Shaping our Low Carbon Future:

Priorities for the global energy economy and investors

Ilesh Patel reflects on our low carbon future and the priorities for the global energy economy and investors in 2022 and beyond.

1 March 2022 | 10 min read | Share this

About the author

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Ilesh Patel

Ilesh has over 25 years of UK and international experience advising utilities, regulators, government, investors and lenders. As a recognised industry expert, he specialises in helping clients develop, define and successfully implement strategies to navigate the energy transition and investments in low carbon projects to reach their net zero ambitions.

Section 1: Introduction and the ‘Ambition Gap’

Firstly, I‘ll start with a bit of a recap on the COP26 agenda – what did we learn, what was concluded, what was not – and then the priorities as I see them for the energy economy globally over the next decade, before then winding back to where should we focus in 2022.

COP26 has rightly been held as most significant climate change summit since Paris. And in the main, we can consider it successful in keeping 1.5 degrees alive and increasing the pressure on governments to achieve the Paris agreement temperature goal at a faster pace.

The conference failed in my view, however, to put in place a comprehensive, coordinated and concerted action plan to deliver 1.5 degrees, let alone “consign coal to history”.

So in short, for me, there's a gap between the collective ambition for a low carbon future and the reality of delivering it, which is widening by the day, as governments and companies set net zero targets. I call this the ambition gap – and that’s what we must address urgently as a global energy economy in our transition to Net Zero.

The low carbon future ambition gap

As we face into a Low Carbon Future, Ilesh reflects on where there are opportunities to invest in the energy transition.

There's a gap between the collective ambition for a low carbon future and the reality of delivering it, which is widening by the day.

Section 2: Shaping the post COP26 agenda

What was concluded? What was not? Where can we expect the focus to switch to now?

COP26 provides a platform on which we can build our low carbon future and yet highlights the areas in which significant gaps remain. Reflecting back on the agreements made, my brief takeaways from COP26 are:

The nationally determined contributions, or NDCs as they are known, will be revisited at the next conference in 2022 in Egypt.

40 nations, representing more than 70% of the world economy, backed the breakthrough agenda – a 10 year plan to deliver clean and affordable technology by 2030, including mass adoption of hydrogen, green steel production and zero emission vehicles.

The phasing down of coal – rather than the phase out of unabated coal power and international financing. Its’s a start of the journey – but not the end.

The financial services industry has a key role to play – and there were some fantastic commitments with 45 countries committing to $130 trillion worth of funds, through the Glasgow Financial Alliance for Net Zero (GFANZ). Combined with the International Sustainability Standards Board (ISSB) developing new ESG disclosure standards. As a result of this and other initiatives, there will be an increasing focus on, and backlash against, greenwashing.

Accounting for nearly 15% of global emissions, zero emission vehicles will become the new normal. 30 countries committed to plans to phase out diesel cars with petrol to soon follow. After that, electrification of short distance transport then long-distance transport, becomes a priority for policymakers.

This was really pleasing to see as a starting point for the collaboration needed between the world’s largest emitters and economies. A hopeful moment in time for our low carbon future.

Some of the deforestation pledges are welcome and the commitments on agriculture and land use are really, really helpful particularly in the first world, the second world is yet to be followed.

Shaping the post COP26 agenda

Shaping the post COP26 agenda – 6 key takeaways
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Shaping the post COP26 agenda

COP26 provides a platform on which we can build our low carbon future and yet highlights the areas in which significant gaps remain. Reflecting on the agreements made, Ilesh, shares his brief takeaways from COP26.

Section 3: Shaping our low carbon future – what are the priorities for the next decade?

In the context of the post COP26 environment what should we prioritise as an industry?
Where can we have most impact on and how do we accelerate?

So whilst COP26 has succeeded in setting the framework for decarbonisation, we’ve seen a lack of specific progress - while governments are setting the strategy, it is now in the hands of private sector to deliver and achieve the goals set. 

Our industry must act now, to shape our own low carbon future. We know what the priorities are, we understand the technologies, business models, financing and regulatory frameworks required to drive to 1.5 degrees. We know that journey can be profitable for investors, and we know it can be achieved at lower cost than alternative journeys.

The 2020s are the key decade to close the emissions gap. This is a formative decade, which will dictate the ‘shape of the curve’ in lowering emissions. Therefore, we must go faster in areas we can, not just “follow a curve” – with constraints, we’ve defined ourselves.  We must now break conventions and forge new markets to deliver decarbonisation with the ideas, solutions, and mechanisms we have at our disposal today.

How do we achieve this? I believe as a global energy economy, we need to look at this in three parts, as priorities for the next decade.

Where to invest in energy 2022

Where to invest in energy 2022 – 8 areas of growth
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The priorities for the next decade

In the context of the post COP26 environment, what should we prioritise as an industry? Where can we have the most impact and how do we accelerate progress? Ilesh shares his priorities for limiting climate change to 1.5 degrees.

Section 4: Priority #1 – Clean tech, deployed at scale

We need to decarbonise, as fast as possible, sectors with clean tech solutions that we can employ now at scale, which we know are financeable.

Those are energy vectors and energy sectors such as electricity and heat production, decarbonising the power sector and accelerating the phase out of coal, and there’s short distance road transport using electric vehicles and potentially hydrogen as well.  We also need to address the methane problem in the oil & gas industry as we know the potency of methane as a greenhouse gas. 

The decarbonization tools that we have available to us are mature technologies. We know renewables are now a mature technology with known business models or well understood technology and well understood integration mechanisms.  We need to combine that with established and emerging storage technologies, both short duration and long duration. Alongside new technologies that can be deployed at scale like heat pumps to increase the focus on electrification, particularly in the building space.

If we do that, we can make a material dent in the 25% of global emissions that sit in electricity and heat production, as well as addressing emissions from short duration transport that contribute to the 14% or so of transport global emissions.

That’s a really big achievement that we can do now with no new business models, and we have the right financing structures and the right technologies today

Priority 1 - Clean tech at scale

The global energy economy has three priorities over the next decade. The first is to deploy clean technology at scale and decarbonise as fast as possible.

Section 5: Priority #2 – Hard to abate, emerging solutions

My second priority - I think these are in parallel rather than sequential – is let's start to address the hard to abate sectors in our global energy economy.

Industry. Long distance transport. Agriculture.

Thinking about and trying to test the commercial viability and scalability of technologies which are emerging. For example, energy use in buildings – is there cheaper energy use in manufacturing or transportation for mid range transport? 

For these three vectors, which between them account for about 35% of our global emissions, we need to go and test out technologies which exist today but need to be proven at commercial scale.

So that’s hydrogen, CCUS, fleet electric vehicles, stable aviation fuel for short distance aviation. Alongside carbon pricing mechanisms and the market design that starts to play a role for these technologies.

We can test both the market framework, the technologies, the scalability and commercial viability, so that once proven, we can apply these to the relevant energy sectors to help us tackle that 35% of global emissions sitting in those hard to abate sectors. We can then scale those over the next five to 10 years to start really heading towards and reducing emissions in our in our world.

Priority 2 - Hard to abate sectors

The global energy economy has three priorities over the next decade. The second priority is to address the hard to abate emerging solutions.

Section 6: Priority #3 – Hard to abate, new solutions required

But in the final bit, this is where it gets really hard – long distance transport, heavy industrial processes, shipping, agriculture and forestry land use – all those really hard areas where some of the technologies we don't even know about yet and we're still testing at R&D stage.

That is the task in my view - let's scale up or R&D efforts, supported by government, by universities around the world, by early-stage venture capital, to go and test some of the developing technologies that can play a role - will play a role - in helping to decarbonize those hard to abate sectors.

Attacking that last 25-30%, which we know is going to take some time, money and the in early stages, to embed, but we know will pay off in the long term.

And therefore, for me, the overall narrative for the next decade is really quite simple. We need to be scaling faster in those areas that we already know can achieve significant reductions in greenhouse gas emissions, particularly carbon and methane.

We need to invest quicker and faster in order to scale some of the technologies and test the business models that enable these technologies, so we can see the next wave of R&D innovations over the next five and ten years that can address the really hard to abate sectors over that longer term.

Priority 3 - Really hard to abate sectors

The global energy economy has three priorities over the next decade. The third priority is to address the really hard to decarbonise sectors.

We need to invest quicker and faster in order to scale some of the technologies and test the business models that enable these technologies.

Section 7: Reflection on 2021, areas for focus in 2022

So where to invest in that context, that narrative, in energy in 2022. Firstly I think we need to reflect on what a difficult year 2021 was. It was a hugely significant year in energy market industry events, particularly the last 6 months, which provide the backdrop to the Investment decisions we will be making this year. 

Some highlights include:

  • Significantly increase in fossil fuel prices, particularly natural gas prices – TTF forward price is 45EUR/MWh for delivery in 2023.
  • Significant increases in the EUA carbon price – current forward prices sit at 93EUR/tonne.
  • Significant increase in capex for solar PV and onshore wind. We've been observing prices against 2019 levels which are of the order of 15 to 20% higher.
  • Significant change in the outlook for inflation and monetary policy. You know, we know the Federal Reserve is purportedly thinking about four interest rate rises this year and the UK Central Bank, at least two potentially, if not 3.
  • Rise in PPA prices, particularly for projects commissioning in 2022-23 is what we are observing with an increase in interest with PPAs from large energy users in clear. The supply and demand balance in the commercial and corporate PPA market, which has been providing additional resilience to new renewables build, is starting to shift.
  • Booming electric car sales – a fantastic story that is - with plug-in electric cars capturing 20% market share in 2021.
  • An increasing number of European governments publishing their Hydrogen roadmaps which is a fantastic achievement, and we know that will play a very important role going forward.
  • Increasing storage capacity including development of long duration storage.
  • Floating offshore wind and we saw the ScotWind leasing round in the UK, which is a really fantastic evidence base that's been provided around the balance of fixed versus floating offshore wind.
  • And we look at the competition now in the provision of new nuclear and the small modular reactors and some of the work that Rolls Royce is doing in that space with its consortium which is really important.Alongside some of the big energy classes have been developed as far fields, Poland, the Netherlands, Belgium, the UK and the US. Couple of those big industrial projects involving hydrogen, CCUS and electrification of industry as partnerships.

For me, the focus in 2022 is around the rise of that kind of low carbon cluster, CCUS, hydrogen, energy services, heat pumps, electrification for me feels like a big area, carbon offsetting and carbon offset markets, scaling renewables, including the role of government and PPAs, short and long duration storage, sustainable aviation fuel, methane and no less, interconnecting – what a shopping list.

So with that, I think what an important year 2022 is going to be for us in terms of achieving low carbon future. Overall there's a huge amount of work for us to do and we have some clear priorities which I believe we should pursue.

Where to invest in 2022

Significant energy market industry events providing the backdrop to the investment decisions we'll be making this year.

2022 is an important year for us in terms of achieving a low carbon future. Overall, there’s a huge amount of work for us to do and we have some clear priorities which I believe we should pursue.

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Ilesh Patel Partner, Energy & Resources