2023 marks the beginning of a new era in the low-carbon transition

The perspective for the low carbon transition to be continued extremely promising for this year. This is what Albert Cheung said, head of global analysis from the BNEF (BloombergNEF).

“Globally, we expect capacity additions to clean energy increase at least 18% in 2023, ignoring supply chain issues and interconnection delays to reach another record of more than 450 GW”, he highlighted.

In his view, clean energy is more cost-competitive than ever, as fossil fuel prices remain high and renewable costs are now resuming their long-term decline, “with the leveled global average of energy costs. onshore wind falling 6.3% from 1H to 2H 2022, offshore wind falling 10.2% and fixed-axis photovoltaic falling 1.7%”.

According to the executive, supply chain restrictions are easing and the prices of key inputs, such as polysilicon, nickel and cobalt, have fallen. Electric vehicle sales continue to rise and are expected to reach 13 million in 2023, up from around 10 million in 2022.

Furthermore, it pointed out that green hydrogen will be cost-competitive sooner than expected, thanks to high fossil fuel prices.

“Sustainability commitments from companies and financial institutions remain strong, and our conversations indicate that they are here to stay, despite some high-profile controversies,” Cheung reported.

In his view, the setting of new science-based targets, in particular, reached a new high in 2022, and many other governments are taking steps to promote corporate disclosure of climate risks.

Other highlights

According to the expert, the formulation of health policies clean energy also “is alive and well. The IRA (US Inflation Reduction Act), the single most important development in the global energy transition last year, will drive massive investment in clean energy technologies in the coming years and help scale up nascent technologies like hydrogen and carbon capture.”

“The EU reached agreement on Fit for 55, RePowerEU and the carbon border adjustment mechanism, setting the stage for faster decarbonization across the bloc. Elsewhere, Australians continued to vote for faster climate action and Indonesia and Vietnam are attracting international funding with their accelerated decarbonization plans.”

Therefore, the analyst highlighted that if 2023 marks the beginning of a new era in the low-carbon transition, it will not be an era characterized by any kind of slowdown. “Quite the opposite: the transition will only accelerate and expand.”

“But this acceleration will take place in a profoundly changed scenario, characterized by four new dynamics: countries in competition; energy security at a premium; a more transactional transition and imperative delivery. Let’s unpack each of these dynamics,” he said.

Countries in competition

For Albert Cheung, as the net zero opportunity becomes clearer (the New Energy Outlook puts the investment opportunity at US$194 trillion by 2050), countries are rightly looking for ways to capture value in the clean energy transition , from the extraction and refining of raw materials to technology development, manufacturing and deployment.

“The US, EU and China are now in much more explicit competition for jobs, economic value, technological leadership and supply chain dominance in clean energy and other technologies, for both economic and security reasons,” he explained.

“Other countries are also seeking their slice of the clean economy pie, especially India. The focus on domestic jobs is leading to protectionist tendencies, and increasingly the gloves will come off when it comes to trade policy related to energy technologies and commodities”, commented the researcher.

According to him, countries have tried different approaches: from restricting raw material exports to promote domestic investment in refining and manufacturing (Indonesia), to import barriers and bidding programs to allocate subsidies for solar energy manufacturing (India ).

“But the Inflation Reduction Act is probably the biggest example. The subsidies offered, including some that are explicitly for technologies manufactured in the United States and in countries with 'free trade agreements,' will distort the playing field, possibly attracting investment from other markets and disrupting trading partners,” he said.

“The EU has already expressed its annoyance even as it works to boost the prospects of its own clean energy manufacturing sector; and the US is looking at allowing imported electric vehicles to access tax credits following concerns raised by trading partners such as South Korea,” he pointed out.

Norway and Australia have already expressed objections to the IRA's hydrogen tax credits, which could distort any future international hydrogen market. “For its part, the EU’s carbon border adjustment mechanism, intended to prevent carbon leakage, faces similar criticism and will generate copycat policies in other markets.”

BNEF published a study in the past on the importance of free trade in reducing barriers to the adoption of clean technologies, “and some of the policies implemented in this period will prove counterproductive or increase costs.”

“For example, our solar analysts estimate that the cost of creating a photovoltaic manufacturing supply chain in Europe or the US, from polysilicon to modules, would be around US$560 million per GW of annual production capacity , compared to just US$ 145 million in China,” he said.

“But a world in which countries compete to capture the value of the energy transition can still move faster towards net zero, despite the implicit inefficiencies,” he emphasized.

Security as a prize

For Cheung, volatility in global energy markets will remain into 2023, and government policymakers, particularly (but not only) in Europe, will spend much of 2023 trying to keep energy costs down and the lights on, both to citizens and companies.

In this next era of energy transition, it is energy security, not sustainability, that will be of value. “In the old 'energy trilemma', energy affordability and security came as a package deal – fossil fuels were seen as reliable and affordable – and it was sustainability that came first. Now, we live in a world where clean energy is the affordable option and energy security comes with the highest price.”

“The good news is that the deployment of clean energy also supports energy security, and therefore the pursuit of greater energy security will ultimately lead to a faster transition,” he highlighted.

However, he assessed that for the private sector this represents a much more complex picture. “Increased competition between countries, as described above, represents a significant political risk and an opportunity to lobby for greater support from receptive governments.”

“Meanwhile, differentials in energy prices between regions will also lead to complicated strategic decisions, especially for companies in energy-intensive sectors,” he pointed out.

Transactional transitions

In the view of BloombergNEF's head of global analysis, the era of easy wins in international climate ambition, when countries lined up to raise their climate targets, may be over for now, as much of the developed world has ambitious climate reduction targets. current emissions.

“However, there is still much more ambition to be unlocked, particularly in emerging markets and developing economies. In our New Energy Outlook, China, India and Indonesia easily exceed their 2030 climate targets, even if they only pursue the lowest-cost trajectory mapped out in our Economic Transition Scenario. In other words, these countries must be able to increase their climate ambition without incurring additional costs”, he highlighted.

“Developing economies have long made clear that the right amount of international finance will trigger greater action, with a strong emphasis on achieving the climate finance target of US$100 billion per year. This still needs to be achieved, as quickly as possible”, he pointed out.

Imperative delivery

Above all, the executive commented that the new era of energy transition must and will be focused on rapid delivery. “A year ago, we concluded that total investment in the global energy transition reached US$ 0.75 trillion in 2021 and that it needed to increase to around US$ 4 trillion per year this decade.”

“The 2022 total will have been a big increase compared to 2021 (our investment figures will be released soon), but it will still not be anywhere near the necessary level”, he lamented.

“We know that the transition will accelerate. We know the capital is there (albeit more expensive than it used to be), and policymakers are shifting their attention from vision and goals to execution and delivery. The signs are good for 2023 and beyond”, he emphasized.

“The implementation of the IRA and the Infrastructure Act are already starting to boost investment in the US. Canada is introducing its own tax credits for clean energy technologies and Indonesian public officials are busy implementing the JETP,” he explained.

“In addition, the European Council agreed rules to accelerate the licensing of renewable energies, a critical bottleneck. Zero-emission vehicle targets now cover 40% of the global automotive market,” he highlighted.

What is needed now, according to the expert, is a tireless effort to remove barriers to the transition and the implementation of pragmatic policies that can meet the goals that have been set.

“Greater competition between countries could indeed support this: it is a sign that countries see the opportunities in the energy transition more clearly than ever before and are preparing to get their piece of the pie. It has been said that something akin to wartime mobilization would be necessary to successfully tackle climate change. This may just be what we are beginning to witness.”