rethink sustainability
Electrification of the economy: a necessary modernisation for a sustainable future
Article published on rethinkeverything.ilsole24ore.com in partnership with Il Sole 24 Ore
Electrifying a country once meant modernising it by bringing light and other conveniences into every home. Today, we need a new kind of electrification. We need clean, green power generated without the use of fossil fuels that produce climate-changing greenhouse gas emissions. This is the new modernisation: achieving net zero emissions by using electricity.
Electricity from renewable sources
The world has a growing need for energy, but around 80% of global energy consumption is still based on the use of fossil fuels. The way to power growth without leading us further into the climate crisis is to use zero-emission renewable energy sources such as hydro, solar, wind and geothermal. This needs to come alongside increased energy efficiency – the second pillar of the energy transition – and needs to happen in every sector of the economy, from agriculture to transport to construction.
Electrification today means using renewable electricity in all elements of end consumption, from domestic needs such as cooking and heating all the way through to transport and industrial production. Some industrial sectors are considered “hard to abate”, so other solutions are being considered for these areas, such as the use of green hydrogen. Change is possible: 86% of all new electricity generation capacity in 2021 was from renewables.
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Beyond renewables, increasing the spread of electrification will require energy storage systems. The sun and the wind may be theoretically unlimited sources of energy, but they are highly variable as they are dependent on weather conditions. Using them to power our economy – including a rising number of electric vehicle charging stations – means we will need new transmission networks that can withstand extreme weather phenomena. These will also need to be digitalised to manage peaks and troughs in energy supply and demand.
More efficient energy use
Electrification also allows for more efficient energy use. Engines in vehicles, boilers and industry that burn fossil fuels are dependent on heat, making them inherently inefficient and consequently more costly to run than they need to be. The internal combustion engines used in cars convert 60-80% of their total energy input into waste heat. An electric motor, on the other hand, produces very little heat. This means an electric car can travel three times further than a traditional car on the same amount of energy input.
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Industrial processes that use fossil fuels to generate heat face similar efficiency problems, although to a lesser extent than in transport. Electrically powered products and industrial systems can provide the same amount of output for a fraction of the energy.
Other advantages of electrification
Electrification offers numerous benefits beyond its contribution to decarbonisation and ability to cut costs. These include reducing urban pollution, which mainly stems from vehicle emissions and the heating systems in our buildings. Electric vehicles and heat pumps not only produce no CO2, they also emit no atmospheric particulates such as nitrogen oxides.
Electrification also enables more flexible use of energy as it is no longer produced by large power stations but by generating facilities of all sizes – right down to household level. The Internet of Things is taking things further by enabling customised use of energy within neighbourhoods, workplaces and the home, as and when needed.
The circular economy is also advanced through electrification, because much of the new energy infrastructure – wind turbines, solar panels, smart meters, transformers – is recyclable or reusable. The same is true of the raw materials used to make them: the silicon in solar panels, and the lithium, copper and aluminium in batteries. Electrification also has safety advantages because it eliminates risks of fire and explosion linked to the use of gas and other combustible fuels.
The most competitive option
Electrification using renewables is already the most competitive option in terms of energy production and consumption costs. This is primarily because of the unlimited availability of renewables, which is not the case with fossil fuels.
From an economic point of view, the direct electrification of our economy using renewables is an anti-inflationary choice. Installation costs for wind turbines, solar power and batteries have tumbled by over 80% in the past decade, and photovoltaic solar power is now the cheapest source of electricity in history, according to the International Energy Agency.
A revolution is underway
This new electrification is already underway. Annual global investments in low-carbon energy technologies (including not just renewables, but also storage and biocombustibles) surged by 31% in 2022 to exceed USD 1 trillion for the first time, according to BloombergNEF. This put it practically head-to-head with investments in technology based on fossil fuels. Moreover, for the first time, investments in renewables are exceeding those in the oil and gas sector (excluding exploration). Renewables, power networks and storage now represent over 80% of total investment in the energy sector. For some technologies such as photovoltaic solar, batteries and electric vehicles, investments are growing at rates consistent with achieving net-zero emissions by 2050 at a global level.
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We at Lombard Odier firmly believe that sustainability is profoundly changing the risk-reward profile of investments in financial markets. We believe that the global economy is moving towards a model that is circular, lean, inclusive and clean: the CLIC® economy. It will be a significant change affecting energy, the materials sector, agriculture, food and land use.
Carbon emissions markets can play a key role in incentivising the transition in these sectors. Including the price of climate-changing emissions in business costs encourages companies to adopt low-emission technologies. At the same time, this shows consumers that prices are shifting in favour of an economic model that reuses and recycles more, and emits and discards less. Markets of this kind, particularly in the EU and the US, have led to emissions reductions in recent years that have not compromised economic growth.
We believe that the transition towards an electrified energy system represents a new industrial revolution that is happening at the speed of the digital revolution: electricity will cover 70% of all energy use by 2050, compared with 20% today. Regulatory changes to tackle climate change, rapid technological progress and decreasing costs will all drive this shift. Complex changes in the behaviour of individuals and consumers will play a part too. This transition will in turn bring about overwhelming systemic changes in numerous sectors and their value chains as the business world rethinks the way it produces goods and services.
Important information
This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This document was not prepared by the Financial Research Department of Lombard Odier.
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