By Rory McCarthy, Principal Analyst, Energy Storage and Simon Morris, Head of Metals Research
The energy transition is a complex, multi-layered challenge littered with interlinked dependencies and often competing priorities. It raises many questions, including: how will we meet the flexibility requirements of evolving power systems? What role will hydrogen play in the new energy landscape? And can the energy transition’s materials needs be met?
This article is based on a presentation from the EMEA edition of our Energy Summit series. Read on for a short summary – and fill in the form for a complimentary copy of the presentation slides.
1. A variable renewable energy system needs much greater flexibility
Globally, we are transitioning to a variable renewable energy (VRE) system. Our base case outlook to 2040 for Europe's five major power markets – the UK, Germany, France, Italy and Spain – shows that VRE nearly doubles over the next decade. And as conventional plants decline, the need for flexibility rises.
So where will this flexibility come from? While interconnectors, pumped hydro, demand response and gas peakers all continue to feature, lithium-ion battery energy storage systems will play an increasingly important role. Around the world, deployments are ramping up to meet the challenges of variability, low and negative loads becoming commonplace on the system. The US currently leads the way, closely followed by China. Europe is currently lagging behind in the energy storage race.
As the power system transforms, gas peakers will find themselves in a head-to-head battle with energy storage. Due to the massive surplus of renewables, assets that can either store or export power to neighbouring markets will be vital and energy storage technology will be a crucial tool. And over the next decade, as battery and other system costs decrease, it will also increasingly out-compete gas peakers on cost – and start to push gas flexibility out of the market.
Gas will remain an essential backup, however. Capacity markets and other services must replace lost revenue as gas plant utilisation is pushed downwards, to ensure it can continue to provide essential security of supply.
2. The hydrogen economy is here – but it’s still hydrocarbon based
Hydrogen holds a great deal of promise for the energy transition. It’s much lauded as a fuel to supplement or displace others in hard-to-decarbonise sectors, such as industrial heat.
The hydrogen economy has technically begun – around a 100 million tonnes is produced per year on a global basis. But around 99.6% of production in 2020 is from carbon-intensive sources. Grey hydrogen, produced from natural gas reforming, makes up the lion’s share, followed by brown hydrogen, from coal gasification. Blue and green hydrogen – produced from low and zero-carbon technologies – currently represent a microscopic share. There’s still a way to go before hydrogen can live up to its hype.
For a more detailed look at the hydrogen value chain, fill in the form at the top of the page for a complimentary copy of our presentation slides.
3. End users aren’t ready for a green hydrogen boom
The green hydrogen market has been plagued by small and inconsistent volumes. The market was essentially non-existent until 2017, when the Hydrogen Council was formed, and remains nascent. There has simply been little impetus for investment so far.
As a result, many of the end use cases for low carbon hydrogen are at least a decade away from mass commercialisation, as the table below illustrates.
From both a supply and demand perspective, the hydrogen market isn't yet ready for the growth targets set by the European Green Deal and other ambitious regional initiatives. But that doesn’t mean that that low carbon hydrogen is a fool's errand.
Based on the announced project pipeline, we see exponential growth ahead. Not all projects will come to fruition, but the geographical spread and diverse end use sectors show that low carbon hydrogen is building momentum over the medium term. But as our latest energy transition outlook shows, more direct policy support and significant scale-up is critical.
4. Metals could inhibit the energy transition without major investment
With metals demand set to rocket over the next two decades, delivering the energy transition’s material needs could be a real challenge.
Five key metals play a vital role in the energy transition: aluminium, copper, nickel, lithium and cobalt. They are essential components of electric vehicles, battery storage, wind and solar power generation and electric transmission. And without cheap, reliable and sustainable supply of these metals the pace of the transition could be slowed.
There is a very material risk that satisfying accelerated energy transition needs will strain financing systems to breaking point. Supplying the metal to support a 2-degree trajectory requires an eye-watering increase in capacity and ~$1 trillion of investment by 2035. This is almost double the total investment that was seen in the preceding 15 years.
5. Meeting the energy transition’s metals needs will take more than money
Finding investment is only part of the energy transition challenge for the metals and mining industry. The successful exploitation of new deposits is becoming more complex as above ground risk rises.
90% of the world's cobalt supply, for example, comes from high risk or high complexity jurisdictions. So that $1 trillion dollars of investment has to be found for projects that could be exposed to significant ESG risk. That risk is likely to be contributing factor in changes to the ownership of supply over the last 20 years. Since the turn of the millennium, China has secured almost half of the world’s supply of cobalt and nickel – two of the metals critical for EV batteries.
There is also the question of how metals production will impact the net zero target. Based on existing processing techniques and energy sources, meeting the increased demand for metal would result in an additional contribution of 12 billion tonnes of carbon by 2040. That’s clearly counter to the goals of the energy transition. Profound changes to mining technologies and power sources will be imperative – and governments and producers must work closely together to find a viable way forward.
For a complimentary copy of the presentation slides, fill in the form at the top of this page.