The crucial transition
It is broadly understood that fossil fuels represent 83 per cent of today’s energy mix, but that headline figure disguises changes in underlying composition.
Oil’s share of consumption is falling over the last two decades, mostly because China has preferred coal for its electricity generation.
And renewables are seeing remarkable growth. Renewable energy sources – led by wind and solar – have increased their share of global energy consumption from 1 per cent to 6 per cent over the same time period.
This trend will continue. Fossil fuels will remain the main source of energy in the global economy, but their share of the global energy mix is expected to decline materially, to 73 per cent in 2040.
Natural gas will grow from 24 per cent of the global energy mix to 26 per cent in 2040, driven by North America’s vast shale gas resource base. But oil and coal will continue to lose market share.
Renewables will take up the running, playing an increasingly important role with their share of the world’s energy mix rising to 15 per cent by 2040.
The biggest change will come in power generation.
Renewables will become the largest source of power generation energy in 2040, almost tripling their share to approach a third of the fuel mix.
Improving affordability of electric vehicles is required for that performance to be matched in transport, and significant changes to industrial and real estate energy may require regulation.
In fact, direct policy actions from governments will only accelerate the changes. Potential regulatory changes could involve banning new coal generation plants or implementing a global carbon tax.
A technological breakthrough – possibly carbon capture and storage, clean nuclear or transmission grids that are able to run fully on renewables – could also contribute to further reduction in carbon intensity.
These changes are critical for infrastructure investors.
One of the most dramatic illustrations of the infrastructure impacts of the shift to a decarbonised economy is in offshore wind power.
Offshore wind power provided just 0.3 per cent of global electricity supply in 2018 but the market has been growing by almost 30 per cent a year since 2010, second only to solar energy6.
There are now more than 100 offshore wind farms in 12 European countries7.
Within two decades, the International Energy Agency predicts offshore wind will be a USD $1 trillion industry8.
The growth is being driven by advances in technology. The shallow, windy waters of the North Sea have provided an ideal environment to perfect offshore wind technology. Larger turbines are being developed, improving power capacity and delivering performance and cost improvements. On average, turbine capacity has increased by 16 per cent every year since 20149.
The result is a capacity factor that matches many gas and coal-fired power plants and can be better than onshore wind and solar10.
The other enormous infrastructure change we believe is coming is the oil and gas companies themselves shifting capital expenditure into renewables.
A 2020 report from the International Energy Agency11 contemplates the change the energy industry is undergoing from being part of the problem of rising carbon emissions to a crucial part of the solution.
“The oil and gas industry faces the strategic challenge of balancing short-term returns with its long-term licence to operate,” the report says.
“Societies are simultaneously demanding energy services and also reductions in emissions. Oil and gas companies have been proficient at delivering the fuels that form the bedrock of today’s energy system; the question that they now face is whether they can help deliver climate solutions.”
The impacts coming in the power sector – which represents almost 40 per cent of global emissions12 – will be accompanied by changes coming to transport and real estate.
Transport represents almost 25 per cent of global emissions globally. Real estate figures are harder to come by but as a reference, buildings contribute 26 per cent of emissions in the UK.
The affordability of electric vehicles will help decarbonise transport, but the slow turnover of building stock means decarbonising real estate will be an ambitious goal to achieve.
Regardless, all-encompassing change is upon us and investors will need to carefully evaluate the impact of these trends.
You can read more in the global listed infrastructure team’s whitepaper: The more energy, less carbon dilemma.
1, 11 https://www.iea.org/reports/the-oil-and-gas-industry-in-energy-transitions
2, 12 https://www.ampcapital.com/content/dam/capital/04-articles/insto-edition/2019/012020%20Energy%20Infra%20Whitepaper_Spreads.pdf
6, 8 https://iea.blob.core.windows.net/assets/2e7ec2d6-7cf1-4636-b92c-046ae16f4448/OffshoreWind-Launch-Presentation1.pdf
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