That the world is engaged in a profound transition in the way we use energy is undeniable. The era of carbon-intensive energy derived from the burning of fossil fuels will come to an end, and a cleaner, more efficient and more reliable energy future based on renewables like wind and solar will be the new normal.
The energy transition is a live, vital, and important driver of stock prices today. Investors look forward and they are worried about what they see. They see falling costs of renewable alternatives, rising tax pressure, and peaking demand for fossil fuels. They see that China and India are looking to build out their energy infrastructure with renewables. And they know that incumbents tend to be challenged by transitions.
Investors are selling down their fossil fuel stocks and putting pressure on management teams to retool the business for the energy transition. Look at the bankruptcy of Peabody Coal, the collapse in the share price of GE, and the breaking of oil stocks from oil prices in the last couple of years. Look at how Exxon dropped out of the top 10 stocks in the United States and how the share of the oil sector in the S&P 500 is at its lowest level. The market is getting worried, and it is going to get a lot worse.
How long this change will take is, however, still a matter of fierce debate. A report from the World Economic Forum’s Global Future Council on Energy, The Speed of the Energy Transition, offers compelling evidence that stakeholders in the global energy system—which means all of us—must prepare for change urgently, because it is coming fast.
Two Roads Diverge
The report, principally authored by Kingsmill Bond of Carbon Tracker, Angus McCrone of Bloomberg New Energy Finance, and myself, examines a key question: will the energy transition be gradual or rapid? A gradual transition means that oil, gas, and coal remain the dominant energy sources even as renewable energy supply increases at a steady but linear rate. And it means that there is growth in energy demand for fossil fuels—with demand for fossil fuels not reaching its peak for a generation or more—allowing the traditional businesses of energy sector incumbents to continue to flourish. In this transition scenario, we miss the climate change goals of the Paris Agreement, but the global energy sector doesn’t face the near-term prospect of wrenching change.
A rapid transition, on the other hand, means that renewables like wind and solar quickly start to supplant fossil fuels as their supply increases at an exponential rate, following the familiar S-curve growth pattern of new technologies like personal computers and mobile phones. It means that renewables supply all the net growth in global electricity demand, displacing oil, gas, and coal—with demand for fossil fuels peaking in the 2020s—and thus seriously disrupting the traditional businesses of the energy sector incumbents. In the rapid transition scenario, the energy sector will face massive change, but humanity has a chance of achieving the goals of the Paris Agreement to limit climate change to well below 2 degrees.
The question of the timing of the energy transition is a critical one: either the tipping point is right before our eyes in the decade to come, or it is far into the future, beyond the planning horizon of most companies. If stakeholders, whether they are governments setting policy, or businesses making investment decisions, assume a gradual transition while the trajectory is actually a rapid one, they will end up making the wrong decisions. Society will bear the costs of uneconomic investments and stranded high-carbon assets. But equally important, humanity will miss its last opportunity to achieve a sustainable world where the risk of catastrophic climate change is limited.
Reading the Signs
The report describes how the two narratives—gradual and rapid—are distinguished by four main questions, and how views on these issues largely determine conclusions on where the energy markets are heading. How one reads the evidence on either side of these questions determines whether one believes the gradual or rapid energy scenario more likely. They are:
At what point do renewables get big enough to impact the incumbency?
It is possible to judge the coming transition by the percentage of total energy supplied by renewable or fossil fuels, and doing so makes the changes seem gradual; solar and wind are said to be only about 1 percent of total energy supply and so too small to have much of an impact. But the key moment of significance in the transition is when renewables make up all the growth in energy supply, and this will likely come in the 2020s, long before fossil fuels lose their dominant share of total energy supply. The effects of the change will be felt by incumbents as market growth turns to decline, and financial markets constrain capital to declining industries, reallocating it to those that are growing.
Is growth in new energy technologies linear or exponential?
The increase in both installed capacity and electricity generated from wind and solar has been rising at a faster than linear rate, with solar accelerating even faster than wind. This was true even when these resources were more expensive than generation from fossil fuels, but now in many places wind and solar are the cheapest forms of new generation per unit of electricity, which could lead to a new dynamic of rapid change. Some argue that renewable costs will stop falling. But the evidence suggests that prices for renewables will drop far below incumbent energy sources, and fast. And it is not only wind and solar; electric vehicles are close to challenging internal combustion engine cars on price. The barriers to growth are soluble for the foreseeable future, and even further waves of change are likely to arrive due to nascent but viable technologies such as green hydrogen.
Will policy change be static—as policymakers remain cautious—or dynamic—as new technologies open up new opportunities to better design markets?
Inertia is a powerful force and existing policies have only gone so far. But history teaches us that change, once it comes, is adopted rapidly everywhere, as with the adoption of laws prohibiting smoking indoors or mobile phone use. We live in an era of increasing pressure to change policy related to carbon-intensive fossil fuels. In the face of catastrophic global warming, continuously accelerating innovation, and the huge energy windfall opened up by low renewable costs, change is inevitable. As technology opens up the opportunity to provide better solutions for consumers’ energy needs, policymakers will respond by redesigning markets. Once politicians see that the transition is not expensive and at the same time creates jobs and improves competitiveness, they will rapidly change the rules that govern energy markets so as to accelerate the transition.
Will emerging markets follow the fossil fuel path taken by developed markets or will they leapfrog to new energy technologies?
Some in the energy sector are convinced that emerging markets will broadly follow the path taken by developed markets and use more fossil fuels as they get richer and energy demand rises. Nations like China and India do indeed require more energy for their citizens. Close to one billion people around the world still do not have access to electricity. But providing consistent access to sufficient energy does not mean that developing countries have to choose a polluting energy system based on fossil fuels, particularly when the developed world is rapidly shifting to lower-cost, cleaner solutions. Just as mobile phones leapfrogged land-line telephony in much of the developing world, developing and emerging countries can leapfrog to the new energy technologies of the future.
There Is Time to Act but it Is Time to Choose
From the perspective of Rocky Mountain Institute, the evidence clearly points to a rapid energy transition scenario. The key is to feel the winds of change early and move into position so that it can fill all sails. We are in a race against time; a race where the speed of the energy transition will determine whether or not we can avoid the catastrophic effects of climate change.
Rocky Mountain Institute has labeled the strategies for an accelerated global energy transition as seven challenges: (1) improving the transparency, accountability, and actionability of climate and energy data; (2) tripling energy productivity gains; (3) electrifying all sectors with renewable energy; (4) reinventing urban systems and infrastructure; (5) speeding the development and adoption of clean energy technologies; (6) redesigning industry to reduce emissions; and (7) managing financial, institutional, and human aspects of the energy transition to transform both developed and developing economies.
This Energy Transition Magazine addresses our need to accelerate the energy transition within the lens of these challenges, describing success stories from around the world and explaining what still needs to be done. In the initial series of articles, we tackle this from the perspective of key sectors and themes. This starts with “Doing More with Less,” which focuses on energy productivity as the fastest and most actionable means to reduce emissions. In this article we look at how productivity can be improved in the buildings sector, including the embedded carbon in our building materials. And then in a separate article, we explore the specific challenges of decarbonizing two materials that are essential to our modern world: cement and steel.
And of course, to speed the energy transition we must also accelerate the deployment of renewables. In “Accelerating Wind and Solar” we explore the remarkable rise of these two resources, looking at the dynamics of price declines and the complicated interaction between policy and markets.
However, we must decarbonize beyond just the electricity sector. In “Electrify Everything” we explore the rapid growth of electric vehicles along with electrification of heating, and how all of this could make it easier to integrate high levels of renewable energy—if we take the right steps.
“21st Century Urban Mobility” looks at the different challenges in both the developing and the developed world, by examining not only the modes of transit, but also how we plan urban development. All of the above is not only technically feasible, but also economically feasible. In “The Power of Finance”, we look at the role that the financial sector is playing in advancing the energy transition, but also the need for action in this sector to more rapidly retire fossil fuel infrastructure, most notably coal-fired power plants.
And no discussion of the energy transition would be complete without looking at the potential social and economic consequences, and without asking whether these changes will replicate existing inequities or provide opportunities for a more just world. In “A Just Transition” we look at what justice means for fossil fuel workers, the technical needs of the developing world, and the dynamics of gender and energy.
The urgency of the task at hand, and the speed at which we must tackle it, cannot be overemphasized. The challenges we face today are surmountable, but will require radical, global collaboration across organizations with different roles in society to achieve a wholesale economic transformation. We need immediate and forceful collaborative action from policymakers, investors, and businesses across the globe. The energy transition is happening as we write this today, now we just need to radically speed it up as we tackle the greatest challenges of our lifetimes, to achieve a clean, prosperous, and secure low-carbon future.