The energy sector in transition

Co-authors: Loek Dalmeijer and Esther Schouten

Introduction

“We didn’t stop with the stone age because we ran out of stone. We just found better alternatives.”

If “stone” is replaced by “fossil fuels”, this statement is at the core of the debate about the energy transition. The good news is that fossil-fuel- based energy will be behind us at some time in the future. The big question, however, is the following: will this transition be due to scarcity of resources because we have extracted the last drop of crude oil, or will this be due to deliberate leadership, policies and innovation focusing on renewable and sustainable energy sources?

Some 250,000 years ago, when our ancestors first discovered how to use fire as an energy source for cooking, heating and lighting, they could hardly have imagined the complicated path of discovery and innovation that our species would embark on from that point. Today, we use a variety of energy sources to satisfy our complex needs, which include heat, light, manufacturing and transportation. But for most countries, energy from fossil fuels is still the most important source. To put this into perspective, in 2000 we consumed 75 million barrels of oil per day worldwide, which increased to 90 million barrels in 2015.^328,329 To illustrate the magnitude of fossil fuel consumption, we use enough oil every day to fill 35,000 family homes!³³⁰

Fossil energy has been an important foundation for the wealth of modern societies. It accelerated the industrial revolution, fuels most of the transport of goods and ensures a comfortable temperature inside our homes. But there is a big paradox with the use of fossil energy: it brought us welfare but at the same time it is the biggest threat to our future welfare. The emission of greenhouse gases (GHGs) is a major cause of climate change that is creating more extreme weather all over the planet. This chapter focuses on how to deal with this paradox by reversing fossil fuel dependency in a way that sustains our way of living.

Is it possible to overcome this paradox? In principle it is. For example, if we could capture all the energy in the sunlight that reaches the Earth’s surface in just 90 minutes, this would be enough to supply the global energy demand for an entire year. ’³¹ Even more important, such a renewable energy source would not create GHGs that shift the consequences to future generations. Renewable energy is “free”, but an investment is required to capture and store this energy to use it at the time we need it. The investments in the energy sector, both conventional and renewable, are huge. According to calculations of the International Energy Agency (IEA), to meet the world’s growing energy needs by 2035 we will need to invest $48 trillion globally. More specifically, around $40 trillion will be needed for the energy supply, of which $23 trillion will go to the fossil fuel industry and $16 trillion to power generation such as renewable and nuclear energy generation. The remaining $8 trillion will be needed for investments in energy efficiency.³³² To meet the obligations in the Paris agreement this means that trillions of dollars of additional investments will be required.

Overcoming this paradox requires more than shifting our current use of energy to renewable sources. Globally, 1 billion people do not have access to electricity, and about 3 billion still use hazardous fuels — like wood, charcoal, coal and dung — for cooking and heating.³³³ Access to affordable and clean energy is also essential to create inclusive societies, especially in the developing world. Driven primarily by the growth in demand from such non-OECD countries, energy demand is expected to increase by between 25% and 60% by 2050.³³⁴

Similar to other sectors, this means that we need to provide a growing number of people with energy while simultaneously switching to clean energy sources in order to mitigate pollution and climate change. This is an enormous challenge.³³⁵

This discussion focuses on this challenge by analyzing the transformation of the energy market towards renewable energy. The energy market comprises all processes of extraction, conversion, storage, transmission and distribution of energy.³³⁶ This chapter does not cover the energy consumption by end users such as manufacturing, transport, construction, agriculture, forestry and households. But as shown later in this chapter, if we can transform the energy sector, this would become an enormous and crucial driver and enabler for other industries to become more sustainable as well.

This chapter addresses the following questions. What are the main sustainability issues in the energy market? Why is it so hard to change this sector and what are the systemic loops that underlie these issues? Finally, what are the barriers to this transition, what is already happening and what needs to be done by which stakeholders to accelerate the transition?

Economic importance of the sector

The amount of energy we use is enormous and is growing every day. In 2017, global energy demand grew by 2.1%, more than twice the growth rate in the year before.³³' The industrialized countries of the Organization for Economic Co-operation and Development (OECD) — including the USA, Australia and most of the countries in Europe — consumed 40% of global energy production in 2015, followed closely by China with a share of 20%. Most energy (80%) is consumed by the transport, manufacturing and residential sectors.³³⁸

The businesses in the energy market have tremendous economic power. For example, the oil and gas sector currently accounts for between 2% and 3% of the global economy.³³⁴ In 2016, the top 25 global economic entities (states and companies) included three energy companies (China National Petroleum, Royal Dutch Shell Group and Exxon Mobil)³⁴⁰ , while BP, Total, Chevron, Gaz and Lukoil are in the top 100.³⁴¹

EIGHT SECTORS IN TRANSITION 261

Furthermore, households spend part of their income on energy. The proportion spent on electricity, gas and other fuels is on average about 3% in the USA and about 4% in the UK, but often reaches 10% in low- income households in these countries.³⁴²

How does energy consumption match up with energy sources? According to the International Energy Outlook 2017 of the US Energy Information Administration (EIA), the total world energy consumption will grow by 28% between 2015 and 2040. As shown in Figure 4.17, despite all of the energy saving and efficiency measures that are being taken, the global energy supply is still expected to increase and remain heavily dependent on fossil fuels.³⁴’ However, this Figure also shows a trend: the increase in energy consumption will occur in parallel with a shift towards renewables. In 2018, global investments in electric energy exceeded investments in oil and gas, with renewable energy and battery storage accounting for much of the investments in electric energy.³⁴⁴

Production and value chain

The energy sector consists of four main subsectors that are differentiated according to modes of energy production.

• First, there is the fossil-fuel subsector, consisting of the petroleum, gas and coal industries. These handle the extraction, processing and

Figure 4.17 Global primary energy consumption by fuel or energy source from 1965 to 2016, and projected consumption to 2040.^345,346

manufacturing of fuels, which are then partly used to fuel machinery or generate electricity and heat. Another part of the oil and gas production is used as raw materials to manufacture chemicals and plastics. The fossil-fuel industry produces approximately 80% of the total primary energy supply and is still growing rapidly, adding around 13,000 million tons of oil equivalent (Mtoe) each year.³⁴' World oil demand rose by 1.6% (or 1.5 million barrels a day) in 2017, which exceeded the yearly average growth of‘only’ 1% in the past ten years. The global demand for natural gas grew by 3% in 2017. Global demand for coal also rose (by 1%) for the first time in two years, mostly driven by coal-fired electricity generation.^348,349 Around 7% of the fossil fuel stock is controlled by national oil companies, and several key producing members, such as Saudi Arabia and Iraq, operate under the umbrella of OPEC to control price volatility;³⁵⁰

• • The nuclear power subsector is responsible for power generation using radioactive fuels such as uranium. Output from nuclear plants provides about 10% of the world’s electricity. This output stabilized in the 1980s at about 450 power reactors, but has risen since 2012, and 50 reactors are under construction. In absolute terms, the USA, France and China generate most of the world’s nuclear electricity. In relative terms, France tops the list by generating about three-fourths of its electricity supply with nuclear energy, but countries like Hungary, Ukraine, Belgium, Sweden and South Korea generate more than 30%;.³⁵¹
• • The renewable energy subsector consists of hydroelectric, hydrogen, bio, wind, solar and geothermal power generation systems. Renewables have had the highest growth rate of any energy source and provided one-fourth of global energy demand in 2017.^3:12 China and the USA accounted for 50% of the total growth in renewables, with wind power contributing 36%. Renewables accounted for about 24% of the global electricity consumption in 2016;³⁵³
• • Finally, the energy transport subsector is responsible for the conversion, storage, transmission and distribution of energy to power our homes and industries. This requires delivery in the right form, like heat, gas, diesel, electricity and hydrogen, and at the right time, which makes storage a crucial part of the energy grid.

It is important to keep in mind that only 18% the world energy consumption is in the form of electricity, with the remaining 82% consisting of in other forms of energy like heat and transportation. Therefore, considering all forms of energy, in 2016 about 5% was from renewables, about 5% was from nuclear, about 10% was from biofuels and about 80% was from fossil fuels.³³⁴

A simplified value chain of the energy sector is shown in Figure 4.18. Let’s go through these various steps in the value chain.

Inputs: Fossil fuel, sun, wind and other energy carriers

As we have seen in the four subsectors in the energy sector, the inputs can be roughly divided into energy carriers like oil, gas, coal, uranium and renewables. The main stakeholders in this part of the supply chain are mining companies for uranium and coal and oil and gas companies. Often, the oil and gas companies are integrated with the next phase in the value chain. For the renewables there are no stakeholders as yet in this phase; this is because these sources are available without human intervention.

Processing: Turning the energy carriers into energy products

In this stage, the input materials are transformed into products that we can use in our economy. Oil and gas companies drill wells, process the oil and gas (dehydrate, sweetening, extracting condensates, compression etc), transport, and then manufacture fuels from it (cracking into butane, propylene, ethane etc), in addition to products for the chemical industry. Furthermore, power plants turn uranium, oil, gas, coal, wind or sun into electricity.

Energy Transport:

This stage of the value chain takes care of the conversion, storage, transmission and distribution of energy to homes and industries. For electricity, these companies provide the grid infrastructure. In some countries they are integrated with the power plants, and in other countries they are independent companies. Furthermore, for oil and gas the infrastructure for transport and storage through pipelines, shipping or other modes of transport is often provided by the same companies that extract oil and gas.

Figure 4.18 The energy value chain.

Energy consumption:

As mentioned earlier the energy products are used in many sectors, especially the transport, manufacturing and residential sectors. However, this is outside the scope of the energy market, but included in other chapters on for example the construction and tourism sector.

Sustainability issues

To emphasize its value, oil is sometimes called black gold. Oil is indeed crucial for the current welfare of most societies but, the same time, it has long been linked to sustainability issues. Prominent events include the Exxon Valdez disaster, when an oil tanker polluted marine habitats in Alaska³⁵⁵, and the Deep Horizon disaster in the Gulf of Mexico, where a malfunctioning oil well erupted oil for weeks, damaging the marine life. And these are just a few of the environmental disasters linked to the drilling and transport of oil³’⁶.

Furthermore, oil is linked to many social issues. The killing of nine leaders of the MOSOP movement in the Ogoni delta in Nigeria occurred during a conflict about the distribution of the revenues from the oil production in that region³’'. And many other oil-rich countries face social unrest, human rights violations and wars linked to protection of interests, also in the context of unfair distribution of wealth.

But all of these crises did not trigger the current energy transition. The main trigger for the energy transition is the climate change crisis. Carbon emissions linked to the use of fossil fuel act like a blanket, trapping the sun’s heat and causing the planet to warm. The decade between 2000 and 2009 was hotter than any other decade in at least the past 1,300 years.³’⁸ This warming is altering the earth's climate system in far-reaching ways, and affecting its land, atmosphere, oceans and ice with rising sea levels and weather events causing devastating impacts (floods, storms etc). Although the debate about the energy transition has intensified, greenhouse gas emissions are still increasing. The International Energy Agency (IEA) has estimated that global energy-related C02 emissions grew by 1.7% in 2017 to a total of 33.1 gigatons (Gt). Although emissions declined in some countries (e.g. Germany, Mexico and Japan), they increased in most major (and growing) economies, including the USA, China and India.³⁵⁹

In the next section, we focus on why it is so hard to become less dependent on fossil-based fuels as an energy source.

The rules of the energy game

What is hampering the transition from an energy sector based on fossil fuels to one based on renewable sources? In this chapter we look at the four loops from Part II and how they jointly drive the challenges to transition and create barriers to change.

Loop I: market dynamics

The two key determinants of market dynamics in the energy sector are capital intensity and stability of supply.

The production of energy has traditionally required substantial investments, which makes the energy market capital-intensive. Despite the large sums required, investors were happy to provide the necessary capital because it resulted in a stable flow of revenue. However, the construction and use of these assets takes decades and with the current changes in the energy market it is hard to estimate the long-term value. Investors should account for the risk of a decline in asset value when the energy market shifts to renewable energy. It is also uncertain whether the same assets can be converted to CCS facilities, biofuel facilities, hydrogen transport facilities, geothermal wells etc. Depending on whether this will succeed, there wil be ‘stranded assets’. Due to this risk, along with the risk of reputational damage, more and more institutional investors are reconsidering their investments in fossil fuels or have already decided to divest from this part of the energy market. For example, in November 2019 the European Central Bank had announced that it would stop investing in fossil fuels altogether, which is an important signal to the market.³⁶"

As mentioned above, stability of supply is a key determinant for the energy market and for investors. The supply of energy underpins nearly all economic activity, and this should not be constrained by shortages. The market therefore prefers to invest in companies with sufficient stocks of energy and the capital needed to guarantee long-term availability. For fossil fuel reserves, these stocks are measured and verified systematically as part of Securities and Exchange Commission (SEC) filings. However, this system is not yet available for renewable energy. This is because the supply of renewable energy supply is still highly variable, so a certain stock cannot be guaranteed. Renewable energy also requires substantial investment in the associated infrastructure. As a result, the market still tends to invest more in the most reliable, efficient and cheapest source of energy: fossil fuels.

Loop II: enabling environment

What about the enabling environment? The main point is that governments see it as a matter of national security to have plenty of cheap energy to support a reliable energy infrastructure. This restrains the transition towards a renewable energy sector, as the current energy infrastructure is not yet suitable for renewable energy and there still is strong interdependence between governments and the fossil fuel industry.

As we have seen in Loop I, the energy market is structured to deliver stable and reliable supplies of cheap energy. Therefore, it is unable to deal with the unstable supply from renewable energy sources like solar and wind, which depend on the weather. The energy grid is therefore too rigidly structured to switch immediately to renewable energy. The oil and gas companies have been around for 150 years. During this time, they obviously acquired a vested interest in the energy system by developing the capital-intensive fossil fuel infrastructure to satisfy energy demand and by working with governments and regulators to develop a standardized system.

This interdependency between governments and the fossil fuel industry is sometimes referred to as the “fossil fuel historical bloc”. It tends to maintain the status quo and thus potentially hampers the development of alternative energy sources.^361,362 Fossd fuel firms depend on governments because they need to operate within the legal structure and rules of trade (such as rules for issuing bonds and contracts) which are established by the government. Governments also rely on the fossil fuel industry for a number of reasons, for example to provide economic growth, tax revenues and jobs. In oil or gas producing countries, a large proportion of government revenue originates from dividends from state-owned enterprises.³⁶³ And the industry is needed because extracting and processing of oil and gas requires a lot of investment and technical capabilities that many governments do not possess. As a result, energy firms have developed strong relationships with policymakers and have established powerful lobbies that are a structural barrier for countries to move towards a renewable energy sector.³⁶⁴

Loop III: mismatched benefits and effects

The transition towards renewable energy sources is also hampered because the firms and governments in the fossil-fuel business are not directly impacted by negative consequences — known as externalities — of their business. Fossil fuel companies have obviously not been the first to warn about the negative consequences from global warming or rising sea levels; they have simply continued their oil exploration and refinery activities. For example, in the mid-nineties some oil and gas companies acknowledged the potentially detrimental consequences that “climate change brought about by global warming via man-made increases in gases such as carbon dioxide”. Nevertheless, since then the fossil fuel activities were not significantly downsized.³⁶⁵ Why? Because the physical impact of climate change would only affect them in the distant future and much profit could be made in the meantime. This will change with the introduction of carbon taxes as some regulatory regimes impose this upon the oil and gas sector.

Furthermore, we see that governments are still not affected very much. Politicians in fossil-fuel-producing countries often face severe criticism if they openly link climate change to events such droughts, extreme rainfall or rampant forest fires. Admitting this link could put current revenues from fossil fuel production at risk and potentially jeapordizing energy supply and economic activity. So why should they take this risk when many citizens and voters prefer to continue with business as usual?

Loop IV: lack of alternatives

What are viable alternatives that can compete against the status quo that favors the fossil fuel sector? Why is so difficult for the renewable energy sector to replace it? First of all, the electricity supply and demand must be balanced, as it is difficult to store electricity once it is produced. Renewable energy technologies such as solar and wind rely on the availability of their power source, which can be highly variable. The transition to renewable energy is not only constrained by this instability of supply, but also by the high investment costs for the infrastructure that can handle this instability. ’⁶⁶ For example, electricity generated by wind and solar could be abundant in periods when consumers do not need it and inadequate when they do. These fluctuations between supply and demand can be dealt with from both ends: increased flexibility of both supply and demand.

The first condition to change in the energy market is therefore that the instability of renewables is compensated in the energy system. In recent decades energy production has focused on matching the supply of electricity to the demand, but in the coming decades the demand must also be matched to the supply. With conventional power plants, it is relatively easy to adjust the electricity supply to match demand. But as the share of power generation from weather-dependent renewable sources such as wind and solar installations increases, more peaks and dips are being caused in the energy supply, which impacts the demand/supply balance. Therefore, besides increasing storage capacity for renewable energy, response shifts in demand could be a solution. Businesses and consumers could adapt their electricity consumption to the renewable energy that is available at a specific time, which would even out the peaks and dips in demand and supply. This condition to change is still mostly absent, but has great potential, as we will see in the next section.

The current focus is on developing better storage solutions for renewable energy, such as pumped-hydro storage. In this approach, surplus electricity is used to pump water into a lake at a higher elevation. During periods of low production and high demand, the water flows by gravity to hydro generators to produce electricity. Another possibility is to use wind or solar electricity to generate hydrogen by electrolysis. This hydrogen can be transported and stored for use, for example to heat buildings and fuel cars.

The final condition to change involves the stubbornly high consumer price for renewable energy despite impressive increases in cost efficiency and capacity. Production costs of solar panels and wind turbines have dropped dramatically: between 2009 and 2017, the price of solar panels per watt declined by 75% and the price of wind turbines per watt declined by 50%.^367,368 Renewable energy capacity has also increased: From 2000 to 2017, the average capacity factor of new wind farms commissioned in Denmark doubled, while those in Brazil increased by 83%, in the United States by 46% and in Germany by 41%.³⁶⁹ Despite these impressive gains, consumers have not seen these decreasing costs reflected in the price they pay for electricity. On the contrary; during the same period, the price of electricity in places that deployed significant quantities of renewables increased dramatically: by 51% in Germany from 2006 to 2016, by 24% in California from 2011 to 2017, and by 100% in Denmark from 1998 to 2013.³⁷⁰ This rising consumer cost is caused by two major factors: the imbalance between supply and demand and higher taxes. The imbalance was described previously: dealing with inefficient fluctuations in supply and demand results in higher costs, which leads to higher consumer prices. The conundrum was summarized by Michael Shellenberger: “If solar and wind are so cheap, why are they making electricity so expensive?”.³⁷¹³⁷².

All these conditions are not yet sufficiently in place and are therefore hampering the energy transition. See Figure 4.19 for an overview of the system loops in the energy sector.

Putting the loops together

All these loops together explain why it is hard to overcome fossil fuel dependency. Markets reward long-term, capital-intensive investments, which results in stability of supply. The enabling environment is constrained by an inflexible infrastructure and strong interdependence between government and industry. The fossil fuel industry and other incumbent actors (such as governments) do not feel the physical consequences of climate changes. The conditions for change to balance the supply and demand of renewable energy through increased storage and demand response shifts are not yet mainstream. It is no wonder why the transition to a more sustainable and renewable energy system appears to be immobilized.

Despite these difficulties in overcoming fossil fuel dependency, however, a lot is happening. In the next section, we look at several initiatives and assess how they are gradually changing the rules of the game in the energy market.

The sector takes action

In which areas can we already see significant movement towards a transition to a renewable energy sector? Several initiatives are being developed

Figure 4.19 The systemic loops that result in unsustainable outcomes in the energy sector.

in response to these challenges: wind and solar energy, batteries for electricity storage and demand/supply balanced response. These initiatives are all in different stages of development (see Figure 4.20). As a whole, however, the transition from a fossil-fuel based to a renewable energy sector is in the competition stage (Phase 2) and is moving slowly towards the pre-competitive collaboration stage (Phase 3), in which an increasing number of energy suppliers invest in renewable energy.

In this section we show how the industry is successfully adopting sustainability at various levels, and we describe the associated challenges. Due to the global scope of the energy sector, there will never be a ‘one- size-fits-alP solution, so we present some concrete examples to give a more accurate picture of the actual circumstances.

Phase r. inception - increasing urgency and move towards actionable alternatives through projects and pioneering

To enhance awareness about the energy transition and encourage willingness to act, many actors are campaigning against business as usual in the energy sector. More institutionalized campaigns are also enhancing awareness about the role of fossil fuel in climate change, which puts pressure on fossil fuel producing companies to change direction. This pressure is essential to drive energy transition; without it, the opposing political and business interests and forces will soon take over to go back to business as usual.

An interesting development is that institutional investors are starting to divest from fossil fuel companies.³⁷³ For example, the World Bank has committed to ceasing investments in the oil and gas sector anymore. Also, one of the largest investment funds in the world, Norway’s one trillion- dollar wealth fund, announced in 2018 that it would divest more than $40 billion of oil and gas stocks.³⁷⁴ This development in the energy market can be understood by focusing on the dynamics in the financial sector. But it plays a role in the energy sector as well because it strengthens the belief that business as usual is no longer an option in the energy market. Instead, energy companies are starting to experiment with alternatives energy sources such hydrogen, hydropower, wind and solar.

Another influencing mechanism used by NGOs involves persuading investors, such as venture capital investors and pension funds, that the oil and gas business is a danger to their own investments. An example is the initiative Follow This, which encourages people to buy oil and gas shares and use their voting rights to pressure the companies to accelerate its investment in renewable energy.^3,3

Phase 2: competitive advantage - creating new business models through innovation and competition

In almost every country, companies are focusing on renewable energy. The competition phase is in full swing. The International Energy Agency (IEA) predicts that wind and solar together will represent more than 80% of global renewable capacity growth from 2017 to 2022.³⁷⁶ By 2022, Denmark is expected to be the world leader, with close to 70% of its electricity coming from various renewable sources. In Ireland, Germany and the UK, the share of wind and solar in total generation will exceed 25% during the same period. In China, India and Brazil, the share of similar energy sources is expected to double to over 10% in just Five years.^377,378

To initiate the condition of change of stabilizing the variability of renewable energy, key developments are taking place to increase energy storage. According to the International Energy Agency (IEA), energy storage capacity (excluding hydropower) has grown significantly since 2015.³⁷⁷ Although batteries are still a relatively expensive energy storage method, cost reductions and rapid scale-up of manufacturing capacities, especially of lithium-ion batteries, have created cost-effective opportunities. What are these opportunities?

We can make a distinction between in-front-of-the-meter storage, which is defined as energy storage provided by electricity suppliers before the electricity flows through the electric meter of your home, and behind-the- meter storage.

One example of in-front-of-the-meter storage is the ever-increasing capacity of batteries that provide reserve capacity to grid operators; by storing electricity from wind or solar sources, these batteries help to balance supply and demand. In 2018, the largest of these batteries in Europe, the EnspireME, came online. It stores up to 50MW, which is more than the capacity of 500 large Tesla cars.³⁸⁰

Power-to-X is another in-front-of-the-meter storage concept that goes beyond ‘traditional’ batteries: during periods of surplus energy production, for example when a lot of wind energy is produced, Power-to-X ensures that the surplus electricity (Power) is converted to various energy carriers (X). These energy carriers include heat, hydrogen and compressed air.

Behind-the-meter storage (on-site batteries that enable end-use consumers to store electricity for use when needed) is also increasing rapidly. This increase is largely driven by the combination of solar panels and storage systems, which are often sold together.

Demand-response shifts allow end-use customers to systematically adapt their electricity demand to the available supply. One example is off- peak metering. This simply means making power cheaper at certain times of the day, for example at night. Another such example is smart metering, which communicates changes in electricity supply — and thus changes in price — to end consumers, who can then adjust their power demand. This shift in demand can involve doing laundry at night (which is cheaper) instead of in the afternoon (which is more expensive), or changing the charging times for an electric vehicle. The latter is called ‘smart charging’: the charging process for an electric vehicle is controlled in response to signals from the grid operator. This not only levels out the peaks in electricity demand, but also keeps the costs of charging electric vehicles relatively low.³⁸¹

Of course, demand response is not limited to homes. Demand-side responses in construction, manufacturing and transport could provide 185 GW of flexibility and avoid $270 billion of investment in new electricity infrastructure.³⁸² The theoretical potential of demand-side response has been estimated at more than 15% of world-wide electricity demand.³⁸³

In the central scenario of the World Energy Outlook 2017, the annual demand-side response potential was predicted to increase from nearly 4,000 terawatt-hours (TWh) to almost 7,000 TWh per year by 2040. The IE A estimated that by 2040 almost 1 billion households and 11 billion appliances could be linked to demand response systems due to smart meters and connected devices.

Phase у pre-competitive collaboration - enabling scaling through collaboration between multi stakeholder coalitions and platforms

When it comes to large-scale renewable installations, subsidies are usually needed to ensure project realization. However, in early 2018, the energy company Vattenfall won the bidding for a tender issued by the Dutch government to develop the twin “Hollandse Kust Zuid” offshore windfarms. If the two 350 MW windfarms are indeed built by 2022 as planned, they will be the world’s first to be built without government subsidy. The news comes on the heels of a zero-subsidy offshore wind tender in Germany in 2017 that was also a landmark for the industry, as it was the first tender to attract zero-subsidy winning bids. These milestones are further evidence that wind energy is becoming commercially attractive and therefore more a more sustainable option for the market.

Several coalitions for change have already started to emerge. An example is the collaboration between Diamond Generating Europe (a daughter company Mitsubishi), offshore contractor Van Oord, energy company Eneco and Shell. They plan to build and operate the offshore windfarm Borssele III/IV. These changing roles are essential to move all the players towards a more coordinated approach, using each other’s strengths. To scale up, large investments and cross-sector strategies are required. According to the IEA, “International co-operation between various levels of governments and with the private sector is essential”.³⁸⁴ For example, the first movers in renewable energy and governments/regulators can benefit from the capital investment in and expertise on large-scale infrastructure projects of oil and gas companies. Some analysist even speculate that oil and gas companies will lead the energy revolution.³⁸³ In many countries, however, there is often mistrust towards the industry that benefits from fossil fuels; this mistrust has to be bridged in order to move forward.

Phase 4: institutionalization - ensuring a level playing field through legislation and coercive self-regulation

Another key initiative that contributes to balancing the demand and supply in renewables is the Paris Agreement, which provides a common goal for all stakeholders (governments, companies, NGOs) and creates a level playing field. The Paris Agreement, initiated in December 2015, was signed by 194 states and the European Union as of July 2018,³⁸⁶ and represents a mechanism to institutionalize the road to sustainable transformation of the energy sector. The aim of the Paris Agreement is to keep the increase in the global average temperature to well below 2°C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5°C above pre-industrial levels.

Figure 4.20 The energy sector takes action.

To achieve the goal of Paris Agreement, stakeholders in the public and private sectors need to work together in order to tackle several crucial objectives,³⁸⁷ which range from expanding energy storage capacities to ensuring that energy and markets deliver through energy policies. Additional objectives include shifting from fossil fuels to renewables while also increasing regional integration of energy markets. The Paris Agreement also addresses certain additional markets, like the carbon capture and storage (CCS) and carbon markets. Although these developments might have an influence on the energy market, in essence they focus on different markets with different market actors.

Is the Paris Agreement an indication of Phase 3 or of Phase 4? When looking at different parts of the agreement, it could theoretically be placed in either phase. But we have positioned it in Phase 4, even though no enforcement of the norms has been agreed upon. Instead, all signatories have accepted the ambitions and have agreed to submit action plans showing how they want to achieve them. As a result, these solutions are being institutionalized. But does it mean that energy companies who still want to continue with fossil fuel no longer have a place in the market? Not yet. That depends on the content of the action plans developed by the signatory states.

How to move the sector forward

Looking forward, the most important questions are the following: what needs to be done, who is going to do it, and how it will be done? Although there are initiatives in every phase, when it comes to the energy transition to renewable energy sources, the dominant logic in the energy sector is in Phase 3. This section addresses of the roles of the parties who are accelerating Phase 3.

Governments

Companies in the energy and transport sectors are indicating that the amount of the required investment depends on the degree to which government frameworks are developed to facilitate innovation. These essential developments involve the provision of long-term price signals, including pricing negative externalities as GHG emissions, to attract investment. Furthermore, efficient short-term “dispatchable generation” is needed. This refers to sources of electricity that can be used on demand and dispatched at the request of power grid operators according to market demand. Electricity dispatching should be ensured by a portfolio of renewable technologies that can be used on demand according to market needs, including hydropower, bioenergy, geothermal and concentrated solar power.³⁸⁸ This combination is essential to provide sufficient flexibility.³⁸⁹ To incentivize market transformation, many countries and regions are considering implementing taxes for polluting energy sources and subsidy schemes for renewables. Regarding carbon taxes, for example, a 2018 study reported that carbon taxes are accepted more easily by the public when they are earmarked for a specific purpose such as green investments, instead of simply contributing to general government budgets.³⁹⁰

Governments and their network operators should also encourage the rollout of smart meters and connected devices to increase the number of appliances that can respond to signals to switch on or off automatically.

Furthermore, to fully support the market transformation and secure long-term labor prospects, governments should focus on preparing current and future workers in the energy sector for new technologies and skill sets. This transition can greatly boost overall employment in the energy sector. On balance, the shift to renewables would create more jobs than are lost in the fossil fuel industry. According to International Renewable Energy Agency,³⁹¹ although this could result in the loss of 7.4 million jobs in fossil fuels by 2050, about 19 million new jobs would be created in renewable energy, energy efficiency, grid enhancement and energy flexibility — a net gain of over 11 million jobs.³⁹²

To overcome seasonal energy shortages, other energy storage options will need to be assessed. Unfortunately, the energy market has not kept pace with technological progress. According to the European Commission, factors slowing the development of energy storage technologies include administrative barriers, limited access to grids and excessive fees and charges. To accelerate these technologies, governments could promote innovation in key technologies via grants and subsidies, as well as by changing the current market rules. Several research programs and test locations are already in operation (e.g. in Germany and Norway) to explore the efficiency of these solutions, but it requires cross-industry collaboration and changes to infrastructure to make these Power-to-X technologies successful. Increasing the scale of their deployment will further increase their efficiency.

In summary:

• • Provide long-term price signals, including pricing negative externalities such as GHG emissions (with carbon taxes or other policies);
• • Promote innovation in key technologies via grants and subsidies, and by implementing suitable market rules;
• • Reinforce the electricity grid and build interconnections;
• • Encourage the rollout of smart meters and connected devices;
• • Prepare future and current workers in the energy sector for new technologies and skill sets.

Industry: oil companies

National oil companies have at least 75% equity access to oil and gas reserves³⁹³. As these companies are government owned (fully or in part), governments are often reluctant to cut into their own revenue streams by shifting energy priorities. On the other hand, governments are worried about being overly dependent on fossil interests in an uncertain future.

International oil companies have almost all recognized the need for transition to cleaner energy and support the Paris Agreement. For example ExxonMobil stated that they are “committed to positive action on climate change and dedicated to reducing the risk of climate change in the most efficient way for society”.³⁴⁴ Shell took its climate commitment a step further by announcing in 2017 that it would reduce its net carbon emissions by 20% before 2035, and by 50% before 2050.³⁹⁵

Oil companies should continue to act on these commitments by investing in renewables and energy storage solutions. What is more, they can step up their game by joining sector-wide, pre-competitive platforms that enable them to develop a broad strategy.

Furthermore, there is a need for companies in the traditional energy sector to think of new ways to use the enormous infrastructure that is often at their disposal. This can help solve the problem issues of stranded assets, which was described in Loop I, and the lack of renewable energy infrastructure, which was highlighted in Loop II. For example, recent studies in the Netherlands have concluded that the existing pipeline infrastructure for transporting natural gas is perfectly suitable for transporting hydrogen in the future.³⁹⁶

In summary:

• • Continue acting on commitments towards more renewable energy;
• • Open the existing infrastructure to the production and transportation of renewable energy.

Industry: energy developers

To overcome resistance against large-scale solar and wind development, energy developers should involve communities in their planning. Moreover, communities should have the opportunity to benefit from such development.

Furthermore, the economist Leon Hirth has predicted that the economic value of wind and solar will decline significantly due to their fundamentally unreliable nature. Both solar and wind produce too much energy at times when consumers do not need it and may not produce enough when demand is high. Solar and wind thus require other, more reliable energy sources such as natural gas plants, hydroelectric dams, batteries or other form of reliable power to start producing electricity at a moment’s notice, for instance when the wind stops blowing or the sun stops shining.³⁹⁷

Solutions to this challenge could be found in technologies that enable flexible demand responses, such as buffering technologies found in batteries, or new energy carriers developed by ‘Power-to-X’. Recent drops in the cost of wind, solar and batteries have weakened the business case for natural gas plants at a faster pace than was foreseen. This means that in a growing number of cases, “solar plus storage” or “wind plus storage” are already cheaper than building new natural gas plants.³⁹⁸

Solar and storage systems also eliminate expenses and issues associated with shipping diesel fuel and provide stable power costs for decades. In recent times, we have witnessed the rise of sustainable microgrids in communities across the globe that previously relied on diesel as their main source of power. These microgrid solutions — featuring a combination of solar power and batteries — cost less than diesel almost everywhere in the world and are a cleaner, safer alternative.³⁹⁹ One of many examples is the island of Ta'u in American Samoa, where 1.4 megawatts of solar generation capacity and a 6 megawatt-hours battery storage system was completed within one year from start to finish. This microgrid system supplies nearly 100% of the island’s power needs from renewable energy,⁴⁰⁰ and demonstrates how a combination of new technologies could power communities in the future. In summary:

• • Increase electricity storage capability and foster a portfolio of dis— patchable renewable technologies;
• • Involve communities in planning and benefits (financial and otherwise) of large-scale development of renewable energy sources.

Civil society

Stakeholders such as NGOs point out that the oil companies’ commitments are still insufficient to meet the two-degree objective of the Paris agreement, which requires an 80% to 95% reduction in GHGs by 2050. As we have seen in Phase 1, these stakeholders engage in strategies such as shareholder activism, for example by buying Shell shares to influence their strategy. These types of actions, in which NGOs transcend the traditional activist campaigning and actively engage in strategic dialogue with existing oil and gas businesses, should be accelerated. Complemented by divestment activities in the financial sector, these provide important channels through which investments can be redirected to renewable energy.

Another interesting development is that several oil-producing countries have initiated a state-owned investment fund. The largest state-owned investment fund was in Norway, based on the oil revenues of Statoil. But Saudi Arabia has initiated an even larger investment fund. These funds fulfil two functions in the energy transition. First, some of these funds are invested in renewable energy parks. Second, these funds make investments in a different part of the economy (not related to oil). This is similar to the previous strategies of Dubai and United Arab Emirates. Together with governments, financial institutions should accelerate these efforts that reduce dependency on oil revenues for these countries and facilitate a smoother transition.

In summary:

• • Persuade shareholders of listed IOCs that the oil and gas business is a danger to their own investments;
• • Redirect state-owned investment funds of oil-producing countries to create alternative forms of income.

-7-6 Executive summary

Fossil energy is an important foundation for the wealth we experience today. It accelerated the industrial revolution, fuels most of the transport of goods and ensures comfortable temperatures inside our homes. But there is a big paradox: fossil energy is also the biggest threat to our future welfare. Emissions of greenhouse gases are a major cause for climate change that is creating more extreme weather all over the planet.

The amount of energy we use is enormous, and it is increasing every day. In 2017, global energy demand grew by 2.1%.The oil and gas sectors currently make up between 2% and 3% of the global economy.

The energy sector consists of four main sub-sectors: the fossil-fuel industry, the nuclear power industry, the renewable energy industry and the energy transport industry. Considering all sources of energy in 2016, about 5% was renewable, about 5% was from nuclear, about 10% was from biofuels and about 80% was from fossil fuels.

The energy sector is linked to many sustainability challenges, such as local social impacts and environmental pollution, but also the impact of its products on climate change. The International Energy Agency has estimated that global energy-related C0₂ emissions grew by 1.7% in 2017 to 33.1 gigatons (Gt). There is a strong need to change to renewable energy, but the rules of the energy market make this sector hard to change.

Loop I: market dynamics

The energy market has two key determinants: capital intensity and stability of supply. Energy supply underpins all economic activity, and this should not be constrained by a lack of energy. The market is therefore looking to invest in companies that have sufficient stocks of energy and the capital needed to guarantee these stocks for the long term.

Loop II: enabling environment

Governments see the energy supply as a matter of national security. It is vital to have plenty of cheap energy to support a reliable energy infrastructure. The oil and gas companies have existed for 150 years and have developed a vested interest in the energy system by creating the capital- intensive fossil fuel infrastructure to satisfy the energy demands and by working with governments and regulators to develop a standardized system. Consequently, in many countries there is strong interdependence between governments and the fossil fuel industry

Loop III: mismatched benefits and effects

The fossil fuel companies will certainly not be the first to warn about the negative consequences of global warming or rising sea levels. Governments are also not affected as much. Politicians often face criticism if they argue for climate action because many citizens and voters prefer to continue with business as usual.

Loop IV: lack of alternatives

The renewable energy sector is constrained by high investment costs for infrastructure and the instability of supply. The focus now is on developing better storage solutions for renewable energy and flexible sup- ply/demand solutions. The rising consumer cost for renewable energy — despite the falling costs of solar panels and wind turbines — is caused primarily by two factors: the imbalance between supply and demand and higher taxes. To finance the energy transition, many governments have raised taxes and surcharges on electricity from renewable sources.

When it comes to the energy transition to renewable energy sources, the dominant logic in the energy sector is in Phase 3. We therefore call on the stakeholders to take the following actions.

Considering the large investments that are needed and the long-term character of these investments, governments have a critical role to play in the energy transition. The necessary developments involve the provision of long-term price signals, including pricing negative externalities (such as GHG emissions) to attract investment. To accelerate the market transformation, more and more governments are also considering taxes on polluting energy sources and subsidy schemes for renewables. Governments and their network operators should also incentivize the rollout of smart meters and connected devices so that more appliances can respond to signals from network operators to control demand. Moreover, to fully support the market transformation and secure long-term labor prospects, governments should prepare current and future workers in the energy sector for new technologies and provide them with the required skill sets. This transition can greatly boost overall employment in the energy sector.

Fossil fuel companies should continue to invest in renewables and energy storage solutions. The traditional energy sector can think of other ways to use the enormous infrastructure that is often at their disposal to facilitate the energy transition. They can also step up their game by joining sector-wide, pre-competitive platforms that enable them to develop a strategy that concerns not only the future of their own sector, but also the future of the many other sectors that depend on a stable, affordable and sustainable energy supply.

Civil society can play an even more important role here by engaging in strategies such as shareholder activism. In this role NGOs, transcend the traditional activist campaigning and actively engage in strategic dialogue with existing oil and gas businesses. Complemented by strategies that call for divestment by the Financial sector in traditional fossil fuel activities and redirecting these investments to the renewable energy sector.

Will we transform the energy sector due to scarcity of resources or due to deliberate leadership, policies and innovations towards more renewable and sustainable energy sources? The answer depends on the actions of various stakeholders. If we want to safeguard future generations from the disastrous effects of climate change, governments in particular have to step up their leadership role significantly.

EIGHT SECTORS IN TRANSITION 285