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Investors and governments have a long road to ‘net zero’

The Energy Institute tells us that fossil fuels still accounted for 82% of world energy use in 2022. However, it also reports that wind and solar energy are growing fast as ways of generating electricity.

| 8 min read

Most people still use much more energy in the form of piped gas and petrol for their heating and transport needs than from their power sockets. It will take time and much investment to switch all this to electrically driven systems.

On both sides of the Atlantic, there are big-government-led efforts to fasten progress to ‘net zero’. There is a willingness to use regulations, taxes and bans to speed the exit from fossil-fuel-using activities. These are to be replaced with regulations, subsidies and requirements to increase the use of methods dependent on renewable electricity or other low-carbon fuels.

Source: Energy Institute

Decarbonisation is proceeding fastest in the power generation sector, where there is strong pressure to close coal power stations and to migrate more from gas to wind or solar. There are some governments that also favour building new nuclear power stations. Given the need for more retirements from ageing fleets of nuclear plants, there is a need for simple replacement as well as for additional capacity to help match or outpace the anticipated rise in electricity demand.

There is a growing awareness of the need to speed the transitions in areas of importance such as vehicles, home heating and the firing of industrial process. Farming too is under the spotlight, with worries over the amount of greenhouse gas generated by animal husbandry and by the impact of fertilisers.

Markets forces and the green revolution

We recently reviewed the progress with electric vehicles (EVs) and the strong position China has established in electric car production and battery manufacture. The West is trying to catch up, commissioning so-called ‘gigafactories’ to produce batteries, seeking supplies of the all-important minerals and metals they need for their fabrication. They aim to put in more charging points to make driving and recharging easier for potential buyers. This has unleashed a subsidy war to attract footloose potential investments in factories to meet the new specifications.

There are still some big issues to be resolved by a mixture of market forces, technological evolution and government action. To achieve the large switch from fossil-fuel power to electrical power for transport, heating and industry, electrical grids need to be greatly expanded. The cable systems running to each home and factory need to be augmented to take the additional power. There will be plenty of demand for construction skills to erect pylons or bury cables, huge demand for electrical cable and money to be made by investing in distribution capacity.

There remains the big question of how do all the cars get recharged – and the heating systems stay on when the wind does not blow and the sun does not shine? The more a country comes to rely on renewables, the more at risk it is of supply shortfalls when the weather changes. Cold, windless spells on dark winter days and nights are particularly difficult to handle.

There are some who think conversion of renewable energy into hydrogen would be a better way.

Governments and industry are exploring several fixes to these problems. The wish to see more people using smart meters is designed to create a system where consumers themselves can solve some of the problems by time shifting their need for power in response to price or regulatory requirements sent to them by the smart system. They may be rewarded for running washing machines and dishwashers overnight instead of at peak hours. It may become cheaper to cook a meal other than at peak time for a main meal.

The drive for more electric cars could also fit into this pattern. EV owners might be asked by a price and signalling system to make electricity from their car battery available for general use at times of peak demand and to return to charging their car when demand has abated. Assuming these systems are voluntary, some people will respond to the price signals to help meet emissions targets – and some will want their old pattern of use for convenience and will pay the higher prices. Using price to shift demand between days or weeks in prolonged periods of little renewable power is not a popular idea given the daily needs for cooking, transport and heating.

There is the discussion about finding more and better ways to store renewable energy when it is being generated in abundance, for times when the wind drops – or the sun disappears. Some advocate large battery farms that can be charged on windy days and provide power when needed. There are losses of power both when charging and when discharging, but it does allow the renewable generators to work at full capacity when the weather allows and to store energy when their output exceeds demand.

The potential of hydrogen gas

There are some who think the conversion of renewable energy into hydrogen would be a better way. Green hydrogen, carbon-free, can be made by using wind or solar energy to split water into hydrogen and oxygen. Hydrogen can be piped to people’s homes for heating, to factories to fuel industrial plants and used in vehicles for direct drive like petrol or diesel engine. Many think this would be more convenient.

It would require a very large investment in hydrogen manufacture, and then a storage and distribution network. It might need different and additional pipes from the current gas network, whilst making some use of existing pipes as and when natural gas is phased out. Hydrogen can also be mixed with natural gas during a transition phase.

Some favour more work and investment into carbon capture and storage. This will allow more continuing use of fossil fuels, with the carbon dioxide this produces – or the equivalent – isolated, captured and stored in suitable underground facilities. These will typically be in rocks that are used to hold oil and gas before extraction.

With the world currently depending on fossil fuels for more than 80% of its overall energy, it will take a fourfold addition to the electrical systems to completely decarbonise this by switching it all to electricity. It will also need a larger rise in renewable power. How much this will be in part depends on how much progress is made with storage and time-shifting power use.

With few such advances, there will need to be a very large increase in renewable generating capacity to allow for bad weather as well as the big switch from fossil fuels. It will also need to be well spread around the world, with interconnectors between countries and regions to allow for the variability of weather. Today many countries still have gas and coal plants they can bring back into use if the wind lets them down.

It will take major government interventions, subsidies and directions to switch so much generation to renewables and to change so many vehicles, heating systems and factories onto new fuel. There will be plenty of continuing opportunities for investors to back the success stories of the green revolution, whilst investment managers need to be alert to the pace of decline in fossil-fuel-backed products and services.

It is not yet clear what the balance will be between new nuclear, renewables with battery storage, renewables with hydrogen, and carbon capture and storage. We are entering a period of government-subsidised technological development in these areas – along with trial plants and a race to scale up the more commercial developments to emerge.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

Investors and governments have a long road to ‘net zero’

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