A path to the energy sector transition

The EU faces an implementation gap of six years in cutting greenhouse gas emissions from the energy sector by 2030. Decarbonizing the energy sector is crucial to achieve the net-zero target as nearly three-quarters of the EU’s total greenhouse gas emissions originate from the production and use of energy, notably from fossil fuels such as coal, oil and gas. In this context, the EU’s Fit for 55 legislation has set a 55% reduction target by 2030 for total emissions (vs 1990 levels). For the energy sector, their proposal would result in a 45% emissions reduction by 2030 (vs 2015 levels). However, while the use of fossil fuels in the EU has been declining, and renewable energy is on the rise, the annual emissions reductions still won’t be enough to limit global warming to 1.5˚C. To comply with this goal, the EU needs EUR717bn of additional investments per year until 2030, including EUR118bn on the supply side (mainly for new power plants and grids) and EUR599bn on the demand side (mainly for the transport and residential sectors).

Coal, oil, gas: can they be phased out fast enough? In all the proposed Ff55 policy scenarios, electricity generation from coal must be phased out completely by 2030, but this looks highly unlikely. Although most EU member states and the UK have correspon-ding plans, Germany still lacks a full commitment (“ideally” by 2030) while the remaining Coal-5 countries (Poland, Bulgaria, the Czech Republic, Romania and Slovenia) have made commitments that come after the 2030 deadline. The share of oil in final energy demand is expected to decrease only slightly over the next ten years to 29% (from 37% in 2015) but will fall more dramatically in the following two decades. Yet, natural gas will remain an important fuel source to meet total energy demand for the time being, decreasing by only 13% in 2030 (from 2015 levels), until hydrogen, e-gas and biogas are ramped up.

In this context, companies can take control. The scope and timeframe with which fossil fuel companies plan to decarbonize is an important component in the energy sector transition. Together, these individual plans dictate a collective transition, which should be in line with a 1.5˚C future. Looking at the largest firms discloses the magnitude of the challenge: Most have to cut GHG intensities by half by 2035. For the EU as a whole, this implies that GHG intensity should be below the global average and reach negative net-intensities through carbon dioxide removal (CDR) by 2045.

Where do we go from here? Now more than ever, the decisions and actions of private and public corporations will play an increasingly important role in the energy sector's green transition. Overnight action is unrealistic, but fortunately there has never been a better time to ramp up investments in renewable energy: The cost of capital for rene-wable energy is now a whopping 15pp lower than that of fossil fuel competitors. A key area for investment is (green) hydrogen. The EU already has an ambitious goal to raise the share of hydrogen in Europe’s final energy demand to 30% by 2050, which provides European industry with a profitable opportunity in the form of a market worth EUR820bn in 2050. But investment in renewables must be simultaneously undertaken with de-investment from fossil fuels, which means governments need to reevaluate their sizable spending on fossil fuel subsidies.

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Markus Zimmer
Allianz SE
Arne Holzhausen
Allianz SE