Rapid ramp-up in renewables will be central to achieving net-zero

• 2 years ago (2021-12-15)
• Junior Isles

Renewables 751

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By Pierre Georges

The recently concluded COP26 conference has placed renewed attention on the urgency of climate change. And the need for action could hardly be clearer – to limit global warming to two degrees above pre-industrial levels, all energy intensive sectors need to drastically cut their carbon emissions, mainly by electrifying their industrial processes and transitioning to low-carbon energy sources – renewables in particular.

As such, decarbonisation remains a key focus for corporates and governments. Yet as the global economy continues to recover from the COVID-19 pandemic, energy markets are facing increasing volatility and questions are being raised about how realistic an expedited energy transition really is.

Indeed, as a result of supply-demand tightness, power prices are surging in certain parts of the world. Oil prices have reached US$80/bbl – up from US$65/bbl on average in H1 2021 – while gas prices have soared to US$28/mmBtu in Europe and exceed US$6/mmBtu in the U.S. Meanwhile, Chinese thermal coal prices jumped 50% in Q3 of this year, reaching roughly US$216/te. This demonstrates the lack of alternatives currently on offer in an economy that remains anchored in hydrocarbons.

Ambitious policy objectives provide clear vision

Recognising the imperative to move decisively in favour of decarbonisation, governments across the globe have put forward a range of ambitious policy objectives. Over the next decade, these will require the doubling of installed renewables electricity generation sources worldwide.

Through its “Fit for 55” plan, the European Commission intends to make significant reductions to carbon emissions across the EU by 2030 in order to accelerate the bloc’s plan to achieve net zero by 2050. The plan involves creating 10 million tons per year of green hydrogen supplies, and adding between 45 GW and 55 GW of renewable capacity per year this decade – up from the 30 GW added in 2020.

Across the Atlantic, President Biden's clean energy framework targets the full decarbonisation of the national power market by 2035, which would require annual renewable capacities doubling to 30 GW per year over 2021-2025 (up from 15 GW in 2020). This would then need to double again over 2026-2030 to reach 60 GW – a challenging feat, government support packages notwithstanding. China, too, has announced the addition of 75-80 GW of renewables capacity during its current Five-Year plan (2021-2025), which would double the growth seen in the previous five-year period.

Production costs rise due to supply chain issues

Nevertheless, a number of significant challenges to the more widespread adoption of renewables persist. In order to meet the required increase in installed capacity cost decreases in the sector will be vital. Yet prolonged inflation could threaten the pace of growth, with production costs starting to show their first signs of deviation from the expected long-term decline of about 40% on average by 2030 compared to 2020 levels. Indeed, S&P Global Platts Analytics estimates that commissioning costs for solar photovoltaic plants will increase up to 10% in 2021, and that the cost of offshore and onshore wind projects will rise 4% and 8%, respectively by the end of the year.

The root cause of this price surge is the increasing cost of raw materials. Copper, aluminium, and steel are all used in the production of solar and wind plants, and scarcity is causing setbacks to both manufacturing and new-build activity. Furthermore, ongoing supply chain challenges such as shipping bottlenecks are making it more difficult to procure materials, contributing to the high-cost environment and compounding the issues of renewables supply chains already struggling to keep up with the required pace of development. Finally, other challenges may surface, including a lack of skilled workers to effectively deliver on this ambitious development plan, which contributes to further cost inflation.

Intermittency and affordability continue to pose challenges

Another factor that could threaten the pace at which net-zero objectives are met is the reliability of renewables when it comes to meeting baseload power needs.

Ultimately, renewables such as wind and solar cannot produce energy around the clock. In the past year, unexpectedly low wind levels in some countries – which have led to power outages in Northeast China and triggered a switch to higher-emitting coal-fired electricity generation in the UK – have contributed to doubts about renewables’ prominent role in the energy mix. And, as extreme weather events increase the risk of blackouts, the need for dispatchable power is only set to increase.

To mitigate this risk and bolster renewables’ long-term growth prospects, renewables rollouts will need to be accompanied by backup solutions, such as hydrogen or battery storage, that boost system reliability. And as renewables occupy an increasing share of the energy mix, sources of carbon-free flexible power sources will become more relevant for system reliability.

Furthermore, ongoing energy price volatility has underscored that social challenges, such as energy affordability, are difficult to separate from the decarbonisation process. High power prices bring with them political sensitivities, which, in turn, has implications for policy objectives and could affect renewables growth.

Looking ahead, the rapid rollout of renewables will be a crucial, and substantial, step in achieving effective global decarbonisation – but it is just one part of a larger puzzle. Addressing current challenges will require policymakers to focus on incentivising dispatchable power while leaving sufficient time for existing fossil fuel generation to provide crucial system balancing peak-load capacity. As such, long-term policy goals and near-term action will need to be balanced in order to achieve the necessary reductions to achieve net-zero.