[thumbnail]
Understanding the evolving landscape is critical for successful investment
Two years ago the UK was targeting an 80% reduction in greenhouse gas emissions by 2050 compared to 1990. This week – coinciding with Earth Day – the government announced acceptance of the Climate Change Committee’s recommendation for the Sixth Carbon Budget which sets us on course for a 78% reduction by 2035. Furthermore, this budget incorporates the UK’s share of international aviation and shipping emissions for the first time. We are delighted that the UK is continuing to take a world-leading stance on decarbonisation and we warmly welcome this ambitious announcement.
This being said, we need to bear in mind that announcing and achieving targets are two separate challenges. Our dependence on fossil fuels remains apparent in every major sector, with swathes of our economic activity still reliant on unsustainable combustion of hydrocarbons. Reducing emissions to achieve this week’s announcement (and pushing on to Net Zero by 2050) is going to profoundly impact how whole sectors function, resulting in shifting market dynamics which create enormous opportunities for emerging technologies. We have already witnessed how the drive to decarbonise has transformed the UK’s power sector – the lowest hanging fruit – with coal plants largely replaced by now-commercial renewable generators. The transport sector looks next in line, with electric vehicles now accounting for c. 10% of new passenger car sales in the UK, up from around 3% in 2019.
These shifts are creating a plethora of value creation opportunities for emerging technologies – those which facilitate, for example, further renewable energy penetration, balancing of supply and demand and the ramping up of transport electrification. In addition, there are another three key sectors for decarbonisation which are lagging behind power and transport: buildings, industry and waste. Below, we discuss some of our views on how these five sectors are going to evolve in the coming years to enable the rapid decarbonisation rates we are targeting.
1. Power: from centralised to distributed to optimised
In the past, electricity was generated in large, centralised coal, gas and nuclear fired power stations and sent through the transmission and distribution networks to customers. It was very much a ‘one way system’.
This is rapidly changing and today power is generated by a variety of different technologies, including onshore and offshore wind, solar PV and biomass which are distributed across the network. This distributed nature allows communities to generate their own power and individual homeowners to be net exporters of electricity.
In addition, to accommodate further increases in variable renewable generation, we are introducing more ‘flexibility’ into the system by commissioning grid-scale battery systems which can store energy as well as large, cross-border interconnectors which enable power trading with other European countries (the largest connections being with Belgium, France, Netherlands and Norway). The power network is no longer unidirectional; it is a complex system that needs to be actively managed and optimised, ideally automatically.
2. Transport: from oil-based, individual ownership to clean and shared
Approximately one third of UK emissions arise from the transport sector, with road transport contributing the majority. Given government’s plan to end the sale of new petrol and diesel cars by 2030, and rapidly improving electric vehicle economics, it is no surprise that a tectonic shift is anticipated in the sector. Deloitte and KPMG both forecast electric vehicles to make up around two thirds of car sales by 2030 and National Grid expects almost all cars on the road to be electric before 2040.
The move to electric vehicles is, of course, only effective in delivering emissions reduction because the UK has largely decarbonised the generation of electricity. Electric vehicles are efficient to run and operate, and in addition to greenhouse gas abatement, they also reduce other pollutants such as nitrogen oxides (NOX), sulphur dioxides (SOX) and particulates which are known to be damaging to human health, especially in cities where traffic jams are common and air circulation poor.
Another big trend in this sector, amplified by COVID, is that expensive cars spend most of their time on owners’ driveways. This, coupled with the emergence of new business models, will accelerate the transition to widespread shared vehicle ownership.
3. Buildings: from consumer to prosumer; wasteful to efficient
The UK’s housing stock is one of the oldest and worst insulated in Europe, with only about 15% built since 1990. With turnover of the building stock at about 1% per year, most of today’s homes and offices are expected to still be in use in 2050. It is a given, then, that existing housing stock must be retrofitted with greenhouse gas abating technology if we are going to achieve Net Zero.
Example solutions include ramping up renewable energy installations at commercial and residential buildings; decarbonising heat by replacing gas and oil boilers with heat pumps and electrical equivalents; and improving the energy efficiency ratings of poorly performing buildings.
Homeowners were once only end users of electricity. In today’s world, solar panels, domestic energy storage and electric vehicles make becoming a net electricity exporter a reality – allowing homeowners to participate in the energy transition, make money from their home and improve their energy security. Homes that were once wasteful and costly to maintain can become efficient and profitable.
4. Industry: from fossil-fuelled to green; independent to community
Traditionally industry has relied on fossil fuels for high-grade heat and the electricity grid for power. Industrial processes have typically emitted large quantities of waste heat, water and greenhouse gases. To achieve Net Zero this has to change. Industry participants are moving towards onsite renewable generation with energy storage to satisfy power demand and exploring the use of alternative fuels (hydrogen and bio-derived alternatives to fossil fuels) to decarbonise their heating requirements.
We are also seeing heat recycling systems being adopted and district heating networks powered by previously wasted, lower-grade industrial heat.
Physical industrial waste is also being valorised and upcycled whether this be to produce construction material from inert waste streams or specialty chemicals from by-products of the food and beverage industries. Industrial activity is generally recognised as very-difficult-to-abate and the sector requires ground-breaking innovations from whole-system thinkers to reduce carbon emissions while maintaining competitive advantages.
5. Waste: from linear to circular
Currently we live in a ‘throw-away society’ dominated by linear value chains. We consume substantially more resources than the earth can provide and this style of living is unequivocally unsustainable. Earth overshoot day marks the point in the year when our demand for ecological resources exceeds what earth can regenerate in that year. In the early 1970s this day fell in December, however, startlingly it occurred on 22 August in 2020.
Resource extraction, processing and transport all generate significant greenhouse gas emissions and the current culture of discarding products before end-of-life and the popularity of single-use items contribute significantly to the climate and biodiversity crises. Whilst not mentioned specifically in the ten point plan reducing, reusing and recycling is fundamental to sustaining life on our planet. It is an area experiencing rapid innovation which is unlocking untapped value for stakeholders.
The drive to decarbonise is transforming many aspects of society and this list only captures a handful of the trends we are going to observe over the coming years. As evidenced by the evolution of the power sector and recent progress in transport, early-stage, agile companies with clever solutions are set to unlock and capture much of the value created by these shifting dynamics. The Clean Growth Fund’s purpose is to select, support and grow these companies to ensure they achieve maximum positive impact and to ultimately provide healthy returns for our investors.
If you would like to discuss any of these trends further, or learn more about the Clean Growth Fund, please contact the fund’s Managing Partner, Beverley Gower-Jones at beverley.gower-jones@cleangrowthfund.com
