Energy: Clean and pleasant land?


11 Jul 2023

Most of the world wants to be carbon neutral by 2050, but do we have the assets to achieve it? Mark Dunne reports.



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Most of the world wants to be carbon neutral by 2050, but do we have the assets to achieve it? Mark Dunne reports.

Britain is full of wind. For the first time the energy that lights up our homes at the flick of a switch and allows us to keep working when the battery powering our laptop runs at has mostly been generated by wind turbines.

Indeed, this accounted for almost a third (32.4%) of Britain’s electricity during the opening three months of the year, slightly ahead of gas (31.7%), power company Drax says.

It gets better. If solar, biomass and hydro are considered then the gap widens with renewable sources responsible for 42% of Britain’s energy during the first quarter, compared to a third for oil and gas.

The growing dominance of cleaner energy sources and the decline of carbon dioxide-emitting oil, gas and coal will be welcome news. To halt the damage to our climate that causes rising temperatures, extreme weather patterns and asthma, the government wants all of Britain’s electricity to be generated from clean sources by 2035.

Although decarbonising the energy mix is moving in the right direction, eradicating fossil fuels from the system is a challenge. Oil and gas have powered our lives for around 200 years and developing the reliable alternatives needed for such structural change will take time. And that is something we are running out of. The world has set ambitious net-zero targets, with the typical deadline being 2050 – just 27 years away.

One of the biggest issues is that the favoured alternatives to burning oil and gas are not as reliable as fossil fuels. Wind farms only produce power when the wind blows and solar parks when the sun shines.

“How can we change a grid from something which is very much in the past – coal, oil and gas – where lights come on at the ick of a switch, to a point where you have to organise the energy load around wind speeds and when the sun is shining. This is a challenge,” says Gabrielle Kinder, an investment specialist in BNP Paribas Asset Management’s environmental strategies group.

The problem is not limited to how we power our homes and businesses, but also how we move around the world. Electricity is seen as the solution to stopping the pollution emanating from our roads.

However, the concerns associated with battery-powered vehicles include cost, range and the size of the recharging infrastructure.

Then there is maintenance. A survey conducted by consumer group Which? found that electricity is the least reliable type of fuel, with such vehicles spending longer o the road when in need of repair. In response, battery-powered car maker Tesla cut the price of its vehicles twice this year to tempt buyers.

It is clear that transitioning the world from an extractive to a regenerative power base will take money…lots of it.

Craig Bethune, a senior portfolio manager on the capital appreciation team in Canada at Manulife Investment Management, believes that in the coming decades $6.9trn (£5.5trn) needs to be spent annually. “It’s a big ask,” he says, “but net zero is going to be a challenge for the world to achieve without aggressive spending.”

Digging deeper

If electricity generated from renewable sources is at the heart of transition plans across the world, more natural resources, such as copper, need to be taken out of the ground to build the car batteries, wind turbines and solar panels that are crucial to eradicating the use of fossil fuels.

Wood Mackenzie, an energy consultant, says that to produce the copper, nickel and lithium needed to reach net zero, mining capex needs to rise from $30bn (£24.1bn) to at least $100bn (£80.5bn) a year until 2050. “So you get a sense of how difficult it is,” says Diana Racanelli, a senior portfolio manager on the capital appreciation team in Canada at Manulife Investment Management.

More than 30 years of monitoring the mining industry has given Racanelli a greater understanding of the enormity of the net-zero challenge. “One of the problems with reaching these transition targets is that we don’t have enough of the metals required.

“Copper is a big one because it is needed at so many levels of the transition, but there is just not enough of it,” she adds. The market is expected to be so tight, she says, that copper producers are starting to discuss the risk of possible substitutions for the commodity in certain uses. “There has to be alternatives and the world is starting to look at that.”

But there is a conflict when it comes to producing more of the minerals needed, as investors have traditionally pushed for higher returns from their mining stocks or companies have reduced their exploration spent to pay down debt.

The barriers to producing more of the minerals needed are not just down to money. There are other issues. One is that it can take well over more than a decade for a newly discovered mine to reach full capacity.

Then some countries have political issues, labour shortages and extreme weather impacts, while regulation can be tighter in different jurisdictions. “There is a wide range of issues making it difficult to mine some of these metals,” Racanelli says.

An alternative, especially for hard to decarbonise sectors, such as transport and industrial processes, is hydrogen. Policy sup- port in this area is strong and Morningstar expects hydrogen demand to grow substantially in the coming decades.

Hydrogen can be stored in in a transportable form and produces no carbon dioxide when burned. Morningstar says that $22bn of such projects have secured funding globally, which equates to about 26 million tons of clean hydrogen capacity, roughly a third of what will be needed to meet the IEA’s 2030 net-zero targets.

Step by step

It appears unlikely that there will be one source of energy that saves the day here. Many alternatives to coal must be employed to help get us to net zero and some sources will not be on everyone’s wish list.

“You can’t be a snob here. You can’t pick and choose what you think you need,” Bethune says. “The focus needs to be on emission reductions, not excluding one type of power over another. Nuclear energy, for example, is low carbon, so you need to think about that as part of the solution.”

Bethune says the world can’t wait for purely clean energy to be perfected. “We need to make all of our energy one step cleaner.”

“For example, liquefied natural gas over coal is a net win for the world,” he says. “It may still be a fossil fuel but if you look at the emissions pro le of the US, there has been a dramatic reduction in emissions, mainly by moving away from coal to natural gas.

“You need to think about every step,” Bethune says. “It is more about emission reduction than waiting for the perfect solution.” Liquid natural gas emits 40% less carbon dioxide on average than coal. “Liquid natural gas is a bridging fuel, but in some ways a bridge to nowhere,” Kinder says.

“Whilst it has some interesting merits in introducing flexibility into the grid, it is expensive in requiring a unique infrastructure,” she adds. “Ships need to be specifically retrofitted to transport this gas, while ports need to be equipped to transform it back into natural gas. It is expensive to move such amounts of gas around the planet.

“In a perfect world, whilst gas will be used to provide inertia when the wind is not blowing and the sun is not shining, it probably would have been best to double down into things like storage or pumped hydro, which could basically guarantee a net-zero economy,” Kinder says.

The other path to achieving net zero could be to keep burning fossil fuels and o set the harmful emissions.

However, the use of offsets to mitigate the damage caused by fossil fuels through funding green projects is controversial as there are question marks around the effectiveness of these markets. “[Offsets] are not a good justification for using coal,” Kinder says. “This could improve, but it is a difficult one.”

Finding the right alternative is not the only issue. “There are challenges putting net zero at risk which I would put higher up the concern list than the available energy sources,” Kinder says. One is the lack of consensus on net zero.

While most of the world has agreed on keeping temperature rises to 1.5-degrees by 2050, some of the countries making the biggest impact on climate change are not aiming for mid-century.

India, China and Indonesia, for example, have set net-zero targets for 2060 or 2070. “They have huge propensity to change whether we can stay within safe limits or not,” Kinder says.

With India and China building more coal-red power plants, fossil fuels remain part of the world’s energy mix. “They can be made greener, which could be something of a positive story for coal,” Kinder says. “Attaching carbon capture and utilisation technologies to coal generators could remove a lot of the negative emissions and by-products you get when coal combusts.”

The transition isn’t working

While investors are pushing companies to back cleaner sources of energy, they have to consider the social consequences of dumping oil and coal – people will lose their jobs, which could hit some communities hard.

The good news is that jobs are being created from a decarbonised economy. The Climate Change Committee’s A Net Zero Workforce report found that around 250,000 jobs have been created by the shift to net zero so far.

However, 65% of ‘green’ employers surveyed by Generation UK, a non-profit that supports people facing barriers to employment, confirmed it is difficult to find staff with the right skills and experience. Green-skilling initiatives need to be scaled up if we are to avoid a bottleneck on the path to net zero and growing unemployment.

These skills are needed.

Bethune says the world doesn’t require less energy each year. “We want more green energy, but we still need more energy overall. “You need to supply enough energy to transition because if you have high energy costs today, it slows down the transition in the future,” he adds.

And the transition needs to speed up if the 2050 net-zero target has any chance of being achieved. The will is there with innovations being developed all the time, such as in electric vehicles (EV). “There’s a lot on the EV horizon,” Kinder says. “Re-charging is getting faster and faster every year.”

Time will tell if the transition assets institutional investors are investing in will be enough to force the structural change the world needs. More reliable assets are needed.

As although Britain is full of wind, it will take more than wind to get us there.


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