Commentary – The “Decarbonization” Challenge
A week doesn’t go by without headlines touting the need to rid the world’s energy diet of fossil fuels – coal, oil and natural gas. That sentiment was parroted on June 8th, 2015 when G7 leaders set a goal of being completely carbon vegan by the end of the century.
It seems unlikely, but never say never. Who knows where we will be 85 years from now? Some 85 years ago there were still plenty of steam engines, kerosene lanterns and the odd horse and buggy. Recent data suggests change is happening, but is it fast enough?
Last Wednesday BP released its 64th annual Statistical Review of World Energy. Underneath the massive stack of fossil fuels, the comprehensive report provided evidence that meaningful transitions are germinating in our energy mega-systems. For example, the global data shows a noticeable slowdown in the world’s year-over-year consumption growth (+0.9% compared to +2.0% the year prior) and impressive shifts to renewables in some markets like Europe and Asia. Overall energy intensity has stepped down again, which means that a dollar of GDP needs 15% less energy to transact today than only five years ago.
Despite notable changes from prior trend lines, BP’s detailed breakdown of primary fuel consumption also reminds the reader of the scale of the “decarbonization” challenge. Last year’s numbers remain almost incomprehensible in magnitude: Every day in 2014, seven billion people were gorging on 15 million tonnes of coal, 92 million barrels of oil, 328 billion cubic feet of natural gas, 200,000 kilograms of uranium and millions of hectares of wind farms, solar panels, forests, cornfields and hydroelectric reservoirs.
On an energy equivalent basis, fossil fuels represent an 86% share of primary energy. Even Germany, a leader in championing green energy still receives 81% of its energy needs from coal, oil, and natural gas. And some countries, like India, are feasting on coal more than ever. Getting the world to move off of fossil fuels is equivalent to getting a Tyrannosaurus Rex to switch from meat to parsley.
Our feature chart this week notionally shows the size of the challenge if the goal of decarbonization by 2100 were to aggressively start this decade. The only time in history when a similarly radical transition occurred was when society went from wood to coal in the 18th century. Of course, back then the scale of consumption was a mere fraction of what it is today.
History shows that energy consumption has always had an environmental impact, and that occasionally the effect has been so extreme that it has forced us to make changes to our sources and use of supply. Our reliance on wood denuded forests and destroyed habitats, so that’s why we moved to coal. Coal, the cheapest and most carbon-intense of all fossil fuels, often turns urban air into eye-watering smog, so we move on to natural gas, nuclear and a smattering of renewables. Now greenhouse gas emissions are the prime catalyst for change, so we seek to decarbonize.
Environmental degradation is a major force, like energy security and scarcity that can lead to a “break point,” a periodic shift, alteration or wholesale change in where we get our energy and how we use it. We are in the midst of such a break point, which in business terms means a battle for market share between the purveyors of primary energy, clean or otherwise.
Each percentage point of primary source market share is worth hundreds of millions of dollars a year. The stakes are enormous so what’s upon us is the mother of all market share battles. Yes, renewables have been making impressive gains recently, but it’s folly to assume, among other things, that established players are going to cede their share willingly – especially if demand growth is moderating, as the BP data showed.
So far the attack against fossil fuels has been dominantly in the electrical power market where it’s been relatively easy to reduce emissions; shuttering antiquated coal plants is a lightweight challenge. Adoption of low-or-no-carbon alternatives is going to get tougher as the low hanging carbon thins out.
Innovation has long been a defensive strategy in the energy business; coal, oil and gas companies are already accelerating their efforts to defend market share through technologies that reduce their costs and emissions. It’s hard to know how innovation and government policies will shape this battle over the years to come, but the good news is that the competitive outcome will be positive for consumers, and for the trajectory of carbon emissions too.
No, the T-Rex is unlikely to become a carbon vegan soon, not likely in 85 years and certainly not in 20. But, the beast is likely to get grumpy as it disrupts its diet. In business terms that means we can expect a lot of aggressive competition between primary energy suppliers even with a mild decarbonization trend.
So what the BP data really says is that any primary energy company that doesn’t recognize the need to improve its competitiveness will end up being extinct like a dinosaur.