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Expect the Unexpected - The Disruptive Power of Low-carbon Technology

Achieving climate stability will require deep and widespread changes in the global energy sector. Fossil fuel industry projections, however, continue to show a future energy system with few changes to that of today. This is in spite of examples of disruption in the energy sector at the hands of the low-carbon transition.
Expect the Unexpected - The Disruptive Power of Low-carbon Technology


EXECUTIVE SUMMARY

The time for energy transformations is now
Achieving climate stability will require deep and widespread changes in the global energy sector. Fossil fuel industry projections, however, continue to show a future energy system with few changes to that of today. This is in spite of examples of disruption in the energy sector at the hands of the low-carbon transition. This scenario analysis was produced in partnership between Carbon Tracker and the Grantham Institute at Imperial College London and explores the extent to which ongoing cost reductions could see solar photovoltaics (PV) and electric vehicles (EVs) impact future demand for coal, oil and gas. The findings of this study should motivate energy companies and their investors to retire the use of business as usual (BAU) scenarios and further integrate the consideration of downside demand scenarios.

Updating model assumptions is critical
This study demonstrates the importance of using the latest available data and market trends for technology costs and climate policy in energy modelling. Applying up-to-date solar PV and EV cost projections, along with climate policy effort in line with the Nationally Determined Contributions (NDCs), should now be the starting point for any scenario analysis. This is not a radical disruptive scenario in terms of its inputs, but a reflection of the current state of play. The key findings in this scenario are presented below.

Low-carbon technologies
▶▶ Solar PV (with associated energy storage costs included) could supply 23% of global power generation in 2040 and 29% by 2050, entirely phasing out coal and leaving natural gas with just a 1% market share. ExxonMobil sees all renewables supplying just 11% of global power generation by 2040.
▶▶ EVs account for approximately 35% of the road transport market by 2035 – BP put this figure at just 6% in its 2017 energy outlook. By 2050, EVs account for over two-thirds of the road transport market. This growth trajectory sees EVs displace approximately two million barrels of oil per day (mbd) in 2025 and 25mbd in 2050. To put these figures in context, the recent 2014-15 oil price collapse was the result of a two mbd (2%) shift in the supply-demand balance.

Fossil fuel demand
▶▶ Although this study focuses on the decarbonisation of the global power and road transport sectors, which today account for only 51% of global CO2 emissions and fossil fuel demand approximately, this scenario sees:
▷▷Coal demand peaking in 2020;
▷▷Oil demand peaking in 2020; and
▷▷Gas demand growth curtailed.

Global warming
Global average temperature rise is limited to between 2.4°C (50% probability) and 2.7°C (66% probability) by 2100 in this scenario – far below the BAU trajectory towards 4°C and beyond used by fossil fuel companies. If climate policy exceeds the pathway prescribed by NDCs, and overall energy demand is lower, cost reductions in solar PV and EVs can help limit global warming to between 2.1°C (50% probability) and 2.3°C (66% probability). Efforts must be made to align with this more carbon-constrained trajectory.

The ‘10% threshold’
In the past Carbon Tracker has shown that a 10% shift in market share can be crippling for incumbents, such as in the value destruction experienced by EU utilities and the near collapse of the US coal sector. Scenarios produced in this study indicate that 10% shifts in market share from incumbents to solar PV or EVs could occur within a single decade. This contrasts with many BAU scenarios which do not see these technologies gaining a 10% market share, even over several decades. Breaking through these kinds of thresholds is significant because they signal the peak in demand for coal or oil; changing the fundamental market dynamic for these fossil fuels.

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No more business as usual

By definition, BAU scenarios involve no additional climate policy mitigation action beyond the present level, or acceleration in the extent to which low-carbon technologies impact energy markets. Given the energy transition is clearly already underway, and there is no way that BAU can meet the climate targets that many countries, states and companies have committed to, it is our contention that it is time to retire the conventional approach to use BAU as a starting point in scenario analyses. The current state of the low-carbon transition means it is highly risky to justify any business strategy by using a BAU scenario as a reference case. By changing the starting point, it shifts the focus on to how to achieve the Paris COP climate targets, i.e. a 2°C reference scenario, rather than the gap between BAU and what is already happening.

Ensuring transparency of assumptions
As noted by the draft guidance from the Financial Stability Board (FSB) Taskforce on Climate-related Financial Disclosures (TCFD), it is important to know the assumptions underlying any energy modelling analysis. This is particularly true for the costs of energy supply technologies given the binary nature of how integrated assessment models (IAMs) tend to select the lowest cost options in their projections of the future energy mix. Equally important are disclosures of efficiency variables, capacity factors and any exogenous constraints applied by the modellers. This analysis demonstrates how it is possible to provide this transparency in accordance with TCFD recommendations (see Appendix) and why it is important to do so.

Decarbonisation of industry and buildings is vital
This study focuses on the potential impacts from growth of solar PV and EVs. It does not address specific measures for other carbon-intensive sectors such as heavy industry, buildings or other transport sectors (rail, maritime and aviation). This analysis shows, however, that decarbonisation of power and road transport alone may not be enough to achieve international climate targets; so all sectors will need to contribute to future emissions mitigation.



To download the full report, please click here.

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