00:00:00
Speaker 1: This is Tom Rowland's Rease and you're listening to Switched on the podcast brought to you by Bloomberg n EF. The push toward a lower carbon global economy faced serious headwinds last year, and the start of twenty twenty six offers little in the way of a clean reset for climate focused investors and companies. The landscape remains complex, shaped by political uncertainty, uneven policy support, and slower progress in some markets. But despite these challenges, the energy transition is still moving forward, driven by underlying economics, technology, and long term structural change. On today's show, Albert Chung, bnef's deputy CEO, is going to read his recent note titled Progress despite Fragmentation Energy Transition to twenty thirty. In it, he explores how the global context has shifted and why the energy transition is likely to continue to grow through the second half of this decade. BNEF clients can find Albert's note by heading to BNF go on the Bloomberg terminal ORBNF dot com if you'd like to learn more about how BNEF approaches strategy research from the energy transition, including developments in commodity markets, trends, across different sectors and the cross cutting technology is shaping the future. You can find more information on BNEF dot com, and if you'd like to speak with a member of our team about becoming a client, email us at salestp BNF at Bloomberg dot net. But for now, let's take a closely look at the progression of the transition to what is proving to be a tough decade.
00:01:33
Speaker 2: Progress despite fragmentation the energy transition to twenty thirty. The second half of the decade will not be straightforward, but count on more progress being made. The emergence of a low carbon global economy, at the core of which is the energy transition, encountered many challenges last year. The start of twenty twenty six is unlikely to bring the sort of reset that climate focused investors and companies might like to see. Following this troubled time, it is important to understand and how the context has changed around the world and why energy transition will continue to progress in spite of ongoing challenges, different regions, different priorities. A year ago, I wrote that the overarching narrative for low carbon transition had shifted from one of opportunity to one of competition. This shift is even more evident today. Indeed, it is no longer clear that major economies are even running the same race. Different priorities are leading to fragmentation. In the US, the race for clean energy leadership has been subjugated to the race for AI dominance, a competition in which the US still leads. This is supercharging demand for both clean and fossil energy to power and explosion of data centers. On the international stage, American diplomats are now leaning into their country's role as the world's largest oil and gas producer, searching for more LNG markets and actively disrupting efforts to decarbonize shipping. More recently, US action in Venezuela shows just how radically it is priorities have changed. For China. Energy security and clean energy leadership continue to coincide as both strategic priorities and economic growth drivers. In China's case, these priorities sit alongside the quest for AI dominance. The country's success in EVS means domestic oil demand has already hit a peak, helping to limit its exposure to fuel imports. The might of its renewable energy sector meanwhile, suggests a peak in coal and therefore emissions may be at hand. China's clean tech companies continue to grow their businesses overseas through both exports and international manufacturing investments, even though tariff barriers, stubborn over capacity and project delayers are causing pain. Europe meanwhile, retains its role as a global climate leader. This is despite a softening stance on sustainability, disclosures and vehicle emissions in the EU. In a more uncertain world, clean energy and electrification continue to offer the EU and UK a path to greater energy security and r reduced exposure to international oil and gas markets. The greater challenge facing Europe is how to increase its economic competitiveness in a world dominated by Chinese made products and American information technology. Lower energy prices must be part of the solution, and reduced LNG exposure could be one factor that will help. Each of these major economies faces different strategic considerations, and climate mitigation is no longer the shared priority it once was. Nowhere is this clearer than in the mixed bag of so called nationally determined contributions or NDCs submitted last year in advance of COP thirty. The UK and EU have each set new paras aligned emissions goals for twenty thirty five, which will require significant efforts to achieve. China's new target is a step forward, as for the first time it calls for the country's emissions to decline, even though it lacks quantitative ambition and should prove easy to reach. In contrast, the US NDC, released in the last days of the Biden administration, is now effectively null and void. The US is exiting the Paris Agreement. India, another major player in the global energy and emissions picture, has not even submitted one yet. These decidedly mixed approaches to emissions goals should go down as the legacy of international climate action in twenty twenty five, demonstrating how changing priorities have knocked climate progressed down the priority list. Clean energy will keep making progress. All of this provides for some awkward mood music, but the energy transition keeps on trucking and we will see more progress in the second half of this decade. Take renewable energy. We estimate that global solar and wind installations exceeded eight hundred gigawatts last year, an all time record and a tripling in yearly deployments since twenty twenty one. Installations will be flat in twenty twenty six and grow more modestly to twenty thirty, but they will grow. As we have said many times before, the economics of renewable power are just too good to ignore, and this helps to insulate the sector from geopolitical volatility. What is more, the acceleration in power demand from AI, data centers and electric vehicles will undoubtedly support further deployment of wind, solar and storage, even in the face of changing tariff regimes. Globally, we now expect four point five tarawats of new wind and solar installations over the next five years, a sixty seven percent increase on the preceding five year period. Even in the US, where policy momentum has moved decidedly away from clean energy, we still expect some three hundred and thirty six gigawatts of wind, solar and energy storage to be installed in the years twenty twenty six to twenty thirty. This is a significant reduction from our previous forecasts, but is still twenty four percent higher than installations in the preceding five year period. Speaking of energy storage, the future here looks bright too. We expect annual global storage installations to exceed one hundred gigawatts in twenty twenty six for the first time and rise onward past two hundred gigawatts over the coming decade. Our most recent energy storage system costs survey showed that IT equipment prices are now one hundred and seventeen dollars per kilo hour, less than a third of what they were three years ago. This tipping point is arriving just in time to support continued renewable energy growth in markets where power prices have been depressed by high solar penetrations. Disruption underway as EV growth continues, Falling battery prices and better electric vehicles continue to drive electrification. In transport. EV sales are now over a quarter of global car sales and unthinkable milestone just a few years ago, and we are forecasting their share to rise to forty percent by twenty thirty. China is the runaway leader, with EV's share of over fifty percent today, and Europe's share is above twenty five percent, while other markets sit below the global average. True, not everything in life is about economics, but quite a lot of it is. It is no coincidence that China is the only major market selling a majority of evs. It is also the only major market where upfront purchase prices of evs have fallen below the price of an internal combustion engine vehicle. In other markets, there is still an EV premium, but we should expect sales to keep rising everywhere as that premium narrows. This includes emerging markets where we are seeing strong growth, such as in Southeast Asia, Latin America, and even Ethiopia. The rapid development of EV's in China means that incumbent Western and Japanese automakers face disruption. The market share of foreign automakers in China has fallen from two thirds in twenty twenty to below forty percent today. At the same time, Chinese automakers have seen a step up and now command an eighteen percent share of EV sales in markets outside of China, with Europe being one of the main destinations. While US federal policy makers seem to have made peace with ceding the global EV market to China, European leaders and automotive companies are determined to fight on the industry is increasingly collaborating with Chinese companies to accelerate their battery and EV technology development. Examples include Stlantis's partnership with coatl and Leap Motor to produce batteries and EV's and the partnership between Volkswagen and XPANG to jointly develop EV models for the China market. The European Commission's recent decision to weaken its twenty thirty five vehicle emissions policy will allow internal combustion engines to keep being sold in the EU after that date, but we still expect more than eighty percent of new car sales will need to be pure battery electrics by then, which provides a clear growth signal for the sector. Disruption is also on the way for global oil markets. Our base case scenario has oil demand peaking in twenty thirty two as evs shave more barrels off the global market. This is in contrast to the EU's recent World Energy Outlook Current Policies scenario, which projected rising oil demand until twenty fifty. The year of peak oil has moved around in BNF's forecasts over the years, but even a sharp reversal in US climate policy has only shifted the milestone back by a year or two. Hard to abate sectors are still hard, but progress is being made. Beyond clean power and vehicle electrification, momentum is more fragile. Decarbonization of industry, building, heat, shipping, and aviation relies on technologies which today are out of the money and still scaling up. The ingredients for success are, however, well understood. Technologies such as electrification, hydrogen, carbon capture and renewable fuels need robust carbon pricing to level the playing field, subsidies or incentives to defray additional costs, mechanisms that create demand, and, if appropriate, trade protections to prevent carbon leakage. This year will deliver important lessons on how to make these measures work. The EU is introducing its long awaited and dreaded in some quarters, carbon Border Adjustment Mechanism or SEABAM, coupled with its Decarbonization Bank and the phase out of free allowances in the carbon market. This is, in principle, the final piece of the puzzle needed to spur net zero aligned industrial production in the EU. There are still questions on implementation even at this late stage, but the EU is the one market that is pulling all of the relevant policy levers. The bar for success is high. SEABAM needs to successfully reduce emissions in Europe without sack reficing its industrial competitiveness, while also encouraging other jurisdictions to implement stringent emissions policies. We will soon know if it works or not. Elsewhere, China is expanding the scope of its carbon market and planning to introduce absolute emissions caps. It is also ramping up efforts on hydrogen, with new policies to fund the scale up of hydrogen production. Japan's gx ets carbon market will launch in twenty twenty six to two, which could lay the foundations for the country's industrial sector to decarbonize. While policy change has slowed investment in the US, the country will still be the largest host for carbon capture projects until the end of the decade. In the meantime, there will be gradual progress on emerging technologies. We now expect global carbon capture capacity to increase more than fourfold by twenty thirty to exceed two hundred million metric tons per aanum. Clean hydrogen production rises to five million metric tons peranum by the same year. While this is a much lower figure than previously expected, it still represents a sixfold jump over the next five years. As for sustainable aviation fuels. We project a ten fold increase from twenty twenty four to twenty thirty, reaching three point eight percent of global jet fuel demand by the end of the decade. The numbers remain small and expectations are much lower than before, but progress is still being made. Winning and losing in the climate race. We are in a fragmented multi speed transition. Progress will continue, but different regions are placing different levels of priority on clean energy development, and different technologies are scaling at different speeds, And as I've hinted in this article, we are starting to see relative winners and losers in the clean energy race. But take a step back and remember that the physical impacts of climate change weight for no one. Our colleagues in Bloomberg Intelligence have calculated that the world suffered one point four trillion dollars of climate damages in twenty twenty four, a figure that's currently doubling with each decade, and data limitations mean this is likely to be a considerable underestimation of the true costs. In twenty twenty five, we saw devastating storms and floods in South East Asia, deadly heat waves in Europe, extreme storms and tornadoes across the US, and who can forget the wildfires in Los Angeles at the beginning of the year. Climate damage is already harming communities and economies around the world, and it is only going to get worse. In a world where the energy transition fails, we will all be losers. But that is not the world we're in. True we can now see that global warming will not be kept below one point five degrees celsius, and in my view, we should not be surprised. The extremely sharp emissions reductions required to achieve this goal were always going to be monumentally challenging to deliver, but the clean energy transition still holds the keys to a better outcome. In our New Energy Outlook last year, we presented a new economic transition scenario showing that a global peak in emissions could occur immediately if we only deployed clean energy technologies in line with a cost effective base case trajectory. We also demonstrated that a faster net zero ALIGNE transition carries only a nine percent higher cost for the energy system to twenty fifteen compared with the base case. The payback in reduced climate damage, improved air quality, and human well being should speak for itself. This spring, Bloomberg and EF will publish a new climate scenario that provides a pathway to keep global warming well below two degrees, in line with the headline goal of the Paris Agreement. This will not be a top down narrative scenario, but a bottom up analysis of technologies, sectors, countries and economies showing a credible pathway to a climate safe outcome. At a moment when countries face competing priorities, we should remember that the energy transition will keep progressing and a pathway to stabilizing the climate still exists. Today's episode of Switched On was produced by Cam Gray with production assistance from Kamala Shelling. Bloomberg NEF is a service provided by Bloomberg Finance LP and its affiliates. This recording does not constitute, nor should it be construed as investment and advice, investment recommendations, or a recommendation as to an investment or other strategy. Bloomberg ANIAF should not be considered as information sufficient upon which to base an investment decision. Neither Bloomberg Finance LP nor any of its affiliates makes any representation or warranty as to the accuracy or completeness of the information contained in this recording, and any liability as a result of this recording is expressly disclaimed.
Speaker 1: This is Tom Rowland's Rease and you're listening to Switched on the podcast brought to you by Bloomberg n EF. The push toward a lower carbon global economy faced serious headwinds last year, and the start of twenty twenty six offers little in the way of a clean reset for climate focused investors and companies. The landscape remains complex, shaped by political uncertainty, uneven policy support, and slower progress in some markets. But despite these challenges, the energy transition is still moving forward, driven by underlying economics, technology, and long term structural change. On today's show, Albert Chung, bnef's deputy CEO, is going to read his recent note titled Progress despite Fragmentation Energy Transition to twenty thirty. In it, he explores how the global context has shifted and why the energy transition is likely to continue to grow through the second half of this decade. BNEF clients can find Albert's note by heading to BNF go on the Bloomberg terminal ORBNF dot com if you'd like to learn more about how BNEF approaches strategy research from the energy transition, including developments in commodity markets, trends, across different sectors and the cross cutting technology is shaping the future. You can find more information on BNEF dot com, and if you'd like to speak with a member of our team about becoming a client, email us at salestp BNF at Bloomberg dot net. But for now, let's take a closely look at the progression of the transition to what is proving to be a tough decade.
00:01:33
Speaker 2: Progress despite fragmentation the energy transition to twenty thirty. The second half of the decade will not be straightforward, but count on more progress being made. The emergence of a low carbon global economy, at the core of which is the energy transition, encountered many challenges last year. The start of twenty twenty six is unlikely to bring the sort of reset that climate focused investors and companies might like to see. Following this troubled time, it is important to understand and how the context has changed around the world and why energy transition will continue to progress in spite of ongoing challenges, different regions, different priorities. A year ago, I wrote that the overarching narrative for low carbon transition had shifted from one of opportunity to one of competition. This shift is even more evident today. Indeed, it is no longer clear that major economies are even running the same race. Different priorities are leading to fragmentation. In the US, the race for clean energy leadership has been subjugated to the race for AI dominance, a competition in which the US still leads. This is supercharging demand for both clean and fossil energy to power and explosion of data centers. On the international stage, American diplomats are now leaning into their country's role as the world's largest oil and gas producer, searching for more LNG markets and actively disrupting efforts to decarbonize shipping. More recently, US action in Venezuela shows just how radically it is priorities have changed. For China. Energy security and clean energy leadership continue to coincide as both strategic priorities and economic growth drivers. In China's case, these priorities sit alongside the quest for AI dominance. The country's success in EVS means domestic oil demand has already hit a peak, helping to limit its exposure to fuel imports. The might of its renewable energy sector meanwhile, suggests a peak in coal and therefore emissions may be at hand. China's clean tech companies continue to grow their businesses overseas through both exports and international manufacturing investments, even though tariff barriers, stubborn over capacity and project delayers are causing pain. Europe meanwhile, retains its role as a global climate leader. This is despite a softening stance on sustainability, disclosures and vehicle emissions in the EU. In a more uncertain world, clean energy and electrification continue to offer the EU and UK a path to greater energy security and r reduced exposure to international oil and gas markets. The greater challenge facing Europe is how to increase its economic competitiveness in a world dominated by Chinese made products and American information technology. Lower energy prices must be part of the solution, and reduced LNG exposure could be one factor that will help. Each of these major economies faces different strategic considerations, and climate mitigation is no longer the shared priority it once was. Nowhere is this clearer than in the mixed bag of so called nationally determined contributions or NDCs submitted last year in advance of COP thirty. The UK and EU have each set new paras aligned emissions goals for twenty thirty five, which will require significant efforts to achieve. China's new target is a step forward, as for the first time it calls for the country's emissions to decline, even though it lacks quantitative ambition and should prove easy to reach. In contrast, the US NDC, released in the last days of the Biden administration, is now effectively null and void. The US is exiting the Paris Agreement. India, another major player in the global energy and emissions picture, has not even submitted one yet. These decidedly mixed approaches to emissions goals should go down as the legacy of international climate action in twenty twenty five, demonstrating how changing priorities have knocked climate progressed down the priority list. Clean energy will keep making progress. All of this provides for some awkward mood music, but the energy transition keeps on trucking and we will see more progress in the second half of this decade. Take renewable energy. We estimate that global solar and wind installations exceeded eight hundred gigawatts last year, an all time record and a tripling in yearly deployments since twenty twenty one. Installations will be flat in twenty twenty six and grow more modestly to twenty thirty, but they will grow. As we have said many times before, the economics of renewable power are just too good to ignore, and this helps to insulate the sector from geopolitical volatility. What is more, the acceleration in power demand from AI, data centers and electric vehicles will undoubtedly support further deployment of wind, solar and storage, even in the face of changing tariff regimes. Globally, we now expect four point five tarawats of new wind and solar installations over the next five years, a sixty seven percent increase on the preceding five year period. Even in the US, where policy momentum has moved decidedly away from clean energy, we still expect some three hundred and thirty six gigawatts of wind, solar and energy storage to be installed in the years twenty twenty six to twenty thirty. This is a significant reduction from our previous forecasts, but is still twenty four percent higher than installations in the preceding five year period. Speaking of energy storage, the future here looks bright too. We expect annual global storage installations to exceed one hundred gigawatts in twenty twenty six for the first time and rise onward past two hundred gigawatts over the coming decade. Our most recent energy storage system costs survey showed that IT equipment prices are now one hundred and seventeen dollars per kilo hour, less than a third of what they were three years ago. This tipping point is arriving just in time to support continued renewable energy growth in markets where power prices have been depressed by high solar penetrations. Disruption underway as EV growth continues, Falling battery prices and better electric vehicles continue to drive electrification. In transport. EV sales are now over a quarter of global car sales and unthinkable milestone just a few years ago, and we are forecasting their share to rise to forty percent by twenty thirty. China is the runaway leader, with EV's share of over fifty percent today, and Europe's share is above twenty five percent, while other markets sit below the global average. True, not everything in life is about economics, but quite a lot of it is. It is no coincidence that China is the only major market selling a majority of evs. It is also the only major market where upfront purchase prices of evs have fallen below the price of an internal combustion engine vehicle. In other markets, there is still an EV premium, but we should expect sales to keep rising everywhere as that premium narrows. This includes emerging markets where we are seeing strong growth, such as in Southeast Asia, Latin America, and even Ethiopia. The rapid development of EV's in China means that incumbent Western and Japanese automakers face disruption. The market share of foreign automakers in China has fallen from two thirds in twenty twenty to below forty percent today. At the same time, Chinese automakers have seen a step up and now command an eighteen percent share of EV sales in markets outside of China, with Europe being one of the main destinations. While US federal policy makers seem to have made peace with ceding the global EV market to China, European leaders and automotive companies are determined to fight on the industry is increasingly collaborating with Chinese companies to accelerate their battery and EV technology development. Examples include Stlantis's partnership with coatl and Leap Motor to produce batteries and EV's and the partnership between Volkswagen and XPANG to jointly develop EV models for the China market. The European Commission's recent decision to weaken its twenty thirty five vehicle emissions policy will allow internal combustion engines to keep being sold in the EU after that date, but we still expect more than eighty percent of new car sales will need to be pure battery electrics by then, which provides a clear growth signal for the sector. Disruption is also on the way for global oil markets. Our base case scenario has oil demand peaking in twenty thirty two as evs shave more barrels off the global market. This is in contrast to the EU's recent World Energy Outlook Current Policies scenario, which projected rising oil demand until twenty fifty. The year of peak oil has moved around in BNF's forecasts over the years, but even a sharp reversal in US climate policy has only shifted the milestone back by a year or two. Hard to abate sectors are still hard, but progress is being made. Beyond clean power and vehicle electrification, momentum is more fragile. Decarbonization of industry, building, heat, shipping, and aviation relies on technologies which today are out of the money and still scaling up. The ingredients for success are, however, well understood. Technologies such as electrification, hydrogen, carbon capture and renewable fuels need robust carbon pricing to level the playing field, subsidies or incentives to defray additional costs, mechanisms that create demand, and, if appropriate, trade protections to prevent carbon leakage. This year will deliver important lessons on how to make these measures work. The EU is introducing its long awaited and dreaded in some quarters, carbon Border Adjustment Mechanism or SEABAM, coupled with its Decarbonization Bank and the phase out of free allowances in the carbon market. This is, in principle, the final piece of the puzzle needed to spur net zero aligned industrial production in the EU. There are still questions on implementation even at this late stage, but the EU is the one market that is pulling all of the relevant policy levers. The bar for success is high. SEABAM needs to successfully reduce emissions in Europe without sack reficing its industrial competitiveness, while also encouraging other jurisdictions to implement stringent emissions policies. We will soon know if it works or not. Elsewhere, China is expanding the scope of its carbon market and planning to introduce absolute emissions caps. It is also ramping up efforts on hydrogen, with new policies to fund the scale up of hydrogen production. Japan's gx ets carbon market will launch in twenty twenty six to two, which could lay the foundations for the country's industrial sector to decarbonize. While policy change has slowed investment in the US, the country will still be the largest host for carbon capture projects until the end of the decade. In the meantime, there will be gradual progress on emerging technologies. We now expect global carbon capture capacity to increase more than fourfold by twenty thirty to exceed two hundred million metric tons per aanum. Clean hydrogen production rises to five million metric tons peranum by the same year. While this is a much lower figure than previously expected, it still represents a sixfold jump over the next five years. As for sustainable aviation fuels. We project a ten fold increase from twenty twenty four to twenty thirty, reaching three point eight percent of global jet fuel demand by the end of the decade. The numbers remain small and expectations are much lower than before, but progress is still being made. Winning and losing in the climate race. We are in a fragmented multi speed transition. Progress will continue, but different regions are placing different levels of priority on clean energy development, and different technologies are scaling at different speeds, And as I've hinted in this article, we are starting to see relative winners and losers in the clean energy race. But take a step back and remember that the physical impacts of climate change weight for no one. Our colleagues in Bloomberg Intelligence have calculated that the world suffered one point four trillion dollars of climate damages in twenty twenty four, a figure that's currently doubling with each decade, and data limitations mean this is likely to be a considerable underestimation of the true costs. In twenty twenty five, we saw devastating storms and floods in South East Asia, deadly heat waves in Europe, extreme storms and tornadoes across the US, and who can forget the wildfires in Los Angeles at the beginning of the year. Climate damage is already harming communities and economies around the world, and it is only going to get worse. In a world where the energy transition fails, we will all be losers. But that is not the world we're in. True we can now see that global warming will not be kept below one point five degrees celsius, and in my view, we should not be surprised. The extremely sharp emissions reductions required to achieve this goal were always going to be monumentally challenging to deliver, but the clean energy transition still holds the keys to a better outcome. In our New Energy Outlook last year, we presented a new economic transition scenario showing that a global peak in emissions could occur immediately if we only deployed clean energy technologies in line with a cost effective base case trajectory. We also demonstrated that a faster net zero ALIGNE transition carries only a nine percent higher cost for the energy system to twenty fifteen compared with the base case. The payback in reduced climate damage, improved air quality, and human well being should speak for itself. This spring, Bloomberg and EF will publish a new climate scenario that provides a pathway to keep global warming well below two degrees, in line with the headline goal of the Paris Agreement. This will not be a top down narrative scenario, but a bottom up analysis of technologies, sectors, countries and economies showing a credible pathway to a climate safe outcome. At a moment when countries face competing priorities, we should remember that the energy transition will keep progressing and a pathway to stabilizing the climate still exists. Today's episode of Switched On was produced by Cam Gray with production assistance from Kamala Shelling. Bloomberg NEF is a service provided by Bloomberg Finance LP and its affiliates. This recording does not constitute, nor should it be construed as investment and advice, investment recommendations, or a recommendation as to an investment or other strategy. Bloomberg ANIAF should not be considered as information sufficient upon which to base an investment decision. Neither Bloomberg Finance LP nor any of its affiliates makes any representation or warranty as to the accuracy or completeness of the information contained in this recording, and any liability as a result of this recording is expressly disclaimed.
