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Rapid and far-reaching system transitions in energy use, urban infrastructure – including transport and buildings – as well as a significant up-scaling of investments are required to achieve the objectives of the Paris Agreement, the Intergovernmental Panel on Climate Change warned in 2018.
What system transitions are we already seeing? In this first of two articles covering innovations to build smarter and greener infrastructures, we have a look at developments in the clean energy market, examine how businesses can benefit from non-fossil fuel sources as well as carbon capture technologies, and we outline why green buildings are key to successfully combatting climate change.
IPCC: The Intergovernmental Panel on Climate Change is a committee of climatologists, meteorologists, geographers and other scientists, established in 1988 by the World Meteorological Organization (WMO) and the United Nations Environment Programme (UNEP) to assess the science related to climate change.
OECD: The Organisation for Economic Co-operation and Development works together with governments, policy makers and citizens to establish evidence-based international standards and policies, and find solutions to a range of social, economic and environmental challenges.
RE100: Led by The Climate Group in partnership with CDP, RE100 is the global corporate renewable energy initiative with over 200 members so far, being committed to 100% renewable electricity.
SLM: The United Nations defines sustainable land management (SLM) as “the use of land resources, including soils, water, animals and plants, for the production of goods to meet changing human needs, while simultaneously ensuring the long-term productive potential of these resources and the maintenance of their environmental functions”.
FAO: The goal of the Food and Agricultural Organization of the United Nations is to achieve food security and access to high quality food for all people. With over 194 member states, the FAO works in over 130 countries worldwide.
EIT Climate-KIC: Supported by the European Institute for Innovation and Technology, the Climate-Knowledge and Innovation Community (KIC) aims to accelerate the transition to a zero-carbon economy by creating networks of expertise, through which innovative products, services and systems can be developed, brought to market and scaled-up.
Clean energy use and energy efficiency measures drive innovations
The OECD estimates that investments of $6.9 trillion 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 fact 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 every corner of our economies, redefining business models and markets, with clean energy just one of the driving forces.
The shift to clean energy is gaining pace
The push towards clean energy has gained momentum in recent years. Clean energy encompasses renewable energy sources as well as nuclear energy and carbon-neutralising technologies such as carbon capture and sequestration (CCS). A shift to clean energy sources – which still emit GHGs, but at a considerably lower level – can significantly reduce carbon emissions from electricity production that make up approximately 30% of global GHG emissions.
A mix of new technologies and policy tools (other than carbon pricing) is helping to accelerate the speed of change in the energy markets. Which are they?
Energy efficiency projects
Improving energy efficiency is an obvious quick win to reduce carbon emissions from energy production.
Setting standards for buildings and appliance efficiency, combined with innovative financing through public-private partnerships have already yielded impressive results, with companies being able to choose between a range of energy efficiency programmes.
Apart 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 continuously look out for potential energy savings.
The circular economy concept also helps increase energy efficiency by turning waste from mainstream industries into energy. A growing number of companies is 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 whenever energy production is higher than energy use.
The EU allocated €18 billion to energy efficiency projects in the period 2014-20 in its European Structural and Investment Funds (ESIF) and has developed a number of other support schemes to help businesses, regions, and countries successfully implement energy efficiency projects. Equally, on a national level, energy efficiency grants are available for any kind and any size of business in the UK.
Reforming fossil fuel subsidies
In 2014, G20 countries collectively provided subsidies amounting to $354 billion for fossil-fuel consumption and $18 billion for fossil-fuel production. While lobbyists argue that those subsidies are supporting valid public policy objectives such as 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 such as carbon pricing.
However, a subsidy reform proposal didn’t make it into the text of the Paris Agreement. Yet, a few months later, the G7 nations pledged to remain committed to the elimination 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 – not only from an environmental angle, but also financially: Estimates suggest that reforming fossil fuel subsidies globally, combined with carbon pricing, could generate $2.8 trillion in annual government revenues or savings, which could be invested in low-carbon projects.
Transitioning away from coal
Coal is currently responsible for around 30% of global energy-related carbon emissions. Compared to cleaner energy alternatives such as natural gas, burning coal produces roughly twice as much CO2. Hence, 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 cannot account for more than 1% of the total electricity mix by 2050.
To have a proper chance to wean economies off of coal within the next three decades, think tank Climate Analytics calculated that by 2030 the coal use in electricity generation globally must fall by 80% below 2010 levels, and that all coal-fired power stations must be shut by 2040 at the latest.
And coal use is already sharply declining: In the US, within the last twelve years, coal-generated electricity dropped from a 45% to a 24% share of overall electricity, and is falling further. And countries, still heavily relying on coal, are committing to ambitious transition plans: Germany, which pledged to phase out coal by 2038, recently announced a $45 billion fund to compensate mines and power plants for lost 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.
Likewise, the EU has included a €4.8 billion “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 steadily increasing
Renewables reached a share of almost 27% in global electricity generation in 2019, and are set 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 about 25% of the increase, hydropower 10% and offshore wind 4%.
China is driving the majority of the renewables capacity increase, investing heavily in wind power and solar PV, while also 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 part of the renewables mix, in particular for transport sectors such as aviation and shipping, where the required energy volume can only be supplied by a liquid fuel (no battery so far 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+ members of the RE100 corporate renewable energy initiative.
Carbon Capture and Storage technology
Still, fossil fuels will retain a significant share of the electricity market going forward. Hence, Carbon Capture and Storage (CCS) has gained a lot of interest as 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 a steel, cement or chemicals, where a move to renewables is currently not feasible.
Consequently, governments have launched carbon capture and utilisation (CCU) demonstration projects – since 2011 the UK government has invested over £130 million R&D and innovation support to develop CCUs in the UK and allocated a further £20 million last year.
The need to adapt to changing electricity demand – in particular with the use of electric vehicles – and to handle 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 turning into energy prosumers, not only using but also generating electricity, mainly through solar power. Coupled with smart metering systems, smart grids can offer information on real-time consumption to consumers and suppliers.
From 2002 up until today, 459 smart grid projects were registered in the EU, amounting to €3.15 billion investment, with over 3,000 organisations from 65 countries taking part, including technology providers, research & innovation (R&I) bodies, regulated operators, electricity market players, local energy communities and consumers. In the UK, the government set up the £500 million Low Carbon Networks Fund to support projects sponsored by the Distribution Network Operators (DNOs) to try out new smart grid technology.
Going clean and reducing energy consumption boosts profit margins
Evidently, clean energy and energy efficiency programmes bring multiple benefits for businesses:
- Costs: Renewables are now frequently the cheapest energy source, and prices will decline further. Also, the cost of installation and maintenance of renewables continue to fall .
Energy accounts for about 5% of costs for an average manufacturing company. Energy-efficiency programmes can save between 10-30% of those energy costs within three years, improving profit margins by 2% in the same period.
- Compliance: Governments have introduced directives aimed at reducing energy consumption. Fast movers will not only avoid fines, but can also benefit from tax incentives.
- Business opportunities: Energy efficiency is more than a cost saving and optimisation tool. For many companies it offers new opportunities – efficiency is a key selling point for electrical devices, and consumers are willing to pay a premium for energy-efficient products.
- ESG score: Reducing energy consumption, using renewable energy sources and exploring new business opportunities demonstrate positive corporate environmental action, strengthening the appeal to ESG investors and other stakeholders.
- Employee satisfaction: Efficiency programmes linked with bonuses boost employee morale.
Read the other articles in the series:
Corporate clients who would like to discuss this topic further should contact:
Dr Arthur Krebbers, Head of Sustainable Finance, Corporates or
Varun Sarda, Head of ESG Advisory