STRATEGY

BUSINESS ENVIRONMENT
RENEWABLE ENERGY : A RESPONSE TO CLIMATE CHANGE

CLIMATE CHANGE WARNING SIGNS AND THE URGENCY FOR A LOW CARBON ECONOMY

The Earth’s climate has been changing at an unprecedented scale in the last century. The fifth Intergovernmental Panel on Climate Change report states that the current warming trend can be largely attributed to human activity with a probability higher than 95%. The World Meteorological Organization confirmed in January 2018 that the last three years were the warmest ones on record: 2016 holds the global record, whilst 2017 was the warmest year without the El Niño effect and was followed by extreme weather around the world.

As it stands, the world is on track to massively miss the goals set forth in the Paris Agreement, with around 1.1° C of global average temperature rise¹ already witnessed since the pre-industrial era. To remain within the Paris Agreement boundaries, the world can only afford around 0.4° C to 0.9° C of additional average warming. Current country pledges, also known as “Nationally Determined Contributions” (NDCs), could lead to an emission decline in the coming years, but are not sufficient to reach the goals, as under the current policy pathway the rise in temperature would range between 2.6° C and 3.2° C by the end of the century according to Climate Action Tracker².

Around 66% of all greenhouse gas emissions comes from energy generation and use, which highlights the need to decarbonize the energy sector to effectively mitigate climate change. In particular, the impact of the electricity sector is quite significant as it is by far the largest source of CO2 emissions, accounting for about 40% of all energy-related emissions. Therefore, to achieve the targets set by the Paris Agreement, the sector needs a resounding transformation from fossil-based to clean energy generation. The transition towards a clean power sector is particularly relevant in the context of electrification of the economy especially of the heating and transportation sectors. Electric vehicles represent one of the most promising technologies for the electrification and decarbonisation of the transportation sector and according to Bloomberg in 20 years the sales of electric vehicles could surpass the ones from internal combustion vehicles. The mass adoption of electric vehicles would result in a paradigm shift for both transportation and power sectors: on one hand, it would boost electricity demand; on the other hand, since renewables tend to be intermittent by nature as they are dependent on weather conditions, the possibility of the electric vehicle to function as a storage unit able to return electricity to the grid, would help to compensate and integrate a larger share of renewable sources.

RENEWABLES IS THE KEY FOR THE TRANSFORMATION

According to the International Renewable Energy Agency (IRENA), renewable energy, coupled with energy efficiency gains, can provide 90% of the CO2 emissions reductions needed by 2050 to stay within the Paris Agreement boundaries. In this scenario, renewable technologies could generate more than 80% of all electricity by 2050, including a 52% share from wind and solar which would have to grow from today’s approximately a 5.5% share. The leading role of renewables has been noticed by governments around the world and most countries have included renewable energy targets in their NDCs; from the 194 signatory countries of the United Nations Framework Convention on Climate Change that submitted NDCs, 145 referred to renewables as an effective way to mitigate climate change and 109 set specific renewable energy targets. At least 1.3 TW of renewable capacity is expected to be added globally by 2030 from NDC implementation, which means a 76% increase. Although current NDCs are not enough to achieve the Paris Agreement’s targets, the so-called “ratchet mechanism”, designed to periodically raise NDCs’ ambition, could eventually align them with the required 2º C target.

THE TRANSITION IS POSSIBLE IN A NATURAL WAY

A clean energy revolution is naturally underway not only because it is sustainable but also because it makes economic sense; onshore wind and solar PV costs have been declining and these technologies are now among the cheapest sources of energy in a growing number of countries, as highlighted by Lazard, Bloomberg New Energy Finance and IRENA. The competitiveness of renewables has been clearly evidenced in 2017 with wind (onshore and offshore) and solar PV’s tenders beating a record of low prices all around the globe.

The awareness that renewables makes sense is increasingly growing in all sectors. Corporations, for instance, have been signing Power Purchases Agreements (PPA) with renewable generators in order to fill their electricity needs. Renewables represent now an increasingly share of new investments in power-generating facilities3 and according to BNEF, renewable energy sources are set to represent almost 75% of the investments in new power generation technologies until 2040. Not surprisingly, Europe’s major utilities pledged to become carbon-neutral “well before 2050” and even several oil and gas major companies have significantly increased their investment in renewables during the recent years. Funding institutions are also stepping back from fossil fuel projects; the World Bank announced in December 2017 that it would cease to finance upstream oil and gas after 2019 and investment funds, such as the Norway’s wealth fund, banks and pension funds have announced similar pledges. Likewise, global green bond4 issuance hit a record of USD 155.5 billion in 2017 and could reach USD 250-300 billion in 2018, according to a research from the Climate Bonds Initiative.

According to a study published by IRENA in January 2018, the EU could double the renewables’ share in its energy mix, cost effectively, even without considering the economic value associated with health and environmental benefits. The share could rise to 34% in the total energy mix and up to 50% in the electricity mix (compared to 29% in 2015).

 

1. Data source: NASA

2. The Climate Action Tracker (CAT) is an independent scientific analysis produced by three research organizations tracking climate action: Climate Analytics, Ecofys and NewClimate Institute

3. According to Bloomberg, global clean energy investment in 2017 was the second highest ever at USD 333.5 billion and representing an annual increase of 3%

4. Debt instruments to be used for projects that promote climate and environmental sustainability purposes