Overview
Part 1 of a 4 part series discussing key takeaways from the J.P. Morgan Eye On the Market 2022 Annual Energy Paper.
Part 1 focuses on the paper’s executive summary and unifying principles.
Unifying principals of the annual energy paper
- Energy transitions differ a lot from transitions in tech, healthcare, biotech, etc.
- Speed of disruptions very different from those in smart phones, ride sharing, etc.
- Decarbonization of electricity is well underway, but decarbonization of industrial production, transportation, heating lag much further behind
- Very important concept for understanding where we are in renewable energy transition
- Countries that reduce own production of fossil fuels under assumption renewables can quickly replace them face substantial risk
- Obvious now after Russia invasion, wasn’t obvious over past decade
Why is the world still so reliant on fossil fuels?
- Fossil fuels still account for 80-85% of energy consumption globally
- Even in Europe (a leader on renewables) its only 70%
- 3 big topics explain why the world is still so reliant:
1. Misleading barometer of levelized costs
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- Levelized costs are not a great barometer for the pace of change
- To compare wind/solar on the margin to fossil fuels is misleading
- Cost estmiates rarely reflecy actual cost of having a grid with a lot of renewable energy on it
- Extra transmission (need larger coverage areas)
- Cost of backup thermal power
- OR cost of utility scale battery storage
2. Have not decarbonized industrial energy use
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- Benefits of grid decarbonization are great, but limited by the fact that we haven’t electrified at all industrial energy use, transportation, and only heating a little bit
- This is why it still looks like world may be 60-70% reliant on fossil fuels even by 2050
3. Energy divide between the developed and developing world
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- In next 10 years Europe, Japan, US are going to use a lot less fossil fuels
- But, the developed world has shifted carbon intensive manufacturing of cement, plastics, steel and ammonia to the developing world
- A lot of success is due to having outsourced carbon intensive manufacturing to countries reliant on coal
Can Europe quickly change course from reliance on Russian energy?
Current plan:
- Rapid uptake of wind and solar
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- In real life – deployment constrained by transmission delays, interconnection queues, etc.
- Electrification of home heating
- So far just a Scandanavian phenomenon
- Building out LNG import (regasification) capacity
- Takes years and billions of dollars
- Nuclear energy
- Europe moving in direction of phasing out
Countries faced with 3 broad choices
- Ramp up domestic production of fossil fuels (if you have them) to avoid geopolitical, economic trap
- Rely on dictators for imported energy
- Confront transition to renewables head on
- Everyone wants this, it will not be accomplished with feel good policies
- Need to curtail ability of local communities to delay or cancel decarb or transmission projects associated with them
- Need consensus on economy wide price for carbon
Two other points from last year's paper
1. The challenge of decarbonizing industrial energy use
- Global industry uses more energy than any other sector (vs. home, businesses, transportation, etc.)
- Electricity is a very small part of industrial energy use
- In US its ~10-15% since 1980, hasn’t really changed
- Testament to how hard it is to electrify industrial energy use
- If you can electrify you can decarbonize, but hard to electrify
- Relies on ways to heat energy which is lost during electrification (makes it much more expensive to electrify)
- A lot of industrial products like plastics, ammonia, cement aren’t metallic to begin with
2. Energy and materials requirements for direct carbon capture are basically unworkable
- Capturing 25% of global CO2 through direct air carbon capture would require 40% or more of global electricity
- Clearly an absurd proposition, not going to waste time on it
