Guest Post: 2021 ESG Outlook, Part 2 – Energy Transition
Sharadiya Dasgupta, Founding Partner, Blue Dot Capital
The Great Unraveling of 2020 demonstrated the futility of prognostications. Yet we present our 2021 ESG Outlook because even as the pandemic rages on and the world navigates the staggering challenges of mass vaccination, climate change and sustainable finance have indelibly captured the mainstream imagination. There is near-universal acknowledgement of private capital’s role in enabling the transition to a sustainable economic order. While the ‘how much’ and ‘how fast’ will be dictated by the economic recovery, multilateral diplomacy, political will, corporate participation, and other dynamics, there is scant doubt about the direction.
You can read Part 1 of our ESG Outlook here. In our second and final part, we take a closer look at the energy transition megatrend.
The continued growth of wind and solar energy
By multiple accounts (including from oil and gas companies themselves) we are either at or very close to peak oil and gas.
On a Levelized Cost of Electricity (LCOE, think of it as the break-even unit price of a power plant) basis, unsubsidized utility-scale solar and onshore wind are now competitive – in some cases, have more compelling economics – with fossil fuels. Renewables will make up almost 90% of worldwide installed capacity in 2020.
- US President-elect Joe Biden’s net-zero-by-2050 and fossil fuel-free-electricity-by-2035 ambitions will be executed by seasoned negotiators and clean energy enthusiasts like Secretary of State John Kerry, Governor Jennifer Granholm, former EPA chief Gina McCarthy, and ex-BlackRock Global Head of Sustainable Investing Brian Deese.
Ensuring disadvantaged communities receive 40% of benefits from clean energy and infrastructure spending is a centerpiece of Joe Biden’s Climate Plan. He will have the counsel of environmental attorney Brenda Mallory, as the new head of Council on Environmental Quality, on issues of environmental justice. And the administration has a $40 billion pool of capital to get going on its plans!
2021 will be a key year for the energy transition story unfolding in China and India, the world’s first and third highest emitters of gross GHG.
- China has set a carbon neutrality target by 2060. According to the International Energy Agency (IEA), 36% and 40% of the world’s growth in solar and wind energy in the next five years is projected to come from China. China has strategically positioned itself to be the world leader in green power while continuing to develop new coal projects. Given that, Is a 2060 net-zero target too far to change anything? We might find the answers and specific action items in the 14th Five Year Plan (FYP) to be unveiled in March 2021 (The plenum communique released earlier outlined what to expect in the FYP and reiterated the government’s decarbonization goals).
- India has committed to reduce carbon emissions by 33-35% (from 2005 levels) by 2030, transition to 60% renewable energy in its electricity sector by 2030 (today, non-fossil fuel accounts for 38% of generation capacity), and 450 GW of renewable energy capacity by 2030. According to IEA’s 2020 Outlook, India is projected to be the largest market for utility-scale storage by 2040. Energy experts and policy watchers are bullish on India’s ability to leapfrog the energy transition just like it did with the telecommunications revolution.
Investors are backing the clean energy theme across public and private markets. Funds focused on renewable energy had a bumper 2020. With maturing technology and falling costs, VCs are joining the climate tech fray (again!). With policy clarity from major governments like the US and China expected in the first half of 2021, capital flows will accelerate and we expect multiple new clean energy funds and vehicles investing across the capital structure.
The state of sustainable mobility
2021 is looking to be a busy EVs launch year.
EV charging network ChargePoint and Volkswagen-backed solid state battery maker QuantumScape were two of the EV-SPAC highlights of the past year. Toyota has also been developing its solid-state battery technology and is expected to do a preview in 2021. Solid-state batteries are leakage-free, have shorter charging periods, and promise higher mileage – they can be the holy-grail component of the technology value chain that can unlock rapid scaling of EVs.
Analysts are expecting global EV sales to grow anywhere between 36% to 50% in 2021 led by demand in the EU. For context, more than 500,000 EVs were sold in Europe in 2020.
The promise of green hydrogen
2020 was the year when hydrogen entered the mainstream energy discourse.
In July, the EU set an ambitious green hydrogen target as part of its Green Deal. It aims to install 40 GW of electrolyzers within its borders by 2030.
In September, the world’s largest planemaker, Airbus announced that it has set a target of five years to develop a commercially viable green hydrogen-powered aircraft.
In December, Equinor joined the NortH2 project (formed by Shell and others) that aims to produce 4 GW of renewable electricity by 2030. The same month, a second project backed by Iberdrola, Orsted, ACWA Power, and Snam announced its plan to develop up to 25 GW of worldwide renewables-based hydrogen production and halve the current production costs to below $2/kg by 2026.
A quick refresher on hydrogen
Although hydrogen is the most abundant element in the universe, it is not freely available and has to be extracted from other materials. Manufacturing hydrogen fuel is energy-intensive and has carbon byproducts.
- Brown hydrogen is produced from coal via gasification. Grey hydrogen is produced from natural gas. Grey and brown hydrogen make up 99.7% of the current 70 million metric tonnes of worldwide capacity and account for 2% of total global GHG emissions.
- Blue hydrogen is grey hydrogen but with carbon capture and storage (CCS) for the GHG emissions.
- Green hydrogen uses an electrolysis process to extract hydrogen from water, using renewable sources of energy like wind or solar. The pipeline of green energy has risen from 3.2 GW of electrolyzer deployments in October 2019 to 15 GW and counting.
What does the future look like?
BofA projects that green hydrogen could provide up to 24% of our energy needs by 2050, helping to cut emissions by around a third. However, for that to happen, costs will need to fall up to 85% for green hydrogen to compete with fossil fuel-derived hydrogen. Energy utilization rate also needs to increase manifold for this nascent technology to scale and be commercially viable.
While we will continue to keenly follow the technology learning curve of green hydrogen, expect more new capacity announcements in 2021. Keep an eye out for displays of Japan’s hydrogen prowess at the Olympics!
2021 is poised to be a year of significant ESG progress backed by much awaited policy action across developed and emerging markets, greater capital mobilization, higher disclosure standards, and improved – not necessarily perfectly correlated – data capabilities. We will continue to closely monitor these developments.
We wish you a happy and healthy new year!
About the author:
Sharadiya is the Founding Partner of Blue Dot Capital, a consultancy that works with investors and investment managers to develop ESG and impact investing capabilities across asset classes. Blue Dot Capital’s clients and partners include single family offices, asset managers, alternative investment firms, private banks, and RIAs.
Before starting Blue Dot, Sharadiya was the founding Managing Director of Total Impact where she oversaw the development of new ESG advisory and educational resources. Prior to that, she was part of the transaction banking advisory team at Axis Bank (LSE: AXBC). Earlier in her career, she held product strategist and institutional client roles in investment management firms like BNP Paribas and Invesco, in India. In her 15 years in financial services, she has worked with a diverse array of capital allocators including corporate treasuries, endowments, foundations, family offices, and community finance organizations.
Education: MPA from Columbia University, MBA from Indian School of Business, B.Sc (Hons) in mathematics, SASB Fundamentals of Sustainable Accounting (FSA).