new properties) and is pushing to award hundreds of new oil and gas licenses.
The EU may be seen as a paragon of climate action, with new and aggressive targets adopted in the wake of Russia’s invasion of Ukraine. Bubbling below the surface, however, is the rising popularity of parties espousing anti-climate rhetoric.
In France – whose 2018 “yellow-vest” protests were copied in Canada and elsewhere – Marine Le Pen’s climate-sceptic Rassemblement Nationale won 41.5% in the 2022 Presidential Election. Germany’s anti-climate-action Alternative fur Deutschland is polling second only to the conservative CDU/CSU; the FDP, which controls the ministries of finance and transport, has been doing its best to water down the country’s rapid decarbonization. In Holland, the Farmer-Citizen Movement, created to resist environmental policies affecting farmers, won a snap election and effectively ended Mark Rutte’s 13 years as Prime Minister. In Southern Europe too, voters have rewarded politicians prioritizing security and economic growth over climate action.
If support for climate action is far from assured even in its European heartland, the reality is, it is skin deep in poorer countries. In 2022 the Pew Research Center, surveying people in 19 countries, found that 75% thought that climate change was a major threat. IPSOS, however poses the question slightly differently, asking respondents to name their three greatest concerns. It found that climate change comes only ninth, far behind inflation, poverty, unemployment, crime, corruption, health care and taxes.
In other words, around the world, people care about climate change, but they care more about immediate priorities.
Horseman 5: Corruption, predatory delay and regulatory capture
This leads us to the fifth and final Horseman – which is corruption, predatory delay and regulatory capture.
The net-zero transition will inevitably create losers – many of them wealthy, powerful, well-connected and secretive. As we already have seen all too clearly, they would rather “burn and rave at close of day” than “go gentle into that good night,” and that gives rise to all sorts of pathological behaviors.
This month Phoebe Cooke, a senior reporter with DeSmog, broke the story of a PR campaign commissioned by the UK’s gas and heating industry, designed to “spark outrage” about heat pumps. This is only the most recent example of the sort of underhand campaigns by fossil-fuel interests to slow down the transition that has been documented in great detail by Naomi Oreskes, Erik Conway and others. The DeSmog story broke in the same month that the Church of England Pensions Board announced plans to disinvest from oil and gas companies, bringing to an end a decade of attempts to engage with them on the climate. They stated that “the reversal of previous commitments, most notably by BP and Shell, has undermined confidence in the sector’s ability to transition.”
If Shell and BP cannot be trusted to set a course for a Paris-aligned future and stick to it, how much less can other fossil-fuel players be trusted – players who are far less transparent, based in jurisdictions less concerned about climate change than the UK? How is Petronas’s net zero 2050 pledge faring? What about Saudi Aramco? Or national oil and gas companies that have not even paid lip service to climate action?
Last year the Global Fossil Fuel Registry found that countries around the world are planning to produce more than twice the amount of fossil fuels in 2030 than would be consistent with 1.5C of global warming. Sultan al Jaber, President of COP28, has set out a four-pillar action plan for the conference later this year, including the phase-down of fossil fuels. A brave move, considering he is also the CEO of Abu Dhabi’s national oil company. Can he deliver an agreement? Perhaps – he’s an extraordinary leader. But even if he does, will the fossil-fuel producers of the world stick to it?
Overly pessimistic?
Thus concludes the bear case for the net-zero transition. If this feels like an unusually pessimistic picture, worry not. The Five Horsemen of the Transition are not showstoppers – each of them can be overcome. All I am saying is these are the key challenges currently standing in the way of the net-zero transition, and they are fearsome.
With the right leadership, focus, innovation and resources, however, I’m sure the Five Horsemen can be turned into nothing more than the Five Speedbumps. In the second half of this two-parter, I will be presenting the bull case for why the net-zero transition will, in fact, be easier than you may think.