The energy transition’s big problem

Hello and welcome back to Energy Source.

Big news out of America’s shale patch yesterday as Pioneer Natural Resources chief executive Scott Sheffield told Myles and Derek that he will step down from the job, again (he also retired in 2016). Sheffield has been at the centre of the US shale revolution from its beginning, embodying its successes, excesses and failures as he transformed Pioneer from a tiny west Texas driller into an industry powerhouse.

Sheffield was a big part of the shale boom — but the future is in the energy transition, and there are a flood of ideas on how to decarbonise the economy. At yesterday’s FT Energy Source Leaders Digital Dialogue, Derek discussed some of these ideas with senior executives from Chevron and Toyota. One point of conversation was potential for deploying a “renewable gasoline” biofuel to decarbonise our cars.

But our main item today comes from Robert Campbell, head of energy transition at the consultancy Energy Aspects, who argues many of these ideas fall down at the same hurdle: their ability to scale. And in Data Drill Amanda has new numbers on the global clean energy subsidies arms race.

Thanks for reading. — Justin

Opinion: A hard truth for the energy transition

Robert Campbell is head of energy transition at Energy Aspects

Scale is the single biggest challenge for the transition from a fossil fuel-based economy to one that runs on renewable energy.

Ignoring this has led to a lot of magical thinking. Ideas such as sucking carbon dioxide out of the atmosphere to turn into fuel for our cars or churning out vast quantities of cheap green hydrogen to blend into natural gas pipelines are prime examples.

This is not to say the transition is impossible. But too many of our current incentives and policies are poorly designed because they fail to take seriously the sheer size of the current fossil fuel energy system they are seeking to replace.

The world consumes about 13.7mn tonnes of oil a day or about 5bn tonnes a year. Road, rail, shipping and aviation account for about 65 per cent of that demand.

Some argue we should decarbonise those areas with biofuels, such as renewable gasoline and diesel or sustainable aviation fuel. But limits on the feedstocks needed for those biofuels mean they can only get us so far.

Suppose we converted all of the world’s vegetable oil production (about 210mn tonnes per annum) into “renewable diesel” fuel. That would replace only about 6.5 per cent of transport fuel demand. There is a lot more biomass that could potentially be brought into use, but costs become significantly higher.

Others have proposed turning captured carbon dioxide into synthetic fuel. It’s technically possible, but again scale is the big problem.

If we wanted to make just 1bn tonnes of fuel a year this way, we would need to capture nearly 3bn tonnes of CO₂ from the atmosphere, many times more than is currently captured. It would also be incredibly expensive. Optimistic long-term costs for capturing atmospheric CO₂ are perhaps $200/tonne — provided that large amounts of cheap and clean energy are available.

The belief that there will be an abundance of low-cost renewable energy underpins a lot of thinking about hydrogen as well.

Hydrogen is not easy to make. Under thermodynamically ideal conditions, 1kg of hydrogen can be made with water at 25C using just 39 kWh of electricity. In reality the actual energy requirements are closer to 55 kWh/kg. If electricity costs 7 cents per kWh then the electricity required to make enough hydrogen to replace 1 litre of gasoline would cost about $1. That’s before recovering any investment, compression or distribution costs.

Finding a clean fuel for shipping faces the same daunting scale problem. Today ammonia is talked of as a potential replacement. It would take about 100mn tonnes of ammonia to replace a quarter of the fuel used by ocean-going ships today. This would require about 18mn tonnes of hydrogen. If we only used electricity to make this hydrogen we would need 9,000 TWh of power, or about 22 per cent of the total electricity consumed in the US in 2022.

Decarbonisation can happen. But transforming a fossil fuel energy system more than 100 years in the making is an immense challenge. Scarce resources such as biomass and low-cost electricity must be allocated well. Doing so requires a rigorous focus on efficiency to ensure the solutions proposed can be scaled up to meet the global economy’s vast energy needs. (Robert Campbell)

Data Drill

Canada is catching up with the US with its own green subsidies. A new analysis from Rystad Energy found Canada’s new investment tax credit has transformed the country into the second-most attractive market for renewable projects, only slightly behind the US.

Canada is among the US allies who have criticised Joe Biden’s landmark $369bn Inflation Reduction Act, arguing the incentives create an “unlevel playing field”. In response, it has come up with its own subsidies.

Last month, Canada released a 30 per cent investment tax credit for clean tech as part of its “Made in Canada” strategy. Rystad Energy found the ITC would make projects 50 per cent more profitable and speed up the deployment of clean energy.

But as western countries race to develop new subsidies to match the IRA, climate leaders and analysts have raised concerns that this approach to decarbonisation will leave out poorer nations. Multiple analyses estimate the IRA’s incentives could exceed $1tn in federal spending.

“We can’t let renewables be a rich person country’s game,” said Geoffrey Hebertson, senior analyst of North American renewables and power at Rystad Energy, adding that numerous bottlenecks persist across countries for renewables deployment such as permitting and grid challenges.

Jigar Shah, the director of the US Department of Energy’s Loan Programs Office, said the IRA tax credits will help make clean technologies more economical for less-wealthy nations to adopt.

“It is the responsibility of the US to commercialise these technologies and to make them cost effective for countries around the world to be able to deploy,” Shah said. (Amanda Chu)

Power Points

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Energy Source is written and edited by Derek Brower, Myles McCormick, Justin Jacobs, Amanda Chu and Emily Goldberg. Reach us at energy.source@ft.com and follow us on Twitter at @FTEnergy. Catch up on past editions of the newsletter here.