Can the global green energy transition bridge the $18T investment gap it faces?

The world faces an $18 trillion investment gap to finance the green energy transition through to 2030 if it is to stand a chance of limiting global warming to 1.5 degrees Celsius, according to a new report from Boston Consulting Group (BCG).

The U.S consulting giant estimated a total of $37 trillion is needed over the rest of the decade to finance the transition away from fossil fuels, of which $19 trillion “at most” has already been committed, leaving an $18 trillion investment gap that urgently needs filling if global climate goals are to be met.

The report also stressed that similar levels of investment were required to bolster electricity grids to prepare for the rapid roll out new solar and wind capacity and manage the influx of intermittent renewable power sources.

At the same time, BCG emphasised that society “must massively accelerate substitution and abatement of fossil fuel use” by electrifying economies and switching to renewable energy sources wherever possible, although it added that selected investment in oil and gas projects would still be needed even as the global economy decarbonizes.

The estimates are featured in a new report, “Blueprint for the Energy Transition,” which predicts that total world consumption of electricity is projected to roughly double by 2050 as developing economies industrialize and the global economy as a whole embraces the electrification of heating, transport and some industrial processes.

In 2021, renewables and other low carbon energy sources accounted for 12 percent of global supply, but BCG said most industry standard models suggested renewables’ share of the power mix needed to reach 50 to 70 percent by 2050 in order to limit average global temperature increases to 1.5C by the end of the century.

As such, it said the green energy transition would need to take place around three times faster than previous transitions, such as the coal-powered Industrial Revolution and the oil and gas booms that helped drive economic growth over the past century.

The report points to five key technology levers to drive the transition: increased energy efficiency; the electrification of economies and processes, primarily through electric vehicles and heat pumps; the decarbonizing of power supplies; the use of lower carbon fuels in hard to abate industries; and the deployment of carbon capture and storage (CCS) technologies.

However, a huge investment gap needs to be bridged to fund these decarbonisation “levers” through to 2030.

“Most of the tools we need to bring our energy system to net zero are already available,” said Maurice Berns, report co-author and a BCG managing director and senior partner who chairs the firm’s Centre for Energy Impact. “What we need, urgently, are the policies, proven business cases and capabilities to effect the biggest and most critical peacetime transformation in our economic history.”

The report notes that most net-zero scenarios require global oil and gas supply to fall 20 to 50 percent by 2030 against 2021 levels, but it warned that current productive fields would not be able to meet projected demand beyond the current decade. As such, it said “selected” new oil and gas production sources would be needed in order to maintain security of supply, but that the focus should be on developing the most affordable, least greenhouse gas intensive production projects, while also redoubling efforts to drive down fossil fuel demand.

Such findings are likely to be controversial, as they appear to be at odds with those of the International Energy Agency (IEA), which in 2021 said no new sources of fossil fuels should be developed worldwide if the world wants to meet its 1.5C target, given sufficient production capacity is up and running to enable the transition to a net zero economy by 2050 in line with a 1.5C scenario.

But regardless of the divergence on the prospects for new oil and gas projects, BCG’s analysis echoes the growing library of reports that emphasize the huge scale of the industrial transformation that is required over the next decade and the investments needed to finance it.

As a result, it predicted the “tectonic” transformation that is already underway would fundamentally change the politics and economics of the global energy system, as it shifts from being based on an extracted to a manufactured resource.

BCG therefore said it expected a material increase in price volatility during the transition, particularly due to the challenge of rapidly ramping up enough energy storage capacity to ensure security of supply as the shift from fossil fuel power plants to renewable electricity gathers pace.

Today there is only enough capacity to store one or two hours of average electricity consumption in the U.S. and Europe, far below what is needed to deliver a reliable net zero power grid, it warned.

Meanwhile, the green energy revolution is also likely to drive up transport costs, which may lead to global industry production centers relocating to regions and countries where energy is cheaper, according to the report.

Patrick Herhold, report co-author and a BCG managing director and senior partner, said a significant acceleration of the green energy transition was “essential to maintaining a liveable planet for today and for future generations,” but that there would inevitably result in some disruption and difficulties ahead.

“As for any transformation, the challenges and disruption it comes with should not be underestimated,” he said. “However, it also offers tremendous opportunities; in the long-run, a largely green energy system can resolve today’s energy trilemma around energy sustainability, affordability and security.”

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