Since the 2015 Paris Agreement, countries around the globe have been analyzing their energy and development strategies and planning to meet their commitments. While some countries have made progress by, among other things, implementing new technology and examining different energy sources in an effort to achieve their commitments, other countries have been slower to implement any change. However, the events of 2020 appear to have breathed fresh air into the climate change dialogue.
In this piece, we provide highlights from the discussion of our colleagues from six of our offices across the globe during the first webinar in our Reaching Net Zero Together webinar series. We lay out the broad strokes that the European Union, Japan, China, Russia, the Middle East, Africa, Latin America, and the United States are making on their energy journeys.
Under the EU Green New Deal, Europe announced its goal of becoming the first climate neutral continent by 2050 through deep decarbonization of all sectors of the economy and greater reductions in greenhouse gas emission by 2030, while promoting job growth and green technology.
In July 2020, the European Commission (EC) adopted two key strategies to help support the goal of a fully decarbonized, more efficient, and interconnected energy system: the European Union’s Energy System Integration Strategy and the Hydrogen Strategy for a Climate Neutral Europe Strategy. Each strategy is set out as an EC Communication, which is meant to serve as an EU-wide roadmap. The Energy System Integration Strategy provides a holistic approach to the framework for green energy transition, with coordinated planning and operation of Europe's energy system as a whole across multiple energy carriers, infrastructures, and consumption sectors. Within this integrated system, the use of hydrogen could be one of the key ways to support the decarbonization of many industries through investment, regulation, and new research and innovation. Although nonbinding, the EC uses its Communications as instruments to identify key issues in policy areas and to set out the direction of future policies.
It’s hoped that these strategies will help provide a unified framework of the various regulations, directives, domestic initiatives, and legal and regulatory regimes that currently make up much of Europe’s renewable energy policies. There has been no single unified approach to date, with each sector siloed in approaches between member states. So it will remain to be seen how the execution of the European Union’s very ambitious goals will play out. In the near future, we can expect that energy policies and regulations will continue to very substantially evolve, and developers, funders, and investors in renewable energy, in particular, will need to keep pace with this shifting terrain.
Japan is currently dependent on imported fossil fuels, largely from the Middle East, with a single-digit energy self-sufficiency rate. So the goal for the country’s energy plan is as much to increase renewable energy sources as it is to increase energy production in the country in general.
Japan has long focused on hydrogen as a potential energy source. Composed of representatives from industry, academia, and government, Japan formed a Hydrogen and Fuel Cells Strategy Council in 2013 that helped create the country’s basic hydrogen strategy, which includes 10 elements largely looking at innovation, expansion, and education. As part of its Basic Hydrogen Strategy, Japan has supported international collaborations at both the governmental and private sector levels to promote hydrogen energy, hosting the first global hydrogen ministerial meeting in October 2018. The government is focused on developing an international hydrogen supply chain, which is still importing energy, but largely working with other countries outside the Middle East. Japan is also working on the domestic production of hydrogen, drawing on recent success at the Fukushima Hydrogen Energy Research Field, which is the largest hydrogen-producing facility in the world using renewable energy.
Many of the country’s major companies are invested in the growth of renewable energy, and specifically hydrogen, to meet their own customer environmental, social, and governance (ESG) goals. But they are finding that lack of detail in the government’s green growth initiatives and lack of access to renewable energy sources are making it difficult to meet those goals. Private sector ESG concerns and carbon-neutral goals of other developed countries will likely result in pressure on the Japanese government to hasten change. A lack of current concrete plans for a transition to a hydrogen society may make international investment opportunities in Japan a moving target, but there are opportunities for nimble investors.
China is the world’s largest energy producer and consumer. The country heavily relies on coal and imports of gas and oil. Since 2011, the country has burned more coal than all other countries combined. So its transition plan to renewable energy relies on comprehensive reforms extending from energy supply to energy consumption.
On the supply side, China has been vigorously promoting the clean and efficient utilization of fossil energy, and increasing the proportion of nonfossil energy. On the consumption side, Chinese authorities claim they are determined to prioritize energy preservation and tighten control of total energy consumption. China is aiming to achieve carbon neutrality before 2060 by upgrading energy technologies through innovation, maintaining energy security, and opening the energy sector further to the world.
To help its economy recover from COVID-19, China is approving a number of economic stimulus plans that are attracting the attention of international investors. But these plans to recover from economic losses borne from the pandemic may be off the green infrastructure track, e.g., the continued use of coal power plants. To help combat that, the Chinese government is lifting some restrictions on foreign investment into some sectors. On hydrogen front, China is encouraging foreign companies to invest in sectors along the full hydrogen value chain: from production, storage, transport, and liquification of hydrogen to manufacturing of hydrogen production equipment, to hydrogen batteries, to operation of hydrogen filling stations. While there has been a steady expansion of international oil companies and multinational companies, there is still heavy regulation and scrutiny over foreign investment into China.
MIDDLE EAST AND RUSSIA
While Russia and many countries of the Middle East, as well as other oil-producing countries, have had a hot-and-cold relationship with the global climate change discussions, the events of 2020 may have provided additional stimuli for them to begin, in earnest, the active drive toward the road to net zero. In 2020 we all witnessed the historical drop in global oil demand as a result of the COVID-19 pandemic, on the back of what was already a weakened market.
And, of course, in addition to the drop in demand, there was the corresponding drop in revenue for the oil producers. This loss in revenue has been especially felt in the exporter countries, in particular the countries of the Middle East, which have a significant portion of their state budgets dependent on oil revenues for their fiscal break-even. The threat of a long-term low demand period, or even a plateau of demand, seems to have gotten their attention, with export countries recognizing that if not carefully managed, this low-demand trend could create destabilization in their overall economies. These countries appear to be identifying the need to replace or supplement the reduced oil revenues, as well as the geopolitical currency that oil has historically given countries such as Saudi Arabia and Russia.
In the last 12 months there has been a heightened movement across this region with the further development of programs and the more focused implementation of various “national visions,” “strategies,” and “roadmaps.” We are seeing a noticeable shift in the players involved in such plans, with greater involvement and even leadership coming from senior members of government, influential ministries, and leading companies (both national and private sector), which are moving from the position that these plans are only relevant to environmental authorities and organizations.
The various visions, strategies, and roadmaps being developed indicate that there are multiple and varying paths to a common goal. In this region a few of the focus areas include the following:
- Energy efficiency: Traditional energy surplus has allowed many of these countries to disregard the low hanging fruit of efficiency and consider developing ways to reduce emissions to remain competitive and seek the best possible returns.
- Gas and gasification: Gas will play a large role, capitalizing on rising demand as the world transitions from oil and coal to cleaner energy, as well as a focus on liquified natural gas (LNG) expansion with green or carbon-neutral LNG opportunities being explored to increase the value of the cargo.
- Carbon capture use and storage (CCUS): CCUS technology is being explored across the region to reduce the carbon footprint of the product, as well as its use as a tool for enhanced oil recovery for the region's mature formations.
- Offsets and carbon credits: Again, the implementation and use of offsets and credits are currently focused heavily on making the product carbon neutral to increase value and demand.
- Renewables: The role of renewables in these regions will greatly depend on location. Russia already has a large geothermal and hydro component to its power supply, but it has not had substantial investment in other renewable sector projects. However, we are seeing continued interest in wind projects and a smattering of solar projects, with smaller localized, off-grid, or within the fence projects traditionally having more success in the short term. The Middle East is better placed for success in renewables with its location and solar potential; the region is putting more resources toward the large-scale development of renewable projects.
- Hydrogen: Maybe the million-dollar question for this region is whether the commercialization of mass production and transportation of hydrogen will create a demand for a cross-border market growth, particularly with respect to the prospects of blue hydrogen in addition to green hydrogen (for the Middle East) and yellow hydrogen (for Russia).
Across Latin America, countries are in very different stages of their renewable energy efforts and overall energy needs, creating divergent paths to achieving net zero energy consumption. Virtually all Latin American countries have signed the Paris Agreement, so there is an overall commitment to combating climate change.
In Brazil, the power matrix is already more than 80% renewable with a high reliance on hydropower, but recurring droughts have caused significant power outages, pushing forward considerable developments in wind and solar power plants. Brazil also had a very significant ethanol production in the 1980s, where many cars ran exclusively on ethanol. While that has lost some traction today, there are basically no cars in Brazil that run exclusively on gasoline given the high ethanol content (25% to 27%) in gasoline sold at Brazilian pumps. In addition, diesel sold in Brazil must have a minimum biodiesel content of 12%.
Chile is generally ahead of most other Latin American jurisdictions in the path to net zero goals, with significant developments in the adoption of renewables (hydroelectric, solar PV, wind, biomass, and geothermal) currently accounting for around 50% of its energy matrix. Separately, in 2019, the Chilean government released a decarbonization plan with a heavy reliance on solar power that set the goal of a complete phase-out of coal by 2040.
In Mexico, natural gas is already displacing oil and coal, with wind power gaining favor over hydropower. In an effort to boost energy production in Mexico, an energy reform initiative led by Mexico’s prior federal administration aimed to attract foreign investment in energy. Despite the success of the reform, changes in policy carried out by the current Mexican administration have adversely affected private investment. And in both Central America and the Caribbean, where many countries are heavily dependent on oil and diesel—in certain cases relying on those resources for more than 80% of their power—governments are fostering cleaner alternatives including LNG imports and the development of renewable resources, such as solar, wind, and geothermal.
Africa is composed of 54 countries so it’s hard to paint its energy picture with broad strokes. But there are well-established opportunities for renewable energy sources in the northern and southern tips of the continent. Both Morocco and South Africa have a proven track record of successful renewable energy development and a regulatory framework. For example, there is a Maghreb–Europe gas pipeline that links a field in Algeria through Morocco to Spain, and Morocco and Germany have signed an agreement to produce green hydrogen in Morocco.
Other regions are in earlier stages of energy development and face challenges unique to their locations. In Sub-Saharan Africa, geography is a large determinant in the success of energy programs. Countries that are further away from key demand centers lack the infrastructure to transport energy. There are also large areas of improvement for a regulatory framework and incentives that work to stimulate development. The Africa-Europe Green Energy Initiative seeks to take joint action to increase energy efficiency and the adoption of renewable energy sources. The initiative has set aside 30 billion euros for investment in Sub-Saharan Africa.
Since much of Africa has limited greenhouse gas emissions, there isn’t as compelling of an environmental argument for hydrocarbon substitution. And many countries are hydrocarbon producers, so there is some pressure to aim for co-existence rather than replacement in the short to medium term.
New US President Joe Biden made good on his campaign promises to focus on climate change, taking significant steps on his first day in office to advance the energy and climate initiatives of his administration. Some of those key actions included the notice of the United States’ intention to rejoin the Paris Agreement, cancellation of the federal permit for the Keystone XL Pipeline Project, and directives by President Biden to certain federal agencies to take a whole-of-government approach to national policy on climate-related issues. These initial executive orders indicate that climate consideration is an essential element of US foreign policy and national security.
The administration has paused issuing new oil and natural gas leases on public lands or in offshore waters until a comprehensive review and reconsideration of federal oil and gas permitting and leasing practices can be completed. This review will include consideration of potential climate and other effects associated with oil and gas activities on public lands or in offshore waters and whether royalties associated with coal, oil, and gas resources extracted from public lands and offshore waters should be adjusted to account for corresponding climate costs. This action may not have an immediate impact on oil and gas companies as drilling on public land can and will continue with the moratorium on new leasing. However, it may have the longer-term effect of shifting oil and gas production overseas.
The administration also has demonstrated a commitment to innovation and scientific development by launching a climate innovation working group, with a new $100 million funding opportunity from the US Department of Energy to spur the creation of new energy technologies. This is expected to examine whether the much-hyped possibility of a hydrogen solution will be viable for the long-term success of US zero net carbon energy goals.
If you’re interested in more details of these countries’ plans and progress, please listen to our Reaching Net Zero Together webinar.