by Emma Foehringer Merchant
March 07, 2019

This week I hosted a webinar on the concept of the energy transition. Since technical difficulties triggered a "point of no return" and the stream cut out, I’ll dig into some of the themes and questions from the webinar in this column.

First, a definition of the “energy transition." The concept broadly means a structural shift in our energy system as it moves from running on thermal resources to relying, in part or fully, on zero-carbon resources like wind and solar. The transition stretches beyond electricity to encompass the entire economy, from industry to agriculture and transportation. While electricity will account for a growing portion of energy use in these sectors — the “electrify everything” idea — the transition may also include technologies like liquid renewable fuels and carbon capture and storage, depending on who you ask. 

And though it’s widely recognized that renewables are gaining on the grid, there’s still debate about how fast the transition will take place. Energy research and consulting company Wood Mackenzie, for instance, sets the transition’s "point of no return" at 2035. Others, like oil and gas majors, are more bullish about a substantial role for oil and gas in coming decades.  

Transition vs. addition

Two charts, one from the Energy Information Administration (EIA) and the other from Axios, show that even the framing of the energy transition is still a topic of debate. 

This view from EIA’s latest Annual Energy Outlook shows renewables overtaking coal in the electric sector prior to 2020.   

The electric system is transitioning from reliance on coal to including a larger role for renewables, which are slated to grow exponentially through mid-century as coal declines. 

But in an Axios article published in August, Richard Newell and Daniel Raimi from Resources for the Future asserted that “there has never been an energy transition.” Instead, the two argue for the concept of “energy addition,” because renewables are taking bites out of the percentage of thermal resources used, but not necessarily reducing overall demand for those resources.

Source: Axios Visuals

“Rapidly falling costs and growing investments have helped boost wind and solar power, but these energy sources — like nuclear, oil, and gas before them — are building on top of old ones, rather than replacing them,” the authors write.

According to the International Energy Agency (IEA), global electricity demand will grow by more than 90 percent by 2040. Renewables are meeting some of that demand, particularly in what IEA defines as “advanced economies,” but in more emerging markets, electricity growth will be met in part by coal and oil.   

Raimi and Newell argue that, for a real “transition” to take place, renewables will have to replace rather than add to fossil fuels. 

Assessing the projections

Whether it's called an addition or transition, renewable capacity is growing. But the extent of the shift from conventional thermal resources to renewables, and its timing, remains something of a moving target. A seemingly unending stream of forecasts aims to quantify the policies, economic factors and market shifts that impact how the transition will unfold. Some are aggressive, others more conservative. 

The Energy Information Administration’s Annual Energy Outlook, released in January, recently received a great deal of scrutiny. One source told Greentech Media the government agency’s take is “extremely conservative.”

Source: Energy Information Administration

EIA’s “reference case,” which represents its best assessment of how energy markets will function, shows natural gas growing to 39 percent of electricity generation by mid-century. Renewables account for just 31 percent. In the Annual Energy Outlook, EIA cautions that “energy market projections are subject to much uncertainty because many of the events that shape energy markets as well as future developments in technologies, demographics, and resources cannot be foreseen with certainty.”

As Jesse Jenkins, a postdoctoral environmental fellow at the Harvard Kennedy School and the Harvard University Center for the Environment, said in a thread about EIA’s Outlook on Twitter: “The EIA uses their models to create ‘projections,’ which are often misinterpreted as ‘predictions.’”

Rather than being interpreted as static forecasts, Jenkins asserts that models are best used “as exploratory tools to map the uncertainty we face and identify robust strategies. We can't run experiments with energy systems, so models are the only way we can gain insight on possible futures.”

And other projections for the U.S. (the market EIA covers) are a bit more bullish.   

Bloomberg New Energy Finance, for instance, expects renewables to account for 55 percent of electricity in the U.S. by 2050, due to cheap wind, solar and gas replacing older and less economic coal-fired power. Under its "new policies scenario," which assesses currently stated ambitions from policymakers, the IEA forecasts renewables will account for 33 percent of electricity generation in the U.S. by 2040, the same as natural gas.  

EIA’s case is on the conservative end because the organization assumes little acceleration in current trends. The agency also assumes that lawmakers may not extend federal tax credits that push renewables growth. Though EIA says solar costs will have fallen far enough by the 2024 sunset of the Investment Tax Credit that growth will continue regardless, an extension would obviously be a boon to the market.

Oil and gas majors are also hedging their bets when it comes to forecasts for the transition. Equinor, a company at least aware enough of the transition that it chose to rebrand, in a June report laid out three transition scenarios: reform, renewal and rivalry. They’re meant to capture a range of possible outcomes and guard against what Equinor also categorizes as uncertainty in the market.

The reform scenario focuses on economic and technological innovation, akin to current business-as-usual, while renewal adds policy interventions that keep warming below 2 degrees Celsius — the goal scientists say would avoid the most catastrophic impacts of climate change (its also a target the world is dangerously far from meeting). Rivalry is a scenario defined by a government’s political priorities rather than a united push to fight climate change.

Equinor’s reform case sees most generation by mid-century coming from wind and solar, but the decline in coal and gas is more pronounced in its policy-fueled scenario. 

The models from Equinor — and the company's recognition that “to succeed in the future, we need a mindset of radical change" — suggest that at least some oil and gas majors are considering how the impacts of climate change and the transition may impact their bottom line. Shell, for instance, has revealed ambitions to "thrive through the energy transition" and to build the "utility of the future" through its various investments in clean energy companies.

But majors, who also declare often that they see a future for oil and gas, are still negotiating how to balance these forecasts with the lower returns associated with investing in clean energy versus their traditional business. And their traditional business is still central: Just this week Chevron and Exxon announced plans to increase oil and gas production in the Permian Basin. The small portion of their balance sheets that majors are currently dedicating to clean energy bets indicates they don't yet feel threatened enough to compel extreme change.

The uncertainty they often cite alongside their models also pokes at some of the questions inherent to forecasts: Because each uses different economic and political assumptions, they’re open to change. 

The policy impact 

The effect of differing assumptions is made explicit in this next chart from Wood Mackenzie, which shows how the assumption of a federal carbon price impacts the U.S. generation mix in coming decades. The federal carbon case assumes a carbon price of $2 in 2028 that rises to $26 in 2040, while the “no carbon case” assumes business-as-usual for areas with no existing carbon price.

The federal carbon case puts coal at just 6 percent of the generation mix in 2040, with clean technologies (including nuclear) accounting for half of generation. Comparatively, the no-carbon case puts coal at nearly a quarter of generation by 2040 with clean technologies accounting for just 34 percent.

EIA doesn’t include a carbon tax in its Annual Energy Outlook, but IEA incorporates carbon prices into several of its scenarios. In its “current policies scenario” and its “new policies scenario,” the organization uses a price where one has been implemented or announced. In its “sustainable development scenario,” which aligns with the goals set out in the United Nation’s Sustainable Development Goals, IEA assumes a carbon price of $63 per ton in advanced economies and $43 per ton in some developing economies by 2025. The price rises through 2040. 

Though it’s unlikely a federal carbon price will arise in the U.S. in the near term, or possibly even at the state level considering the struggles in Washington state, states are stepping into the federal leadership vacuum.

100 Percent State Targets 

Source: Wood Mackenzie Power & Renewables

A spate of states are considering 100 percent renewables or clean energy goals (shaded yellow), with Minnesota and Wisconsin joining the cohort just this month and a New Mexico bill advanced this week. That's in addition to those that already have a target (shaded green). 

In Arizona, the effort is being driven by a utility regulator. Commissioner Andrew Tobin has proposed an 80 percent clean energy target by 2050, "with the ultimate goal being 100 percent."

Six governors who won election in 2018 campaigned on pledges to increase their state renewable portfolio standards. Though not all of those pledges were 100 percent, an analysis from WoodMac showed that even with just a 50 percent by 2030 RPS in these states, new policies would prompt gigawatts more renewables potential across the country. 

These goals are significant because they're likely to garner more support than proposals at the federal level, and state policies control a great deal of decision-making.

If you’re eager to hear more about what's shaping the energy transition, watch the webinar here. And don’t mind that cutoff — even our webinar platform is not immune to rolling blackouts in the wild world of the energy transition.