Decarbonising energy systems is economically viable

Decarbonising energy systems is economically viable

The transition toward a low-carbon energy system is often considered a daunting task, both technologically and economically. Nordic Energy Technology Perspectives 2016 (NETP 2016) has estimated the investments needed to attain carbon neutrality in the Nordic region by 2050. The conclusion is that, while achieving the carbon-neutral scenario outlined in the report will require significantly different investment patterns, decarbonising the region will not cost the world.

By Páll Tómas Finnsson

Comparison between two different climate scenarios
The analysis looks at the investments necessary to achieve the Nordic carbon-neutral scenario (CNS), which entails an 85 per cent reduction of 1990 energy-related CO2 emissions by 2050, compared with the costs associated with achieving the less ambitious baseline four-degree scenario (4DS), in which emissions reductions would be only 42 per cent. The differential reveals the additional investment costs of decarbonising the region’s energy system. The analysis is based on the IEA’s Energy Technology Perspectives cost optimisation model.

“To define these investment costs, we’ve looked at each sector – buildings, industry, transport and power – and then estimated which investments are related to the energy system,” says Benjamin D. Smith, project leader of NETP 2016 on behalf of Nordic Energy Research and now Senior Adviser on energy systems at the Research Council of Norway.

The NETP 2016 modelling indicates that the Nordic countries would have to invest an additional USD 333 billion between 2016-2050 to achieve the CNS, or less than one per cent of the expected cumulative GDP throughout the period. It is important to note that benefits such as fuel savings, increased energy security and reduced health costs due to air quality improvements are not included in the analysis due to their uncertainty. However, by most estimates, these benefits would at least offset the additional investment costs and probably generate more savings.

“One per cent of the Nordic countries’ cumulative GDP may sound a lot, but it’s important to keep in mind that these investments are in no way net costs but also have a payback and a multiplier effect on the economy,” says Hans Jørgen Koch, Director of Nordic Energy Research, the Nordic Council of Ministers’ platform for cooperative energy research and policy development.

“What can be misleading with these calculations,” Smith adds, “is that we’re only looking at the actual technology investments, and haven’t included fuel savings given the unpredictability of oil prices. We might even see that fuel savings alone could offset all of the infrastructure costs related to the transition to the CNS.”

Largest additional investment in buildings and transport
According to Smith, the largest investments are required in buildings and transport. Investments in buildings addressed by the analysis include the costs of equipment for heating and cooling, lighting and appliances, as well as costs of improving the thermal envelope of buildings to substantially reduce space heating demand.

“The CNS requires the current rate of improvement in the energy intensity of space heating to double or even triple. Considering that most of the buildings in 2050 are already standing today, we will need a considerable increase in investment in energy efficiency improvement in buildings,” Smith says. Additional investment costs in this category are expected to amount to USD 170 billion, of which around 90 per cent comes from building envelope investments.

Transport investments include the costs of purchasing vehicles and developing infrastructure, including roads and railways, electric charging infrastructure and biofuel filling stations, as well as investments in shipping. Infrastructure investment will amount to an additional USD 195 billion.

“Today we spend a lot of money on gasoline and diesel. To achieve the CNS, we need to transition these costs into investments in emission-free vehicles and in new infrastructure that will enable an electrified transport system and support a modal shift from road to rail, including high-speed rail between the largest cities,” Smith says.

Need for innovation and new processes in the Nordic industrial sector
The analysis of investment costs in the industrial sector focuses on five energy-intensive sectors that account for about 80 per cent of the total industrial energy use in the region: pulp and paper, chemical and petrochemicals, aluminium, iron and steel, and the cement industry. Assuming a similar industrial structure to that of today, investments will be required in innovation to improve energy efficiency and develop new low-carbon production processes and carbon capture and storage (CCS).

The additional investment needed in the sector will amount to around USD 33 billion, which is much less than the differential between the building and transport sectors in the two scenarios.

“The overall additional investment required in industry is much lower than the total investments needed for buildings and transport, but it will be felt more strongly as the costs will be shared between fewer actors, plants and locations,” Smith explains. “These industries compete on the global market, so it’s hard to imagine that this level of investment would take place without some sort of governmental support.”

Investment costs in power sector lower in carbon-neutral scenario
Koch explains that the analysis of the power sector indicates that investment costs would be lower in the CNS outlined in NETP 2016 than in the 4DS scenario.

“This is due to lower infrastructure costs and reduced electricity demand. As an example, investment costs for wind would be lower in the CNS, due to increased global deployment, which would drive down technology costs.”

The NETP 2016 analysis covers the costs of all power plants and decentralised power systems generating electricity, as well as transmission and distribution infrastructure. Investments in power generation are estimated at USD 43 billion less than in the 4DS, corresponding to 18 per cent, while costs related to power infrastructure are expected to be USD 22 billion lower, or 13 per cent lower than in the 4DS.

“In the CNS, you would have more energy efficiency in buildings and in industry, essentially,” Koch explains. “This means that we won’t have to build out as much power generation, transmission and distribution infrastructure. We would save large amounts on both fronts.”

From Nordic Energy Technology Perspectives 2016
“Nordic Energy Technology Perspectives 2016 presents a clear technological and economical pathway for the Nordic region towards a nearly carbon-neutral energy system in 2050. Nordic countries’ success can send a strong signal to the global community that the ambitions of the Paris Agreement from COP21 are achievable.”

“One per cent of the Nordic countries’ cumulative GDP may sound a lot, but it’s important to keep in mind that these investments are in no way net costs but also have a payback and a multiplier effect on the economy”

Hans Jørgen Koch, Director
of Nordic Energy Research

“Today we spend a lot of money on gasoline and diesel. To achieve the CNS, we need to transition these costs into investments in emission-free vehicles and in new infrastructure that will enable an electrified transport system and support a modal shift from road to rail, including high-speed rail between the largest cities”

Benjamin D. Smith, project leader of NETP