The renewable energy opportunity

#1 of 7 articles about the electrification of goods transport

Pre Covid-19, the United States (US) Energy Information Administration (EIA) had projected that world energy consumption would grow by nearly 50% between 2018 and 2050. The increase would come in particular from non-OECD countries to support their economic growth. The unwanted effects of energy consumption are carbon (CO₂) emissions, which cause climate change and significant adverse conditions for humanity and our life. CO₂ accounts for roughly 76 percent of global greenhouse gas (GHG) emissions. The other gasses that reinforce to varying degrees the effects of CO₂ are methane, nitrous oxide (N₂O) and various hydrofluorocarbons. In passenger and freight transport, CO₂ emissions account for 96 percent of total GHG emissions.

Electrification is strongly associated with the fight against climate change. With the decarbonization of the economy and the logistics and transport sector. But electrification only eliminates emissions when the energy itself comes from renewable sources. Research shows that “transport electrification without the replacement of fossil-fuel power plants leads to the unfortunate result of increasing emissions instead of achieving a low-carbon transition”.

Although a human tragedy, Covid-19 has helped the reduction of CO₂ emissions. “Global CO₂ emissions were over 5% lower in Q1 2020 than in Q1 2019, mainly due to a 8% decline in emissions from coal, 4.5% from oil and 2.3% from natural gas. CO₂ emissions fell more than energy demand, as the most carbon-intensive fuels experienced the largest declines in demand,” concludes the International Energy Agency in their Global Energy Review 2020. But we need the 2020’s rate of decline of emissions for the next 30 years if we wish to limit global warming to 1.5°C. Which would be in line with the long-term ambition of the 2015 United Nations Climate Change Conference (COP21) agreement in Paris (Paris Agreement) to keep the increase in global average temperature to well below 2 °C above pre-industrial levels and limit the temperature rise to 1.5 °C.

From aspiration to destination

We have a long way to go. Deloitte states that “massive strides in policy, technology, and procurement strategies and tools are needed to turn 100% renewables from an aspiration to a destination”. “For many, 100% renewables will remain an aspiration unless more wind and solar energy is available and key policy initiatives and technological advances are realized,” says Marlene Motyka, U.S. and global renewable energy leader and principal, Deloitte Transactions and Business Analytics LLP. This requires efforts from private and public sector players.

Governments need to set the rules and provide support. They are critical to achieve the climate goals. Alan McKinnon writes in his book Decarbonizing Logistics: Distributing Goods in a Low Carbon World that “National governments can pull a range of domestic policy levers to cut carbon emissions. These broadly fall into four categories: Regulatory, investment-related, advisory and fiscal”. 

The New York State Energy and Development Authority put in place regulation for energy-efficient products and environmentally friendly buildings. The State of California works towards the goal of generating half of the state’s electricity from renewable sources by 2030. The objective of the European Union (EU) is to establish an economy with net-zero GHG emissions by 2050. This ambition is in line with the Union’s commitment to the Paris Agreement and sits at the core of the European Green Deal.

Accelerating the transition

“Imminent fiscal recovery packages could entrench or partly displace the current fossil-fuel-intensive economic system,” states a paper of Oxford Smith School of Enterprise and the Environment. The research shows that policies can achieve economic recovery and decarbonization in parallel. Covid-19 opens an opportunity for a shift in energy production and consumption, but this requires that Covid-19 rescue and support packages are linked to the emission reduction efforts and targets.

The investment guidelines for the Solvency Support Instrument, created to support those companies that are mostly impacted by the coronavirus pandemic will help to prioritize green investments. As per a communication from the European Commission, 25% of the EU budget is earmarked for “climate investments and additional funding for Horizon Europe, reflecting the crucial role of research and innovation in driving the shift towards a clean, circular, competitive and climate neutral economy”.

“Corporate power purchase agreements can be a powerful tool in helping Europe’s private sector to decarbonize,” claim the authors of the article This powerful tool can help drive Europe’s green recovery published on the World Economic Forum Agenda. Corporate power purchase agreements (cPPAs) are long-term contracts under which companies agree to purchase electricity directly from energy generators instead of buying electricity from licensed electricity suppliers through utility PPAs. cPPAs provide financial certainty for the developers, which removes a significant roadblock to financing and building new renewable energy facilities. Off-takers benefit from stable and competitive energy prices but can also demonstrate their strong commitment to environmentally friendly practices through entering in cPPAs.

Source: Aurora Energy Research

The cPPAs come not without challenges. Amongst the hurdles are the lack of credit worthiness of off-takers, the limited willingness for off-takers to take on long term commitments, and the complexity of so-called synthetic or virtual PPAs, a hedging instrument which is complex to implement, opposed to the straight forward physical PPAs. Specific policies can help to overcome these constraints and develop a PPA market.

The stimulus packages present a chance for regulatory frameworks to boost cPPAs. Despite the turmoil on the global energy markets caused by Covid-19, cPPA activities continue and the market has proven resilient so far. Now, a unique situation to accelerate the creation of a PPA market has arrived. The Covid-19 solvency packages should be launched in this context of opportunity, sustainable objectives and accompanied by respective policies.

The role of transport in the energy transition

The transport sector accounts for about a quarter of the world’s energy consumption and 15 percent of the total emissions for all human activity. Freight’s share of CO₂ emissions is around 40 percent of total transport emissions, with road transport consuming the lion share. Transport plays a critical role in the transition toward renewable sources of energy. The contribution at large includes vehicles powered by renewable energy and the infrastructure that is required to scale the solutions, which comprises charging and battery swapping stations but also the development of alternative fuels.

Public pressure is mounting. Worldwide, many countries and cities have announced to eventually ban internal combustion engines (ICEs), following the Paris Agreement. Nations including France, Germany, the Netherlands, Norway, the United Kingdom (UK), China and India indicated their intentions to ban production and sale of cars that run on fossil fuels. Cities like Athens, Madrid, Mexico City and Paris have announced plans to ban diesel cars by 2030 or earlier. 

The electrification of transport is the main pillar of national and local policies for decarbonizing urban transport of passengers and freight by replacing ICEs with electric vehicles (EVs). This must not come with economic repercussions. “With technological innovations such as electrified road transport, climate change mitigation does not have to occur at the expense of economic growth. Because a transport electrification policy closely interacts with energy and economic systems, transport planners, economists, and energy policymakers need to work together to propose policy schemes that consider a cross-sectoral balance for a green sustainable future,” we can read in the article authored by Runsen Zhang and Shinichiro Fujimori 2020 Environ. Res. Lett. 15 034019.

The International Renewable Energy Agency (IRENA) roadmap for 2050 indicates that renewables-based transformation grows employment 14% and adds 2.5% to global GDP. “Every dollar spent delivers returns between three and seven dollars in fuel savings, avoided investments and reduced health and environmental damage. The sooner coal- and oil burning plants are excluded as new investment options, the more countries can benefit from a modern, fit-for-purpose energy system”, explains the paperTransforming the Energy System published by IRENA. Policy makers are called to put in place the frameworks that drive climate-proof investments. Then, the private sector needs to pick up the signals and leverage available instruments to electrify the economy and transport industry to combat climate change. 

Now is the moment to demonstrate leadership and foresight to drive long term action. Short-term fixes in response to an economic downturn do not only result in adverse environmental impacts but also weaker performance. “Analysis of oil and gas valuations over three major economic recessions during the last 25 years confirms that “wait and watch” was a poor option. Across industry sectors, companies that took bold and effective action during the 2007–08 global financial crisis performed much better than those that retreated to pre crisis approaches and activities,” finds a study shared by Bain & Company. I finish with Alan McKinnon’s reminder and call for action. He says “there is no shortage of tried and teste carbon-reducing initiatives that companies and governments can take in the short and medium term to drive down logistics emissions. What we need is their commitment to implement these initiatives as soon as possible”.