MONDAY STUDY: Tomorrow’s Big New Energies

Future Energy; The technologies shaping the energy transition

September 2020 (Wood Mackenzie)

Future energy: green hydrogen

Could it be a pillar of decarbonisation?

The ambition is net-carbon neutral. The EU, and others, want to get there by 2050, some even sooner. Achieving that goal needs policy, investment and technology. Hydrogen is one of the technology pillars on which hopes to abate climate change rest. To find out more, I chatted to Ben Gallagher, our lead analyst on emerging technologies. What is the attraction of hydrogen? It’s a super-versatile energy carrier with exceptional energy density (MJ/kg). Today, around 70 million metric tonnes of hydrogen are produced globally, used across an array of sectors – fertiliser, refining, petrochemicals, solar panels and glass manufacturing. In the future, hydrogen will have a huge role to play in decarbonising the global economy, especially in hard-to-decarbonise sectors. But, first, there are a lot of challenges…

When?

Realistically, it’ll be another decade before hydrogen starts to make a meaningful contribution to decarbonisation. Today green hydrogen is tiny, with only around US$365 million invested in 94 MW of capacity, though the pipeline of new projects has quadrupled in less than a year to over 15 GW. That shows the interest the technology is attracting in China, Japan, the US, Europe and Australia, but so far, it’s only scratching the surface. If the pieces fall into place it could be huge. We think hydrogen could displace 1400 Mtoe of primary energy demand by 2050 under a 2-degree scenario LINK, 10% of global supply, with green hydrogen the majority of that. Scalable, commercial green hydrogen would answer a lot of questions around global decarbonisation.

And who will invest?

Only a handful of companies have entered the electrolyser market. But rising membership of the Hydrogen Council, formed in 2017, reveals the widespread interest among big players across multiple sectors including automakers (among them BMW, GM and Honda), power and gas utilities (Engie and EDF), engineering (Bosch, Alstom), finance, and oil and gas (Aramco, Shell, BP, Total and Equinor).

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Future energy: carbon capture & storage

Central to decarbonisation strategies Shell, Repsol, BP are among those setting bold targets to become net-carbon neutral. Governments, too, will head in that direction. But how to get there? Carbon capture and storage (CCS) is invariably central to the strategy. I asked Ben Gallagher, lead analyst on emerging technologies, about the opportunity and the challenges.

What is CCS?

A method of removing the carbon dioxide (CO2) released in the processing or combustion of hydrocarbons. CCS can be applied in power generation, natural-gas processing, refining, cement, hydrogen reforming and chemicals and other industries. There’s now a search underway to use the carbon or embed it in materials – what’s called carbon capture utilisation and storage.

Why’s there so much interest in CCS?

Few think the global economy can thrive for the next few decades without coal, oil and gas. The world will be emitting carbon for decades yet; the trick will be to capture and store it. Commercial, scaled-up CCS means we can use fossil fuels while greatly reducing CO2 emissions until energy consumption is fully decarbonised. It’s going to be hugely important for hard-to-decarbonise sectors like cement and steel…

How much investment is needed?

Today, it’s a tiny part of the decarbonisation story – the 42 million metric tonnes of installed capacity are capable of capturing just 1% of annual global emissions. Most are attached to power plants. We think capacity will double by 2030. As the power sector transitions to renewables, blue hydrogen production makes up an increasing proportion of the CCS development pipeline. If the world is to get onto a 2-degree pathway, we could need up to 4 billion tonnes of capacity by 2050, 100 times what we have today. Exponential growth will require exponential investment. That will only happen if the incentives are there – high carbon prices, policy support or, most likely, both.

How will Big Oil invest in CCS?

First, storing carbon extracted from high CO2 gas fields – Chevron (Gorgon, Australia) and Equinor (Sleipner and Snovhit, Norway) have projects already in operation. Second, injecting post-combustion CO2 to enhance oil recovery – Occidental is one of the leading exponents in the Permian. Thirdly, and a big growth opportunity, is to partner in high-emitting but hard-todecarbonise sectors. Total has teamed up with Lafarge and Svante in Canada to pilot CO2 capture and reuse from Lafarge’s Richmond cement plant in British Columbia.

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Future energy: zero-carbon heating

Could heat pumps displace gas in our homes?

Fifty years ago, natural gas transformed homes with instant heat and hot water. But the days of gas and other fossil fuels dominating domestic fuels may be numbered. Rapidly evolving policy in the EU is searching for technologies to speed up electrification and decarbonisation. Heat pumps could be part of the answer, binding households once and for all into reducing carbon emissions. Our experts in new energy technologies, Fei Wang and Ben Gallagher, and Murray Douglas, European gas, explained the options.

What is the technology?

Heat pumps are a proven technology, a heating and cooling system that’s ready for mass deployment. Two types are suitable for residential or commercial use – air source and ground source. Unlike a combustion boiler, they don’t produce heat but work like a fridge, transferring heat from a coil outside the building to a second coil inside using a refrigerant. The process can be reversed for air-conditioning in summer. They run on electricity, ideally zero-carbon renewables. The big advantage is the heat pump’s exceptional energy conversion rate. A modern gas boiler has an efficiency rate of around 80%, with 20% lost in the process. Heat pumps can have 300% efficiency, generating 3kw of thermal energy for every 1 kilowatt consumed.

How big is the opportunity?

Huge.

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Over one-third of global energy demand is space heating in the residential and commercial sectors, served by a mix of fuels. Gas is the incumbent fuel in Europe (43%) and an important part of the mix in the US (40%), where electricity already has the biggest share (44%); while coal dominates in Poland and China. Oil and LPG are still widely used globally where communities are remote from gas infrastructure. The penetration of heat pumps into the market today is minuscule. But the opportunity is massive – many multiples of the 20 million systems installed world-wide…

What are the implications for future gas and electricity consumption?

The EU’s 2030 targets are ambitious and may rely mostly on squeezing coal out of the power market. Heat pumps’ economics are just one barrier – the skilled workforce to roll out the systems at scale isn’t there yet. It could be that, like electric vehicles, heat pumps go mass market in the 2030s rather than this decade. The potential loss of gas demand by 2040 could be substantial – we reckon as much as 25% lower in the residential sector to get on the pathway to reach the Green Deal’s ultimate goal of net-zero emissions by 2050. That’s around 50 bcm, or 10% of total demand, in the EU27 plus UK today. Meanwhile, switching from fossil fuels to heat pumps will drive up electricity demand, adding to pressure on power infrastructure.

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Future energy: offshore wind

The zero-carbon technology that’s attracting big capital So much of the technology to deliver a netcarbon neutral world seems distant. Green hydrogen, carbon capture and storage, and heat pumps all need R&D and heavy subsidies before they can contribute materially. Offshore wind is more ‘ovenready’ and set to take off. Soeren Lassen, head of offshore wind research, and his team identify five reasons why it’s becoming central to energy companies’ plans.

First, the exponential improvement and innovation in the technology, led by a competitive global OEM sector. New installations are bigger, delivering huge output gains and lower costs for each MW installed and MWh produced. The average turbine size has doubled to 8 MW in five years with more to come – the latest models on order are 14 MW…

Second, supportive policy. European governments started incentivising offshore wind more than a decade ago as part of the drive to cut greenhouse gases. The UK, Germany and Denmark led the way, while China has also been an early adopter…

Third, there’s almost unlimited growth potential – offshore wind can work wherever the resource is close enough to market. Today, there’s just 28 GW of installed capacity (equivalent to one-third of the UK’s total generation capacity) and spread across a handful of countries with a North Sea coastline, and China. The US, Poland, Taiwan, Japan and South Korea are among those already committed to developing offshore wind…

Fourth, the economics. Mid-single digit returns in Europe can be boosted by innovative financing…

Fifth, an influx of capital. The space was niche, dominated by pioneers like Orsted and a handful of utilities. But that’s changing as new players move in, including risk-averse financial investors. Big Oil will also invest in a big way…

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