The Transition to Cleaner Sources of Power
Topic: Human Interest, Investments
January 29, 2020
Image used with permission: iStock/Gearstd
The Transition to Cleaner Sources of Power
Today, businesses of all kinds are under pressure to reduce their greenhouse gas (GHG) emissions.
Climate change has become a leading concern among the public and garners significant attention from global policy makers and corporate leaders.(1)
With the call to action growing louder, the question is, where do we begin?
Logically, one starting point is to target key sources of the emissions. While there are myriad sources, the electricity industry accounts for roughly 25% of GHG emissions.(2) In fact, the burning of coal, natural gas and oil for electricity and heat is the largest single source of GHG emissions. Obviously, any solution to reduce emissions will require changes to the way we produce electricity.
Not so fast…
But, dramatically changing our electricity system won’t be easy. The historical record indicates that energy transitions take a long time.
Václav Smil, Canadian academic and Order of Canada recipient, has shown that it took more than 100 years for major economies – including the U.S., China and Germany – to transition away from burning wood to primarily relying on coal and other fossil fuels for energy. The same will be true of transitioning to low-carbon systems. “The solution appears to be simple enough: replace fossil fuels by non-carbon energy sources,” writes Smil. “After all, the planet receives enough solar radiation that capturing a mere 0.1% of it could satisfy a global demand 10 times higher than that for today’s energy use. But, like its predecessors, global decarbonization – the fifth energy revolution that will do away with fossil fuels and replace them by an uncertain combination of renewably generated electricity, hydrogen and nuclear power – will take a long time to accomplish.”(3)
Change is coming
Clearly, the solution for the electricity industry will involve technological change. And the good news is the industry seems willing to embrace the need to change.
What’s particularly interesting is how vocal electric utility companies are about the coming change. We recently attended the largest electric utility conference in North America and heard a remarkably consistent message from more than a dozen management teams. Coal-fired generation is on its way out as a destination for new capital investment in Western economies. Instead, utilities are investing in lower-carbon natural gas power plants as well as renewables (especially wind and solar). This change in investment is driven by a combination of two factors: the improving cost competitiveness of renewable power and government policies designed to incentivize companies to adopt lower-emission power technology.
The data below illustrate that, in North America at least, this transition toward cleaner sources of electricity is under way. Between 2008 and 2018, the U.S. electric generation mix has shifted away from coal and moved toward a much higher weighting in natural gas and renewables (mostly wind and solar).
The data, alongside commentary from the management teams running North America’s electric utilities, are encouraging. They suggest the industry is delivering increasingly clean energy while also achieving other critical goals of affordability, reliability and – importantly – the profitability that supports future investment in low-carbon electricity systems.
However, it’s difficult today to accurately predict just what the low-carbon electricity system of the future will look like. Some, like Smil, see the future energy mix as a combination of renewables, hydrogen and nuclear. Others envision major breakthroughs like harnessing energy from the ocean, capturing and sequestering carbon emissions, and introducing nuclear fusion or fission.(4) Perhaps the only thing more difficult to predict is when these key breakthroughs might occur.
In the meantime, it looks like the challenge of reducing emissions from the electricity industry will be tackled with incremental change in areas like renewable technology, battery storage, energy efficiency and grid modernization. The electric utility industry looks well placed to continue moving this incremental change forward, but we should temper our expectations about its pace. As Smil puts it, “Global energy (r)evolutions take time…”
(1) Most recently, we’ve seen significant statements regarding climate risk from Mark Carney (the departing governor of the Bank of England), Laurence D. Fink (CEO of BlackRock, the world’s largest asset manager) as well as a host of corporate leaders attending the 50th anniversary of the World Economic Forum in Davos, Switzerland.
(2) Intergovernmental Panel on Climate Change https://www.ipcc.ch/report/ar5/wg3/.
(3) Václav Smil, “Energy (r)evolutions take time,” World Energy Magazine, No. 44, October 2019.
(4) Bill Gates, for instance, wrote in his 2016 annual letter that he expects a clean energy breakthrough sometime in the next 15 years and announced his “Breakthrough Energy” initiative to invest in new clean energy technologies.