DNV has launched its Energy Transition Outlook for 2022 to an in-person and online audience in Copenhagen. Despite many reasons to be optimistic, it still makes for a difficult read.
DNV has increased its prediction on the proportion of global energy being sourced from renewables by 2050 to 51% – the first time this outlook has forecasted a predominant renewables sector. However, even at the launch event, this figure was met with some scepticism. Henrik Andersen, Group President and CEO at Vestas commented, “The state of political decision making won’t allow us to meet even half of the 51% estimate.”
Electrification remains a pinnacle ambition worldwide, with 83% of electricity generation forecasted from renewable sources by 2050, including a 10-fold increase in wind generation and a 20-fold increase in solar generation. The energy services sector is forecasted to benefit from investment inflows of $1,300Bn per year by 2032 – overwhelmingly in favour of electricity grid expansion accounting for $1,000bn / year.
Hydrogen has generated significant interest as an alternative fuel for shipping, but according to DNV, hydrogen has not developed much further as a dominant future energy source; predicted at just 5% of global energy generation by 2050. 10% of that demand will be in Europe.
A unique feature of this year’s outlook is the effect that the Russia-Ukraine war is expected to have on the energy transition. The conflict has put a spotlight on energy security and a European over-reliance on Russian coal, oil, and gas. The European Union’s REPower EU plan was an immediate response to a threat that has been on the horizon for decades. Any major escalation of tensions with Europe’s biggest and most problematic energy supplier would always lead to very complex diplomacy.
As winter approaches, maintaining Russian supplies to keep European homes warm and energy prices within reach of citizens already reeling from rampant inflation has appeared to clash with more strident US foreign policy. It is still unclear who was responsible for sabotaging the Baltic Nord Stream pipelines in September, but the message it sent to Brussels was loud and clear – diversify supplies or face further supply disruptions. Commenting on the situation in his opening remarks, DNV’s Group President and CEO Remi Eriksen said, “Russia’s invasion of Ukraine has underlined how vulnerable energy security is in Europe. Cyber attacks and the sabotage of the Nord Stream pipelines are brutal reminders of how energy can be weaponized.”
The outlook concludes that higher energy prices and a greater focus on energy security will not slow the long-term transition to renewables, despite signs of a renaissance of coal-fired power generation in Germany and elsewhere. DNV acknowledges that much of the urgent action called for at COP26 and by the IPCC has not materialised, adjusting its annual decarbonisation trajectory upwards to 8%. But, DNV’s analysts maintain that no new oil and gas will be needed in high-income countries beyond 2024, with middle- and low-income countries catching up beyond 2028.
The report highlights that it is now not possible to reduce fossil fuel usage quickly enough to achieve net-zero by 2050, without extensive carbon capture and storage. DNV points out that OECD countries now need to go below net-zero (becoming net removers of CO2) in order to bring the world close to the 2050 target. As TotalEnergies President of Strategy and Sustainability, Helle Kristoffersen, highlighted, “We cannot afford to lose focus on climate change. At the same time, people need affordable and secure energy here and now. If we step back, we see that we still need the old system – like it or not and we find ourselves in the position of needing to invest in two systems at the same time.”
Tumult in global markets adds to the uncertainty. Yngve Slyngstad, CEO of Aker Asset Management commented, “The energy transition, while necessary, is not shielded from wider developments in markets and economies. We have seen significant developments in the macro space; cost inflation, changes in real rates etc. Energy is a long-dated asset, so it is particularly vulnerable to that. We have also seen changes in supply and demand which energy is very vulnerable to. Generally, we are seeing higher risk markets and economies for energy.”
The shipping industry finds itself in the middle of the so-called energy trilemma; balancing energy security, affordability, and environmental targets. Ships are not just problematic energy consumers. They perform a vital duty transporting energy and materials around the world. They also enable trade, bringing economic benefits to many remote and developing nations.
There is a developing opportunity for shipping to take a prominent role in carbon capture and storage, now so clearly central to a successful net-zero effort. The North Sea is one example of an environment that has been used for oil and gas extraction, but is now poised to play a key role in the sequestration and storage of carbon from the atmosphere and ships will be pivotal to building the infrastructure and supply chain required to serve it.
Whatever the outcome, one thing is clear – keeping a currently indispensable fossil fuels industry producing affordable and reliable energy, while diverting ever-increasing investment towards the renewables sector, will require acts of diplomacy and international cooperation on unprecedented scales. For good or for ill, shipping looks certain to maintain a central role.