Priorities for the global energy economy and investors

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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:

1.5 degrees is still breathing

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

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.

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.

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.