The Global Energy sector is on the brink of a major transformation. An inflection point that will mark the 2020s as a historic period where everything changed.
We’re witnessing slowing growth rates for legacy energy sources alongside the rise of renewable energy sources at a pace never before seen in any historic energy “transition”.
This transformation will fundamentally alter the way we produce, distribute, and consume energy.
We’re going to first explore the differences between a transition and transformation.
We’ll then walk through the 3 main phases the transformation process will go through before achieving full decarbonization:
The Wake-up Call
The Learning Phase
The Course Correction
Here we dive into each phase as it relates to the leading energy transformation to occur over the next 30 years: The Electrification of Everything.
Transitioning vs. Transforming
First, it’s important to distinguish these two terms.
You've probably heard the term "transition" used to describe a change from one state to another.
It could be as simple as changing jobs or moving to another city.
A transformation though, is a much more profound, far-reaching change that fundamentally alters something (or someone). Though there is some overlap between the two concepts, they’re distinct in their scope, intensity, and duration.
Scope
Transitions are more narrowly focused. Like a change in a person’s daily routine. Transformations are more encompassing in scope. Like a change in a person’s entire worldview or values.
Intensity
Transitions involve minor adjustments and less effort or resources. Transformations are much more intense, requiring significant effort and resources to bring about fundamental change.
Duration
Transitions are usually temporary and could lead to a new stable state. Transformations are long-lasting, involving ongoing growth and development.
If someone goes through a mid-life crisis and re-evaluates their goals and values, is that a transition or a transformation? And what about a society undergoing a drastic political revolution? Or a system that's been built over 300 years, costing trillions of dollars, attempting to overhaul itself over 30 years?
All of these examples are transformations, because they fundamentally change the way things are done.
We're currently witnessing several transformative changes in the global energy sector, and today we'll explore the leading energy transformation that's inevitably going to occur in the coming decades. This process is in its very early stages, but we're seeing evidence of it’s stickiness in corporate targets, media sentiment, policy guidelines etc.
We'll be using the following Energy Transformation pathway to Net Zero by 20?? to lay out the path for The Electrification of Everything that will take place:
Transformation Process Begins: The Electrification of Everything
The process of transforming our energy system is already underway, and many experts believe that electrifying everything is the key to achieving decarbonization. It's hard to argue against this given that fossil fuel combustion releases a lot of CO2.
While there are many low-carbon alternatives for things like coal-fired power plants, fossil-combustion vehicles, gas boilers etc., electrification has proven to be the most effective, efficient, and economic option.
The electrification of legacy energy infrastructure is already evident in:
The rise of electric vehicles – growing at a monster 44% CAGR from 2020-2025
The retirement of fossil fuel plants – with planned retirements expected to reduce coal generation capacity in the US by over 50% by 2035 compared to 2015
The shift towards electrified solutions in various industries – where industrial manufacturers target 45% overall electrification by 2035, higher than their current rate of 35%
Significant roadblocks are up ahead, however. That is the coming mismatch between electricity demand and supply.
Demand
Demand for electricity will significantly outpace supply and lead to higher prices for consumers.
We’ve seen this happen in the post-COVID era, where renewables were praised and subsidized but infrastructure additions were not enough to offset declines in fossil fuel supplies nor increases in energy demand.
We’ll see this happen again in the electricity sector.
Primary demand drivers will be:
Increasing Electric Vehicle adoption
Higher penetration of renewables in the grid
The rise of smart homes and buildings along with electric heating, etc.
Asia is expected to make up 37 of the total 65 quad BTU of electricity growth through 2050!
Supply
On the other hand, electricity supplies are set to decline, or at least not match the rate of demand increases, primarily due to:
Elevated pace of oil and coal power plant retirements
Continued policy missteps that discourage investment in reliable energy sources
In the end, power generation facilities, both renewable and remaining fossil fuels, will be selling electricity to counterparties under increasingly expensive terms – which will ultimately be borne by the everyday consumer.
This reality will act as a wake-up call, entering the next phase of the Energy Transformation.
The Wake-up Call
The electrification of everything is an inevitable energy transformation that can’t be supported solely by renewable capacity additions.
A major hurdle that must be recognized is increasingly challenged economics in the absence of substantial (and unsustainable) subsidies.
Challenged renewable economics primarily stems from increasing manufacturing costs and demand for key materials outpacing supply.
Higher cost of manufacturing renewables
About 2/3 of the cost reductions in solar over the past 10+ years are attributed to lower interest rates and cheap fossil fuels, both of which have reversed drastically.
We now have higher rates and more expensive fossil fuels – which is expected to keep solar and wind generation profitability low.
Working with solar developers to help finance various projects, we’ve seen rising costs for materials and higher expected costs of capital leading financial modelers to tweak every single variable to their fullest extent to make profitability metrics appear reasonable for investors.
This is DESPITE the tax equity and production tax credits that get accounted for.
Increasingly scarce renewable infrastructure metals and minerals
It’s no secret that critical renewable energy materials are becoming increasingly scarce, evidenced by sky-rocketing commodity prices.
Lithium, cobalt, rare earth metals, copper, silicon, and many others are each coming under increasing stress as renewable subsidies fuel the artificial demand lift for these materials. The same cannot be said about supply, where producers face endless pushback from environmentalists who cite potential habitat destruction, water and air pollution, and infringe on indigenous rights.
Sustainable mining methods are becoming increasingly important, but unlikely to become the industry norm until The Learning Phase is completed.
Unintended consequences become too much to ignore
In the Wake-up Call Phase, Media and policy will wake-up to the unintended consequences of an unchecked, aggressive and dishonest energy policy and legislation.
The mismatch between lack of generation capacity and increasing demand will lead to soaring electricity prices and remain elevated for an extended period of time due to the long-cycle nature of infrastructure buildouts.
This is when the prevailing narrative breaks down, media flips to messaging a more balanced view on sustainable decarbonization (LINK) and the Learning Phase begins.
Learning Phase
With the wake-up call phase behind us, we are now in the learning phase of the energy transformation.
The Learning Phase involves innovating and implementing new technology that can help bridge the gap between current renewable energy capabilities and the energy demands of a fully electrified world.
Feedback from technology, economics, and policy will lead to a more nuanced approach as solutions are iterated upon. The goal of full decarbonization here remains a priority, but emphasis on a self-sustaining energy sector becomes just as important.
Nations will look to achieve a self-sustaining energy sector that can provide citizens with continued energy abundance and affordability *without* the need for perpetual subsidies.
The process of becoming self-sustaining takes much time and nuance.
We talk a lot about this cycle in our post:
The inevitable natural gas affordability and abundance will lead to more lax regulation surrounding gas-fired plant additions. Though likely to be paired with CCS technology, reliable baseload power will become increasingly prominent in the transformation of the grid and the rising prosperity of lower-income nations.
Opening up to nuclear, thorium, and other alternative technologies would allow for private and public market capital to flow through the innovation pipeline.
Sustainable mining processes will be pursued, capturing the ears of policymakers and producers alike. This leads to substantial investment in upgrading, discovering, and processing raw materials necessary for manufacturing low-carbon energy infrastructure, appeasing both ends of the “Climate Attitude” spectrum.
In this phase, balance is on its way to being restored.
Further implementation of these key low-carbon and sustainable solutions will still be needed however, as observations of their interaction with economic realities are still in their early stages.
This is key because subsidies at this point will have been weaned off substantially after decades of “free” benefits that began in the “Transformation Process Begins” Phase, handing the baton off to free markets.
Through this Observation-Implementation loop, we gradually progress towards the final phase of the Energy Transformation: Course Correction Phase.
Course Correction Phase
In this phase, the future of global energy infrastructure and trade becomes much clearer.
Today, the forecasts for the growth of various energy sources and carriers vary substantially, with some predicting fossil fuels comprising 10% of global energy demand by 2050, while others have it at 40%.
This disparity underscores the elevated uncertainty around legislation, energy subsidies, carbon tax regimes, potential scarcity in key renewable energy materials, grid infrastructure constraints, and much more.
As the world comes to terms with the realities of the energy transformation and undergoes substantial changes to energy security measures and more nuanced subsidy guidelines, the path to Net Zero becomes clearer. The infrastructure required to achieve this will lead to an energy mix differing significantly from what forecasters expect today.
As greater certainty emerges, reduced energy prices can be expected as producers, processors, transporters, generators, and other stakeholders feel comfortable committing to multi-billion dollar projects that span the course of 20+ years.
This phase will likely see an overbuild of energy infrastructure, but it’s important to remember how far off we are from achieving our ultimate goal of a fully decarbonized energy sector.
This phase will likely occur around 2050, leading to a delay in achieving Net Zero targets due to policymakers adopting more nuanced and responsible guidelines influenced by the media's narrative shift from the wake-up call and subsequent learning phase.
Nonetheless, the Course Correction Phase will set the stage for the final push towards achieving a sustainable and self-sufficient global energy infrastructure.
We view this as not just optimistic, but really the only viable path forward.
Decarbonization is an inevitability, in our opinion. We believe there is a < 5% probability that the world completely changes course, even in the wake of a serious wake-up call. A nuanced approach to elevated CO2 concentrations seems most likely, underpinning the entirety of the rocky road towards a full decarbonization.