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The shape of the new energy era

by Jorge Vasconcelos

The shape of the new energy era

We have come a long way from the 1997 Kyoto accord, which the US never ratified and binds just 37 industrialised nations to emissions targets. According to a United Nations report published in March, ‘Renewable energy set new records in 2015 for dollar investment, the amount of new capacity added and the relative importance of developing countries in that growth. All this happened in a year in which prices of fossil fuel commodities – oil, coal and gas – plummeted.’

At the UN in New York on 22 April, 175 countries signed the Paris agreement, approved just four months earlier to strengthen ‘the global response to the threat of climate change, in the context of sustainable development and efforts to eradicate poverty’.

By coincidence, Peabody, the world largest private sector coal company, filed for Chapter 11 bankruptcy protection on 13 April. And some of the largest private and sovereign funds have announced fossil fuel divestments since the start of the year.

Political statements and investment decisions are aligned in a clear direction – both are promoting the transition to a low-carbon economy. The question is no longer whether this is the direction, but whether the transition is sufficiently fast and consistent.

Critical sectors
Three sectors are critical in the energy transition path because they are the largest greenhouse gas emitters. Transport, heating, and cooling in buildings account for the majority of emissions on the demand side.

The energy sector, due to the extraction and transformation processes involved in ‘producing’ and supplying energy, is the leading emitter. These sectors are interlinked because full decarbonisation of transport, and heating and cooling requires the use of ‘green’ – namely zero-carbon – electricity.

Replacing fossil fuel car engines and boilers with equivalent electric machines driven by green electricity should not be the only – or even the first – measure to adopt. Construction and use of buildings and vehicles should be considered from the viewpoint of energy efficiency: only new architectures and mobility models, combined with better materials, create the conditions for a more efficient urban metabolism. Investing in energy efficiency must be the absolute priority.

Although significant results have been achieved, they remain modest compared with both the existing technical and economic potential, as well as the effort needed to cut greenhouse gas emissions. A combination of more stringent standards, more stable public policies and innovative financial mechanisms to narrow the gap between short-term capital needs and long-term returns is needed.

The rise of green electricity
Electricity is replacing fossil fuels in many cases. At the same time, it is becoming greener: combined wind and solar accounts for more than 25% of total electricity generation in three EU member states, a reality many derided as technically unfeasible a decade ago.

Green electricity is becoming cheaper and green electricity generation is increasingly decentralised – there are more than 1.5m active ‘producers’ in Germany, for example.

Some states have guaranteed prices through mechanisms such as tax credits, feed-in tariffs, and market premiums, as well as, more rarely, investment subsidies. As a result, electricity generation from renewable energy sources is affordable for small and medium-sized investors, not just institutions with deep pockets.

The renewable energy sector encompasses a diverse range of companies around the world, ranging from high-tech equipment manufacturers to private equity funds and construction businesses. A new and dynamic green energy business universe emerged in the 21st century, and its size and scope – for example in terms of storage – continues to grow.

Low-risk investment opportunities
The ‘modern classics’ of efficiency and renewables still offer opportunities for low-risk investment. The ‘avant-garde’ areas such as storage, electric vehicles, and demand management show signs of strong vitality and risk appetite, as demonstrated by the growth of electronic vehicle manufacturer Tesla.

However, these are ‘one note’ melodies, ‘bread and butter’ business models based on a single technology. The most significant phase in the new energy era will begin only when several new technologies are digitally interlinked and combined into new business models and resilient (for example, extreme weather, cyber security) infrastructures.

Creative businesspeople and investors will bring the digital revolution into the enlarged energy industry. Infrastructure operators, regulators and policy-makers will be obliged to run behind them to limit the damage (stranded investments, incumbent and newcomer crashes, big failures and small incidents).

Decision-makers have two alternatives – either to delay the inevitable transformations, most likely inflicting a competitive disadvantage on their economies, or to ensure that transition is as consistent as possible.

This can be achieved by providing clear and stable guidelines, based on demanding concrete technical choices rather than generous vague principles of political economy. All this requires is a modest amount of know-how and political capital.

Constant policy pressure to maintain the forward path will keep capital costs for investors and energy prices for consumers within reasonable limits, enabling long-term sustainable investments. 

■ Jorge Vasconcelos is Chairman of NEWES New Energy Solutions, Lisbon, and was the founder and first Chairman of the Council of European Energy Regulators.