The global energy mix will go through critical changes over the coming decades. On the one hand, energy consumption is expected to increase by 14% through to 2050, requiring new energy infrastructure; whilst on the other, more established energy systems will see dramatic changes to make them more secure and lower carbon emissions. With the share of electricity in our global energy mix predicted to grow from c.20% today to over 60% by middle of the century, especially to support Power-to-X (P2X) systems, the question is how can we realise the potential of these solutions to transform our energy system?
P2X refers to the process of using surplus clean electric power – generated via wind, solar, hydro or other renewable means – into other useful products that can be stored or utilised across numerous sectors. This could be using renewable electricity to power electrolysers to produce green hydrogen that can be useful to supplant coal use in steel furnaces; or by combining with capture carbon dioxide or other recycled molecules to produce clean chemicals and fuels. The use cases for P2X are endless and will be critical to decarbonising sectors from agriculture to transport, and from heavy industry to consumer goods.
However, the challenge is that over 70% of our needed P2X supply is yet to be built. We need a dramatic scale-up of energy transition infrastructure if we are to achieve our global objectives to drive economic development and limit the effects of climate change by staying below 1.5o. We ultimately require three key changes to our global energy system to achieve this:
1. Expanding global renewable power capacity from c.2,800 GW today to over 33,000 GW by 2050, which will require significant investment in both generation capacity as well as new transmission networks.
2. Developing global low carbon fuels supply-chains, including for clean hydrogen and its derivatives whilst also enabling transport routes for clean fuels to key consumption sectors.
3. Retrofitting or building new end-use sector infrastructure, that supplants fossil fuels for either electrification or use of P2X fuels, whilst maintaining their commercial viability.
Alone, each of these are formidable objectives. Together, they are incredibly daunting to achieve. But that challenge is the key to this puzzle; we must see them as part of an interconnected strategy that requires systems thinking to bring about the type of energy revolution we need to drive both economic growth and emissions reductions. Below we discuss how we can collectively bring together the support of government, operators and customers, and finance to unlock the potential of P2X solutions.
Government support for scaling-up P2X deployment
The role of governments and intergovernmental organisations (such as the EU) will be critical in establishing the policies and regulations we need to incentivise and promote P2X solutions. Fostering renewable energy production, the bringing together of actors across the value-chain to coordinate projects and investments, and (most importantly of all) sending strong signals to the market that the energy transition is a long-lasting government priority will be key to generating wider private investment.
Our work with energy and finance majors across EMEA and APAC highlights how positive announcements from government can amplify private sector confidence to invest in P2X solutions. For example, in India we saw several industrial leaders in different hard-to-abate sectors take their cues from the National Hydrogen Mission as the green light to begin their own decarbonisation journeys; investing billions of dollars in balance sheet capital to support their transition. These organisations saw announcements from Prime Minister Modi and Renewable Purchase Obligation (RPO) mandates in adjacent sectors as a sign of the national trajectory and followed course appropriately.
The same, however, can also be true in reverse. One recent conversation with a large energy player in Europe indicated how perceived political backsliding in Sweden and the UK over climate targets was undermining business cases for low carbon fuels projects and had effectively halted new investments in those regions. For them, government sat at the top of the pyramid and held the weathervane for national priorities indicating which way investments needed to blow. Hence clear signalling from government is often the most important role they can play to spur scaling up of P2X solutions.
Circular ecosystems for demand and production growth
Operators and customers are, of course, central to the story of commercially viable P2X systems. Most importantly, they must be seen together. We have spoken about this before and always emphasise that the first step for any new energy system should be starting from demand. They say that the customer always comes first, and that is especially true in energy.
There are two principles to this. The first is that understanding who will be consuming, through what carrier and at what quantity, will enable energy operators to design efficient systems. This includes minimising transmission and transport costs, that can sometimes be as high as 70% of the final delivered price, through co-locating plants around diversified demand anchors. Here it is important for producers to identify diversified demand centres that can anchor, and hedge, offtake.
A second principle is that thinking in circular ecosystems might offer potential opportunities to widen the scale of P2X deployment. We worked with one of the largest clean steel producers in the world to design for them a circular ecosystem bringing together upstream renewable energy players, using surplus electricity to produce green hydrogen, using that to feed into steel production as well as other offtake centres such as shipping, and using steel products to them feed back into production of new energy infrastructure to scale networks.
Thinking through an interconnected system is a vital strategic approach to support operators and customers deliver long-lasting P2X solutions. It not only helped the steel major to strengthen their own business cases, but also supported market development for other energy producers and consumers in the wider economy critical to anchor their downstream demand. We have seen this strategy effectively play out across numerous projects in EMEA and see systems thinking as vital to successful scaling up.
Connecting private finance with Power-to-X
Finance is the third pillar. P2X typically involve large CapEx solutions requiring high levels of financing that cannot be solely provided by the public sector. The gap will be partial met by corporations’ increasing use of balance sheets and capital markets to fund investments in renewable energy, according to the UNFCCC – but, this will not be enough, especially as the world requires $32 trillion of investment by 2030 to us on track to achieve net zero.
Leaving aside whether this level of investment is even achievable, it does not need to come at sub-optimal commercial returns. UNFCCC analysis argues that 70-80% of decarbonisation technologies today could offer higher net present values (NPVs) than higher-carbon alternatives based on regionally adjusted trajectories and assuming a weighted average cost of capital (WACC) of 4%. Tangibly, this means that investors could play a significant role in driving the energy transition whilst still maintaining strong returns for their LPs, and we have seen this to be the case across numerous energy, industry, and transport projects.
Beyond the question of available funding and closing an existing gap (estimated to be in excess of $700 billion per year through to 2050), we need to make sure funding is flowing in the right direction. Coordination is therefore critical. Over the last year, we have seen 47% of private capital energy transition investments flow to generation projects; leaving the remainder split between different midstream, storage, and consumption sectors. This unevenness can undermine business cases by limiting the next step for P2X solutions and wider available offtake channels.
Finance can play a role not just in the provision of funding but also in the convening of value-chain actors, including policy makers, to advise on how to ensure projects are thought about holistically. By engaging across the value-chain to finance different solutions, funders can utilise a wider viewpoint to drive coordination and systemic thinking.
Systems thinking as the unlock to meeting the challenge
Ultimately, the global energy mix will go through critical changes over the next 30 years. Expanding global renewable energy generation, developing supply infrastructure, and building offtake markets will require systemic thinking that starts with strong signals from government as well as integrated projects from the market and finance. The energy transition will involve all players if we are to efficiently scale-up P2X solutions and maximise the finance available. This is especially so if we will achieve the potential for P2X solutions to support our wider economic development and emissions reductions.
If you would like to discuss more about your energy transition opportunities, wherever you sit across the value-chain, please get in touch.
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