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The year 2021 saw much of the world undergo an energy supply
crunch, with disruptions and record-high prices. It also saw
difficulties—and some breakthroughs—in setting the agenda
to combat climate change during the 26th United Nations Climate
Change Conference of the Parties (COP26) in Glasgow. For the global
power sector, affordability, reliability, and sustainability have
rarely simultaneously caught global attention as they have this
past year.
Looking forward, these multiple requisites placed on the
electric power sector while it tries to decarbonize represent both
an enormous challenge and an immense opportunity for market
participants: 55% of the world's current generation fleet runs on
fossil fuels, many clean technology solutions like battery storage
and offshore wind are still maturing, the remit of electricity is
broadening into areas such as vehicle transport and hydrogen
production, and by 2050 the world's overall need for power could be
2-2.5 times higher than today.
Should the power sector indeed lead a full-fledged global energy
transition effort, then, according to one of the IHS Markit deep
decarbonization scenarios, over 2021-50 the world may need to add
about 28,000 GW of clean generation capacity, or 5.5 times more per
year than was added annually over the past 10 years. This
represents a total future investment of approximately $30-40
trillion.
IHS Markit recently published a report entitled "Decarbonizing
electric power: Key challenges amid a global energy crunch and
climate negotiations" that discusses four fundamental topics
related to power sector decarbonization:
1) Building resilient supply chains for clean
energy. Under a full decarbonization scenario, the diverse
supply chains for solar, wind, and battery technologies may need to
increase 4- to 45-fold relative to today (see Figure 1). This
increase is complicated by mineral scarcity, shortages in
processing and workforce capacity, and regional bottlenecks, among
other matters. As clean energy expands, however, there could be
more technology hubs in more markets around the world, helping
minimize bottlenecks and boost resilience. Incentivizing demand for
clean technologies can create market certainty and drive
capital-intensive investments in the supply chain. For example, the
European Commission has committed to building 60 GW of offshore
wind capacity by 2030 and 300 GW by 2050. Also, recycling in
equipment manufacturing can relieve stresses on the mining and
processing of raw material. For example, in the United States,
several states either implemented or are considering incentives or
mandates to promote the sustainable management of materials.
2) Ensuring power supply reliability. Because
wind and solar resources are intermittent, high penetration rates
for these technologies test the reliability of decarbonized power
systems, especially as climate change brings on more extreme
weather. Reliability planning is becoming more complex. More
investment is needed to make clean reliable technologies low cost,
and, until they are, there are benefits to keeping online the
dependable low-emitting facilities that exist today. For example,
in Japan, new draft energy policy aims to maintain nuclear at 20 to
22% of the generation mix to 2030. Renumeration schemes can evolve
to reward carbon-free firm and flexible resources through a variety
of different means, including greater locational and temporal price
granularity, scarcity pricing mechanisms that accurately reflect
system conditions, and the remuneration of ancillary services,
demand response, and energy storage (see Figure 2). For instance,
India is implementing an ancillary services market and allowing
energy storage solutions to participate.
3) Expanding and upgrading transmission and distribution
networks. Power networks are poorly adapted to variable
and distributed renewables: grids in many countries are old, they
were designed for large dispatchable generators, new lines often
take years to build, and revenue structures are often dissociated
from upcoming needs. For this to change, planning policies that
build networks concertedly with renewables can substantially reduce
the cost of decarbonization. For example, Australia is developing
areas called Renewable Energy Zones, with states backing the
infrastructure development. Revenue schemes can evolve to address
emerging system balancing needs. In China, for instance, tariff
reforms are starting to shed light into the often opaque cost
structure of the grid companies. Lastly, digitalized grids can
better capitalize on the operating characteristics of renewables
and distributed energy, including the proximity of distributed
generation to demand centers or the ability of renewables to nearly
immediately ramp down their output.
4) Harmonizing the renewables industry's relationship
with land and the community. Renewables are typically
diffuse, so exploiting them on a massive scale will create land use
competition with other economic, community and environmental
interests. The competition can also engender greenhouse gas
emissions from land use changes. Establishing solutions will
require multi-level governance that considers the local
specificities of land management and community participation. In
Chile, for example, communities in energy-dense localities pay
lower energy tariffs and gain other social benefits. Meanwhile,
India is planning hybrid wind-solar parks in barren, waste, or
deserted areas. Policies can target locations where renewables
maximize carbon displacement. Also, technologies that increase
power production per unit of land, that relocate generation to sea,
or that co-locate multiple economic activities can increase
resource access. Some population-dense geographies like South Korea
and Indonesia are already considering floating PV a third tier
along with rooftop and ground-mount installations.
While the electric power sector faces significant challenges
ahead for deep decarbonization, the process of overcoming them will
also lead to business opportunities for companies along the value
chain. Many solutions can emerge from policies that drive companies
to develop clean energy projects, in turn increasing equipment
manufacturing capacity, decreasing supply chain costs, and
accelerating technology improvements, all of which facilitate
implementing yet more policies that favor renewables. Together, the
governments and companies that promote these types of solutions can
create a "virtuous cycle of clean energy development."
Etienne Gabel is a senior director at IHS Markit with
the Latin America gas, power, and renewables team who specializes
in the analysis of regulatory and market developments in the
natural gas and power sectors.
Xizhou Zhou is a vice president in the Climate &
Sustainability Group at IHS Markit and leads the company's power
and renewables practice globally. He has expertise in power and
renewable market fundamentals analysis and forecasting, power
market design and policy analysis, renewable energy business
models, and company strategies, among other areas.
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