Paris, COP21 – Two Months On: Time to Separate News from Trends
By Dr. Maximilian Martin
Two months ago, on December 12, 2015, 196 countries representing 97 percent of world GDP agreed on ambitious long-term carbon emissions reductions to contain global warming via the historical COP21 Paris Agreement.
In the meantime, a couple of interesting data points have come in. The day before the climate deal, the barrel of Brent crude oil had settled at $37.36, about a dollar above the $36.20 per barrel hit during the financial crisis. Two months later, it stood at $30.82. Brent crude oil prices are now forecast to average $38 per barrel in 2016 and $50 in 2017. Oil prices close to a 13-year low are not only wreaking havoc on employment and investment in the petroleum industry itself—forcing innovation and restructuring that could render procurement and production processes vastly more efficient. They also put public budgets in petroleum exporting countries in the red and undermine the economic competitiveness of the current generation of renewables.
In the United States, the Supreme Court stayed the implementation of President Obama’s efforts to curb carbon dioxide emissions from coal-fired power plants on February 9 while litigation with more than 30 lawsuits is ongoing. Associate Judge Antonin Scalia, who had voted to block the plan, died on February 13, resulting in additional uncertainty about the Supreme Court’s likely position on the issue going forward. The latest US Environmental Protection Agency (EPA) rule, which would require a 32 percent cut in power-plant carbon emissions by 2030 (based on 2005 emissions levels), may ultimately fail to stand. Whether the US will ultimately be able and willing to deliver on the pledges made in Paris is one of the topics likely ultimately decided at the next presidential election on November 8.
The home of the energy transition, Germany, is in the meantime busy grappling with more than one million refugees seeking asylum and avoiding the implosion of the Schengen area. Wrestling with questions such as how to actually get the one million electric cars onto German roads by 2020, which the government announced in 2011 to position the country as a market leader in e-mobility, risks taking a backseat. For now, Germany continues to be highly energy dependent on Russia: 2015 set another record year of 45.3 billion cubic meters (bcm) of natural gas delivered by Gazprom, up from 38.7 bcm the year before. German consumers currently face among the highest electricity costs in Europe. Taxes and fees make up half the costs—seen that the country’s energy-hungry industries are largely exempted from carrying the cost of the energy transition.
So is the energy transition stalling? Not quite. It would be a mistake to underestimate the power of technology and innovation to keep driving nonlinear change toward a low-carbon economy. Oil companies know this and are working on carbon shadow pricing.
Don’t Underestimate Hardware and Digital Innovation
The big game changers are the ongoing rise of digital, and research breakthroughs that will make renewables cheaper. The closest thing to a silver bullet lies in the interplay of the innovation ecosystem and enabling regulation that clears the path to market.
Thoughtful state intervention is essential if we want to get the market mechanism to work on the supply side of clean energy as well, and unlock its full disruptive power. This is key to driving down the cost of generation, storage and transmission through next generation technologies. Some of these technologies already exist and are at varying distances from deployment. For storage, the Achilles heel of renewables, significant progress is only half a decade away.
The integration with digital will amplify all of this. Consider the storage capacity coming on stream if Germany were to reach its goal of putting one million electric cars on its roads by 2020. Vehicle-to-grid (V2G) capability illustrates the power of marrying digital with hardware, as discussed in my book “Building the Impact Economy,” recently released by Springer. If swarm battery management—where batteries release electricity to the grid when it is needed and get charged when there is excess supply of electricity—becomes fully viable in scale on time, the implications would be powerful.
Even if a million of future electric cars in Germany only had today’s BMW i3 125 KW batteries, and 100,000 cars released electricity to the grid at any point in time, this would add up to 109,500 GWh (in a year’s 8,760 hours). Under remote swarm management, electricity could be stored when there is excess supply of renewables in the grid, and discharged when there is net or peak demand. Compare this to the next-generation French nuclear power plants of the 1,650 MWe class in the European Pressurized Reactor (EPR) design. If the nuclear power plant runs 80 percent of the time, so 7,008 of 8,760 hours in a year, it produces 11,563 GWh. In other words, provided there are sufficient solar panels and wind farms to retrieve the energy in the first place and enough electric cars to store and release it, a large-scale swarm battery system in the electric vehicle fleet could enable capacity that substitutes for about ten nuclear power plants.
Now is the time to seed many more potential breakthroughs that are even wilder than this, complementing existing programs such as ARPA-E in the United States or Climate KIC in the European Union. Many things out there have hardly hit our radar. For example, just consider what would happen if a much more potent source of energy such as low-energy nuclear reactions became commercially viable. Or consider the medium-term implications of the Max Planck Institute’s Wendelstein 7-X fusion device. Six days before the US Supreme Court decision, it produced its first hydrogen plasma. The scientists will now assess the setup’s suitability for use in a power plant that would derive its energy from the fusion of atomic nuclei—just as the sun and the stars do (should this work eventually, it would provide a defining answer to our need for low-carbon energy generation).
Beware: It is a Different Ballgame for the G77
In emerging and frontier economies, the ballgame is different. Disruption is also needed in the 134 developing countries that are part of the G77. Change on the scale necessary to turn renewables into real 800-pound gorillas requires choices, money, and technology transfer. To make progress faster, “scale-up-as-usual” will not be good enough. We also cannot provide endless amounts of money to subsidize the mainstreaming of renewables. The $100 billion a year to help developing countries cope with climate change, which advanced economies committed to in Copenhagen in 2009 and in Cancun in 2010, are a good start, but alone will not do the trick. To seriously accelerate the energy transition here, it is essential to raise the investment path by several orders of magnitude—in ways that make economic sense, and that are adapted to the realities in advanced and developing economies.
The International Energy Agency estimates that implementing climate pledges (“Intended Nationally Determined Contribution,” INDC) for COP21 would require the global energy sector to invest $13.5 trillion in energy efficiency and low-carbon technologies from 2015 to 2030, or 40 percent of total sector investment. Take the example of Bangladesh, with 160 million inhabitants, the world’s eighth most populated country—and at 1,100 people per square kilometer also one of the most densely populated. Power outages were responsible for an output loss of nearly 3 percent of GDP in 2013 according to the World Bank Enterprise Survey. A majority of Bangladeshi firms have to invest in back-up generation, which adds costs to doing business. Energy demand is moreover projected to rise almost five-fold by 2030. Domestic gas production, the main source of energy, will decline as of 2019. I will leave it up to the reader to decide whether Rosatom’s planned two 1,200 MWe-class nuclear reactors 160km north of Dhaka, where 16 million people live—to come on stream in 2022 and 2023—are next to being a low-carbon idea also a good idea.
However, what is for sure is that the implicit Paris Agreement long-term goal of 100 percent renewable electricity needs to be seen in the wider context of Bangladesh’s rapid urbanization, which increases the need for energy, and the country’s energy security. Under a Business as Usual (BAU) scenario, greenhouse gas (GHG) emissions in Bangladesh in the power, transport and industry sectors are expected to represent 69 percent of total emissions by 2030. This is an increase of 264 percent by 2030, up from 64 million metric tons of carbon dioxide equivalent (MtCO2e) in 2011 to 234 MtCO2e in 2030. The country’s INDC covers the power, transport and industry sectors and pledges (1) an unconditional contribution, which will reduce its GHG emissions by 12 MtCO2e by 2030 or 5 percent below BAU emissions—this while the population keeps growing! (2) Further, the INDC targets a conditional 15 percent reduction in GHG emissions in the three sectors by 36 MtCO2e by 2030. The commitment is subject to obtaining the appropriate international support in the form of finance, investment, technology development and transfer, and capacity building. Needless to say that we can hardly expect G77 countries to uphold their commitments should the US not manage to uphold its own.
Moreover, to make this work in practice in Bangladesh and other G77 countries, a sort of “yin and yang” is needed. Advanced economies will need to transfer technology and invest. Moreover, Bangladesh will need to re-regulate its energy market in ways that are more attractive for foreign investment. This requires improving legislation and execution on public-private partnerships, corporate governance and transparency, so that multi-billion dollar investments funded by parties other than multilateral and bilateral donors become a practical possibility.
Where Do We Go from Here?
The strong decline in energy prices makes it difficult to estimate the increase in demand. It will trigger investment cuts in fossil fuels that complicate any analysis of their future competitive position, especially in emerging markets. The likely net effect is that the agreed-upon targets must be more ambitious, as they do not sufficiently consider the surge in demand.
It is nevertheless time to separate news from trends and keep going. Research and technology will keep pushing out the possibility frontier. If in response to the Paris Agreement, OECD countries can take their clean energy innovation R&D to the next level, and G77 countries focus on becoming fully investment ready, by the time the next oil shock hits, the next ten years have all the potential to be the most exciting yet for anyone involved in clean energy as a scientist, entrepreneur, investor or member of civil society.
Maximilian Martin is the Founder and CEO of Impact Economy. Dr. Martin created Europe’s first global philanthropic services and impact investing department for UBS and the UBS Philanthropy Forum. In 2013, he wrote the primer on impact investing “Status of the Social Impact Investing Market” for the UK G8 social impact investment summit. His new book “Building the Impact Economy” shows how to reconcile responsibility with opportunity to seize the multitrillion-dollar opportunity of building a sustainable economy. Among other things, the book synthesizes insights from a review of over 9,000 cleantech startups and technologies.