The Big Picture

Energy Transition Hits Speed Bumps But Maintains Momentum

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  • At face value, the low-carbon transition appears to be stalling — with coal-burning on the rise, US climate policy constrained and parts of the financial community toning down climate action.
  • This overlooks underlying momentum from technologies and corporations, as well as overlap between energy security and transition goals for many governments.
  • Factor in the market forces impact of high fossil fuel prices, and the net outcome looks set to be a “slower now, faster later” transition.

The low-carbon transition has hit some major speed bumps this year — that much is certain. Surging oil and gas prices appear to have vindicated arguments that the low-carbon transition was moving too quickly. Investors such as BlackRock are easing off calls for rapid climate action in the face of domestic challenges. And consumer countries, from China to Europe, have upped coal-burning as high gas prices and disruptions distort the market.

But individual data points do not make a complete picture. For consumers, high and volatile fossil fuel prices also reinforce the cost advantages established by wind and solar power — even accounting for inflation and supply chain bottlenecks. Those technologies appear to have established an unassailable lead on cost, particularly in Europe and Asia. Electric vehicles are slightly behind on the cost parity curve, but sales are quickly rising in Europe and China — and could now get a boost from pump prices. Energy and other companies show no signs of abandoning longer-term strategies, even if they are making space for more oil and gas supply in the nearer term.

Putting all of this together, a recent report from Energy Intelligence’s Research & Advisory unit concluded that the transition will remain uneven and untidy. In the near term, progress toward decarbonization may slow. But from the mid-2020s, as policy pressures rise and clean energy technology costs fall further, this trend is likely to reverse.

Shift in Sentiment

Coal is certainly seeing near-term gains. A number of European governments have unveiled plans to use more coal at existing plants if needed, as they focus on injecting gas into storage ahead of winter. But moves to phase out coal will continue. German Economy Minister Robert Habeck called the use of more coal for a transitional period “bitter” but “necessary.” In India, high prices are marginalizing gas usage relative to coal, while in China, energy security needs after last autumn’s power shortages and Russia's Ukraine invasion are keeping coal in business.

Investor sentiment in support of the energy transition also appears less robust. G7 leaders last week shifted from a blanket ban on financial support for unabated fossil fuel projects to saying that such projects could be acceptable “in limited circumstances.” Industry has seen weaker support for activist investor proposals amid rising concerns around energy security and inflation risk. But that also reflects the farther-reaching nature of some proposals.

Meanwhile, legal and political constraints have reined in US President Joe Biden’s climate agenda — from congressional gridlock to last week’s Supreme Court ruling limiting federal government tools to curb power sector emissions.

Underlying Momentum

On the other side of the ledger, technology advances continue to add to momentum. Renewables have repeatedly beat expectations on cost over the decades, leading to faster-than-expected deployment. Energy Intelligence’s levelized cost of energy analysis shows lifetime generation costs for new wind and solar capacity falling by around 50% and 85% respectively since 2010. True, renewables are currently facing headwinds on cost — but fossil fuels even more so. In Europe and Asia, onshore wind and solar PV costs are far below those for gas and coal.

China continues to advance plans to more than double its renewables' capacity to 1,200 gigawatts by 2030, despite increased coal usage. Some believe it will get close to that level as early as 2025. The Ukraine war has meanwhile prompted the EU to step up its climate ambitions “to yet another level,” according to European Commission President Ursula von der Leyen. Europe has accelerated its target for renewables' share in the energy mix to 45% in 2030, from a previous target of 40% and 22% now. Permitting, which has long been a bottleneck, is to be streamlined. The war has also spurred less glamorous but critical energy efficiency efforts. Energy Intelligence estimates suggest that energy efficiency measures could realistically slice 15 billion cubic meters off EU demand for Russian gas in 2022.

Bottlenecks and supply risks for key materials for low-carbon technologies are often cited. The counterargument is that lithium, aluminum, copper, nickel and cobalt are widely distributed, and higher prices will encourage more investment in mining and equipment. Technological advances — including on electric vehicle (EV) battery materials and recycling — could also be game-changers.

EVs, a slightly less mature technology, have seen some of the biggest input cost increases. But EV sales are already at the top end of Energy Intelligence’s earlier forecasts in China and Europe, supportive subsidy and other policies remain in place, and sustained high fuel prices should boost their appeal. Increasingly, the central question is not what support is needed for EV take-off, but what might slow EV take-up.

Market Forces Now a Driver

In China, EV sales more than doubled in May from a year ago, and accounted for 24% of overall auto sales — ahead of the government’s target of 20% by 2025. In Europe, fully battery-electric cars rose to 10% of cars sold in first-quarter 2022, while all kinds of electric passenger cars — including hybrids — hit 44%, versus nearly 53% for gasoline and diesel cars combined. Crucially, EVs offer consumers an alternative that didn’t exist in previous oil price spikes, argues Aidan McClean, CEO of electric car rental company UFODrive.

High fossil fuel prices could also spur take-up of rooftop solar and heat pumps among consumers, especially in Europe. The International Energy Agency’s (IEA) recently released Renewable Energy Market Update found that renewable power growth this year has been "much faster than initially expected," amid strong policy support in China, the EU and Latin America — but slower than anticipated in the US.

As highlighted by the IEA report, the US will likely remain an outlier on climate policy, given polarized politics and legal dynamics. But Congress could still take action before November midterm elections, and state-level policies will continue to drive change — albeit divided along political lines.

So what does this all mean? The transition’s progress was never expected to be smooth, but this year’s events have made it more disjointed across regions and technologies. Similar warnings of stalling were common at the start of the Covid-19 pandemic two years ago, only for the transition to gain momentum as the dust settled. This time, there has been a clearer near-term swing in sentiment back toward fossil fuels; less so in the underlying momentum toward low-carbon alternatives.

Policy and Regulation, ESG, Low-Carbon Policy, Renewable Electricity , Electric Vehicles
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