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Achieving the objectives of the Paris Agreement will require swift and far-reaching system transitions in energy use and urban infrastructure – and significant upscaling of investments, warned the Intergovernmental Panel on Climate Change in 2018.
What system transitions are we seeing already? In this article, we take a look at developments in the clean energy market, explore how businesses can benefit from non-fossil fuel sources as well as carbon capture technologies, and outline why green buildings are key to successfully combatting climate change.
Driving innovation: clean energy use and energy efficiency
The Organisation for Economic Co-operation and Development (OECD) estimates that investments of $6.9trn are required over the next 15 years in order to build smarter and greener – as well as more inclusive – sustainable infrastructures worldwide.
What seems a staggering number is in reality a mere 10% increase – relative to annual infrastructure investments required anyway – before considering climate issues. Staggering too, however, has been the transformative power of the climate change challenge, spurring innovation in all areas of our economies, redefining business models and markets, with clean energy just one of the driving forces.
Clean energy shift gains pace
The drive towards clean energy has gained momentum in recent years. Clean energy includes renewable energy sources as well as nuclear energy and carbon-neutralising technologies, such as carbon capture and storage (CCS). A shift to clean energy sources, which still emit greenhouse gases (GHGs) but at a considerably lower level, can significantly reduce carbon emissions from electricity production, which account for approximately 30% of global GHG emissions.
A combination of new technologies and policy tools (other than carbon pricing) is helping to accelerate the speed of change in the energy markets. So what are they?
Projects to increase energy efficiency
Improving energy efficiency is an obvious quick win to reduce carbon emissions resulting from energy production.
Setting standards for buildings and appliance efficiency, combined with innovative financing via public-private partnerships have yielded impressive results so far, with companies being able to choose between a range of energy efficiency programmes.
Aside from production processes, lighting, heating and ventilation represent areas with the biggest potential for energy savings, with employers often investing in bonus programmes to encourage staff to look out for potential energy savings on a continuous basis.
The circular economy concept also helps increase energy efficiency by converting waste from mainstream industries into energy. An increasing number of companies are also investing in more complex energy management systems that include, for example, power storage – helping businesses to leverage price differences in energy during peak and off peak times – as well as on-site energy generation, so that power can be sold back to the grid when energy production is higher than energy use.
The EU allocated €18bn to energy efficiency projects in the period 2014 – 2020 in its European Structural and Investment Funds (ESIF) and has created a number of other support schemes to help businesses, regions, and countries successfully implement energy efficiency projects. At the same time, on a national level, energy efficiency grants are available for any kind and any size of business in the UK.
Reforms for fossil fuel subsidies
In 2014, G20 countries collectively provided subsidies totalling $354bn for fossil-fuel consumption and $18bn for fossil-fuel production. While lobbyists contend that those subsidies are supporting valid public policy objectives, including energy security and inexpensive access to energy for poorer households, studies have shown that fossil-fuel subsidies, which come at large fiscal costs for governments, lead to higher CO2 emissions, hinder investment in renewables and energy efficiency, and undermine effective tools of climate mitigation like carbon pricing.
To wean economies off coal within the next three decades, think tank Climate Analytics calculated that by 2030 global coal use in electricity generation must fall by 80% below 2010 levels – and all coal-fired power stations must close by 2040
However, a subsidy reform proposal didn’t make it into the wording of the Paris Agreement. Yet, a few months later, the G7 nations pledged to remain committed to the eradication of inefficient fossil fuel subsidies by 2025, recognising the fact that energy production and energy use account for around two-thirds of global GHG emissions. While this is not an easy undertaking, it’s one worth taking – both financially and environmentally. Estimates suggest that reforming fossil fuel subsidies globally, combined with carbon pricing, could generate $2.8trn in annual government revenues or savings, which could subsequently be invested in low-carbon projects.
The transition away from coal
Coal currently accounts for around 30% of global energy-related carbon emissions. Compared to cleaner energy alternatives, such as natural gas, burning coal produces roughly double the CO2. As such, the Intergovernmental Panel for Climate Change (IPCC) established that in order to limit the global temperature rise to 1.5°C (as stated in the Paris Agreement), coal-powered electricity can’t account for more than 1% of the total electricity mix by 2050.
To have a real chance to wean economies off of coal within the next three decades, think tank Climate Analytics calculated that by 2030 global coal use in electricity generation must fall by 80% below 2010 levels, and that all coal-fired power stations must be closed down by 2040 at the latest.
In fact, coal use is already sharply declining. In the US, within the last 12 years, coal-generated electricity dropped from a 45% to a 24% share of overall electricity, and this share continues to fall. Countries that are still heavily reliant on coal are also committing to ambitious transition plans. Germany, which pledged to phase out coal by 2038, recently announced a $45bn fund to compensate mines and power plants for loss of revenue as well as to fund new infrastructure projects in coal-dependent areas and help the 25,000 coal-sector workers reskill for alternative jobs in their local area.
At the same time, the EU has included a €4.8bn Just Transition Fund as part of its European Green Deal, which aims “to address societal, socio-economic and environmental impacts on workers and communities adversely affected by the transition from coal and carbon dependence”.
Renewables capacity increases at a steady pace
Renewables reached a share of almost 27% in global electricity generation in 2019, and are on track to expand their capacity by 50% between 2019 and 2024, led by solar photovoltaic, which accounts for almost 60% of the expected growth. Onshore wind is expected to contribute roughly 25% of the increase, hydropower 10% and offshore wind 4%.
China is the driver behind the majority of the renewables capacity increase, investing heavily in wind power and solar PV, while at the same time transitioning to a competitive auction system as is already in use in most parts of Europe.
Biofuels, such as biodiesel, hydrogen, natural gas and ethanol make a small, but indispensable contribution to the renewables mix, particularly for transport sectors such as aviation and shipping, where the required energy volume can only be supplied by a liquid fuel (no battery currently comes close to having sufficient energy density).
To accelerate the use of clean energy in the commercial sector, a growing number of the world’s most influential companies are committing to 100% renewable power, such as the 200-plus members of the RE100 corporate renewable energy initiative.
The benefits of carbon capture and storage technology
Despite this positive action, fossil fuels will retain a significant share of the electricity market going forward. As a result, interest in CCS has grown significantly, as it is a technology that can help capture up to 90% of the carbon dioxide emissions produced from the use of fossil fuels in electricity generation, preventing the carbon dioxide from entering the atmosphere.
International climate change bodies have acknowledged that CCS is the only mitigation technology to decarbonise large industrial sectors, such as steel, cement or chemicals, where a shift to renewables is currently not feasible.
Consequently, governments have launched carbon capture and utilisation (CCU) demonstration projects – since 2011 the UK government has invested upwards of £130m in R&D and innovation support to develop CCUs in the UK and allocated a further £20m last year.
The growth of smart grids
The need to adapt to changing electricity demand – particularly with the use of electric vehicles – and to manage a variety of power sources, such as renewables, has propelled the growth of smart grids.
Smart grids can automatically monitor multi-directional energy flows, a necessary feature given that energy consumers are becoming energy prosumers, not only using but also generating electricity, mainly through solar power. In tandem with smart metering systems, smart grids can offer information on real-time consumption to consumers and suppliers.
From 2002 to date, 459 smart grid projects were registered in the EU, amounting to €3.15bn in investment; more than 3,000 organisations from 65 countries have taken part, including technology providers, research and innovation (R&I) bodies, regulated operators, electricity market players, local energy communities and consumers. In the UK, the government set up the £500m Low Carbon Networks Fund to support projects sponsored by the Distribution Network Operators (DNOs) to try out new smart grid technology.
Converting to clean energy and reducing consumption boosts profit margins
Evidently, clean energy and energy efficiency programmes result in a number of benefits for businesses:
- Costs: renewables are now frequently the cheapest energy source, with prices set to decline further. The price of installation and maintenance of renewables also continue to fall. Energy makes up about 5% of costs for an average manufacturing company. Energy-efficiency programmes can save between 10% and 30% of those energy costs within a three-year period, improving profit margins by 2% in the same period.
- Compliance: governments have introduced directives that seek to reduce energy consumption. Quick adopters will not only avoid fines, but can also benefit from tax incentives.
- Business opportunities: energy efficiency is not just a cost saving and optimisation tool. For many companies it offers new opportunities – efficiency is an important selling point for electrical devices, and increasingly conscious consumers are willing to pay a premium for energy-efficient products.
- ESG score: reducing energy consumption, utilising renewable energy sources and exploring new business opportunities demonstrate positive corporate environmental action, which strengthens the appeal to ESG investors and other stakeholders.
- Employee satisfaction: Efficiency programmes linked with bonuses serve to boost employee morale.
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