Home Energy assets Where will the trillions needed to go green come from?

Where will the trillions needed to go green come from?

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One word you’ll find liberally scattered throughout the nearly 500 pages of the International Energy Agency’s latest World Energy Outlook is “trillion”. Even today, it’s an intimidating word, especially when applied to dollars. And it represents one of the main obstacles to the energy transition mapped by the IEA models.

Clean tech generally requires a larger initial investment, but saves money through lower running costs, such as free sun and wind, down the line (I’m leaving out the “savings” of the climate change mitigation, which are substantial). However, recovery times can be long. For example, at prevailing prices, it would take around eight years for the fuel cost savings resulting from the purchase of an electric vehicle to cover the initial premium over a traditional car, excluding subsidies. (1) So when the IEA talks about annual clean energy investments needing to reach $4 trillion by 2030 to achieve net zero emissions, more than three times current spending, the question of where all this will come soon stands.

One answer: Money saved on other fuels.

Let’s agree from the outset that any long-term pattern tends to be both (a) wrong on its specific outputs, and (b) improbably smooth on its trends. Nevertheless, the basic concept here – that investment in a technology can be offset to some extent by savings on the one it replaces – is indisputable.

Take the biggest energy market of all, oil, where the nominal upstream cost of current consumption is north of $9 billion a day. decade or quickly collapses, depending on the ambition with which net-zero emissions policies are implemented. Lower demand should mean a lower daily fuel bill, including the impact of lower oil prices, and less investment needed to maintain or develop oilfields. Multiplying the IEA assumptions, the global upstream oil “bill” looks like this until 2050:

The question is: how much of the additional investment in clean energy needed to achieve the most ambitious scenarios is offset by lower oil spending? A lot, it turns out. The oil savings more than offset the additional investment required in clean energy.

Offsetting one against the other yields cumulative savings of $8 trillion or $19 trillion under the Announced Ads and Net Zero scenarios, respectively.

Most of them, however, do not come into effect until the 2030s according to these projections, because it takes time for oil demand to drop enough to offset the surge in clean energy investment. This initial increase in spending on green technologies is particularly formidable in today’s environment, where war and fragmented trade ties have driven energy costs to existential levels for some countries.

Even without the disruptions caused by Russian aggression, these soft projections mask the inevitable upheavals that accompany any capital rotation on this scale. As the IEA recognizes in its Outlook, simply relying on two competing energy systems for any length of time, with existing assets facing economic obsolescence long before their physical usefulness ends, poses a particularly thorny problem. (see this). Still, when you’re faced with a multi-trillion dollar bill for decarbonization, don’t ignore the discounts that come with it.

• Our climate future can be decided in deadlock: David Fickling

• A hotter planet is already distorting asset prices: Jonathan Levin

• Climate bill alone won’t halve emissions by 2030: Eduardo Porter

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(1) This assumes an average pre-subsidy premium of $10,000 for an electric vehicle versus a comparable internal combustion engine vehicle (Source: National Resources Defense Council). Also assumes a driver driving 13,000 miles per year, with a fuel economy of 25.7 miles per gallon for gasoline and 3 to 3.5 miles per kilowatt hour for electric. Uses prevailing average gasoline price of $3.77 per gallon and residential electricity rate of 15.95 cents per kilowatt hour.

(2) This is just the product of multiplying 4Q 2022 demand of 100.6 million barrels per day by $95, where Brent crude oil currently trades. It does not take into account refining, logistics and marketing costs and margins, or price differences between different grades of crude oil.

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy and commodities. A former investment banker, he was editor of the Heard on the Street section of the Wall Street Journal and a reporter for the Lex section of the Financial Times.

More stories like this are available at bloomberg.com/opinion