The big electrification

While fossil fuels today remain the main source of primary energy,¹ this might soon turn out to be a reflection of the past. Since the onset of the industrialization in Great Britain in the midst of the 18^th century, the idea to use fossil fuel combustion in various forms and applications has conquered the world. Moreover, being able to tap into huge reserves of fossil energy has been a decisive factor for the rise and fall of nations ever since.

While burning fossil fuels and mining finite resources have undoubtedly propelled economic progress and created unparalleled wealth, this has also pushed the planet’s ecosystem out of balance. In face of the pressuring challenges of climate change, animal mass extinction and biodiversity loss, the tide is turning. This generation will be able to witness a fundamental shift in the years and decades to come, away from the old paradigm of fossil fuels, which essentially has dominated since the historic scale-up in the industrialization. A step-change in electrification, powered by various renewable energy sources, will characterize the new paradigm.

Today, electricity accounts for about 20% of final energy consumption and was previously believed to gradually increase to 25% by 2050. However, given the rising price competitiveness of renewable energy and the growth of electric vehicle registrations, a higher share becomes more likely. Attempts to keep the global average temperature increase well below 2°C put the energy sector on a pathway on which electricity reaches a share of 45% in 2050.² The forthcoming price decline of battery storage technology and green hydrogen will play an important role in achieving this goal.

Despite power demand rising over the next decades and emissions pushed from transportation to the power sector, electrification can act as an important measure for decarbonization. Assuming a growing share for renewables and green hydrogen in the overall energy mix, electrification could lead to a net reduction of 34% of emissions in 2050. This corresponds to an accumulated saving of 124GT of CO₂ emissions by 2050,³ approximately four years of global emissions at current levels. Three sectors are especially relevant for achieving this shift: transportation, industry, and buildings.

The transportation sector should experience the biggest change via electrification, mainly driven by passenger and light commercial vehicles, 2-wheelers, and busses. In the scenario above, 80% of all vehicles will be electrified by 2050, except for heavy commercial vehicles, which should reach penetration levels of below 50%.⁴ Current passenger car registrations for electric vehicles in Europe underpin the validity of this scenario, with hybrid electric vehicles and electric vehicles (EV) accounting for 22.4% of all new car registrations in 2020 compared to 8.7% the year before.⁵

Total electrification for the transportation sector could even overshoot to the upside if the marine, aviation, and rail sectors were able to adopt battery storage solutions in a meaningful way. While railway has probably the best prospects to increase electrification, its relatively low share of 1% of total global energy consumption⁶ somewhat caps the impact in the overall mix. On the other hand, especially green hydrogen is expected to become more relevant for these sectors. Recent comments from the world’s leading airline manufacturer Airbus, which is currently examining three potential designs for a hydrogen aircraft and set a mid-2030s target for a hydrogen plane,⁷ point into this direction.

Figure 2: Share of electricity and hydrogen in total final energy consumption, NCS-CEHP⁷

Like the transportation sector, the industrial sector too is reliant on fossil fuels and has shown little signs of change in recent history. For example, fossil fuels account for 87% of all manufacturing fuel use in the US, essentially unchanged for the last four decades.⁸

However, more detailed recent data reveal that a significant part of industrial heat demand falls into ranges, which can be covered by electric alternatives. According to the U.S. Department of Energy, approximately 73% of industrial heat demand belongs to the bracket below 300°C, much of which is demand for hot water and steam currently provided by fossil fuel combustion boilers.⁹

For the very energy-intensive, high-temperature processes involved in industries such as iron, steel, and cement, which account for over half of global greenhouse gas (GHG) emissions from industry,¹⁰ increasing the useful lifetime of resources offers a viable option to cut emissions. According to the Institute of Scrap Recycling Industries, it requires 60% less energy to recycle steel compared to producing steel from iron ore.

Similarly, the U.S. Department of Energy calculates that as little as 6% of energy is required to produce secondary aluminum compared to the primary production. Although more investments are required to modernize sorting, collection, and transportation systems to provide the required scrap metals, investments for secondary production are usually significantly lower. For example, secondary production of aluminum requires only 10% of investments compared to setting up a primary production plant.¹¹ With the increasing availability of green hydrogen technology, it is possible to replace fossil fuel combustion in these high temperature processes. By combining electrification with recycling technologies, emission reduction can therefore become more meaningful for several more industries than previously assumed.

The share of fossil fuels consumption in buildings today is already lower compared to the sectors mentioned above, thanks to higher levels of electrification and biomass use. Heating provided by direct fossil fuel appears ripe to be replaced by electric heat pumps and direct electric heaters. As heat pump/water heater solutions can produce up to twice as much hot water per kwh of electricity, homeowners can not only improve their own environmental footprint, but also lower their energy bill.

On the residential side, further electrification can enable an unprecedented level of energy self-sufficiency (see Picture 1), while reducing greenhouse gases emissions by up to 40% compared to an equivalent home powered by natural gas. Besides the positive environmental impact, the integration of various electric solutions provide homeowners also with new functionalities and better cost control.¹²

Picture 1: Advanced all-electric smart home

The ongoing electrification of various sectors is about to accelerate significantly. Rising price competitiveness of renewable energy and storage solutions, increasing regulatory pressure for fossil fuel combustion such as stricter emission targets for passenger vehicles set the tone for the coming years. The proposed USD 2 trillion infrastructure plan of US president Biden is the most recent confirmation of the trend. It addresses various initiatives concerning broader environmental challenges like upgrading the electric grid and water infrastructure.

Looking at the proposed investment for the transportation sector, electrifying vehicles commands the largest share with USD 174 billion. The plan includes the built-out of a national network of 500,000 EV chargers by 2030, the replacement of 50,000 diesel transit vehicles and the electrification of at least 20 percent of school busses.¹³ The shift in US policy has the potential to drive significant scale effects over the next years for electrification solutions.

Furthermore, the trend toward hybrid projects, which combine renewable energy power generation and battery storage solutions, is gaining momentum. General Motors and Facebook signed up for a 173 MW solar and 30 MW battery system project in March this year.¹⁴ Also in March, food company Kellogg announced a virtual power purchase agreement with Enel Green Power to procure 100 MW of a project that includes 350 MW of wind paired with 137 MW of battery storage.¹⁵

If the price competitiveness for renewable energy rising fast over the last decade is a reliable indicator of how energy storage solutions could fare in the next years, our expectation of electrification could even turn out to be conservative.

¹ Environmental and Energy Study Institute, Fossil Fuels | EESI, accessed in May 2021
² Bloomberg New Energy Finance, 2020
³ Bloomberg NEF, New Energy Outlook 2020
⁴ Bloomberg NEF, New Energy Outlook 2020
⁵ European Automobile Manufacturers Association, 2021
⁶ Bloomberg NEF, New Energy Outlook 2020
⁷ https://www.bloomberg.com/news/articles/2021-03-30/airbus-touts-sustainable-fuel-after-year-of-hydrogen-evangelism, accessed in May 2021
8 International Energy Agency, 1983; 2017
9 U.S. Department of Energy, Opportunities for Solar Industrial Process Heat in the United States, 2021
¹⁰ International Energy Agency, 2020
¹¹ U.S. Energy Information Administration (EIA), 2015
¹² https://www.smud.org/en, accessed in May 2021
¹³ https://www.whitehouse.gov/briefing-room/statements-releases/2021/03/31/fact-sheet-the-american-jobs-plan/ accessed in May 2021
¹⁴ https://pv-magazine-usa.com/
¹⁵ https://www.enelgreenpower.com/media/press/ accessed in May 2021