The International Energy Agency recently published its World Energy Outlook. It found that renewables and natural gas are expected to be the big winners in meeting energy demand growth until 2040. But it warmed that the era of fossil fuels is far from over.
Where does this leave the Paris agreement? And what is Europe’s role and responsibilities in the shift to a low carbon future?
EURACTIV organised a podcast to discuss these questions with Eirik Wærness, Chief Economist at Statoil, and Jonathan Gaventa, Director of E3G.
James Crisp: Let’s begin with the good news in the report – renewables. The EIA says the big winners are wind and solar. Is that borne out on the ground Eirik?
Eirik Wærness: Yes, we see that the renewables are growing much faster than any other energy source, driven by policy, driven by technological improvement. So in that sense, yes, it’s a winner.
James: And is this a market driven process, Jonathan?
Jonathan Gaventa: It’s driven by both a policy push and an opportunity and market pull. The IEA is naturally quite a conservative organisation, but the extraordinary thing about this year’s World Energy Outlook is, like every year for the last decade or so, it’s projected a strong growth in renewables. And every year, the global growth in this market keeps on exceeding expectations and the price drops keep exceeding expectations as well.
James: Renewables have a reputation for being too expensive and very capital intensive. Are they becoming more competitive?
Eirik: Definitely, they are becoming more competitive both in terms of average cost and in particular in terms of marginal cost, because the marginal cost of producing solar is zero when the sun shines. What remains to be seen is the total cost picture of an electricity system where we base ourselves on very large shares of renewables and an intermittent and seasonally varying production. Because then that has to be combined with a lot of storage, that could be batteries or other types of long-term storage like hydro, and some back-up power, probably gas. And then what’s the total cost of that going to be? Because we also have to invest more in grids in such an electricity system where you have a lot of varying production. And that’s where we haven’t seen the total solution yet.
Jonathan: I think system flexibility is crucial, of course, to make renewables heavy system work. The good news is that according to a recent study that we’ve done with Imperial College London, even once you start factoring in the system integration costs – the grids, the backup, the storage – wind and solar is already cheaper than other low carbon options.
James: How important is interconnectivity between different EU member states in this scenario?
Jonathan: Electricity interconnection is probably the lowest cost way of providing that flexibility that you need for high renewable systems to work in practise. Without that interconnection in place, you have to resort to other options such as demand side response to storage and to flexible generation. Now, all of those are possible, but with greater proportions of interconnectivity the system cost as a whole goes down considerably.
James: But we don’t have that kind of interconnectivity in the EU, do we?
Eirik: No. As it’s just been said, it’s probably the least costly option to decarbonise the electricity system that we have to supplement the investments in the renewable sources themselves by increased grid capacity. If we don’t, then we have to invest much more renewable capacity, because we’re going to have too much electricity basically. But of course, the political issues about that hasn’t been solved yet. What it means is that we have to double the current grid capacities in Europe as a whole. And that’s crossing country borders with electricity lines, etc… it’s not a walk in the park.
James: How much does this cost?
Eirik: Well, a lot. But less than the alternatives. It’s a cost that we have to take on in order to decarbonise, or at least partly decarbonise the electricity sector.
James: Jonathan, are you also sensing this investment gap?
Jonathan: Yes. In Europe and also globally, we’re facing an investment gap in clean energy. In the EU, I think it’s hitting hundreds of billions of euros that will need to be invested in any scenario. The upfront capital costs of a clean energy scenarios is higher than those that aren’t consistent with our climate goals, but the fuel costs – the ongoing costs that you’d have to pay for oil and gas and coal – is far, far less. So actually, we’re seeing that even with those higher upfront costs, the cost over time is becoming increasingly competitive.
James: This investment gap… is it something for the private sector, the public sector, or a combination of both?
Eirik: Most of the investments will have to be undertaking by the private sector, of course. But in order to make that happen, we need framework conditions and regulatory schemes that makes it profitable for somebody to do that on a risk-adjusted basis. Ultimately, it’s the customer that pays that – either as a customer or as a tax payer.
James: Can EU policy makers send out a market signal that strong?
Eirik: That’s a challenge, I think, in the current political environment. One of the reasons is that we want so much in European climate policy. We have so many targets and it’s difficult to be very clear in one or the other direction when you have several targets that are sometimes actually contradicting each other as well.
James: Are the contradictory targets, Jonathan?
Jonathan: Well, there are a number of energy and climate related targets. At the moment, they are all pushing in the same direction. So by investing in energy efficiency, you’re reducing greenhouse gas emissions. By investing in renewable energy, you’re reducing greenhouse gas emissions as well.
At the same time, you lower the carbon price and therefore it makes it difficult to replace the highest emitting source of electricity generation.
It’s worth remembering that the carbon price is tool to meet your objectives, rather than the objective itself.
Eirik: Yes, definitely.
Jonathan: On the investment point, it’s worth remembering that the world is awash with capital at the moment. Interest rates are hitting record lows and so the challenge isn’t an absence of available money to invest, but rather trying to direct it into the right place.
James: So trying to unlock this dry power…
Eirik: Unlocking the investment by de-risking investments in clean energy sectors and in grids in particular.
Eirik: And making it available to the investment community with the necessary number of projects. Making it a credible way forward that if you invest in this you can actually make a risk adjusted rate of return that is competitive and having the sufficient amount of projects around that deliver that with credibility.
James: And when you talk about the investment community, are we talking specifically about long term investors such as pension funds, insurance funds?
Eirik: The ones who finance it could be the banks and the credit institutions and the hedge funds and the pension funds… but the ones that actually have to make the fiscal investment have to be energy companies of some kind. Either it’s a solar specialist or a traditional energy company, or a utility or grid investment company.
Jonathan: I think we need to rethink who we’re imagining as the investors of the future. Yes, it’s pension funds, yes it’s the banks… but increasingly it’s also communities, municipalities, private individuals, making the decisions in their own homes and their own vehicles and perhaps even investing in local community generation schemes as well. We’ve seen a real growth in crowd funding in terms of all kinds of interesting innovations and startups.And I think that’s one of the real disruptive forces that we’re going to see in the energy sector.
James: The EU, as part of its energy union plan, has said that they want to put consumers at the heart of this. But we also have the capital markets union, where we’ve heard that there is discussion ongoing about whether to de-risk this kind of green investment.
James: Let’s turn to the Paris agreement. We’ve come to the end of COP22 in Marrakech. Was it a success, Jonathan?
Jonathan: I think it was a very strong success in very challenging circumstances. No one was expecting the U.S. to elect a climate skeptic president. It happened while the conference was ongoing, and the conference did what it needed to do in terms of demonstrating that the commitment was still there. There’s now 110 countries that have ratified. There’s a clear timetable for developing and implementing the rules. And the most important thing is that there’s also a clear timetable for reviewing commitments to decarbonisation and ratcheting them up over time to make sure that we being to get on track to the trajectory of well below two degrees.
James: Let’s talk Trump Eirik. This introduces precisely the kind of uncertainty that investors hate, doesn’t it?
Eirik: Yes. It’s also part of the global community, that we change politicians, we change the ones in charge of a government or a cabinet.
James: But this is no normal politician.
Eirik: No, but there are many other politicians out there of all varieties. I think it remains to be seen the exact concrete consequences of this particular election on the U.S. energy and climate policies. There would probably have been changes with the other candidate being elected as well, compared to what we’ve seen. The follow up of the Paris agreement is going to be a long process anyway. It’s not only about being in agreement about how to follow up on the pledges and the targets, but it’s also in each individual country you have to put measures in place that actually drive each country towards their pledges and promises. That’s going to be a drawn out process.
Jonathan: I think Trump can change policies, but he can’t change fundamental economics. He can support coal generation, but can’t change the fact that, actually, coal generation is now expensive compared to all the alternatives. And he certainly can’t put clean energy technologies back in the box. The changes that we’ve seen in the underlying economics of wind and solar and LEDs and other efficiency technologies can’t suddenly be undone by a presidential decree. And so, yes, it’s very bad news that we’ve got climate skeptic as the U.S. president, but I don’t think that will fundamentally change the global direction of travel on climate change.
James: A big part of his victory were people in U.S. coal country. There were signs saying “Trump digs coal”.
Eirik: But I agree that it’s very difficult to see exactly what type of concrete measure could be put in place to improve the conditions in those parts of the U.S., because it’s been such a strong market movement. There is, as far as I know, no limitations on the U.S. coal industry’s ability to export coal. There’s a global coal market there. What is difficult for them is to expect an increased coal demand in the power sector in the United States, where the market, partly because of renewables but mostly because of gas, has been driving coal out of the mix. And it’s difficult to see how that could change rapidly by policy measures. One of the interesting things about the United States climate score, if you like, is that most of that has been driven by the market, also under Obama. A very little part of it has been driven by policy. And as a consequence, you have gas coming into the power sector, together with renewables, driven by cost developments and not by subsidies to the same extent as in Europe. And at the same time, the flip side of that coin is of course that because of the low gasoline prices now, we have record gasoline sales as well, despite policies.