Future Outlook for Clean Energy

Guest article from Industry Expert, Michael Wilshire

In the last decade, the clean energy sector has grown at an impressive rate.  Wind and solar accounted for less than 2% of global generation in 2010, growing to over 10% by 2020, with a 56% share projected for 2050 (see Bloomberg New Energy Finance’s latest “ New Energy Outlook”, Economic Transition Scenario). Global investment in renewable energy generation now runs at around $300 billion a year. Installation of domestic heat pumps added another $50 billion of annual investment in 2020.¹ Total annual expenditure on electric vehicles and associated charging infrastructure, an industry that barely existed ten years ago, was an additional $140 billion in 2020.

Underlying trends

The keys to this success have been a mix of technology innovation, coupled with policies that stimulated early demand for these developments. As a result, we are now seeing just the first instalments of a radically different and cleaner energy system.  Innovation has been unusually rapid for three reasons

• Modularity, a shift away from large scale generation and other assets towards new smaller scale units that are being deployed in large volumes – for example solar modules, individual wind turbines, heat pumps, batteries and hydrogen electrolysers. High unit volumes lead to strong learning effects that rapidly drive down costs. In solar, for example, every doubling of installed capacity has led to costs falling by over 28% – a learning rate that is almost unparalleled, other in a few fast-developing sectors such semiconductors, software and genomics. 
• Decentralisation, where the physical location of assets moves from the centre towards a distributed network of smaller, often interconnected assets, in homes, commercial buildings and local districts.  New types of businesses are emerging that may install, operate, own or aggregate these assets – for example offering managed solar and storage services, EV charging, energy management, microgrids, and demand response services.  In some ways, this catalyst for innovation is similar to the early days of the internet, a highly decentralised technology that liberated the telecommunications industry from closed, proprietary and centrally managed networks.
• Digitalisation, in particular an abundance of data to and from sensors, controls and other devices (the so-called ‘Internet of Things’), low cost cloud computing, and machine learning.  These technologies allow decentralised assets to be monitored, controlled and optimised in new ways that improve efficiency and resilience.
  

New challenges

There are however still many challenges and the scale of required investment is huge.  BNEF’s Economic Transition Scenario, which focuses on the direct economics of energy investment and removes longer term policy drivers, forecasts that between now and 2050, a cumulative total of $15.1 trillion will need to be invested in new power capacity, 80% of which is renewables and batteries, plus another $14 trillion in the grid.  Even this is unlikely to be enough. For example, to stay on track for 1.75 degrees warming (as a reminder, the Paris agreement targets to remain below 2 degrees compared with pre-industrial times), we would need to more than double the cumulative amount invested just in power generation and grid storage assets to $35 trillion, even before allowing for additional power capacity needed to produce green hydrogen. Other challenges include:

• Balancing the grid, as the proportion of intermittent renewable generation increases and as more flexible gas fired generation comes under pressure due to its emissions.  Curtailment, longer term storage, and demand management will all be needed.
• Managing complexity.  The transition to clean energy also requires a digital transformation of energy networks, so that they can handle fast growth in the number of underlying assets and devices that in turn generate huge volumes of data.  Without new approaches, the complexity of doing this would increase in a non-linear, even exponential manner.  New technologies are needed to meet this challenge, such as more modular software platforms and AI.
• Ensuring resilience, for example strengthening the grid to help integrate renewables and EVs, with major upgrades in cybersecurity. 
• Deepening inroads into transport, which generates almost a quarter of total fuel-related emissions.  Consumer-driven EVs are just the beginning and battery powered light commercial vehicles, buses and trucks are also strong candidates for electrification. Cities need to develop integrated approaches to different types of public and private transport. Other forms of transport such as long-distance shipping and long-haul aviation will need alternative low carbon molecules such as biofuels or ammonia, due to their requirements for high energy density and long ranges.
• Decarbonising buildings, which account for around 10% of global emissions from fuel combustion, over half of which is from space and water heating.  This requires a major shift away from gas and oil to electricity.  Heat pumps that extract and concentrate heat from the outside air or ground and which can almost magically produce up to four times as much heat as their electricity input are very energy efficient, but for mass adoption the capital costs of installed systems need to fall significantly.
• Cleaning up industrial manufacturing and processes, which represent just over a quarter of emissions from fuel combustion.  Steel, chemicals and cement production are the most emissions and energy intensive sectors, but are often low margin, with long-established and optimised processes, high entry barriers and large amounts of existing capacity – all of which act as disincentives to major change.

Opportunities

Addressing these challenges will lead to a variety of new business and investment opportunities, for example in:

• Asset investment, to build the energy infrastructure of the future.  Utilities will need to invest heavily in renewable generation, grid infrastructure, grid-scale battery storage, and hydrogen electrolysers. One of the best applications for hydrogen is likely to be for long-term storage of energy to balance the grid in periods of peak demand.  Other players, including oil and gas companies, are already shifting more of their investment towards clean technologies.
• Deeper decentralisation of electrification.  Continued investment in rooftop solar for commercial and residential premises is one example of decentralisation, but a massive programme of investment is also needed in distributed assets that can take advantage of cheap, clean electricity such as heat pumps for buildings, private and public EV charging networks and local battery storage.  Installation and design services will be needed to support these rollouts.
• Software platforms, that act as a unified interface with complex energy systems and simplify the challenge of developing applications and systems to run them.  In the US, C3.ai, an enterprise software company, has developed a ‘model-driven architecture’ that acts as a layer of abstraction between different sources of device data, databases, machine learning frameworks, algorithms and applications – with energy as its largest current market. In Europe, software businesses like Greencom Networks, Kiwigrid and others have developed platforms, designed to help utilities control distributed assets such as control solar panels, batteries, electric vehicle chargers and smart home energy loads.  Cybersecurity platforms are also being developed that similarly interface with a myriad of different devices on networks.
• New service models.  Whilst much of the energy industry has in the past been vertically integrated, we are seeing a distinction between businesses which provide a service and those which own or operate the underlying assets.  For example, Octopus Energy in the UK, launched in 2015, now has 2.2 million domestic customers, 7.5% of the UK retail market. At the core is its ‘Kraken’ software platform, which  supports a wide range of consumer services, including clean electricity retail, EV charging points, battery storage services, and integration with rooftop solar generation. It also licenses Kraken to third parties, with a total of 17 million energy accounts now on the platform.
• Clean industrial processes. Technologies are being designed to reduce emissions from industrial processes.  Examples include Boston Metal in the US which has developed a molten oxide electrolysis process that eliminates the need for coke in steel production.  In Sweden SSAB (a Swedish steel company), LKAB (Europe’s largest iron ore producer) and Vattenfall (a major European energy company) are working together to decarbonise steel using hydrogen, aiming for commercial scale production within five years.  CarbonCure has developed a process for adding captured CO₂ to concrete as it is produced, thereby increasing its strength, embedding the CO₂ permanently and reducing the amount of cement needed.
• Continual technology innovation.  Whilst ‘breakthroughs’ are often hoped for, technology innovation is often a more continuous process of learning in which a series of smaller improvements are made more gradually, but which collectively add up to a remarkable improvement over time.  We are likely to see continued reductions in the costs of solar, wind energy, battery technologies, heat pumps and other areas – due to improvements drawn from engineering, physics, chemistry, materials and computer sciences.  There is little evidence that the learning rates we have seen over the last ten years are slowing, and companies that best understand these trends and exploit them are most likely to prosper over the next decade.

Capital at risk. For illustrative purposes only and does not constitute investment advice.

¹ BNEF 2021 Energy Transitions Investment Trends Report

About Michael

Michael is a private investor and advisor, with a particular focus on the impact of emerging technologies.

Michael has significant industry experience having previously worked as Head of Strategy and Research at BNEF, where he built the research teams covering renewables, advanced transportation and digital technologies. He was one of the first investors in the company, prior to its acquisition by Bloomberg in 2010. Michael was formerly a partner at McKinsey, where he advised clients in the energy, technology and telecommunications industries on technology, strategic, operational and marketing matters. Prior to that Michael worked in the UK Department of Energy and was Private Secretary to both the Permanent Secretary and the Minister of State for Energy where he worked on the deregulation of the energy sector, nuclear policy and the privatisation of the electricity industry.

Michael has an MA in Mathematics from Cambridge University and an MBA from the London Business School.