Energy transition: defining the new playground

For the energy sector, reaching Net Zero by 2050 involves the disruption of existing processes and infrastructure, as well as the maturation of emerging technologies. This implies scaling up energy investments to unprecedented levels, from 2% of global GDP currently to 4% by 2030, i.e. from $2 trillion to $4.5 trillion p.a. according to the International Energy Agency in its updated (2023) roadmap to net zero.

In a video and a research paper, Ivan Pavlovic, Energy Transition Specialist, and Bernard Dahdah, Senior Commodities Analyst, examine the main bottlenecks of the energy transition and analyze the conditions for financial institutions to channel appropriate flows of capital, when and where needed, to relevant low-carbon technologies through to 2050.

In its recently updated report, the International Energy Agency recalls the five main pillars outlining the energy pathway to achieving net zero.

First, the development of low-carbon electricity sources, i.e. renewables and nuclear, must accelerate, to support the electrification of uses in mobility (electric vehicles), buildings (heat pumps) and industry.

Second, the development of low-carbon gases - notably hydrogen and biomethane - and synthetic fuels aims at responding to the technical limitations of the electricity-based decarbonization solutions in mobility and industry.

The three other levers of decarbonization are improved energy efficiency (buildings) and behavioral changes, large-scale development of CCUS (carbon capture utilization & storage) in hard-to-abate sectors, and negative emissions generating processes (such as BECCs - bioenergies with carbon capture & storage – and DAC - direct air capture).

Access to mineral resources and controlling the refining processes constitute a key issue. The underinvestment observed in the mining sector in the pre-Covid decade represents a source of tension in the supply of minerals necessary for transition technologies, given the development times inherent to mining projects.

Tensions related to the availability of mineral resources are accompanied by an increased struggle between the three major economic blocs (US, EU and China) over their sourcing and control of refining capacities.

The energy pathway to net zero and the tremendous amounts at stake require the full involvement, and an optimal coordination, of the private and public sectors in undertaking the necessary investments.

For the financial sector - commercial banks and investment funds - channeling capital when and where needed through to 2050 represents a daunting task. Financial innovation will be key to channeling private capital flows to new, low-carbon assets and technologies.

It cannot be achieved without the implementation of appropriate public policies, in the form of consistent energy policies, appropriate regulatory and fiscal schemes, and meaningful carbon price regulations. Furthermore, governments must contribute to the de-risking of new low-carbon technologies by taking their share of the financial risk during the R&D phase and by supporting cash flow visibility once in commercial deployment.

From the perspective of consumers and/or taxpayers, the final costs associated with energy transition constitutes another major challenge and supposes appropriate transition strategies, especially for existing energy assets.

Given the various challenges facing the energy transition, financial institutions have a major role to play in the next decades.

First, by taking appropriate risk when and where needed, they can amplify the reach of public support mechanisms to low-carbon technologies at various stages of their readiness level.

Second, by developing innovative financing mechanisms, in particular those leveraging the current emergence of carbon markets, they can directly support the decarbonization of some of the hardest to abate industrial activities.