My wife took the children to Italy for the holidays, leaving me to catch up on work and reading. I decided to invest some of the time in reading the IEA’s 300-page World Energy Outlook report for 2023.

The document maps out three energy scenarios: STEPS (Stated Political Scenario) is the most conservative and predicts a temperature rise to 1.9 °C in 2050 and 2.4 °C in 2100. In the Announced Pledges Scenario (APS), the temperature rise in 2100 is 1.7 °C and in the Net Zero Emissions by 2050 (NZE) Scenario, the temperature peaks in mid-century and falls to around 1.4 °C above current levels in 2100. 
                            

Unfortunately, in a divided world distracted by wars the STEPS scenario is probably as good as we get for the next decade and beyond. What would this scenario mean for Africa, China, the US and Europe in particular?

FUTURE OF FOSSIL FUELS

While wading through the first half of the report, this line jumped out: Over the past decade, emerging markets and developing countries have cumulatively spent USD 3.7 trillion on oil, natural gas, and coal subsidies (USD 3.2 trillion excluding China). Not only are existing fossil energy systems heavily subsidised, they also have massive externalities. The report claims:

  • One-in-nine deaths is linked to poor air quality
  • Over 90% of people are exposed to polluted air, leading to more than 6 million premature deaths a year
  • Air pollution also compounds multiple chronic health conditions, such as asthma, and leads to serious diseases, such as lung cancer
  • Air pollution is estimated to reduce global gross domestic product (GDP) by around 6%, and the GDP of some emerging market and developing economies by more than 10% per year (World Bank, 2022). 

The good news is that for clean energy systems to compete with fossil fuels, the bar is lower than we think. Especially when considering the externalised costs of fossil fuels, i.e. their impact on human health and environment health. Investments are starting to shift from fossil to clean energy with coal (the most toxic of fossil fuels) being the first to lose demand.     

FUNDING THE TRANSITION

In 2022 we saw the end of low interest rates and quantitative easing and the arrival of higher interest rates. The green transition needs funding and higher interest rates won’t help. In the STEPS scenario, global energy investment rises to an annual USD 3.2 trillion by 2030, nearly 15% higher than the estimated USD 2.8 trillion for 2023. Clean energy investment accounts for all the increase (USD 400 billion), with fossil fuel investment falling slightly to USD 1.1 trillion. 

Renewables cost more upfront, but their total ownership costs are lower than fossil energy. Thus, a high interest rate environment is a threat to the transition, and particularly so for  developing economies, which tend to be a greater financial risk. If we want to stay within 1.5 or 2 degrees of warming we will have to find new ways of helping the developing world fund their green transition. There is little in the report on how this will be achieved.

AFRICA: GOING URBAN

The big demographic story of the next 50 years is Africa’s growing population and its burgeoning urbanisation. Can richer regions help Africa build more sustainable cities? The West seems to have lost appetite for the challenge, leaving China to step in with its Belt and Road initiative. But, around 17 African countries have been unable to repay their Belt and Road loans, which left the Chinese government with little choice but to write off large amounts of debt. But if Western countries are sincere about human progress – balanced with environmental protection – then they should take interest in helping Africa achieve sustainable economic objectives. It could be good for business too. 

Mobile phones have done for Africans what no developmental economist could have imagined, helping them leapfrog past fixed line telephony into the information age. Off-grid and mini-grid solar systems for this sun-saturated continent could do something similar. It was once a catastrophe for Africa that governments could not establish reliable national grids. Today, falling prices for solar panels and battery storage present a new leapfrogging opportunity for the continent. 

CHINA: PART PROBLEM – PART SOLUTION

Over the last decade China accounted for more than one third of growth in global GDP, over  50% of growth in global energy demand, and 85% of the rise in CO2 emissions for the energy sector. China is by far the largest producer and consumer of coal, and a major consumer of oil and gas, which makes it the world’s largest COemitter, accounting for one-third of the global total. But China is also the largest user in the world of many clean energy technologies, accounting in 2022 for 60% of global sales of electric cars, 50% of wind capacity additions, 45% of global solar PV additions, and 30% of nuclear energy additions. China is on track to exceed its 2030 national target of 1,200 GW of solar and wind capacity five years ahead of schedule, which bodes well for its commitment to be carbon neutral by 2060. 

Unfortunately, much of China’s energy was used to build homes that may never be filled. Today, China has a massive oversupply of housing, with major cities reporting vacancy rates of up to 12%, while the country’s demographics face a precipitous decline. This is one reason why China is pivoting away from infrastructure investment and toward manufacturing for export, taking a leading position in greentech. BYD (electric vehicles) has a market capitalization of $95 billion, CATL (batteries) has a market capitalization of $112 billion, while Trina Solar’s (solar panels) is $9 billion. 

USA: GAS & CASH

Thanks to the development of its natural gas resources and thanks to key policy initiatives to onshore its green industry, the United States now finds itself in an enviable position. President Biden’s Inflation Reduction Act (IRA) sets aside $370 billion for energy security and climate change, while the Bipartisan Infrastructure and Investment Act puts $190 billion toward clean energy and mass transit infrastructure. 

In the US, LNG (liquefied natural gas) will power factories at half the cost of Europe, as well as providing the feedstock for a host of chemicals, some of which are needed in the green transition. European companies bogged down by high energy costs and excessive red tape will look to offshore manufacturing to the US. 

In the US, LNG (liquefied natural gas) will power factories at half the cost of Europe, as well as providing the feedstock for a host of chemicals, some of which are needed in the green transition. European companies bogged down by high energy costs and excessive red tape will look to offshore manufacturing to the US. 

EUROPE: STUCK IN THE MIDDLE

Despite being early adopters of the green transition, Europe has been unable to build world-beating greentech companies. Existing European automakers are finding it hard to compete with Tesla and now BYD in the EV space; and it is unlikely new European manufacturers will be able to compete with the Chinese in battery storage and solar panels. 

China and America will compete with each other, in an increasingly protectionist environment, to export to Europe. Further, many European companies are building new production in the US to take advantage of their incentives; they’ve also started investing in Chinese OEMs to access their technology and supply chain. Europe understandably wants to bolster its energy security by owning critical parts of the value chain. The graphic below forecasts the clean technology supply chain geography for 2030. It’s a world still dominated by China but with Europe and the US starting to make inroads in certain sectors. When it comes to energy security, the two main spheres of Western influence will need to pick their battles carefully and to avoid losing battles. For solar PVs, China has 80% of world manufacturing capacity yet consumes 45% of the world’s capacity. Europe and the USA account for only 1% each of manufacturing, but consume 17% and 9% respectively. 

BOTTOM LINE:

Decarbonisation does not need to mean deindustrialisation for Europe. Some industries like Solar PV are probably not worth pursuing but many others like wind, nuclear and battery storage are. European companies will benefit from the lower costs and stable prices of new energy systems even if many of the components are imported. The EU needs to figure out where to compete in the new energy industry and find niches that will scale.

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