Fossil-clean energy mix can ease transition pains

Melting glaciers, rising water levels, increase in earth’s temperature are affecting everything from geopolitics to economies to migration. Large scale investment in development of renewable energy power plants has started yielding returns (or expectation of returns) for a lot of countries.

However, with all the noise around renewable energy, it is important to not lose sight of the “net zero emissions” journey that we have traversed so far and whether we are headed in the right direction as responsible citizens of this planet.

Adoption of renewable energy — Are we anywhere close to a fossil fuel free energy system?

Adoption of renewables-based electricity has significantly grown across metrics — installed capacity, gross generation and percentage share of total electricity consumption.

Since comparison of renewable and conventional electricity based on installed capacity is not an apples-to-apples comparison, due to low “plant load factor” (PLF), which renewable-based electricity plants generate, we would ignore it for now. PLF (or capacity utilisation) is the amount of power which a plant can generate as a percentage of its installed capacity. For most renewable plants (solar, wind, hydro), PLF is generally as low as 20-25% and as high as 90-95% for coal-fired power plants (most common type of conventional power plants).

As can be seen from Figure 1, the contribution of renewable-based electricity (excluding nuclear) has increased from 19.4% in 2000 to 29% in 2020, implying a compound annual growth rate (CAGR) of 4.9% against total electricity generation CAGR of 2.8%. However, if we look at low carbon sources (renewable + nuclear), the contribution has remained almost unchanged – 36.3% in 2000 to 39.1% in 2020 due to decline in nuclear output.

While electricity from low carbon sources contributes 39% of total electricity generation, the contribution of low carbon sources to total energy mix is only 16% (Figure 2). This is because energy has two other major components, viz. transport and heating, which still rely heavily on fossil fuels.

Therefore, while we have been able to make progress in adopting renewables for electricity generation, the same is not true for energy. This would involve adoption of electric vehicles and renewable-based HVAC systems like thermally driven chillers, ice-powered air conditioners, geothermal heat pumps etc. Since most of us use the terms energy and electricity interchangeably, it gives a false sense of progress. In my view, the first right step is to understand the magnitude of transformation that we loosely talk about.

Let’s focus on renewable electricity / power generation.

The front runners so far…

The shift in focus of governments especially of some of the major developed and emerging market economies towards renewable electricity has been commendable.

Figure 3 shows that the percentage consumption of fossil fuel-based electricity has reduced in all major developed and emerging market economies over the last two decades. Here’s what some of the major developed and emerging economies have done to bring about this transition:

United States

Solar and wind energy have been the focus areas for the United States with electricity production from these sourcesgrowing at a staggering84% and 15% CAGR respectively over the decade. For solar, the decline in cost of electricity generation due to reduction in prices of utility scale photovoltaic (PV) modules globally is a major factor contributing to the increased adoption. Cost of wind energy has also declined on account of improving technologies, economies of scale and competitive supply chains. However, the decline in cost of wind energyhas slowed down while decline in solar continues. The levelised cost of energy (LCOE) for solar and wind power plants in the United States is one of the lowest as depicted in Figure 4.

In addition to the above, the power purchase agreements (PPA) for wind and solar have been competitive with other sources. In H1 CY2021, the weighted average the U.S. price for solar PPA auctions was $31/MWh while for onshore wind it was $37/MWh as compared to wholesale electricity price of $34/MWh for the same period. The government has also been providing incentives like tax credits (investment tax credit) to enhance the economic feasibility of renewable power plants. Moreover, as conventional power plants become old their operating costs increase significantly thereby dis-incentivising the operation of these plants. As a result, the case for wind and solar power plants is strong and the U.S. has experienced a remarkable explosion of innovation and entrepreneurship in clean energy.

United Kingdom

The exponential growth of offshore and onshore wind farms in the U.K. has been a testament to the government’s efforts. Electricity generation from wind power has increased by more than 7 times in the last decade in the U.K. It has the largest offshore wind farm — located off the cost of Yorkshire. According to a news source, wind power in the country’s energy mix hit a record 50.7% in Dec 2020 with an annual average contribution of 25%. The government is targeting generating one-third of the country’s electricity from only offshore wind farms by 2030.

However, concerns around reliability of wind energy have surfaced as the U.K. witnessed a significant decline in the generation of wind-based electricity due to unfavorable weather conditionsin 2021 which led to an energy crisis. The contribution of wind power declined to 15% in Q3 2021 compelling the government to bring back gas and coal fired power plants online to control the price volatility — the price shot up to $553/MWh in September 2021 due to double whammy from low wind power generation and higher commodity prices.

This incidence in the U.K. has sparked a debate around reliability of renewable power vs. nuclear power. Moreover, it emphasises the importance of pairing battery technology with renewable electricity generation to store excess power if renewable has to play a significant role in the structural energy shift away from fossils.

India

India’s renewable power generation capacity has posed a CAGR of 17.3% between FY16-20. Being a tropical country and a land where sun is worshiped, the obvious major source of renewable powerfor India has been solar. As of 2021, India has approximately 159 GW of renewable installed capacity with a target to reach 500 GW by 2030, out of which solar would contribute 55% of the capacity. Given the current installed solar capacity of approximately 50 GW, we can expect the focus on solar power to only increase over the next 10 years — 225 GW of 340 GW renewable capacity installation is likely to be of solar.

In order to promote Make in India for solar cells and modules, the government has imposed 40% duty on imported cells, wafers, and modules. Moreover, production linked incentive (PLI) scheme has been introduced to provide government support for setting up solar PV modules manufacturing units.

Ministry for New and Renewable Energy (MNRE) has: (i) awarded ‘must-run’ status to renewable power plants to promote the distribution companies (DISCOMs) to buy renewable-based power; (ii) removed tariff ceiling in PPA auctions which were earlier placed by DISCOMs,to improve economic feasibility of setting up renewable capacity; and (iii) set-up state wise Renewable Purchase Obligation wherein each state DISCOM is required to purchase a minimum amount of renewable power.

However, amidst these and many other policy actions taken by the government, several challenges including poor financial health of DISCOMs leading to delay in payments to power generation units, land acquisition hurdles, issues in maintaining grid stability, etc. plague the development of the sector. As always is the case with India, policy implementation remains the key.

China

China surpassed the United States as the top greenhouse gases emitter in 2005. In 2013, Asian Development Bank reported that 7 out of 10 most polluted cities in the world are in China. A major reason for this is coal-fired power plants in China which cater to nearly two-thirds of China’s electricity consumption. As a result, in 2016 the government banned construction of coal-fired power plants for two years. However, when the ban lifted, construction of new plants ramped up again. In 2020, China built over three times more new coal power capacity than the rest of the world combined . Even today, China is generating 30% of total global emissions.

However, China aims to achieve carbon neutrality by 2060. In order to do that, it not only needs to rollout renewable power plants and electric vehicles but also tackle emissions from industries. As a roadmap for carbon neutrality in 2060, China plans to increase electricity generation from renewables seven-fold, accounting for 80% of power mix by then. This will not only boost the labour market but also ensure better productivity and higher life expectancy.

A long way to go

At the UN Climate Change Conference (COP26) held in October 2021, several nations discussed the need to tackle climate change and achieve net zero emissions target. 197 countries signed the Glasgow Climate Pact wherein they agreed to report the progress towards climate ambition next year in COP27. However, China and India softened the language of the agreement at the last minute from “phasing-out coal power and inefficient subsidies for fossil fuels” to “phase down coal use”. This left many members along with COP26 president Alok Sharma disappointed.

Figure 5: Carbon emissions (in billion tonnes) by various countries

As can be seen from Figure 5, China and India are two major emerging economies which have increasingly contributed to global emission volumes over the last two decades. In fact, the proponents of investment in renewable energy (as discussed in previous section) are also the front runners in contributing to global emissions, which indicates that we still have a lot of ground to cover. However, it is well understood that given the size of these economies and the energy requirement, phasing out fossil fuels is a gradual process and therefore a hybrid system of fossils + clean energy ensures better reliability than directly switching to purely clean energy systems.

While 2022 is expected to be the year of post-Covid recovery, the increase in industrial activity has already led to a sharp spike in the temperatures in Antarctica reflecting the impact of global warming.

As we think about the roadmap for net zero emissions, the question that the economies need to ask is whether installing renewable capacities is enough to tackle climate change or is there something more that needs to be done?

Way forward

Achieving net zero emissions will require no less than complete transformation of the global energy system – shifting away from fossils as primary fuel source to clean energy (not just electricity). Among various clean energy sources, the bet most likely has to be on renewable electricity (used as fuel) powering the planet since this is where the world has made most progress. Development of other sources like hydrogen, bioenergy-based fuels, etc. will take longer and can be used to fill the gaps which renewable electricity can’t.

Two major breakthroughs need to happen for us to switch from fossil as a primary fuel to clean electricity: (i) introduction of storage battery systems along with renewable electricity to streamline the supply and improve reliability; and (ii) technological advancement to enable large scale electrification of HVACs and transportation systems, both of which are currently largely dependent on fossil fuels.

Moreover, as renewable electricity becomes a primary fuel source, the demand will shoot up significantly. Catering to this demand will not only require massive investments in setting up new capacity but also investments in improving energy efficiency of buildings, vehicles, home appliances, industries, etc. According to a McKinsey report, $275 trillion of cumulative spending on physical assets would be needed over the next three decades ($9.2 trillion per year vs. $5.7 trillion per year spent currently) — this will involve not only a significant increase in spending on low-emission assets but also reallocation of capital from high emission to low emission assets. As a result, while the cost of electricity would rise initially due to higher capital cost / depreciation and grid costs, but then gradually fall due to reduction in operating cost of fossil fuel-based power plants as they retire .

Several policy level initiatives would need to complement the above technological and monetary investments. These include easing out land acquisition norms, tax credits, integration of global supply chains to ensure seamless manufacturing of renewable equipment, generation and production linked incentives, long term power purchase agreements with economically feasible tariffs, etc. As debate around global warming picks up heat governments have started announcing some of these policy changes. Stronger institutions in developed economies enable them to implement these policies more effectively than some of the emerging economies like India.What will determine winners over the next decade is not only intent but whether these policy changes have the desired trickle-down effect reaping benefits for investors, sponsors, and the common man.