Article
Although our daily life centers around tools and devices, which are increasingly powered by rechargeable batteries, there is often still a lack of awareness about the underlying historic shift that is taking place in the energy market.
May 27, 2021
While fossil fuels today remain the main source of primary energy, this might soon turn out to be a reflection of the past. Since the onset of the industrialization in Great Britain in the midst of the 18th century, the idea to use fossil fuel combustion in various forms and applications has conquered the world. Moreover, being able to tap into huge reserves of fossil energy has been a decisive factor for the rise and fall of nations ever since. While burning fossil fuels and mining finite resources have undoubtedly propelled economic progress and created unparalleled wealth, this has also pushed the planet’s ecosystem out of balance. In face of the pressuring challenges of climate change, animal mass distinction and biodiversity loss, the tide is turning. This generation will be able to witness a fundamental shift in the years and decades to come, away from the old paradigm of fossil fuels, which essentially has dominated since the historic scale-up in the industrialization. A step-change in electrification, powered by various renewable energy sources, will characterize the new paradigm.
Fig 1: Mind the shift, electricity to account for 50% of final energy consumption (estimates)
Source: Bloomberg NEF New Energy Outlook 2020. Note: NCS-CEHP is NEO Climate Scenario: Clean Electricity & Green Hydrogen Pathway
Electricity accounts today for about 20% of final energy consumption and was previously believed to gradually increase to eventually 25% until 2050. However, given the rising price competitiveness of renewable energy and the growth of electric vehicle registrations, a higher share becomes more likely. In order to keep global average temperatures increase well below 2°C puts the energy sector on a pathway on which electricity reaches a share of 45% in 2050.1 The forthcoming price decline of battery storage technology and green hydrogen will play an important role for achieving this pathway.
Despite generally rising power demand over the next decades and emissions pushed from transportation to the power sector, electrification can act as an important measure for de-carbonization. Assuming a growing share for renewables and green hydrogen in the overall energy mix, electrification could lead to a net reduction of 34% of emissions in 2050. This corresponds to an accumulated saving of 124GT of CO2 emissions until 20502, approximately 4 years of global emissions at current levels. Three sectors are especially relevant for achieving this shift: Transport, industry and buildings.
Transportation
The transportation sector should experience the biggest change in electrification, mainly driven by passenger and light commercial vehicles, 2-wheelers and busses. In the scenario above, 80% of all vehicles will be electrified by 2050, except for heavy commercial vehicles, which should reach penetration levels of below 50%.3 Current passenger car registrations for electrified vehicles in Europe underpin the validity of this scenario, with hybrid electric vehicles and electric vehicles (EV) accounting for 22.4% of all new car registrations in 2020 vs. 8.7% in the year before.4 Total electrification for the transport sector could even overshoot to the upside, if the marine, aviation and rail sectors would be able to adopt battery storage solutions in a meaning full way. While rail has probably the best prospects to increase electrification, its relatively low share of 1% of total global energy consumption5, somewhat caps the impact in the overall mix. On the other hand, especially green hydrogen is expected to become more relevant for these sectors. Recent comments from the world’s leading airliner manufacturer Airbus, who is currently examining three potential designs for a hydrogen aircraft and set a mid-2030s target for a hydrogen plane6, point into this direction.
Fig 2: Share of electricity and hydrogen in total final energy consumption, NCS-CEHP7
Source: Bloomberg NEF New Energy Outlook 2020; 2050 numbers are estimates
Industry
The industrial sector is after transportation most reliant on fossil fuels and has shown little signs of change in the recent history. For example, fossil fuels account for 87% of all manufacturing fuel use in the United States, essentially unchanged since four decades.7 However, more detailed recent data reveals, a significant part of industrial heat demand falls into ranges, which can be covered by electric alternatives. According to data of the U.S. Department of Energy, approximately 73% of industrial heat demand belongs to the bracket below 300°C, much of which is demand for hot water and steam currently provided by fossil fuel combustion boilers.8
For the very energy-intensive, high-temperature processes involved in industries such as iron, steel and cement, which account for over half of global greenhouse gas (GHG) emissions from industry9, increasing the useful lifetime of resources offers a viable option to cut emissions. According to data of the Institute of Scrap Recycling Industries, it requires 60% less energy to recycle steel compared to producing steel from iron ore. Similarly, the U.S. Department of Energy calculates as little as 6% of energy required to produce secondary aluminum compared to the primary production. Although more investments are required to modernize sorting, collection and transportation systems in order to provide the required scrap metals, investments for secondary production are usually significantly lower. For example, aluminum secondary production requires only 10% of investments compared to setting up a primary production plant.10 With the increasing availability of green hydrogen technology, it is furthermore possible to replace fossil fuel combustion in these high temperature processes. By combining electrification with recycling technologies, emission reduction can therefore become more meaningful for several industries than previously assumed.
Buildings
The share of fossil fuels consumption in buildings today is already lower compared to the other sectors above, thanks to higher levels of electrification and biomass use. Heating provided by direct fossil fuel appears to be ripe for being replaced by electric heat pumps and direct electric heaters. As heat pump/water heater solutions can produce up to twice as much hot water per kwh of electricity, homeowners can not only improve their own environmental footprint, but also lower their energy bill. On the residential side, further electrification can enable an unprecedented level of energy self-sufficiency (see picture 1), while reducing greenhouse gases emissions by up to 40% compared to an equivalent home powered by natural gas. Besides the positive environmental impact, the integration of various electric solutions, provide homeowners also with new functionalities and better cost control.11
Picture 1: Advanced All-Electric Smart Home
Sources: Credit Suisse, SMUD, based on https://www.smud.org/-/media/Documents/Going-Green/AE-Diagram-BH.ashx
Outlook and conclusion
The ongoing electrification of various sectors is about to accelerate in a meaningful way. Rising price competiveness of renewable energy and storage solutions, increasing regulatory pressure for fossil fuel combustion like stricter emission targets for passenger vehicles, set the tone for the coming years. The proposed $2T infrastructure plan of US president Biden, is the most recent confirmation for this. It addresses various initiatives concerning broader environmental challenges like upgrading the electric grid and water infrastructure. Looking at the proposed investment for the transportation sector, electrifying vehicles commands the largest share with $174bn. The plan includes the built-out of a national network of 500,000 EV chargers by 2030, the replacement of 50,000 diesel transit vehicles and the electrification of at least 20 percent of school busses.12 The shift in US policy has the potential to drive significant scale effects over the next years for electrification solutions.
Furthermore, the trend towards hybrid projects, which combine renewable energy power generation and battery storage solutions, is gaining momentum. General Motors and Facebook signed up for a 173 MW solar and 30 MW battery system project in March this year.13 Also in March, food company Kellogg announced a virtual power purchase agreement with Enel Green Power to procure 100 MW of a project that includes 350 MW of wind paired with 137 MW of battery storage.14 If the quickly rising price competitiveness for renewable energy over the last decade is a reliable indicator, of how energy storage solutions could fare in the next years, our expectation of electrification could even turn out to be conservative.
Credit Suisse Asset Management has designed a number of highly focused strategies to provide clients with “pure-play” exposure to a number of compelling long-term secular growth themes, such as Robotics & Automation, Security & Safety, Digital Health, Edutainment and Environmental Impact.
1 Bloomberg New Energy Finance, 2020
2 Bloomberg NEF, New Energy Outlook 2020
3 Bloomberg NEF, New Energy Outlook 2020
4 European Automobile Manufacturers Association, 2021
5 Bloomberg NEF, New Energy Outlook 2020
6 https://www.bloomberg.com/news/articles/2021-03-30/airbus-touts-sustainable-fuel-after-year-of-hydrogen-evangelism
7 International Energy Agency, 1983; 2017
8 U.S. Department of Energy, Opportunities for Solar Industrial Process Heat in the United States, 2021
9 International Energy Agency, 2020
10 U.S. Energy Information Administration (EIA), 2015
11 https://www.smud.org/en
12 https://www.whitehouse.gov/briefing-room/statements-releases/2021/03/31/fact-sheet-the-american-jobs-plan/
13 https://pv-magazine-usa.com/
14 https://www.enelgreenpower.com/media/press/
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