The affordable energy transition

Sverre Alvik 29 November 2019 0 Comments

It is not too good to be true, it is the economic reality that lies ahead of us.

The energy transition facing us in the coming decades is an affordable one. In fact, the future energy system is not only affordable, it is cheaper than the energy system we have today. And this creates an opportunity to invest more to achieve the future we want.

Let me be more precise: in just one generation, humanity will be spending a much lower share of its GDP on energy than it does today. The main reason is not energy prices, but energy efficiency. Whether you believe in the phenomenon of peak energy, as DNV GL does, or just increased efficiency, the conclusion is the same, and it is robust.

Affordability is reward enough, but there is an even more important win – we are heading towards a decarbonized energy future. But do not pop the champagne yet. Our Energy Transition Outlook (ref. 1) outlines the most likely future as DNV GL sees it. The energy transition, modelled to the best of our ability, is far too slow; we are not on track for a Paris-compliant future.

Some of the savings that therefore accrue from a much more efficient energy system need to be ploughed into speeding things up, investing in R&D, technology support, policy incentives and other activities increasing the pace of the transition.

And even if society does invest and achieve Paris ambitions, the transition is affordable, purely in energy economic terms. The stakes beyond energy economics are of course far larger; the costs of runaway global warming are close to incalculable.

Figure 1. World energy expenditures will increase from 4.6 trn USD today to 5.6 trn USD in 2050. The present expenditures are dominated by 70% fossil energy expenditures, while in 2050 grid and non-fossil energy will represent 30% each

What should count as ‘energy expenditures’ is open to debate. DNV GL’s Energy Transition Outlook uses a strict definition, including only fossil-fuel extraction, refinement and conversion, installation and operation of renewable energy plants, and all costs incurred by the power sector.

The definition could have been extended with energy efficiency measures, energy transport costs, and energy support and subsidies. Using our definition, present expenditures are at 4.6 trn USD annually, and will grow in absolute terms to 5.6 trn USD annually in 2050, as illustrated in Figure 1.

There are different views of the unit costs of energy going forward. Renewable energy production will inevitably be cheaper, while grid complexity increases and will be more expensive. Fossil energy extraction is helped by technology improvements, but is also moving to more challenging conditions.

Without going into details, it is likely that the relative costs of a unit of energy will stay within the same range as today. On a global accumulated level, DNV GL figures show average energy costs slowly increasing from 8 to 10 USD/GJ over the next 30 years.

But the world economy is growing at a much faster speed than energy expenditures. With an average expected growth in global GDP of 2.6% per year the global economy will be 130% larger than it is today. Illustrated in Figure 2, this is a story about affordability.

Figure 2. The forecasted transition is affordable as the share of world GDP devoted to energy is reduced from 3.6% to 1.9% over the forecast period. There will be a massive shift of investments from fossil to renewables and grids.

Would this conclusion change if we included costs that are excluded from our energy expenditure definitions? No. The costs would add to the absolute costs and percentages, e.g. fossil fuel subsidies today are in the range of 400 bn USD (ref. 2), renewable subsidies at 150 bn USD (ref. 2), and energy efficiency costs at 240 bn USD (ref. 3).

The first is likely to decrease the coming decades, the two latter to increase, but the change in the figures will remain too small to alter the overall conclusion.

Figure 3. From 2030 onwards, global primary energy use will start to reduce as intensity improvements are higher than the sum of population and economic growth.

The overarching driver of affordability is energy efficiency. This is best illustrated as improvement in global energy intensity – the global primary energy consumption per unit of GDP. Energy intensity has improved 1.6% per year over the last decades.

With increased electrification and more efficient energy end use in all sectors and all regions, we expect global energy intensity reduction to be 2.5% per year on average towards 2050.

The shift gives us the watershed moment of peak energy, when humanity – in spite of population and economic growth and great improvements in energy access for poorer populations – will start to use less energy (ref. 4).

The main reason for the affordable transition is the reduction – both absolute and relative to economic growth – in global energy use, not changes in energy costs.

The market, left to its own devices, tends to be short-sighted. Unless forced by rules and regulations, most energy developments are economically rational in the short term. What if we forced the energy system to achieve Paris ambitions, would this be costly? Yes and no.

Various references exist on the cost of achieving Paris ambitions. Most of them also include the benefits of reducing climate change damages.

However, if we confine ourselves narrowly just to the extra costs involved in decarbonizing the energy system, that could add up to an additional annual cost of 0.4-0.8% of GDP (ref. 5). If we add this number to the GDP share for energy expenditures shown in Figure 2, we see that the transition is still affordable, with a clear margin.

The conclusion that the energy transition is affordable is valid even without considering the benefits of avoiding the dangerous consequences of global warming, which obviously are compelling.

Something for the COP 25 negotiators to bear in mind!

Sverre Alvik is the Energy Transition programme director, DNV GL