2024 concluded as another annus horribilis for climate action, with COP29 blowing ‘hot air’, reinforced geopolitical tensions overshadowing the climate crisis, and the re-election of Donald Trump in the US.
We only have a couple of years left before spending the totality of the +1.5°C carbon budget. How will the recent political changes and global geopolitical tensions impact the transition?
The energy transition is not a question of ‘if’ — but of ‘when’ and ‘how’. Climate change is a physical reality, as seen in the recent deadly floods in Spain. Failing to act now means paying a higher price later, and forcing countries to adapt with far greater socio-economic consequences.
While waning political ambition may slow the transition, we see it as an unstoppable trend that will continue to reshape our societies. The decisions guiding this energy transition will be increasingly driven by the pursuit of greater economic competitiveness and the imperative to secure maximum independence in energy supply chains.
A delayed transition is now the most likely scenario
Global GHG emissions rose to 57.1Gt CO2e in 2023, up 1.3 per cent over a year. Unfortunately the peak of global emissions is now further away on the horizon. Current climate commitments are steering us toward a best-case global warming scenario of +2.6°C with severe environmental, social and economic consequences. The lack of ambition shown in Baku at COP29 and the election of Donald Trump in the US are not signals of hope, at least on the medium term.
However, on the ground, many technologies key to the energy transition are showing very strong development, first and foremost renewables. Global renewable capacity is expected to grow by 2.7 times by 2030, surpassing countries’ ambitions by nearly 25 per cent. This represents an additional 5,500 GW of capacity, with about 60 per cent of this growth occurring in China. While this falls short of the net zero trajectory objective of tripling renewable capacities, it underscores that renewable development is now less driven by environmental regulation and subsidies, and thus less subject to political volatility.
Politics and regulation are no longer the sole compass of this transition
The Inflation Reduction Act (IRA) in the US showed how regulations can accelerate the transition. Although Trump announced he would aim for a repeal of this Act, a full repeal is unlikely given its economic benefits in many Republican-led states. Trump’s anti-environmental stance is likely to focus on symbolic decisions that shouldn’t jeopardise economic growth, such as reducing the power of federal agencies or repealing emissions and pollution controls.
While regulations can accelerate the transition, the rapid deployment of renewables globally is now mostly driven by economic factors. Renewables have become the cheapest source of electricity in many regions thanks to a continuous improvement in their global weighted average Levelized Cost Of Energy (LCOE) – which technological advancements are expected to further reduce. Meanwhile, thermal power generation is challenged by rising carbon costs and volatile commodity markets.
Amid global trade tensions, the clean tech supply chain is becoming a key geopolitical battleground
A trade war is brewing between the US and China, and to a lesser extent Europe, aiming to protect local clean tech industries. The clean tech sector has become a prime target for protectionism, as seen in May with tariff increases on Chinese products such as electric vehicles (EVs), solar cells, EV batteries and non-EV Lithium-ion batteries, or the Intergovernmental Critical Mineral Task Force Act enacted in September 2024 that aims to reduce US reliance on China for critical minerals used in clean tech.
This means that building regional clean tech supply chain and ensuring access to critical minerals is now seen as a matter of competitiveness and sovereignty – one of the few topics that has bipartisan support in the US. This should serve as a guiding thread in decisions made beyond political divides.
The situation is similar in Europe. Despite the new Parliament and Commission’s softer stance on environmental matters, it is unlikely that the EU will dismantle flagship regulation such as the Net Zero Industry Act, which first and foremost aims at ensuring Europe’s competitiveness and independence on the long run.
Ultimately, while the regionalisation of clean tech supply chains is likely to increase the overall cost of the transition, it will require even more investments in clean technologies and their supply chains, creating larger investment opportunities.
How to seize investment opportunities in this new context?
Investments in the transition are on track to reach $2 trillion in 2024, a 60 per cent increase since 2015. According to the International Energy Agency’s (IEA) central “Announced Pledges” scenario, this number is expected to double in advanced economies and China, and quadruple in developing economies, reaching nearly $3.7 trillion. In the net zero scenario, investments are projected to increase to $4.8 trillion. Both scenarios create a wide range of opportunities for investors across a variety of technologies.
Electrification is key – with significant increase expected in power demand
Electrification is key to decarbonising the global economy. Global electricity demand is expected to rise faster over the next two years (+3.4% annually through 2026), driven by demographics, new usages such as AI (data centers are expected to consume 1,000 TWh by 2026) and the electrification of energy needs in buildings, industry and transport. In its base case “STEPS” scenario, the IEA sees electricity demand growing by 1000TWh per year throughout 2035 (45 per cent coming from China), equivalent to adding another Japan to global electricity consumption every year.
The deployment of renewables is driven by increasing power demand and favourable economics
The global weighted average LCOE for utility-scale solar PV projects is now at $0.049/kWh 29 per cent lower than the cheapest fossil fuel-fired option. The economic benefits of solar and wind technologies are compelling, even without subsidies. The Inflation Reduction Act and the Bipartisan Infrastructure Law have laid the groundwork for clean energy progress, and local, state and private sector leaders are expected to carry this momentum forward. Increasing power demand and further improvements in LCOE are the key drivers of the 2.7x increase in capacity by 2030 envisaged by the IEA in its base case scenario.
Massive grid investments are required to unlock the green potential
Upgrading and expanding transmission infrastructure is essential to decarbonise power systems. In the U.S., more than 70% of grid transmission lines and transformers are old and vulnerable to power outages, cyber-attacks, and susceptible of causing wildfires. According to the IEA, investments in grids must double to over $900 billion annually to meet climate goals, with every 1$ invested in renewables requiring another 1$ in grids. As of 2023, almost 1,500 GW of advanced wind and solar projects were in global connection queues, waiting to connect to the electricity grid due to a lack of grid availability. Governments have a crucial role to play in unlocking investments in larger, more resilient and more digitalised grids.
The (still) missing piece to net zero power systems: energy storage
The demand for storage solutions is rising rapidly. Battery storage capacity was projected to grow by 82 per cent in 2024, with technological improvements allowing to reduce costs and improve efficiency up to 2030. In particular, sodium-ion battery technologies and on the longer term solid-state batteries are expected to help resolve the stationary storage technological conundrum, that has so far prevented energy storage system from playing the role they should in decarbonising power grids. We expect technological breakthrough in this space to happen before 2030.
Conclusion
The political developments of 2024 have challenged the transition to net zero. However, the physical reality of climate change remains the same, or worse. A senior US advisor said in Baku: “This is not the end of our fight for a cleaner, safer planet. Facts are still facts. Science is still science. The fight is bigger than one election, one political cycle in one country”.
The momentum around the transition is now supported by the drive for increased economic competitiveness and the need to ensure maximum energy supply chain independence, that should mitigate the influence of shorter-term political changes. Ultimately, in the context of deglobalisation, investments needed for the transition are likely to be higher than expected, creating a wide range of investment opportunities.