Leading the energy transition: where are we now?

Transcript

Leading the energy transition: where are we now?

Germany in 2023 and 2024 spent about 3 billion in congestion management. It's very clear that underinvestment is more expensive in the long term than investment. Today there is one trillion US dollars that are spent in subsidizing fossil fuels. They are benefiting the richest people and not the poorest people. The power grid is planned to require twice as much investment in the next five years than what happened the last five years.

Hello, I'm Tom Parker and welcome to the next five podcast, brought to you by the FT partner studio. In this series, we ask industry experts about how their world will change in the next five years and the impact it will have on our day today.

In this episode, we explore where we are in the energy transition, the challenges, technologies and the policies. As the UN Secretary General Antonio Guterres said in July this year, now we are on the cusp of a new era. Fossil fuels are running out of road. The sun is rising on a clean energy age.

Renewables and nuclear did indeed reach an historic 40% share of global electricity generation in 2024, with renewables alone supplying around 32% of global power for the first time. But the length of this road and the speed we are travelling down it will determine the success of the world's energy transition.

I have been working on the renewable world for many years, I'd say 25 years or more.

This is Maria Mendelucce, CEO of We Mean Business Coalition, a global non-profit that brings business and policy action together to halve emissions by 2030 and accelerate a just net zero transition.

And so I have seen the full transition and it's quite interesting because thanks to the Paris Agreement, it gave us a framework and it gave the final push that it was a lot of investment that happened in the early 2000s that made the technology develop and become cheaper and cheaper.

But I perfectly remember 2014 talking to a senior executive for an oil and gas company saying that the renewables were the parasites of the grid. Fast forward, 97% of businesses in a survey that we did last April said that in the next 10 years or more, they will invest in renewables. It's not the parasite actually, it's the lifeblood of the economy.

97% of executives support a shift to renewable-based electricity moving forward and 91% of companies are maintaining or increasing their net zero investments and more than half plan to relocate operations or supply chains to secure more renewable power.

Simply said, when companies are thinking about investments, they're thinking about investing in renewables, in grids, in storage. The energy transition has left the station. They're not looking to invest in fossil fuel alternatives.

I've been working in the sector for almost that long, so I've kind of lived through how things have changed.

This is Elizabeth Cremona, senior energy analyst for Europe at Ember, an energy think tank that aims to accelerate the clean energy transition with data and policy.

And I've really seen a difference in the imperative that's driving this energy transition. I think in the beginning, especially if we go specifically to 2015, it was very much climate oriented.

So we had to do this energy transition because we need to cut carbon emissions. We need to remain within a carbon budget. And there was a big push on that using the climate objective.

And now I think we're in a very different era where there are a very different number of concerns. So we have geopolitical uncertainty. It's a very different time to how it was 10 years ago.

But really the transition now has a momentum of its own. So there was this initial push, the beginning of the last decade, let's say. And now it's just taken off.

I think even the attitude to the transition has changed. It's no longer a climate imperative, but people are now seeing the actual benefits and the opportunities that the transition brings.

If we take solar, for instance, as a really simple example, in 2015, it was just over 200 gigawatts. A lot. But if we look nowadays, we're reaching almost 2000 gigawatts. So to put those figures into context, the global installed capacity that we have today is close to 10 terawatts. So solar is a fifth of that. So we're talking about a huge amount essentially of new power that's come online in the last decade and now is rivaling other powers as well.

One thing that also relates to this kind of question of how things have changed in the last 10 years is, to me, China. So if we go back 10 years, China was kind of at the beginning of the energy transition. Perhaps it was less in favor of doing things from the climate objective. And now, again, talking about snowballing, China is just racing ahead when it comes to the transition. And this is not only about renewables, where it is definitely leading, but also on electrification.

And this is a hugely positive change because it's something that has been a difficult to actually take off in other regions of the world. So China in 2023, which is around the time we have the most granular and certain data, has an electrification rate of 32%, which is massive. And it essentially added 1% to its electrification rate from 2015 up to 2023, reaching this big figure of 32%. So a third of its entire enormous economy is electrified.

And that change in the last 10 years really puts into perspective how the US and the EU are just lagging behind. They're pretty much being sold at around 21% to 24% in terms of electrification. And things have not changed, whereas China is just rocking ahead with renewables, with clean power, with electrification. So I would say definitely a big positive there in terms of one of the world's largest economies essentially leading the way.

Indeed, the US and Europe are lagging when it comes to electrification. Let's take the EU, for example. While Europe's 38% renewable share of power supply is impressive and aims to increase to 42.5% by 2030, electricity is only one quarter of the energy consumed in the EU. Renewable-based electrification, supported by indirect electrification of 6,800 terawatt hours by 2050. That's double today's demand.

In order to meet this target and ultimately a complete transition to renewables, there must be a stable, strong and interconnected grid. The electricity there represents 20% of the energy mix of a given country. In 2050, this 20% will grow to 50%.

This is Massimo Battaglini, CEO of Prismium, a multinational that produces cables used in the energy and telecom sectors. That means there will be other sources of energy because electricity cannot cover everything. Also because there are in this decarbonisation journey industry whose CO2 emission cannot be abated with electricity like the glass industry, the steel industry that need the different means like hydrogen or biomass to reduce the carbon footprint of this industry. So electricity will not be accounted for 100% of the energy mix of even if electricity can be entirely made in a renewable way.

Having said so, to bring more electricity to someone, and in the US this is very visible, electrification of buildings, residential factories and so on is a driver of business in the US, much more in Europe. To bring electricity to the final users, you need a grid. So you have to connect the building to something. This something is called a vast network of cables.

The grid is not solid enough, is not large enough, is not robust enough to transmit all the electricity required. We see a significant surge in demand fueled by data centres because data centres require a lot of energy, electricity. So there is more generation that has to happen and some of this generation has to happen in a renewable way because data centres have owners feel very bad about the additional consumption of electricity. So they want to have some of this energy being renewable.

And then this energy, additional energy created has to be transferred to the data centre. So have a grid. So the grid of the country also requires a stronger strengthening to support the centre of demand.

And there is a second challenge. The shift from fossil fuel generation to renewable generation creates a different challenge to the grid because this renewable generation is intermittent, which requires additional tension of the grid, but also new devices like monitoring or the performance of the grid become essential to maximise the generation of renewable energy and the transmission of renewable energy.

So this is the reason why the power grid is planned to require twice as much investment in the next five years than what happened in the last five years. According to the IEA, each year global investment into grid infrastructure currently stands at $400 billion, compared with around a trillion dollars on generation assets.

Maintaining electricity security amid rising electricity use requires a rapid increase in grid spending, moving towards parity with the amount spent on generation. In the EU alone, investments into grid infrastructure currently stands at 40 billion euros annually, but would need to double by 2050 to 80 billion. That's 0.5% of Europe's 2023 GDP.

I'm really glad that you put those big investment figures into context because we do get a bit of a shock, obviously, when you see 80 billion. But in context, it's not actually that dramatic, let's say. And it's very clear already that it actually costs far more to not invest in your grid than to actually invest.

So if we take an example from Germany, for instance, in 2023 and 2024, they spent about 3 billion in congestion management. And to deal with it, you have to spend a lot of money. So 3 billion just to address congestion. They spent 6 billion on their grid. So half the amount that they chose to invest in the infrastructure, that same amount, half of it was actually used just to deal with the fact that they hadn't invested enough. So it's very clear that underinvestment is more expensive in the long term than investment.

To the EU last year. Being a Spanish and having seen the blackout in Spain is a good example on why we need to invest in the grid to upgrade it. We need to integrate more storage in the grid, wherever there are bottlenecks. We need to increase the interconnections with other markets so that they can compensate each other. We need to make them much more smart and intelligent. And this is something that needs to be done very fast because there's a lot of renewable capacity waiting to be connected. A lot of consumers that would like to have access to that energy that is more reliable, it is more affordable, it makes them more competitive. And that requires new policies as well that will allow and provide incentives to invest in the grid and to get a fair remuneration for that investment.

And just think about how much imports of fossil fuels will be saving. Today, there is one trillion US dollars that are spent in subsidizing fossil fuels. Actually, they are benefiting the richest people and not the poorest people. So there is no point about having fossil fuel subsidies. We need to redirect those funds to improving the grid, improving the planning, improving the access to everybody, those that those subsidies were intended to. Shouldn't we give them access to clean technology? Shouldn't we give them the possibility to benefit from the transition?

The impact that this will have on the cost of living of people will be enormous and one that will stand forever. Because once you invest in renewables, in upgrading the grids, in storage, it's a high capital investment. But then there is no operational expense because the sun and the wind are free. They are available. So it's a fantastic story as well. And I think policymakers need to address this because companies are requesting it. They want to have access to reliable, clean and cheap electricity.

Redirecting fossil fuel subsidies is one route, but there are other market drivers of investment. Back to Massimo. It's difficult for us to tell where the investments come from, but there is a certain two models, two business models in the market. There are developers that decide to invest in generation and transmission of electricity because they can sell this electricity to a certain price at a money rate investment. So in some cases, these are financial institutions decided to invest in offshore generation or solar generation or simply interconnecting grid A with grid B and leveraging the differential in price and making this a business case.

Most of the investment in generation and transmission are sustained by utilities who are regulated by different systems. So the total capex invested by these companies is basically transferred to the end users. In the daily bills of households, there is a portion of amount of money not related to the consumption, but related to a firm fee associated to the extra capex that this company are going to invest.

This is unfortunately putting us some criticism to this situation because users see the bills going up because utilities have to invest more in renewable or more in grid. And the big dilemma is that the data centers in the US are the ones that require significant investment for utilities, but those investments are paid by the whole community.

Let's focus on the US for a minute. Over the last 10 years, the United States rose to become the largest producer and exporter of natural gas globally. And under Trump's second term, is the only country to have left the Paris Agreement. Federal support for clean energy is being cut, tax credits revoked and stricter permitting is being imposed on wind and solar projects.

The US government intervention in August wiped billions from Allstead, the world's largest offshore wind developer, who saw shares drop by 16% to a record low as the Trump administration ordered them to halt construction on a $1.5 billion wind project that was four-fifths complete. The company, which is majority owned by the Danish government, was forced to seek a raise of $9.4 billion in fresh capital, 80% of the company's market cap.

So, how does policy reversals and unforeseen political interference like this affect investment decisions? We have seen in the past few years that when there is a stable policy environment and the companies and investors see that countries are investing, are putting the policy frameworks and have a long-term plan, there is a lot of investment that flows to these technologies and to the solutions projects, et cetera.

So, it's often said there's not a lack of money, there is a lack of stability and frameworks that will allow that investment to give the benefits that are expected. If you think about Allstead, they were planning to invest millions, billions, and suddenly there is an upside-down policy change which then completely removes the business case for investment and also prove that company to travel. And so, it's up to the governments to create plans to make the country investable. And we see that in China, in the UK, in Spain, the countries and the governments are committed to the money flows. When countries start to have doubts, then companies wait and see.

Here's Elizabeth again to dig into the policy and investment landscape. It's this constant paradox, the trade-off between the short-term political objectives versus these much longer-term heavy infrastructure projects, essentially. So, when it comes to building any kind of generator, whether it's a fossil generator or some form of clean power, it has a technical lifetime of 30 years, 40 years, and so on.

So, when investors calculate if there is a business case, they have to make some assumptions about what the regulatory framework looks like over the entire period, what it means for their income and revenue streams. So, that really is a big issue when we have this kind of back-and-forth with regards to policy. Instead, there needs to be at least a long-term vision, if not a perfect set-in-stone way you're going to work for such a long period of time, but at least there is some kind of long-term backing for a particular project.

Obviously, I think Orsted is quite a specific example when it comes to it being a key part of a particular country's economy. But yeah, I definitely think that we're seeing this kind of back-and-forth impacting the speed and certainty behind investment decisions.

I think it's also quite interesting when you have a kind of reversal of what we've just talked about when it comes to having a short-lived political objective. I've seen, for instance, in the last couple of years, a huge political push behind hydrogen. We've seen it in the States, we've seen it in Europe, it's spreading across the world.

And I find it very interesting that despite this political certainty that's being provided for investors in order to incentivise them, it is now the investors who are choosing to drop out of major projects, as opposed to the projects falling through because of a lack of political certainty. So it's a reversal, which tends to happen, I think, when you have too much political hype versus technical feasibility, as boring as that sounds.

So what does this mean for a multinational company? How do they pivot under an uncertain policy environment? Here's Massimo. I think policy plays a significant role in this transformation, in this journey, because customers don't invest a huge amount of money if you don't have the certainty that they get a payback sometime.

I think the only area where there's been some uncertainties in the US due to this shift of the administration from pro-wind to against-wind. And when there was a bad administration, there was a lot of push for offshore wind for generation of renewable energy. Even if, I must admit, that also during the Biden administration, there was not a real effort in making this shift towards offshore wind becoming real.

So the point that we were about to invest into our submarine plan to produce submarine cable in the US and satisfy growing demand in the US. And all of a sudden, we shifted to a different plan because with the new administration, there was a clear opposition to the wind development in the US. But this is only wind, in terms of wind offshore, more or less. Wind onshore and photovoltaic parks can be sustained also by the current administration. So the policy is important to maintain certainty in the customer investment, hence indirectly to our investment.

As said before, we had to be flexible and we changed our mind when it came to this factory because the environment changed. If you had a stable environment in terms of policy, in terms of commitment of a given country, it would be better for investors. It would be easier for investors to decide how much money to put in the expansion of the grid, in the electrification of buildings going to the generation and on our side, that would be reflecting more certainty in our investment.

But we take the world as it is and we are much more agile than we were 10 years ago. We are very flexible and we adapt our strategy to the different moments.

By the same way, I must admit that outside of this specific environment, the US environment, we have seen stability in all the rest of the world when it comes to policy support in the energy transition, in the carbonisation. Certainly in Europe, a great stability, great commitment, long-term commitment. And so easy for us to decide where to invest and what to invest and how much to invest because the scenario is much more well regulated and stable.

Another area that needs attention when it comes to the transition is critical minerals. Demand for lithium, cobalt, nickel, graphite and copper continues to soar. In 2024, the energy sector accounted for 85% of demand growth. Supply remains geographically concentrated. China refines 75% of strategic minerals and dominates processing capacity. The IEA forecasts a potential 30% supply shortfall in copper by 2030 and investment growth in mining has slowed significantly last year.

Furthermore, with geopolitical instability in tariff wars, what does this all mean for the transition and the sectors leading it? The cable industry is one of the major buyers of copper as an industry. By accounts being the major for 25% of the copper demand. We've been hearing about these possible short-term four years and this hasn't happened because we've seen always companies vertical integrators, raw producers, vertical integrators with mines investing in mines expansion capacity because it makes a lot of sense.

Now the copper is very expensive. An investment in expanding mining capacity is well rewarded by the high level of copper. The high level of copper, although very high already, is going to grow in the future due to this probably tightness of the market. I don't think this will lead to a scarcity or this will constrain the problem of the carbonization, the energy transition, but certainly it will make the transition cost a little bit more.

There is a couple of solutions here. First of all, aluminum is becoming more relevant and more and more customers shifting away from copper cables, moving to aluminum cables. They're saving weight, so cost of transportation and the cost of material, aluminum is one fifth of the cost of copper. So there is a financial benefit behind the shift.

In fact, this has been happening very fast in the last three years. The aluminum material is 30% less conductive than copper, and this requires that when you shift from copper to aluminum cables, you have to increase the size of the conductor to transmit the same power that you can transmit with copper cables. But despite this metal content disadvantage due to conductivity, being the price one fifth, the overall cable cost around 20-30% less than the equivalent copper cables, and that's why this transition makes a lot of sense to many customers.

And the second point is also many suppliers of copper rods becoming capable of converting waste of copper, recovered by different industries, and use the waste in their production. So this means that you don't need any longer to rely only on virgin material. You can recycle copper waste, making the available availability of copper less a problem today than it was three or four years ago.

Rare earths are really well in control by China, not so much in terms of instruction, but very much in terms of process to refine them. I think the rest of the world has tried to catch up. They probably lost an opportunity in the past 10 years when they decided to rely much more on China. This is affecting much more the energy transition. It affects more the digital transformation, so the center chips and all the rest of the stuff. So I don't think this will represent a real threat to the speed and the pace of the energy transition, but of course, it poses some question about the reliance on China for many things.

But, you know, in the last three years there's been a lot of awareness about the geopolitical situation and everybody in both Europe and the US are trying to become self-sufficient in rare earth stuff, but also in other activities.

Looking ahead, where will we be with the transition in the next five years? Let's start with Maria. In the next five years it's all going to be about electrification. Everybody is going to electrify their energy uses because clean energy is cheaper. So what's going to happen is that electrifiers clean electrification of transport. Passenger is going to happen, yes and yes, and I'm afraid it's more difficult that it's going to happen as well because it's going to become more competitive.

I think now trucks are still more expensive but they will get cheaper as there is more scale. Then it is about electrifying the industrial heat. We can do it with electricity up to very high heat temperatures and companies are going to be looking at it because the gas or alternatives are quite expensive and volatile as well and you can have the energy next to your factory or very close by.

Then it's going to be about electrifying the heating buildings and that will require a lot of support from governments because then we're talking about millions and millions of buildings that need to be electrified and certainly once we get the trick then it will grow exponentially and the trick is to make it easier for consumers to move to heat towns and to make it also the heat towns, the technology more affordable and it's complex.

When you're going to build in automatically you can have a gas boiler and you don't do anything, it's all done but if you want a heat town you need to do so much, right? So much research, I'm doing it myself so we need to simplify that so that it is the easy route is to have heat towers on buildings and with those three things electricity is just more efficient, it's more convenient, it's more clean, it is available everywhere because there are blacks everywhere and I think we're going to be talking a lot about this in the next five years and investing a lot and innovating a lot because there are many new technologies that will emerge with this push and it's going to be very exciting and it's going to create jobs and it's going to be from an innovation perspective, from an economic perspective, from our security of supplies, jobs it's going to be the thing for the next five years.

And Massimo? Difficult to say, maybe even more difficult to say what's happening in the next 10 years because the next five years I pretty much define in terms of projects, a pipeline, activities and so on. Definitely I think we will continue to see a stronger demand of data center due to data center expansion and I said before this is not just cable, it's also electricity generation. So there will be in a view an additional boost in generational electricity, renewable generation electricity because data center have to invest more in renewable to justify the excessive demand of electricity.

The power grid journey will continue because this is now a real constraint to the decarbonization, not only to the decarbonization but to the need of additional electricity required by no residential factories and data center as I mentioned before. So I see a positive trend and I think that the energy transition will expand these coverage also to countries which didn't invest so much in it because now as I said before has become more economical vis-a-vis the alternative sources of energy production.

And finally, Elizabeth? So I'm pretty certain but I hope to not have to come back on this podcast in five years and say I was wrong that the energy transition is now so ingrained in the policies and the outlooks of different economies that is going to continue. The only question mark is the pace and I think that's pretty much it to be honest when we look at kind of the big high level trends.

So there's no doubt that it's absolutely accelerated in the last five years and I see it only increasing even more over the next five. So definitely and especially when it comes to renewables, continued acceleration, the global power system just getting cleaner and cleaner and starting to finally offset fossil fuel even as total energy demands increase.

India is one of the few economies that's completely committed to actually tripling its renewables between now and 2030 and if we look at its trajectory it seems to be very much in line with that. In October of 2024 it was at 200 gigawatts of renewables and the aim by 2030 is to get to 500 gigawatts of renewables. So it seems to be definitely on the right trajectory and that means that from its 22% of clean power today it would be more than 40% renewable power by 2030. A massive change in a short period of time while again also keeping up with the huge increase in power demand.

What I would like to see but I'm less certain of is alongside renewables continuing to accelerate electrification finally taking off. We've seen this happening in China for sure so we can see it's something that's feasible. Again the economics there that make the clear business and economic case for it but we've yet to see it take off in other major economies in the US and Europe and so on. So that is something I would like to see in five years but I am far less certain I will.

For better or worse a lot has happened since the inking of the Paris Climate Agreement a decade ago. In 2015 it was predicted that the global average temperature would rise by up to 3.8 degrees Celsius by the end of the century. Today those forecasts have dropped to between 2.5 and 2.9 degrees Celsius. This is still above the one and a half degrees set out in Paris and a single degree difference makes a big difference.

Whether the current driver of the transition is economics, energy security or climate change there are benefits to be had in all camps but much more must be done. The world's biggest economies China, the US, the European Union and India are also the biggest admitters. None of whom have met their Paris promises and they are all at different stages of their transition journey.

While it is still fossil fuel dominant China as Elizabeth mentioned is surging ahead in renewables adding more solar and wind power in 2024 than the rest of the world combined. But this may not be because of climate concerns more so the economic advantages of market dominance. Think rare earths too.

Then it comes to the United States. Investments into wind and solar projects are expected to fall short of estimates under the IRA. But the US doesn't have the same energy security issues as Europe so this should allow more freedom to invest in electrification and grid infrastructure. But policy reversals does make it a tricky environment. And as we learned today Europe's own grid infrastructure issues are costing more to get wrong than put right.

With policy being one of the single biggest drivers of change countries and governments must act swiftly consistently and boldly to reach energy transition targets. The Paris agreement seems like it happened only yesterday. 10 years goes quickly let alone five. Soon it will be 2050 and it will be down to what we do in the next five or even 10 years that will make all the difference.