Looking Beyond the Transition

The energy transition is “burgeoning,” as one economic commentator put it recently. Evidence of this is widely visible in solar arrays on roofs and fields, wind farms dotting land and seascapes and electric vehicles (EVs) on the roads. Less discussed is how short this “transition” is likely to be and how soon a new, largely electrified energy system will be in place. Renewable electricity is sharing the transition forefront with EVs, so solar, wind and battery-storage manufacturers could easily face market saturation within 12-15 years — a decade or so ahead of UN, national and many corporate targets for full decarbonization. This means nobody will catch up to China in clean energy during the transition. As China’s global competitors accept this, their focus will likely turn to second-generation replacements and hard-to-decarbonize sectors. Likewise, EVs are on track to slash gasoline and road diesel sales well ahead of the 2050 target date. This is the logic not merely of climate science and government policy, but of markets.

While much about the latter stages of the transition remains uncertain, a front-end buildout of renewable generation and EVs is far enough along that its timing and technologies are clarifying. Solar and wind accounted for roughly 12% of generated electricity worldwide in 2022 and solar, especially, continues to grow at hefty double-digit rates. Renewables are now the cheapest way to expand power generation almost everywhere, and nearly enough manufacturing capacity already exists — much of it in China — to ensure that equipment shortages will not throw up major obstacles. Costs for solar and onshore wind are back on a downward track after a brief rise last year.

It’s increasingly evident that, even with hefty government subsidies, US solar equipment cannot come close to catching up to China’s in cost terms, and Washington will have to rely on high tariffs to keep cheaper Chinese modules out of its domestic market. Nor can the US provide the components needed even for those solar panels it does make within the buildout period for the 2035 net-zero-emissions grid the Biden Administration wants.

Past trade moves suggest that, when push comes to shove, Biden will probably let solar components in, rather than see the US fall even further behind in the transition to renewables and be saddled with uncompetitively expensive electricity. Whether a second Trump or other Republican administration would keep the US similarly open to Chinese components is unknowable.

However, each passing year brings closer the point at which companies eyeing solar equipment factories have to consider whether there will be a growing market for their products for long enough to pay off their investment, even taking government subsidies into account. Market saturation similar to that now afflicting Apple and other smartphone manufacturers is a very real threat in the 2030s. It’s not that demand for renewable generation equipment will dry up. Replacements and improvements will be needed for the foreseeable future. But the pace of solar installation may well slow abruptly in less than that lifetime of a factory or mine on the drawing board today.

Onshore wind is also growing rapidly, but offshore prospects are uncertain, amid technical and financial disarray across that sector. In any case, Chinese dominance in wind is less established and probably could still be challenged if the turmoil settles quickly. It does need to be quick, though, or that prospect, too, will fade.

Next Generation

All this points to the conflicting considerations the US and EU face as they try to balance the reality of a rapid energy transition and climate deterioration against their desire to lessen dependence on Chinese manufacturing. Odds are that, rather than going head-on against China during the transition itself, the West will compete mainly by developing next-generation, more efficient solar and wind equipment that can be installed after 2030 or even 2035, when much of their baseload needs are already met by solar and wind equipment made largely in China.

The situation with storage batteries is more complex, both because the technology is still more fluid and because, for now, the power sector generally uses the same batteries as EVs. What does seem clear is that short-duration, overnight storage will be put in alongside most of the solar and wind installed over the next decade. However, mechanisms to provide backup power for longer periods of low solar and wind generation will be a major competitive battleground in the later years of the transition, if not sooner.

If river-water levels remain as unstable as they have been of late in places from Europe, to the Pacific Northwest of North America, to Southern China, hydropower may be reserved increasingly for backup. Green or blue hydrogen are eyed for this same market segment, and potential technical breakthroughs for long-term, slow-release storage are touted regularly.

EV Angle

Worldwide, the transition to EVs is outpacing virtually all expectations, with roughly one-third of Chinese and one-quarter of European auto sales now fully electric or plug in hybrid, and a previously lagging US market expanding rapidly off its currently much lower roughly 9% market share. By 2035, many countries are slated to have banned sales of internal combustion engine vehicles, and gasoline cars may not be allowed at all in many cities. The EV transition will largely be over.

Who will be making all those EVs is much less clear. The dynamics of the EV industry started out, and remain, very different from those for solar, wind and storage battery manufacturing. US-based Tesla drove much of the early action, not Chinese startups. The established Western automakers also decided years ago that the future was with EVs, and Japanese and South Korean car companies have gradually come around. All are investing heavily in moving rapidly into EVs and out of conventional cars.

China historically relied mainly on foreign companies for conventional auto manufacturing, but firms led by the likes of BYD and Nio dominate the domestic EV market along with Tesla and are now setting their sights on exports. Bets are these Chinese manufacturers will make rapid headway in Europe, assuming the EU maintains close trade ties with China.

Oil Aspects

What does it mean for the oil industry? First, it suggests the window for new entrants to move into large-scale manufacturing for the transition may already have closed. Few of the Western majors gravitated in this direction in any case, but it’s one more possibility foreclosed.

The EV surge means oil demand may not have as long a stable plateau near peak levels as forecasts still tend to show. China’s galloping EV market is already bringing peak gasoline demand, and the International Energy Agency expects Chinese EVs to lop 1 million barrels per day off oil demand growth by 2028. Beijing is now supporting efforts to electrify heavy-duty trucks. Studies find e-trucks could be fully competitive by 2030 and dominate the market by 2040. The track record of EV forecasting suggests that could, in fact, happen sooner.

How gas will fare in a solar- and wind-dominated power sector is less clear. While there is unlikely to be much baseload demand except, perhaps, in big gas-producing countries such as the US and Russia, there could be room for lots of gas-fired generation capacity as backup. But, as noted, that depends heavily on how hydropower adapts to a changing climate, new technologies and the extent to which cost-inflating carbon capture and storage is required.

The main point, though, is that a new energy order may already be visible well before the 2050 date at which the last “hard-to-decarbonize” aspect of the transition has passed. And the wacky weather of late is likely to rule out a reversion to the near-business-as-usual scenarios some forecasts still posit. The transition is not turning out to be the leisurely process that allows time for contemplation — much less for kidding yourself about what’s coming.

Sarah Miller is a former editor of Petroleum Intelligence Weekly, World Gas Intelligence and Energy Compass. The views expressed in this article are those of the author.