Saturday, October 26, 2019

The Changing Energy Landscape

Around the world, energy economies are changing. Companies like Honda and Daimler have announced that they are no longer going to produce cars, SUVs and trucks which use gasoline or diesel as a fuel – in Honda’s case, they will stop making gas driven vehicles in 2022 – just 26 months from now. Uber and Volkswagen have teamed up to build a massive fleet of self-driving cars, all of them electric, so that the world can shift away from transport systems which add to CO2 emissions.

Countries are also on board, banning the sale of fossil fuel vehicles. Norway was the first, with sales of fossil fuel cars and trucks from 2025. India, Germany, Netherlands will do so from 2030, France and the UK (Scotland will do so in 2032) in 2040, Ireland in 2045 and the US State of California will also join the 2040 crowd. Diesel cars and trucks are being phased out faster – Athens, Madrid, Paris, Mexico City, Rome, Brussels will end sales of these vehicles by 2030 and sales, as a result, are already in rapid decline.

Banks and other investors have agreed not to invest in fossil fuels and to switch investments in fossil fuels to other sectors. A renewed commitment was made valued at $11 trillion by over 1,000 fund managers meeting in  Cape Town in September. This is around 16% of the total equity market, and the campaign to be Paris-compliant is gathering momentum. But it is not just concerns about emissions that is leading investors to back off fossil fuels, it is the return on investment. A recent study from the University of Leeds shows that ROI from fossil fuels and green energy are now about equal when a medium term view of ROI is taken – in part due to the higher costs of extraction and distribution. The 23% decline in ROI for fossil fuels over a sixteen year window is at the heart of this calculation.

While demand for oil and gas remains strong and will do so for sometime, that time horizon is shortening. By 2030 – just a decade from now – the world energy system will look very different. By 2030 we expect $1.2 trillion to be invested in green energy projects – five times more than investment in fossil fuels. There will be a growing set of micro-energy producers – companies, communities – using solar, thermal and windpower to generate energy on local scale and selling energy to regional and national grids. We can also expect widespread electrification of transport systems – buses, cars, trains. While natural gas will be a key source of energy fueling the new transport systems – coal will be almost completely gone in the developed world as a source of electricity – new energy forms will also start to appear – hydrogen and fusion power will also begin to play a role in the energy mix.

So the energy game is changing. We need to play our part in shaping this future, otherwise we will all play catch-up.

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