Transition to Clean Energy

Transition to Clean Energy
By Rob Lambert

Maia Becker: Hi, I'm Maia Becker, senior director of Responsible Investment, and I'm joined today by Rob Lambert, a BlueBay Portfolio Manager with the Investment Grade team. Rob, thank you for joining me.

Rob Lambert: Thank you.

Maia: Today, we're going to be talking about the clean energy transition, which can include a range of themes, renewables, electric vehicles, carbon capture, large-scale battery storage and hydrogen. Rob, as we look back on 2023, what do you think were the biggest headwinds when it comes to the clean energy transition?

Rob: It was a somewhat bifurcated renewable landscape in 2023. You had the solar market was actually fairly strong, but wind faced a number of challenges. That was from project input, labor, capital cost pressures. We also had interconnection and permitting delays and transmission limitations. More specifically, high financing costs had a very large impact on projects. Then you had labor and land costs, which outweighed commodity and freight costs, which fell in 2023. That pushed up the levelized cost of energy for wind and utility-scale solar, but mostly in wind. If you look at the impact of inflation and interest rates in particular, you saw offshore winds levelized cost of electricity go up 50% from 2021 to 2023.

Maia: Thank you. If those are the three biggest headwinds from the clean energy transition, what do you think were the three biggest tailwinds in '23?

Rob: I think the IRA investment tax credits and production tax credits have made utility scale solar and onshore wind, including projects paired with storage, competitive with the marginal cost of existing conventional generation. Renewables collecting production tax credits will likely increase the prevalence of negative prices in wholesale electricity markets going forward.

Then you've also had national and regional targets for renewables, which have also helped. I think there's over 29 states in the US now which have mandatory renewable portfolio standards, and 24 have zero greenhouse gas emissions, or 100% renewable energy goals spanning 2030 through to 2050. Then at the corporate level, you've got a large push in renewable procurement. We saw the number of transacting customers increase by 31% in the first half of last year on year, and big tech was obviously a large driver of that.

Maia: We certainly saw with the IRA that having a potentially big impact. If we look across countries or regions, which ones do you think will face the greatest challenges in transitioning to clean energy and why?

Rob: I think developing nations, particularly Africa. Looking at global estimates, there are about 152 nations that qualify as developing rather than developed. That's nearly 7 billion people or 85% of the population. These nations receive less than 5% of investment into renewable energy. If you look at the Dominican Republic of Congo, they've got close to 100 million people, but over 70% of them have no electricity at all. It's worrisome, not only from a regional perspective, but also a global one is over 75% of all carbon dioxide emissions will come from those countries by 2050.

Maia: That's an important point if we think of what action is needed to address climate change. If you think of the clean energy transition, in many ways, it's taking place right now against a backdrop of conflict and geopolitical risks, trade tensions, supply chain disruptions, and relatively high inflation. How and what way have or are these factors affecting the clean energy transition?

Rob: The war between Russia and Ukraine and the subsequent sanctions on Russian gas highlighted the reliance for Europe on natural gas for power and heating. That triggered a strong pivot from the EU to accelerate renewable. It also exacerbated the situation in commodities and across the supply chain and workforce, where we saw some pretty heightened inflation, that coupled with high rates to counter that inflation resulted in a number of quite notable renewable project cancellations, notably off the East Coast of the US. Heightened political risk, notably with China, has led to both Europe and the US seeking to create domestic supply chains, which over time could aid the transition.

Another important consideration is close to a third of the energy transition mineral projects are on or near territories affected by geopolitical risks.

Maia: We know that government policy and action on climate change is essential for progress in the clean energy transition. At the end of this year, governments will be coming together for the annual climate conference at COP29. What are your expectations for COP29 later this year?

Rob: The COP29 summit in Baku in November is going to focus on climate finance, and I think governments will set a new post-2025 finance goal. Without more grant-based funding, I think plans to adapt to climate change and cut emissions will not be implemented. The COP29 decision on climate finance is going to be vital. Apart from agreement about scaled-up funding, it needs to address time frames, measures for tracking and accounting, and an agreement about where and how funding should be spent and directed.

I hope governments of the Global North arrive at COP29 with strong and parliamentarian mandates, but that process needs to start now, and something that we're seeing this year is a lot of government elections, so we could see some changes in policy.

Maia: Absolutely. It's clear that very much the energy transition is a work in progress. What do you believe the next era of clean energy will look like? What are the energy sources of the future? What are you looking towards?

Rob: I think much will depend upon the scale of nascent technologies, such as hydrogen and carbon capture. There's some way from being cost competitive or commercially viable at scale, but if the cost curve follows what we've seen in solar and wind, that could be a factor into the next decade. I also think energy security has become much more important after the past couple of years elevated power prices and the issues we've had with Russian natural gas, so I'd expect there to be a more open-minded attitude to baseload options such as nuclear.

Despite the rising costs, and there's been plenty of headlines about how nuclear, notably in the UK, is massively over budget, but most renewables are still intermittent, so without new baseload, we could face blackouts. I think there needs to be some pragmatism there at the national level. In terms of the clean energy of choice, I think solar probably has the most potential to achieve the lowest levelized cost of power.

The two main factors underpinning this are construction, it takes about one year for a large solar farm versus three years for an offshore wind farm, and affordability. Both technologies have come down sharply, but the cost of solar and batteries has come down by over 90% since 2010. I think various projections point to another 60% odd reduction from current levels by 2050.

Maia: Given that, what do you think is key to the success of a clean energy transition?

Rob: Firstly, I'd say diversification. No unique source of energy can do the job alone. Countries near the equator tend to have the best potential for the solar, but that declines as you move away. Then also, offshore wind works well in shallow waters, less well in deep waters, which is why you don't have much offshore wind off the coast of California. Storage and networks are going to be key. We need huge investments in networks and connecting renewables to the grid. Spark grids, I think, are going to play a key role, and commercial storage options, given renewables are primarily intermittent.

Profitability needs to be compelling. Costs have tumbled, but we still need government and private support to hit renewables targets. I think government's reluctance to move on offtake prices last year led to a number of high-profile project cancellations, so we are seeing some semblance of pragmatism there in terms of moving up the offtake prices, but that definitely needs to come through. Finally, I say, I think legal frameworks are also key, particularly to encourage replacing archaic polluting tech with clean tech, and that highlights the importance of collaboration, notably at the COP summits.

Maia: Rob, thanks for sharing your insights with us today. It's been a pleasure discussing the clean energy transition and learning more about where we're at and what's ahead for the year.