Audioblog 11: The Five Horsemen of the Transition

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Hello, I'm Michael Liebreich and this is Cleaning Up. Should we be optimistic or pessimistic about net zero? In this world of polarised politics, raging culture wars and scientifically illiterate journalism, it can be very hard to separate signal from noise. One minute, net zero will be perfectly straightforward: we just have to continue rolling out cheap, clean energy technologies, become a bit more energy efficient every year, keep innovating, and stop chopping down forests. What could be easier? The next minute, net zero will be brutally challenging. Every sector of the economy will have to switch to entirely new technologies, consumers will have to completely change their behaviour, new supply chains will have to be built, and all of this has to happen in the course of just a few decades in every country around the world. And it will cost a whole generation's savings. Surely you can't be serious? Some people, of course, take the fools way out: "if only we could destroy global capitalism, the road to net zero would be magically revealed to us!" The rest of us however, gyrate between extremes of optimism and pessimism. This episode of Cleaning Up is the first of a two-parter, in which I'll explore the bull and bear cases for the net zero transition. They're based on a pair of essays I wrote for Bloomberg NEF, the first of which appeared last September, and the second in February this year. As always, my gratitude goes to my former colleagues at Bloomberg for letting me release these audio adaptations.

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To get the bad news out of the way first, in today's episode, I'll lay out the reasons why net zero is going to be extraordinarily hard, perhaps impossible. We'll be meeting the five horsemen of the transition, five reasons why anyone hoping for rapid global decarbonisation is kidding themselves. And these are: the poor economics of clean solutions beyond wind, solar and batteries; the inadequacy of our current electrical grid; soaring demand for critical minerals; political and social inertia; and predatory delay by powerful players who are going to lose out. In part two, which will follow next week, I will introduce the five superheroes of the net zero transition. These are five forces which may be even more powerful than the five horsemen and which gives us cause for optimism, and they will be: exponential growth; systems solution; great power rivalry; disappearing demand; and the primary energy demand fallacy. So, will the five superheroes of the transition vanquish the five horsemen? Does Godzilla beat Kong? Does Alien beat Predator? I'm not saying. You'll have to listen to these two episodes to find out. Let's get started. Prepare to meet the five horsemen of the transition. Horsemen 1: costs. Over the past decade, wind and solar have become the cheapest sources of new power generation almost everywhere on the planet. Saudi Arabia's 600 megawatt Al Faisaliah solar plant will deliver electricity at just $10.4 per megawatt hour. That's tantalysingly close to the one US cent per kilowatt hour mark that most energy analysts thought would not be achieved even by 2050. In more and more regions, it's now becoming economic to shutter existing fossil fuel plants and replace that output with new renewables. Of course, wind and solar are intermittent sources of power, but battery costs too are plummeting, to the extent that they can now often underbid so called "peaking plants" that burn natural gas. Cheaper batteries, along with lower maintenance costs, also mean that electric vehicles (two wheelers, cars, buses, and soon, trucks) have become largely competitive with internal combustion vehicles. Despite all this, there are three reasons why cost is the first horsemen of the transition. First, in a future economy deeply dependent on electricity, resilience really matters, as I explained in my March 2022 Bloomberg essay entitled, The Quest for Resilience - What Could Possibly go Wrong? while, getting to 90% clean power should be affordable, the last 10% could cost as much again as the first 90%. There are times when wind and solar fall away almost completely for weeks, under-deliver for months, or weaken for years. To provide real resilience, deep resilience, batteries alone won't cut it. We'll need a combination of renewable overcapacity, multiple long distance interconnectors, much more bioenergy, nuclear power and pumped hydro storage, as well as long duration storage of either hydrogen or its derivatives. As of today, we have neither the regulatory frameworks, nor the political support to fund the solutions. The second reason why cost is the first horseman is that dramatic reductions in wind and solar costs have lulled us into thinking that any clean technology, given an initial boost, will storm to market dominance under its own economic steam. I myself have made the argument that burning stuff will inevitably lose out to electrification. And it will - just not fast enough. Left to its own devices, the process of decarbonising the economy could take the rest of this century. Take the example of natural gas which is simply an extraordinarily cheap source of heat. To match a Henry Hub price of $3 per million British thermal units with clean electricity would require a wholesale power price of just $10 per megawatt hour. That's around a third of the price in many markets, even before the commodity price spike of the early 2020s that is currently unwinding. And for industrial heat, you need that power, not just when it's windy or sunny, but continuously. To displace the same natural gas with hydrogen, its cost would need to be 35 cents per kilogramme. While the cost of electrolyzers is surely set to plummet, they constitute only one cost driver for green hydrogen among many, and no serious forecaster expects hydrogen at 35 cents per kilo this century. So, to be optimistic about clean energy displacing natural gas on the economics alone, you have to hope clean power costs drop by another factor of five, or green hydrogen costs dropped by a factor of more than 10. Alternatively, you have to hope carbon prices will reach around $200 per tonne of CO2 equivalent, and not just in Europe and California, but in every country of the world You want to put your hope in so called "direct air capture"? Well, current costs are between $600 and $1,100 per tonne of carbon dioxide, and they're largely driven by the thermodynamics of the processes involved. I simply don't believe they can be reduced below $200 per tonne of CO2 any time soon. The third reason cost is such a problem is that in much of the world, cheap wind, cheap solar, cheap batteries and cheap EVs are still a mirage. Clean energy almost always involves higher capital costs, followed by lower or zero fuel and maintenance costs. So, it's only cheap if you have access to cheap capital, which is fine if you're in Europe, Japan, South Korea or the US and your cost of capital is say 6%, but not if you're in the Global South and your cost of capital is 15%. The International Energy Agency has pointed out that investment in the transition in developing countries, excluding China, needs to increase from $770 billion to $2.8 trillion per year by the early 2030s. If the world is to stay on track for one and a half degrees centigrade of warming, where is that money supposed to come from? To be sure, multilateral financial institutions have deployed 10s of billions of dollars of concessional funding, and they have employed all sorts of clever blended finance structures to increase the figures, but they still provide a fraction of what is needed. Reforms of the multilateral finance institutions being proposed by the Bridgetown initiative and so on, may help reduce the interest rate differential between developed and developing countries. But you can't eliminate a risk premium where there is a real difference in risk.

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Horseman 2 is the power grid. Getting to net zero will require a dramatic expansion of our electrical infrastructure and a commensurate amount of investment: $21.4 trillion of it in the most recent Net Zero Scenario of Bloomberg NEF's New Energy Outlook. To put that figure in perspective, it would be $1 out of every seven of the $140 trillion of assets managed by the signatories to the famous Glasgow Financial Alliance for Net Zero or GFANZ. Extending across transmission, distribution and high voltage DC, underground and overground, the Global North and the Global South, we're talking about a network double the size of today's, one that would reach all the way to the sun and partway back. Why so many wires? Any future net zero economy will be much more deeply electrified than today. The ultimate depth of electrification will depend on many factors, but there's general agreement that it will need to increase from the current 20% to at least 70% of global energy use. You can subtract around a third for energy efficiency improvements, but you have to more than add that back for economic growth. And so we'll be using around three times more power than today. And it will all need to be moved around. In addition, a much more substantial proportion of power in future will clearly be met by wind and solar. Most of our current power stations are built along coasts or rivers. While the vast majority of grid scale wind and solar power will be imported from rural areas, deserts and oceans, that's a lot of new cable routes. Plus, wind and solar are variable, so, just as we'll need surplus generating capacity to ensure there's always supply somewhere on the network, we will need surplus grid capacity to support its output to users. Right now in Europe, according to Bloomberg NEF, there are 600 gigawatts of wind and solar projects, equivalent to 130% of all capacity installed to date, stalled and awaiting a grid connection. In the US, Berkeley Lab puts the current interconnection backlog at more than 1.4 terawatts - that's equivalent to 120% of the entire capacity of the US power generation system. ChargeUp Europe, an association representing EV charge point operators, reports that the largest bottleneck currently holding back the build out of charging infrastructure across the continent is, 'the amount of time it takes to establish a grid connection point, the complexity of the process to get one, and access to sufficient grid capacity.' The scale of the challenge is almost inconceivable. As an example, in May 2023, the UK National Grid estimated that meeting the current government 2035 target for net zero power would mean building five times more transmission lines by 2030 than it had built over the past three decades. Under the UK opposition Labour Party's promise to bring net zero power forward to 2030, that challenge becomes even more extreme. But, any country that embarks on delivering on the Net Zero commitments made at COP 26 in Glasgow and extended at COP 27 in Sharm el Sheikh and COP 28 in Dubai is going to run up against the same issues. The power engineering supply chain simply cannot cope. Its short of cables, short of transformers, short of project managers and short of of engineers. The only thing preventing it from being completely overwhelmed is the convoluted and lengthy planning process for additional transmission, with new routes often languishing in regulatory limbo for well over a decade. And worst of all, politicians do not yet seem to have grasped the scale of the problem, or the fact that as Alan Anderson, Associate Professor at the University of Oslo said 10 years ago, "without transmission, there is no transition."

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Horseman 3: critical minerals. Clean energy rocks. A lot of rocks! Each new electric vehicle uses 6 times more minerals than an equivalent internal combustion vehicle. Renewable and nuclear power use between 3 and 12 times more per unit of output as fossil power, and enormous amounts of copper and aluminium will be needed to build out all of that new transmission infrastructure. Overall, Bloomberg NEF estimates, in its Net Zero Scenario, the energy sector will use 5 times more minerals by 2040 than it does today. In 2022, Simon Michaud, Associate Professor at the Geological Survey of Finland, published a report in which he claimed quote, 'there are not enough minerals in the currently reported global reserves to build just one generation of batteries for all EVs and stationary power storage.' Naturally, Michaud became an instant pinup for the anti renewables and climate-contrarian crowds. But it's only when you dive into his assumptions that you realise he thinks every wind and solar plant in the world has to be paired with 4 weeks of battery storage. The result is a grid connected storage figure 90 to 450 times higher than any scenario produced by modellers who actually understand the energy system. The problem is, even if you set this sort of silliness aside, meeting Bloomberg NEF's five-fold growth in mineral demand from clean energy technologies looks incredibly challenging. To reach net zero, demand from the energy industry for lithium will increase by a factor of 14 through to 2050. Demand for rare earths used in wind turbines and electric vehicles will grow by 11 times, copper demand will increase by 6 times and cobalt will double. Now, investment in the mining sector has doubled over the past few years. But even if all the projects currently on drawing boards could enter production by 2030, according to the IEA, that would still deliver just 75% of the minerals required to keep the world on a 1.5 degrees centigrade pathway. The average new mine has been taking no less than 16 years to get from resource characterization to production. Of course, that can be accelerated, but at what risk to the environment and to social justice?

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Horsemen 4: political and social inertia. Even in the rich world, society's commitment to climate action is still fragile. In a survey in March 2023, the Pew Research Centre found that the overall percentage of Americans who view climate change as a major threat had dropped from a 2018 peak of 58% to 54%. More significantly, however, just 23% of Republicans see climate change as a major threat. Meanwhile, 98% of Republicans aged 65 and older are against the US eliminating the use of oil, coal and natural gas. And if you think that doesn't matter, think about who owns most investments in the US, who donates most to politicians, and who might win the presidency later this year. So, although the Pew Centre research did find that more than 2/3 of Americans support wind and solar power, and say that they're in favour of net zero by 2050, when it comes down to things that might actually cost the money, it's a very different story. The US could find the momentum created by its landmark Inflation Reduction Act extremely hard to maintain over the long term. In the UK, despite an unusual level of bipartisan agreement on climate change, including a Climate Change Act that has enshrined net zero by 2050 into law, both major political parties have been tempering their support for climate action. The Conservative administration under Rishi Sunak has pushed back the date for the ban on internal combustion cars from 2030 to 2035, all but removed the requirement for homeowners to stop buying replacement gas and oil fired boilers by 2035, and is pushing to award hundreds of new oil and gas licences. Meanwhile, the Labour Party, odds-on favourites to win the next general election, has abandoned an early pledge to spend £28 billion, that's $36 billion, per year on green energy. The EU may be seen as a paragon of climate action, with new and aggressive targets adopted in the wake of Russia's invasion of Ukraine. However, bubbling under the surface is the rising popularity of parties espousing anti climate rhetoric. In France, whose 2018 Yellow Vest protests were copied in Canada and elsewhere, Marine Le Pen's climate sceptic Rassemblement National won 41.5% in the 2022 presidential election. Germany's anti-climate action Alternative für Deutschland is polling second only to the conservative CDU/CSU Alliance. The FTP, which controls the ministries of finance and transport, has been doing its best to water down the country's rapid decarbonisation. In Holland, the Farmer–Citizen Movement, created to resist environmental policies affecting farmers, won a snap election and effectively ended Mark Rutte's 13 years as prime minister. In southern Europe too, voters have rewarded politicians prioritising security and economic growth over climate action. If support for climate action is far from assured in its European heartland, the reality is it is skin-deep in poorer countries. In 2022, the Pew Research Centre surveying people in 19 countries found that 75% thought that climate change was a major threat. Another polling company IPSOS, however, posed the question slightly differently, asking respondents to name their three greatest concerns, and it found that climate change comes in only ninth, far behind inflation, poverty, unemployment, crime, corruption, health care, and taxes. In other words, around the world, people care about climate change, but they can more about immediate priorities.

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This leads us to the fifth and final horseman, which is corruption, regulatory capture and predatory delay. The net zero transition will inevitably create losers, many of them wealthy, powerful, well connected and secretive. And we've already seen, all too clearly, that they would rather "burn and rave at close-of-day", to quote Dylan Thomas, than to "go gentle into that good night." And that gives rise to all sorts of pathological behaviours. Just last year, Phoebe Cook, a senior reporter with DeSmog, broke the story of a PR company working for the UK's Gas and Heating Industry Association, boasting about its campaign to quote spark outrage about heat pumps. This is only the most recent example of the sort of underhand campaigns by fossil fuel interests to slow down the transition that my co-host, Bryony Worthington, discusses with professor and author, Naomi Oreskes in Episode 141 of Cleaning Up. That story of the UK heating industry's antiheat-pump campaign broke in the same month that the Church of England Pensions Board announced plans to divest from oil and gas companies, bringing to an end a decade of attempts to engage with them on climate. The board stated that, 'the reversal of previous commitments, most notably by BP and Shell, has undermined confidence in the sector's ability to transition.' If BP and Shell cannot be trusted to set a course for a Paris aligned future and stick to it, how much less can other fossil fuel players be trusted, players who are far less transparent, based in jurisdictions far less concerned about climate change than the UK? How is Petronas' net zero 2050 pledge faring? What about Saudi Aramco, or national oil and gas companies that have not even paid lip service to climate action? Last year, the global fossil fuel registry found that countries around the world are planning to produce more than twice the amount of fossil fuels in 2030, than would be consistent with one and a half degrees centigrade of global warming. In preparation for COP 28 Dubai in December last year, its president Sultan Al Jaber, set out a four pillar action plan, including the phase-down of fossil fuels. A brave move, considering he's also the CEO of the National Oil Company of Abu Dhabi! What he secured in the negotiations was, for the first time in the history of the UNFCCC, wording on the need for the world to transition away from fossil fuels. But does anyone really think that the world's fossil fuel producing nations are committed to that goal? Indeed, just as world leaders were convening in Dubai, news leaked of Saudi Arabia's ODSP - that's its Oil Demand Sustainability Program - a plan supported at the highest levels to increase demand for oil and gas in developing countries by promoting things like supersonic jet travel, cheap internal combustion cars, and electricity generated from fossil fuels.

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So those are the five horsemen of the netzero transition, the key challenges standing in the way of addressing climate change and meeting the goals enshrined in the Paris Agreement. And there is no question they are fearsome. However, as we will see from the second part of this two-parter, the five horsemen are not necessarily showstoppers: each of them can be overcome. With the right leadership, focus, innovation and resources, the five horsemen can be turned into nothing more than the five speed bumps. If you want to find out how you'll have to wait for the second part of this two part series out next week. Thank you for listening.

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As always, we've put links in the shownotes to resources mentioned during the episode. So that is part one of my two part essay for Bloomberg NEF, on which this audio blog is based, entitled: Net Zero Will be Harder Than you Think - And Easier. Part 1: Harder, my March 2022 essay for Bloomberg NEF, entitled, The Quest for Resilience - What Could Possibly go Wrong, which was also the basis for cleaning up Audioblog number 6, my April 2023 essay for Bloomberg NEF on the electrification of heat, The Next Half Trillion Dollar Investment Opportunity, which was also the basis for cleaning up Audioblog 10, Bloomberg New Energy Finance's 2022 New Energy Outlook, the IEA's "Role of Critical Minerals in Clean Energy Transitions, the IPSOS research report on global concerns about climate change, Episode 141 of Cleaning Up - Lifting the Curtain on Climate Change Denial, with Bryony Worthington and Professor Naomi Oreskes, and for those who want to read ahead, the second part of my two-parter Bloomberg NEF, on which this pair of audioblogs is based, entitled: Net Zero Will be Harder Than you Think - and Easier. Part 2: Easier.

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