New insights 2021

1. COVID-19 economic recovery spending is a lost opportunity

Government interventions, to stop the spread of the virus and then to restart activity, revealed how effective national and global actions can be.

Similar action and funding have yet to be applied to the unfolding global climate crisis. 

The trillion of dollars pushed into the global economy over the past 20 months have mainly been directed towards emergency measures like wage supplements and on building back the existing economic and industrial engine. Yet the opportunity for a green reset of production, transport and economic activity was unique, and as we wrote in ETO 2020, “The post-COVID-19 stimulus packages hold the potential to alter the speed of the transition.” With some notable exceptions, particularly in the EU, governments have not steered recovery spending towards a decarbonized outcome. 

Global CO2 and GHG emissions fell 6% in 2020 but will rise again this year. While the emissions trajectory has shifted down slightly, that is due to lost economic activity, not energy-system renewal. The overall pace of the transition has not accelerated, and that is a lost opportunity.

2. Variability and low power prices are not roadblocks to a renewable-based power system

The present power system is not set up for variable renewables as the dominant source of production.

Yet plunging costs, government support for renewable power buildout, and carbon pricing will ensure that renewables will eventually dominate power generation. Over the coming 30 years, USD 12 trillion will be invested in both building a larger grid and adapting it to the variability of solar and wind through technical solutions such as connectivity, storage, and demand response. 

The cost of power from solar and wind will continue to reduce but price cannibalization threatens the investment case for renewable capacity if cheap power is unused at times of ample supply. However, indirect electrification through power-to-X will require massive renewable electricity production, and along with various storage solutions, will ensure that surplus power will be used, and capture prices maintained at a satisfactory level. 

Solar PV + storage will make solar more directly competitive with thermal generation, nuclear and hydropower. We find that one third of all solar production will be built with direct storage, and by 2050, solar PV + storage will produce 12% of all grid-connected electricity.

3. Decarbonizing hard-to-abate sectors requires far greater scaling of hydrogen, e-fuels, and biofuels

Hard-to-abate sectors are those that cannot easily be decarbonized through electrification, and include aviation, maritime, long-haul trucking and large parts of heavy industry.

These sectors are currently responsible for around 35% of global CO2 emissions, and progress in reducing these emissions is stubbornly slow. 

Hydrogen is seen as the main decarbonization alternative for these sectors, with biofuels in a supporting role, mainly in aviation. Direct hydrogen use is often not suitable, and ships and aircraft require hydrogen derivatives and e-fuels such as ammonia and synthetic jet fuel. 

Global hydrogen production for energy purposes is currently negligible and will only start to scale from the late 2030s, meeting 5% of global energy demand by 2050. Government incentives, similar to those given to renewables, are needed to stimulate technology development and accelerate uptake of hydrogen and e-fuels. 

Aviation, maritime and heavy industry thus retain high unabated fossil-fuel shares towards 2050, slowing the transition and significantly impeding the achievement of the Paris Agreement.

4. Most hydrogen will be produced from dedicated renewables-based electrolysers by 2050

The current production of hydrogen as an energy carrier is negligible compared with the 75m tonnes of grey/brown hydrogen produced annually for fertilizer and chemicals production.

Blue hydrogen, produced by steam methane reforming (SMR) from gas with CCS, will replace some of the grey and brown hydrogen in the coming decades. In total, blue hydrogen will also comprise 18% of hydrogen supply for energy purposes by 2050. 

Green hydrogen from electrolysis will be the main long-term solution for decarbonizing hard-to-abate sectors, including hydrogen as a basis for other e-fuels. 

Electrolysis powered by grid electricity is disadvantaged by the limited number of hours of low-priced electricity. Its CO2 footprint will, however, improve as more renewables enter the power mix. The future production of hydrogen for energy purposes will be dominated by electrolysis using dedicated off-grid renewables, such as solar and wind farms. By 2050, 18% of hydrogen will be grid-based and 43% will come from dedicated capacity comprising solar PV (16%), onshore wind (16%) and fixed offshore wind (9%).