Growing evidence for global warming and aggressive targets have increased climate urgency, but success will require multiple pathways and patience
Every energy sector is being shaped by a growing appetite for a decarbonized economy. Emboldened by stronger climate change evidence and policy ambitions, the public’s collective timetable for progress is becoming more aggressive. Until recently, expectations were driven by a collective pursuit of steady temperature reduction targets plotted for the next half-century. That cadence has been upended as several critical players – from oil majors to utilities to multinational companies to government entities – have adopted aggressive net zero carbon targets over a relatively tight period.
This urgency needs to be tempered by the complexity in the world’s energy puzzle. While certain behaviors and business practices can result in significant changes in the near-to-midterm in advanced economies, other industries and societies will take longer to transform. And this energy transformation is not taking place in a vacuum. The race to address climate change is happening as the world rapidly digitizes. These transitions aim to make the world better, but also compete for resources, capital, and their place in our collective priorities.
AlixPartners expects gradual decarbonization. Migration from fossil fuels requires patience, discernment, and willingness to effectively navigate the economic consequences, geopolitical threats, energy availability, and tradeoffs for driving decarbonization responsibly and comprehensively.
There is no single policy or strategy that can address every concern climate change presents. Decarbonization, in fact, will advance in a multitiered approach on two fronts: (1) industrial output controls; and (2) personal consumption. Success rides on combining technological progress, economic incentives, and regulatory pressure.
INDUSTRIAL CARBON OUTPUT
Heavily concentrated carbon emissions are more easily identified and measured at the industrial level. By focusing on capital intensive, low-labor content, and high-carbon generating sectors, solutions can be deployed in a disproportionately meaningful but less visible ecosystem. This includes power generation, refining, petrochemicals, fertilizers, mining, and steel.
In this framework, decarbonization is addressed by balancing regulatory requirements against technological innovation. For example, a carbon tax on natural gas power generation can be offset by deploying capital for carbon-capture and sequestration. Or, existing emissions can be offset by replacing older direct combustion with more efficient combined cycle plants, producing more power with lower carbon. Any negative economic impacts will have relatively low public visibility, as abatement expenses are initially taken from corporate profits and slowly recouped via gradually increased costs.
Regulation, meanwhile, can take several forms. Tax incentives can favor wind and solar alternatives, while encouraging carbon capture and sequestration. Cap and trade systems can be designed to measure and lower carbon emissions. Finally, there is always the threat of enacting outright bans on carbon emitting technologies, such as the coal-generation phaseouts seen in Europe.
PERSONAL CARBON CONSUMPTION
Individuals also play a role, making personal choices to lower their own footprint. Most common options include installing home solar and smart meters; buying electric vehicles; moving closer to work to lower commutes (and environmental impact); and using mass transit. In marginal cases, individuals will pay more for truly green options when the cost vs. benefit equation is favorable.
Migrating to alternative low-carbon power generation and mobility will continue, but it is uncertain how fundamental decarbonization goals will adjust when real economic impacts become visible. Do we, for instance, want to truly aim for zero-carbon emissions, or is it more sensible and realistic to shoot for a capped increase of two degrees Celsius through 2070 to create a more balanced economic impact?
LIGHT-DUTY BATTERY ELECTRIC VEHICLES
Among the most viable decarbonization strategies is the migration to battery electric vehicles (BEVs) for light-duty transportation needs. BEV technology works in richer economies where people will pay more upfront to lower daily driving costs over the long-haul. The BEV is preferred because power for electric drivetrains is generated with a lower total carbon footprint than the internal combustion engine (ICE). In developed economies, people have more vehicle charging options with a strong home preference, a trend that will be an increasingly critical consideration for a public that does not enjoy the gas station.
The BEV migration will not be as rapid as many expect. AlixPartners projections show the transition in western Europe, China, and North America from gasoline to BEV occurring in a timeframe that approaches a half-century. For example, we forecast that ICE-only vehicles will still be the majority of new cars manufactured in the United States through at least 2033, and non-ICE vehicles won’t become a majority of new cars until after 2040 (figure 2). At the same time, it is unclear which application will succeed in each individual market. Pure BEVs and gasoline-hybrid vehicles will compete for market share.
Many other challenges must still be addressed. For instance, there are yet-to-be-solved constraints in existing power infrastructure that wasn’t built to accommodate a dramatic change in consumer behavior.
Grid operators claim to be able to handle increased BEV charging loads, but they have not fully modeled the impact of multivehicle charging in most residential locations happening simultaneously. System load requirements for residents with multiple BEVs must alter grid infrastructure. Furthermore, electrons under the current technology will likely be biased toward carbon-based sources – barring an aggressive move toward nuclear.
Hydrogen fuel cells, meanwhile, represent a low-carbon solution for mobility – including, potentially, long-haul trucks – but the technology faces numerous hurdles. The key challenge for this technology lies in finding an efficient pathway to get hydrogen fuel to the vehicle. Even though technology exists to pipe hydrogen in gaseous state across existing natural gas infrastructure and separate for use closer to vehicle fueling, it still must be compressed. Energy is wasted in the process.
A third hydrogen path is the ammonia-to-electricity option. This approach has three variations: Black (steam reforming without carbon capture and sequestration); Blue (steam reforming with CCS): or Green (hydrolysis backstopped by wind, solar, hydro, nuclear). These processes generate liquid ammonia, lowering most hydrogen transport concerns. Using emerging technologies, ammonia can then be combusted to generate electricity for BEVs.
However, methane-to-ammonia reforming remains the cheapest option, but this process emits substantial carbon. Without CCS, ammonia reforming does not achieve the low carbon goals. It is unclear if ammonia reforming with CCS will cost less than renewables or nuclear.
BEV ISN’T ONE-SIZE-FITS-ALL
Meanwhile, in emerging markets, the near-term outlook favors fuel transportability and low infrastructure needs – requirements best met by gasoline- and diesel-powered vehicles. This will not change until these nations can build expensive electric infrastructure backstopped by alternative-energy sources.
Moving too fast toward BEVs could result in adverse consequences. As concerned as we should be about climate change, we also need to prioritize addressing energy poverty – a widespread problem that contributes greatly to substandard living conditions. The lack of affordable energy erodes human rights and is highly correlated to infant mortality, poor health, unfair labor, and unfair conditions for women.
It is unrealistic to solve energy poverty by forcing expensive technologies in developing economies. Prudent regulations, decarbonization goals, and products that address climate change need to be balanced against the immediate goal of providing affordable power.
DIESEL: A SOLUTION FOR YEARS TO COME
While BEVs are increasingly viable for light-duty applications, our analysis shows the same is not the case for long-haul transport. BEV truck costs, road-weight limitations, and paying a driver during long charge times make BEV trucking prohibitive (figure 3). Certain innovations, including autonomous technology replacing the driver, will not negate higher costs and weight limits. Therefore, distillate fuels will remain key to long-haul road transport.
Furthermore, diesel and gasoline will likely maintain a role in hybrid-electric or other applications and remain a desirable alternative to heavy fuel oil in heavier transportation applications, primarily maritime shipping. Battery-powered solutions are unlikely to seriously penetrate long-distance road or maritime transport without technological breakthroughs in energy density and other factors.
THE GASOLINE CONUNDRUM
Greater penetration of light-duty BEVs will reduce the need for gasoline at a time when diesel demand grows. This creates a refining product imbalance, and capital or technology must be deployed to address the gasoline-diesel mix. Otherwise the stranded by-product gasoline becomes incredibly inexpensive, thereby driving these molecules to emerging markets without low-carbon mobility options. This dynamic is a major risk for the BEV decarbonization pathway, potentially shifting emissions to regions where lower carbon is far down the priority list.
Fortunately, advances in new refining catalyst and processing technologies have the potential to enable the crude-to-chemicals transition. Not-needed gasoline refining can be converted to petrochemical feedstock production. This will provide needed polymers and plastics for information technology expansion as well as all the other medical and consumer applications that grow with population and economic prosperity.
Additionally, circular recycling technologies are now being piloted to close the chemical/plastics loop. Plastics recycling coupled with crude-to-chemicals can potentially be an economical method for keeping needed diesel fuel production flowing while using the gasoline chain molecules for other needs.
GEOPOLITICAL, ENVIRONMENTAL CONSIDERATIONS
Similar to the world’s oil and gas resources, Mother Nature has concentrated valuable battery resources in specific geographic locations. As BEV penetration increases, there will be greater demand for materials that are accompanied by political and social costs.
BEVs, the grid, power generation and IT devices/ infrastructure all pull from the same concentrated resources, including lithium, cobalt, nickel, and manganese. This potentially creates a major imbalance in resource demands. Addressing climate change could increase geopolitical unrest as many critical resources are in less-developed nations that will want to optimize wealth from the extraction.
At the same time, we do not fully understand the environmental impact of extracting precious minerals essential to advanced battery technologies. It is unclear how the general population and various regulators will respond to this changing dynamic, which could create a new global economic power balance.
Greater penetration of light-duty BEVs will reduce the need for gasoline at a time when diesel demand grows.
This creates a refining product imbalance, and capital or technology must be deployed to address the gasoline-diesel mix.
DIGITIZATION: A COMPETING MEGATREND?
Finally, information technology and the rise of digitization will compete for the same finite resources needed for decarbonization. The similar demands being placed on tech infrastructure are rarely considered in conjunction with those placed by power infrastructure. Handheld devices, connected wearables, telecommunications cables, switch gear, and other components require the same input resources as BEVs and renewables, and the infrastructure needed to support them. Ignoring the interplay will be a costly oversight.
Growing demand for better technology infrastructure will not abate, particularly as artificial intelligence – which drives exponentially increasing calculations, computer chips, processing equipment, and energy – is needed to support a digital economy. This will result in massive IT server infrastructure expansion to support online-all-the-time technology habits and the Internet of Things.
To illustrate, a large data center consumes as much energy as the power output from an average natural gas combined cycle unit (figure 4). Advanced economies are planning hundreds of these data centers, putting enormous strain on the same underlying resources and value chains that supply alternative power (wind, solar) and BEVs.
There is no silver bullet solution for addressing the world’s energy, mobility, and information technology challenges. Instead, there will be multiple pathways to the same goal; policies need to be calibrated with several considerations in mind.
Trends to expect
- Nuclear power will be a compelling option, but projects need to be constructed at reasonable costs and with effective safety protocols.
- Fossil power, primarily natural gas, can be effective with carbon sequestration under prudent regulatory and incentive structures. Underground storage pathways or biological pathways will become more prevalent.
- Alternative power at increasing scale can comprise more of the energy mix but requires more technology breakthroughs. For example, more efficient wind and solar generation can lower the impact of the footprint and improved battery technology can increase storage capacity, lowering the demand for backstop 'nighttime fossil'.
- The ammonia/hydrogen-to-electricity option can address peak load storage. Distillate fuel will remain prevalent in long-haul trucking and likely grow in maritime transport.
In developed economies
- Prioritize logical-scale technologies that meet low-carbon objectives.
- Measure progress by transition from high-carbon to less-carbon-intense fuels.
- Any development needs to be backstopped by massive infrastructure investments. Materials needed to facilitate the transition will be stretched amid competition with information technology.
In emerging economies
- Energy poverty is best solved with remote solar and wind.
- BEV costs and the need for grid infrastructure require deep pockets, so emerging-markets mobility will initially trend toward traditional road fuels, especially diesel.
- Underlying demand for petroleum fuels will grow in emerging markets in the near-to-medium term until alternative generation and grid infrastructure is established to support BEVs.