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Unlocking decarbonisation – the rise of low price, clean energy

Unlocking decarbonisation – the rise of low price, clean energy

What does a world with free power look like? That was the question posed by Mattia Romani, Partner at sustainability and climate advisory SYSTEMIQ, at the recently held Net Zero Transition Forum hosted at the University of Oxford in partnership with Lombard Odier. Highlighting substantial falls in the cost of renewables over the last decade – solar panels costs are down 85% and wind power manufacturing costs down 55% – Romani said, “These trends are going to continue. We’ve crossed a key tipping point. Fundamentally we believe that in the next 10 to 15 years, in several locations in the world, power will be basically zero marginal cost.”

As delegates gathered for the conference, the UK experienced record-breaking high temperatures, breaching 40 degrees Celsius for the first time. With the urgency of the climate crisis laid bare, Dr Ben Caldecott, Director of the Oxford Sustainable Finance Group and the Lombard Odier Associate Professor of Sustainable Finance, led experts from industry, finance and academia in an exploration of the role of finance in the energy sector’s decarbonisation transition, and the economy-wide implications of the rise of cheap, clean power.

 

Seismic implications require systems thinking

Across industries, Mattia Romani said, similar fast-falling cost trajectories are being seen – where these cost curves interact, the changes inside and across sectors will be seismic. With the cost of computation falling, he explained, “A.I. is becoming cheaper and cheaper. The combination of A.I. and free power means that autonomous driving will become incredibly cheap very quickly.” And for food production, “the combination of free power and cheaper genomics implies that things like alternative proteins can be produced at scale at very low cost.”

When the cost of alternative proteins falls significantly, Romani asked, how will cattle and poultry markets be impacted? And with much of the world’s agricultural land currently used to rear livestock or to grow crops for animal feed, “what would that mean for land use and land value?”

For the climate challenge, “the implications of even a small amount of demand shifting to alternative proteins could be substantial.” With animal agriculture a large driver of deforestation and loss of biodiversity, the rise of alternative proteins could allow former forest areas to be restored and threatened species to recover. Farmland could be returned to nature, cutting the use of fertilisers and pesticides and turning vast regions into net carbon stores. “We start with power,” Romani said, “but power underpins so many transformations that are really deep, they require real systems thinking to be understood.”

Finance needs to identify future bottlenecks and invest in them. Not only is this good for the transition, but it’s actually good business

Read also: Putting an end to deforestation – starting local, going global

 

Energy first

For the financial sector, Nick Tracey, Director at Baringa Partners, echoed this view of the foundational importance of the energy sector. “The first thing banks need to tackle is the power sector,” he said. “At this stage most progress is coming from banks leaning into renewables, as opposed to disengaging from fossil fuel generators, but I think that will come. I think financial services are increasingly committed to delivering.”

The sums required, according to Professor Nick Eyre, Co-Director of the ZERO Institute at the University of Oxford, are within reach: “The total investment required is quite large – USD 23 trillion – but not unimaginably large. Global energy sector investment is about USD 2 trillion annually, so we need 10 years’ worth of investment.”

For Mattia Romani, one key area of focus should be on bottlenecks, such as recently seen supply side bottlenecks in renewables, where a lack of available materials and skilled workers has left renewable energy projects falling short of demand. “Finance needs to identify future bottlenecks and invest in them. Not only is this good for the transition, but it’s actually good business,” he said. However, to be most effective in accelerating the energy sector transition, Romani believes, the finance industry needs to take a fundamentally new approach. “Finance tends to be very linear in the way that it thinks about the future – it really has to shift gear. Equity analysts need to look further ahead. Finance needs to be better at thinking about an exponentially changing future.”

Read also: Avoiding the storm: Changing how we eat is the only way to tackle food instability

 

Emerging markets leapfrog

As with all large-scale economic disruptions there will be social consequences, Professor Eyre said. “The nature of a transition is that there are some winners and losers. Clearly people who mine coal are going to lose their jobs, we’ve seen that in many European countries, with serious social consequences in some cases.”

With forward thinking, however, these risks can be minimised. In Australia, energy generator and retailer AGL has put the social question at the heart of an accelerated transition from coal-power to renewables, Nick Tracey explained. “What the management are trying to do is build a renewable energy hub, with a plan to create a new industry so that both current staff and the wider community have jobs to go to when they switch away from coal power.”

For emerging markets and less developed countries in particular, Professor Eyre said, “this is one of the few cases where the “E”, the “S” and the “G” [of Environmental, Social and Governance] are pretty much aligned. Let’s not forget that 1 billion people on this planet don’t have access to electricity. The price change of renewables allows us to electrify rural areas in sub-Saharan Africa much more cheaply than the traditional idea of building a giant oil-fired power station on the coast along with a massive transmission line.”

The positive impact for emerging markets will be profound, Mattia Romani agreed. “You can’t have another transition in which emerging markets are left behind. They can leapfrog past having to build expensive fossil fuel-based electricity plants. These are value added opportunities which are unique in a generation.”

A world of free power

The energy sector’s transition to net zero is creating a profound transformation, with renewables technology increasingly beating fossil-fuel power on both emissions and cost. The transformation of the energy system, alongside the transformation of land & ocean systems and material systems, will underpin an economy-wide environmental transition that will disrupt 95% of global economic systems – for instance, we foresee an annual profit pool of USD 1.5 trillion by 2030 to emerge from the transition to new food systems. This profitable and sustainable new paradigm will emerge as we transform the production, distribution and consumption of foods so that we can feed a growing population while returning a fifth of agricultural land back to nature.

Mattia Romani's opening question – what does a world with free power look like? – may only be fully answerable after the fact. While highlighting the opportunities, he acknowledged the difficulty in fully predicting the cascade of consequences that zero marginal cost power could bring.

The opportunities for investors are enormous. They’re opportunities about rethinking everything

To navigate these profound changes investors will need to be adaptable, ready to rethink traditional economic paradigms. In-depth science-based frameworks – such as our Portfolio Temperature Alignment Framework, developed in partnership with SYSTEMIQ – will combine with broad cross-sector analysis to identify the companies and technologies most likely to lead the transition, and to position portfolios as systems shift. As Romani said, “The opportunities for investors are enormous. They’re opportunities about rethinking everything.”

Important information

This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This document was not prepared by the Financial Research Department of Lombard Odier.

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