A holistic approach to rethinking energy

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With renewables now part of the mainstream, new approaches are needed to electricity systems’ planning and market design, policy frameworks and funding, and training and education to take the energy transformation to the next level, writes Adnan Z Amin

An alignment of economics, demographics, climate change and technology has set in motion an ongoing transformation of the global energy system.

Growing populations, with improved living standards and increasingly concentrated in urban centres, have dramatically raised the demand for energy services.

REmap 2030, a global roadmap developed by the International Renewable Energy Agency (IRENA), shows that not only can renewable energy meet the world’s rising demand, but it can do so more cheaply, while contributing to limiting global warming to under 2oC – the widely cited tipping point for climate change.

A technology once considered as niche is becoming mainstream. What remains unclear is how long this transition will take, and how well policymakers will handle the change.

As this transformation gets underway, it will affect every aspect of society. At the heart of the energy transformation lies demand, the aim to strengthen energy security and the imperative of a sustainable future.

Over the past 40 years the world’s population grew from four billion to seven billion people. An increasing proportion is middle class and living in cities. During the same period, electricity generation grew by more than 250 per cent.

This growth will continue. In 2030 there will be more than eight billion people, with five billion in urban conglomerations. Global spending by the middle classes is expected to more than double, from $21 trillion in 2010 to $56 trillion in 2030. World electricity generation is forecast to grow by 70 per cent, from 22,126 TWh in 2011 to 37,000 TWh in 2030.

But this energy is coming at a cost. There is growing consensus on the threat of climate change brought on by increasing atmospheric concentrations of greenhouse gases, prompting worldwide efforts to reduce emissions. If business continues as usual, these efforts will not succeed. The average emissions intensity of electricity production has barely changed over the past 20 years. Gains from the increasing deployment of renewables, and less intensive fossil fuels such as natural gas, have been offset by less efficient power plants and the rising use of coal.

Without a substantial increase in the share of renewables in the mix, climate change mitigation will remain elusive. REmap 2030 shows that under current policies and national plans, average CO2 emissions will only fall to 498 g/kWh by 2030. That is insufficient to keep atmospheric CO2 levels below 450 parts per million (ppm), beyond which severe climate change is expected to occur. A doubling in the share of renewables could help mitigate climate change by reducing the global average emissions of CO2 to 349 g/kWh – equivalent to a 40 per cent intensity reduction compared to 1990 levels.

Countries are increasingly looking to reduce their dependence on imported fossil fuels. By reducing energy imports, countries are striving for greater energy independence; avoiding potential supply disruptions (for example, in case of conflicts or disasters), high energy prices and price fluctuations.

There is growing pressure, meanwhile, to bring electricity to the 1.3 billion people currently without electricity access, many in remote areas, for whom traditional large-scale power plants and transmission systems have not yet provided an answer.

Also, 2.6 billion people rely on traditional biomass and cook using traditional stoves that cause severe health impacts.

These trends have prompted a widespread conviction that something has to change. Fossil fuels powered the first industrial revolution, but even in the new era of shale oil and gas, questions remain about their compatibility with sustainable human well-being. The stage is set for the era of modern renewable energy that is cost competitive, mainstream and sustainable.

Robust and efficient

Large-scale hydro, geothermal and biomass power have been competitive for some time, but for many years wind and solar power struggled to compete with coal, oil and natural gas. Over the past decade, however, and in particular over the last five years, that picture has changed dramatically.

Renewable energy technologies have grown more robust and more efficient and are increasingly able to generate power even in suboptimal conditions such as low wind speeds and low solar irradiation. Energy storage technologies are improving fast.

Buoyed by state support in Europe and the US, and boosted by the rise of new manufacturing powerhouses such as China, costs have plummeted. These trends are illustrated in the graphic below which charts the levelized cost of electricity for different forms of utility and off-grid power.

Solar photovoltaic (PV) prices have fallen by 80 per cent since 2008 and are expected to keep dropping. In 2013, commercial solar power reached grid parity in Italy, Germany and Spain and will do so soon in Mexico and France. Increasingly, solar PV can compete without subsidies: power from a new 70 MW solar farm under construction in Chile, for example, is anticipated to sell on the national spot market, competing directly with fossil fuel-based electricity.

The cost of onshore wind electricity has fallen 18 per cent since 2009, with turbine costs falling nearly 30 per cent since 2008, making it the cheapest source of new electricity in a wide and growing range of markets. More than 100 countries now use wind power.

Offshore wind is also expected to grow rapidly as costs fall, with the UK leading the market with 4.2 GW of installed capacity as of mid-2014.

These and other developments have made renewables increasingly attractive in many more markets. In 2013, for the first time, new renewable capacity installations were higher in non-OECD countries. For example, China’s deployment of solar PV and wind in 2013 was estimated at 27.4 GW, nearly four times more than the next largest, Japan.

Worldwide, renewable power capacity has grown 85 per cent over the past 10 years, reaching 1700 GW in 2013, and renewables today constitute 30 per cent of all installed power capacity.

The challenge has moved on from whether renewable energy can power modern lifestyles at a reasonable cost – which we now know it can – to how best to finance and accelerate its deployment.

Financing renewables

Renewable energy is competitive on a cost per kWh basis. As most renewable technologies have a relatively high ratio of up-front to operating costs, their viability is particularly sensitive to the cost of capital.

That is why government financial support has traditionally been critical for promoting renewables. However, as the technology has grown more competitive and pressure on budgets has increased, governments have been reducing their support.

The good news is that private finance is increasingly ready to step in. Due to growing experience, developers are getting better at forecasting cash flow and financiers are more able to accurately assess risk. The cost of capital is falling and products are being tailored for a wider range of investors, from small-scale communities to large institutions.

Institutional investors are also starting to get interested. They are increasingly taking into account the risk attached to fossil fuels and new long-term, low-risk instruments are being created to encourage them to invest in renewables. Early-mover private developers in this space attracted $11 billion in 2013, up 200 per cent in 12 months.

Large non-energy corporates are also becoming involved. Ikea’s turbines and solar panels now produce 37 per cent of its energy consumption, and Google has invested over $1.4 billion in wind and solar.

But these trends are not yet enough. Total investment in renewable energy rose from $55 billion in 2004 to $214 billion in 2013 (excluding large hydropower). This falls short of the $550 billion needed annually until 2030 to double the global share of renewable energy and avert catastrophic climate change.

Policymakers have an important role to play. If they make it clear that renewable energy will be a larger part of their national energy mix, and commit to long-term, non-financial support mechanisms, they could reduce uncertainty and attract more investors. In emerging markets, public financing will remain important as domestic structures to support the deployment of renewables are developed. In this context, international cooperation and financial flows play an increasingly prominent role. With increasing competitiveness, financial support can gradually and predictably be scaled back, focusing instead on grid improvements, education and industry standards, which strengthen the market as a whole.

There is also an opportunity for traditional utilities to do more. Joint projects between large utilities, small developers and clients could be a way forward, as business models adapt to the changing market conditions.

Renewables’ wider benefits

There is growing evidence that renewable energy has a positive ripple effect throughout society, simultaneously advancing economic, social and environmental goals. Its costs and benefits are best understood not within traditional policy silos, but as part of a holistic strategy to promote economic prosperity, well-being and a healthy environment.

Renewables are good for a country’s economy. A recent Japanese study, looking at a 2030 target of 14-16 per cent renewables, found the benefits were two to three times higher than the costs – including savings in fossil fuel imports, CO2 emissions reductions and economic ripple effects.

Spain’s use of renewables avoided $2.8 billion of fossil fuel imports in 2010, while Germany saved $13.5 billion in 2012. For fossil fuel-exporting countries, deploying renewables at home makes more resources available for sale overseas.

The benefits are felt through the value chain as renewable energy stimulates domestic economic activities and creates employment. In 2013, it supported 6.5 million direct and indirect jobs – including 2.6 million in China. As the share of renewable energy grows, the structure of the industry and the nature and role of power producers are undergoing change.

A sector once dominated by large utilities is becoming more decentralized, diverse and distributed. In Germany, almost half of all renewable energy is now in the hands of households and farmers, and only 12 per cent of renewable assets are owned directly by utilities.

New storage technologies, and smart technologies to support better demand-side management, will grow in importance – creating a whole new ancillary industry of smart appliances. In many emerging markets, renewables are already the most economic power source for off-grid and mini-grid systems.

These and other trends require a different way of thinking about energy, shifting from a system dominated by a few centralized utilities to a diverse, distributed system, where consumers are also producers, with far more control over how and when they use energy.

Policymakers can do much to either promote or hinder this vision. Renewable energy investors need stable and predictable policy frameworks which recognize the system-level benefits renewable energy can bring. They need a level playing field, including cutting back on the substantial subsidies currently enjoyed by fossil fuels worldwide. And they need a supportive grid infrastructure, including more regional interconnections to take advantage of synergies between different forms of renewable power.

Rethinking energy means policymakers need to consider the benefits of renewable energy as a whole, linking areas previously considered unrelated – such as healthcare, rural development and governance. Herein lies the biggest change: adopting a truly holistic approach, which not only takes into account the interests of short-term growth, but provides the opportunity of sustainable prosperity for all.

The changes at hand offer the potential for a new industrial revolution. The technology is ready to deploy. People, businesses and governments must now embrace its potential.

Adnan Z Amin is Director-General of the International Renewable Energy Agency

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