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News & opinion

20 NOV 2019

Expert view: How can we transition to renewable energy?

In order to tackle climate change, we need to be asking questions of practicality: how can we transition the world's energy infrastructure away from gas and coal, while also meeting dramatically increased overall global demand?

In order to make the switch - what will it take for businesses, governments and industries to transition to renewable energy?

The path for policymakers trying to remove polluting fuels from our energy system has never run in a straight line. Over 20 years after the current series of United Nations climate change conferences began, the share of global energy consumption provided by fossil fuels remains over 80%, according to International Energy Agency figures. Global energy consumption has increased by over 45% in the past 20 years and production of coal and natural gas has risen even faster.

At the latest climate change conference in Katowice last year, governments with heavy economic reliance on both coal and gas, including the United States, refused to endorse scientific advice on climate change. But we should not see the energy transition problem as a binary opposition between fossil fuel producers and renewable energy leaders.

While it's true that the Trump administration has championed the coal industry, the fact is that coal is already on its way out in the US, and more so than in some other countries. To understand the challenge facing advocates of energy transition, we need to distinguish between the transition from coal and the transition from gas.

In North America today, there are no plans to build new coal-fired power stations and the economics for coal get worse with every passing year. In those parts of the US that operate competitive power markets, coal-fired power struggles to compete with natural gas on price. Moreover, the kind of large-scale, constant baseload power which coal-fired generation excels at providing is becoming less important. Over the past 40 years, the US and other developed economies have de-industrialised. Energy-hungry heavy industries have given way to service industries with much lighter electricity demand. As a result, overall electricity consumption in the world's largest economy is falling. The spread of data centres will not be enough to offset this trend, and neither will electric vehicles (especially with the relatively sluggish take-up of the latter in the US). Changes in working patterns mean that demand on the power grid is not as predictable as it used to be.

Smart meters mean that consumers can see in real time how much power they are consuming and adjust their consumption accordingly. The huge growth in renewables, meanwhile, has transformed the energy supply proposition in North America. Wind and solar power have no variable cost of production: the wind and sun are free, so whenever they appear, electricity gets generated. This acts like negative demand on the grid, further reducing the demand for baseload power.

In emerging markets, on the other hand, coal is the cheapest fuel available. For countries like India, China and the states of South-East Asia, with growing economies and increasing demand for power, domestic coal production remains an attractive way to sustain economic growth at a price point that most of the population can still afford. Over 300GW of new coal-fired power generation – more than the output of all the coal-fired power stations in the US and Canada combined – was being planned or constructed as late as last year, most of it in these countries.

Transitioning away from coal, therefore, requires different measures in different parts of the world. In the US, still the third-largest user of coal-fired power by capacity, market forces will lead to much of the current fleet being decommissioned in the coming years. However, this only applies in competitive markets where power production is separated from energy supply. If power markets across the country were open to competition, this could be accelerated – although political support for the coal industry (which includes coal mining and haulage as well as power) is likely to prevent that for the foreseeable future.

Market forces can also work outside the US, where in some countries – particularly in Latin America – the fall in the cost of renewables means they can compete with fossil fuel generation. Where coal remains competitive on price, natural gas can be a bridging fuel to renewables, replacing coal as the main provider of baseload capacity. Gas-fired peaking plants, which are designed to be started up quickly in response to urgent demand for electricity in peak periods, are considerably cleaner than coal plants and quicker to start up. The shale gas boom in North America has made natural gas more competitive. Asian countries with insufficient domestic gas production have already invested in infrastructure to import liquefied natural gas and further investment could reduce their reliance on burning coal.

The transition from gas will be harder, not least in the US, which now produces so much gas that it became a net exporter for the first time in 2017 and is due to scrap tax credits for renewable energy generation in the coming years. As solar cell technology improves and wind turbines become more powerful, renewables are becoming more cost competitive on a price per kilowatt-hour basis, but this alone is not enough. To compete overall, they must also be as reliable as fossil fuels, and that means when combined with batteries or other technology able to supply power when wind and solar are not generating. At their current price, the cost of large-scale batteries needs to fall by about 50% before this can occur.

The built environment is responsible for up to 30% of global greenhouse emissions.

Ellen MacArthur Foundation

A cost-effective solution already exists, however, in the form of capacity markets. Such markets sell power capacity to energy suppliers to guard against power outages at peak times. This can be in the form of either increased generation or of reduced consumption, such as a factory that offers to switch off its machinery temporarily at peak times when demand is high. Smart grid technology can help to aggregate capacity providers, as well as to schedule power demand – such as for charging electric vehicles – away from peak times. If capacity markets are combined with markets for carbon credits, this could cancel out some of cheap gas' competitive advantage. In the longer term, the most important technological advance in the energy transition will be in battery storage.

Both government and energy infrastructure professions have a part to play here. Governments who have committed to phasing out fossil fuels can put their money where their mouth is by investing in research and creating incentives to spur innovation in the field of energy storage. The energy infrastructure professions meanwhile face a re-skilling challenge, with a generation of experts in coal-fired power finding increasingly little to do in countries that have turned their backs on coal.

There is already no shortage, at least in the US, of people eager to take jobs in the renewable energy industry. But like other industries, this sector will be increasingly driven by automation at all levels, from project origination through design to asset management. Energy efficiency and balancing increasingly variable supply with price-sensitive demand relies on ever-increasing flows of data.

Both industry veterans and new entrants will have to get to grips with the power of automation and making sense of data streams; either by up-skilling or by partnering with service providers. At the same time, the spread of capacity markets could bring new entrants to the energy industry in the form of heavy-duty industrial consumers. Professionals at these firms who can master energy efficiency, data analytics and power trading are well placed to capitalise on the energy transition.

Michael Ferguson is Director, Energy Infrastructure Practice, Corporate Ratings Group, S&P Global


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