2050 ‘NET ZERO’ TARGETS The Energy Transition and the drive to mitigate the impact of Climate Change is perhaps the biggest infrastructure challenge the world has ever faced. The IEA estimates that around $4.5 Trln per annum of investment across the clean energy value chain is needed to meet 2050 ‘Net Zero’ targets. But in 2023 it stood at $1.7 Trln, an increase of 17% y/y, but also highlighting that financing is a key challenge. That said this estimate is no more than a model ‘guesstimate’, based on current costs and technology, which will evolve very rapidly, and much may also depend on how existing energy infrastructure can be repurposed. It should be noted that the post Global Financial Crisis era of ‘fiat money’ has also increased investor interest in infrastructure, and more broadly in ‘real’ as opposed to ‘financial’ assets’, with investment and pension funds following Sovereign Wealth Funds in increasing asset allocation weights.
But ultimately it is governments that determine the balance of incentives and penalties via subsidies, tax credits and regulation amongst other things. There is no ideal or correct way to achieve this. What can be observed about the paths on which the US, EU and China are currently on is that in the US the IRA and CHIPS acts offers a lot of potentially very costly ‘carrots’, with little in the way of ‘stick’. The EU by contrast has an array of ESG related directive ‘sticks’, but due to its structure the incentives are formulated at a national level due to the absence of a fiscal union, though also a necessity, given the colossal divergence in existing power sources and infrastructure. But this in turn hampers forging cross-border initiatives, which would likely reduce costs, create greater efficiencies and greater resilience in power distribution networks. China has and is investing heavily in the whole of the renewable energy value chain, with estimates it may lead the rest of the world by as much as seven years in technological and productive capacity terms. The risk given a combination of heightened
THE OVERARCHING CHALLENGE IS TO UNDERSTAND THAT THE UNDERLYING TECHNOLOGIES HAVE YET TO REACH THE POINT WHERE SPECIFIC SOLUTIONS FOR ANY GIVEN VALUE CHAIN ARE ESTABLISHED.
trade and geopolitical tensions, and domestic demand hobbled by the property sector crisis, is that excess capacity sparks a competitive price war, which ends up as a destructive deflationary spiral that wipes out profits, rather than enhancing deployment of renewables.
THE SUPPOSED ‘HOLY GRAIL’ OF WHOLESALE ELECTRIFICATION OF POWER The overarching challenge is to understand that the underlying technologies have yet to reach the point where specific solutions for any given value chain are established. As such infrastructure spending plans need to have adaptability and flexibility, so that they factor in the possibility that a given technology may be superseded, or rendered obsolescent. However waiting for greater clarity to emerge equally runs the risk of being fatally wounded by the march of regulatory evolution. It is also about understanding and getting to grips with ‘interconnectivity’. Thus rapid increases in renewable solar and wind power generation are good. But unless the challenges of their being inherently ‘intermittent’ power sources are met by a quantum leap in battery storage technology, in a way that is scalable, and in distribution networks, above all to overcome the inherent degradation of power supplies when transmitted over longer distances, the supposed ‘holy grail’ of wholesale electrification of power will remain elusive.
Marc Ostwald E:
marc.ostwald@admisi.com T: +44(0) 20 7716 8534
25 | ADMISI - The Ghost In The Machine | Q3 Edition 2024
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