Download PDF Summer Bridge on Engineering the Energy Transition June 26, 2023 Volume 53 Issue 2 This issue explores the energy transition needed to address the mounting threats of climate change. The articles are an excellent resource to help inform meaningful decisions and steps for energy-related contributions to reduce carbon emissions. The Energy Transition: Energy Industry Concerns as Reflected in Consulting Companies’ Analyses Wednesday, June 7, 2023 Author: Thomas F. Degnan Jr. What are the most significant concerns and technical uncertainties for business leaders who allocate capital for the energy transition? Commitments to a net zero carbon goal have increased dramatically over the past several years. However, countries are generally falling short of commitments made in the 2015 Paris Climate Accord. Despite analyses showing feasible pathways to achieving a delta global 1.5°C cap using current technology, there is a widely held belief that the world will exceed the Paris target. The root causes of society’s potentially missed climate change targets go beyond the need for scientific breakthroughs, energy technology innovation, or financing. An important additional factor is the perception of energy industry decision makers of the impacts of other constraints. Introduction My meta-analysis of studies by consulting firms in the energy and environmental sector shows a prevalence of three constraints: access and availability of critical raw materials, adequate technical personnel to address permitting requirements and carry out the necessary capital projects, and concerns related to the scalability of sustainable technologies. Uncertainty associated with efforts needed to address these constraints likely influences resource commitments by CEOs and boards of directors of major organizations in the energy sector. Balancing the allocation of capital investment and human resources while addressing shareholder financial expectations and responding to the growing negative public perception of fossil fuels is a daunting challenge for business leaders. The history of previous “energy transitions” has been well chronicled (Smil 2016, 2017). What differentiates the current energy transition, to net zero carbon, is that it is not motivated by either energy resource scarcity (as was the case in Britain’s transition from wood to coal) or significant improvements in energy efficiency (as in the transition from the steam engine to diesel) but by the prospect of an environmental cataclysm. Delays in addressing this potential cataclysm are due mainly to societal denial that climate change is real. Confounding factors are uncertainties associated with measuring and attributing emissions, confusion between weather effects and climate change, and an erroneous sense that impacts will become evident only in the “distant” future. Costs and Savings This next energy transition could be expensive—not only in dollars but also in its draw on non-earth--abundant materials and human resources. Cost estimates to achieve a net zero carbon (NZC) global economy range from $125 trillion (Climate Champions 2021) to $275 trillion over the next 30 years (McKinsey Global Institute 2022), equating to $9.2 trillion in annual average spending on physical assets, $3.5 trillion more than today. In relative terms, that increase is equivalent to half of global corporate profits and one-quarter of total tax revenue in 2020 (Krishnan et al. 2022). However, McKinsey projects that expenditures—for the capital, labor, and other resources needed both to construct a new energy infrastructure (e.g., for wind, solar, renewables) and to deconstruct the existing energy infrastructure as appropriate to achieve NZC emissions—should increase GDP by only 0.9 percentage point over maintaining the status quo (McKinsey Global Institute 2022). The International Monetary Fund (Stanley 2021) and International Energy Agency (IEA 2021b) similarly estimate the necessary incremental investment over the next decade at 0.6–0.9 percent of cumulative output. On the other hand, a recent analysis concludes that a rapid green energy transition will likely produce $5–15 trillion in net savings and that, by 2050, rapid conversion of the energy system will cost an average of $5.9 trillion a year (Way et al. 2022). In contrast, maintaining the status quo will average $6.3 trillion annually. The study projects an 80 percent likelihood that an NZC energy economy will be cheaper than continuing with the fossil fuel–based system. Another study estimates that the total global cost of doing nothing to pursue the 1.5°C maximum global temperature increase target could be $125–800 trillion between now and 2100 (Wei et al. 2020). In the analyses considered here, costs will accrue nonlinearly, with most of the expenses or cost benefits realized in the first 10–15 years. Unfortunately, many sustainable energy technologies are currently economically challenged or viewed by some as politically unsavory. The comparative costs of doing nothing should also account for societal impacts such as the effects of fossil fuel combustion on public health (Kopel and Brower 2019). But the costs of health impacts—such as respiratory disease attributable to fossil fuel combustion products (NOx, CO, SOx)—are very difficult to quantify in dollars. Finally, studies have concluded that several paths to an NZC global economy are technically achievable using current energy-producing technologies (IEA 2021b; Jacobsen 2020; Kelly 2021). No major scientific breakthroughs are required, but there are unarguably many economic and logistical advantages to be gained from technology improvements. Unfortunately, many sustainable energy technologies are currently economically challenged (e.g., carbon capture and storage) or viewed by some as politically unsavory (e.g., nuclear, geoengineering, and offshore wind in some locations). Wind and solar costs in many regions have declined to parity with—and are now often lower than—-comparable costs for the most economical fossil fuel–produced electricity on an energy-delivered basis. Nevertheless, many nonfossil technologies remain grossly uneconomic, including green hydrogen, carbon capture and sequestration, and ambient air CO2 capture. Even where they are economical, sustainable energy systems struggle to achieve the same functionality, reliability, and efficiency as fossil fuel–based systems. An (Over)Simplified Energy Transition Model While the objective of net zero carbon is technically achievable—and there seems no alternative than to pursue it—progress is confounded by society’s slower-than-needed response. Indeed, to draw on a chemical analogy, a net zero carbon society is thermodynamically achievable but kinetically limited. Continuing the chemical analogy, the “catalysts” are human resources, policy, infrastructure, capital, and access to critical raw materials (figure 1). However, there are parallel reaction paths: the current energy system (bottom row of figure 1) must be maintained while the net zero path (top row) is accelerated. Both -reactions draw on the same catalysts, and balancing the catalyst allocation in the most cost- and capital-efficient manner is the challenge facing decision makers in the energy industry. The implications of the war in Ukraine and the global pandemic increased attention to the energy security risks associated with the current energy system. As a result, energy security has displaced energy sustainability as the more important priority for leaders in the Organization for Economic Cooperation and Development, at least for the near term. But most of the capital investment and resources required to move to a net zero carbon society by 2050 must be made in the next 10 years. Except for coal and coal-fired power plants, existing fossil-fueled energy infrastructure has been difficult to replace. Nearly all new sustainable energy supplies have been additive: growth in energy-producing capacity via renewables has been on top of existing fossil fuel–based capacity. Nuclear power plants have been shuttered in Germany and the United States, but when energy shortages have occurred, natural gas and even coal-fired power plants have been brought back online. Petroleum refining capacity has remained constant or slightly increased over the past decade even as the number of refineries has diminished and fuel manufacture has shifted geographically. As global energy demand is expected to grow by about 1.2 percent per year over the next two decades, oil and gas together are likely to remain critical in the global energy mix, accounting for 52 percent of the energy basket in 2040 (Mukhergee et al. 2019). Key Concerns for Industry Decision Makers Apportionment of the resources (i.e., catalysts) necessary for the energy transformation is primarily the responsibility of decision makers in the energy industry (CEOs and boards of directors). Lawmakers and senior government officials provide subsidies, institute new regulations, and set expectations, but it is energy industry leaders who make critical cost-benefit decisions in capital and human resource deployment. It is therefore imperative to understand how these leaders visualize the future and what factors are most important in their decision making. Their thinking is influenced not only by shareholder sentiment but also by the ability of their company to operate within government constraints (e.g., regulations, tax structure). Surveys of the Top 10 Energy and Environment Companies To determine the critical factors that influence key decision makers, I drew on surveys regularly conducted by respected consulting companies in the energy and environment space. According to Forbes, the top 10 management consulting companies in energy and environment are Accenture, Analysis Group, Aon, Bain & Company, Booz Allen Hamilton, Boston Consulting Group, Deloitte, IBM, McKinsey & Company, and PricewaterhouseCoopers (Sairam 2022). All have published extensively on the topic of energy transitions, and most have a long history of working closely with client firms in the energy field. The information produced by these management consulting companies has a significant advantage: it is public and candid, gleaned from anonymous responses of energy industry decision makers. My assessment of management responses (cited in published reports, blogs, and press releases) reported by these top 10 consulting companies (table 1) plus published IEA reports revealed three concerns as especially significant: access to critical natural resources; availability of experienced technical personnel, especially engineers; and scalability of technology (i.e., the ability of both new and existing energy technologies to be commercialized and deployed at scale). Access to Critical Resources (Metals) Understandably, at or near the top of the list of executive technical concerns is the availability of and access to critical raw materials, including copper, nickel, cobalt, aluminum, rare earth elements (necessary for high-performance magnets and motors), and chromium (figure 2). Copper is particularly significant as electrification sufficient to meet NZC targets requires an unprecedented 60 percent increase in the global supply of copper (Pickens et al. 2022). Higher prices should stimulate growth in the supply of copper, but political, social, and environmental challenges to this increased supply are also likely to grow. Nickel is “critical” or “very important” to 6 of the 10 major energy sectors. Russia sources 20 percent of the global nickel supply, which is no longer exported to Western markets because of sanctions. Nickel has unique properties essential to the operation of geo-thermal energy, batteries for electric vehicles (EVs) and energy storage, hydrogen, wind, concentrating solar power, and nuclear. Many applications require only small amounts of nickel, but they are critical to efficiency and durability (Nickel Institute 2021). Cobalt is essential for EVs and battery storage. The IEA projects that demand for cobalt will grow by 500 percent between 2020 and 2040 (Mishra 2022). The Democratic Republic of Congo provides about 70 percent of the world supply, but its questionable environmental and governance history adds to the supply uncertainty. Diversification is possible (Australia has large deposits), but infrastructure and supply chain development will take time—likely a decade or more. Fortunately, although metals and minerals are unavoidably energy intensive and often environmentally challenging to produce, in many cases they can be recovered and recycled. Scalability Deployment of new technologies and broader deployment of existing sustainable energy technologies must pass scalability tests, a major source of uncertainty. Scalable technologies must conform to either of two models. The first is the classical economy of scale model, where capital costs decline with size and breadth of deployment. Capital projects typically follow the two-thirds rule: capital expense = k (project size)2/3 where k = $/capacity (in m3, ft3, etc.). In this model, the plant or facility, and thus the technology, becomes more affordable as its breadth and size increase. The second model involves a modular approach, where the strategy is “design one, build many.” It is often proposed for small modular (nuclear) reactors (Liou 2021). In both models, technical confidence grows with deployment. Investors often refer to the “valley of death” in startups; in technology development and deployment, unproven technologies have to traverse a “valley of uncertainty” before they are accepted and widely deployed. The time required to scale from technology concept to commercial deployment varies greatly. For example, new software or digital inventions can scale in a -matter of months, but capital-intensive technologies can require decades. Renowned economist Edwin Mansfield (1968) analyzed the time intervals between invention (i.e., patent issuance) and commercialization of 37 inventions across selected industries. Most of these discoveries were related to capital-intensive industries (e.g., chemicals, energy processes, new products like plastics) rather than information-based or digital (table 2). The average discovery-to-commercial time was just over 13 years, and the median was 10. It is worth noting that some of the inventions with the shortest interval to commercialization (Freon refrigerants [CFCs], tetraethyl lead octane enhancer, and DDT) were the most societally regrettable because of their dramatic negative environmental impacts. There is no comparable study of the commercialization of digital inventions, although some references cite a range of 4 to 12 months (Wardynski 2022). The most ubiquitously cited example of concept to first commercial demonstration is the iPhone, which took 30 months (Silver 2018). The iPhone example notwithstanding, moving a capital-intensive new technology to the commercial stage in less than a decade remains an immense challenge. Widescale adoption and deployment can take just as long. The first diesel engine was commercially manufactured in 1897, and the first passenger vehicle with a diesel engine was launched by Mercedes-Benz nearly 40 years later, in 1936 (Smil 2013). It was not until the 1960s that diesel engines became the preferred power source for commercial trucking and marine shipping industries—even though the diesel engine was unquestionably superior to the steam engine and the gasoline-spark engine in terms of energy efficiency, reliability, and durability. Clearly, technical superiority is not always the most significant driver for change. It remains difficult for emerging technologies to displace existing technologies that society finds familiar, convenient, and reliable. While entirely new energy technologies are not required to achieve net zero carbon, they will be desirable to address the needs of difficult-to-decarbonize energy consumers. These include aviation, long--distance transport and shipping, chemicals production, production of carbon-intensive structural materials such as steel and cement, and provision of a reliable electricity supply that meets varying demands: “In 2014, difficult-to--eliminate emissions related to aviation, long--distance transportation, and shipping; structural materials; and highly reliable electricity totaled ~9.2 Gt CO2 or 27 percent of global CO2 emissions from all fossil fuel and industrial sources” (Davis et al. 2018). The demand for energy for difficult-to-decarbonize segments is projected to increase substantially over the next 30 years. Capital investment today in the infrastructure to support these segments will determine achievement of NZC targets. It is difficult for emerging technologies to displace existing technologies that society finds familiar, convenient, and reliable. Another sector that will be difficult to decarbonize is the residential sector—not just home heating (where heat pumps are making inroads) but gas-fired stovetops, ovens, fireplaces, and ornamental lighting. Scalability also, of course, relates to the ability of a technology to be deployed widely. For example, offshore wind technology is scalable in Europe but has been challenged by a number of factors in the United States, where there are only two functioning offshore wind farms (Block Island Wind in Rhode Island and Coastal Virginia Offshore Wind), although several others are at various stages in the permitting process. The two US wind farms have a combined generating -capacity of 42 MW; in contrast, Europe has 123 operating wind farms in 12 countries with a collective production capacity of 28.4 GW. Engineering Skills and Experience In addition to challenges associated with capital, critical raw materials, and technical readiness, lack of engineering skills constrains implementation of the energy transition. Lawmakers have focused on reducing permitting times for new projects and streamlining environmental and community approval processes, but the underlying problem is a lack of qualified engineers to conduct the studies, issue the reports, and certify safety and environmental suitability. As a result, approvals for clean--energy projects are lagging. As the New York Times recently reported, “more than 8,100 energy projects—the vast majority of them wind, solar and batteries—were waiting for permission to connect to electric grids at the end of 2021, up from 5,600 the year before, jamming the system known as interconnection. On average, it takes roughly four years for developers to get approval for wind and solar installation—double the time it took a decade ago” (Plumer 2023). Reskilling and upskilling the workforce must be concurrent with onboarding new talent. The transition to renewable energy and the race to net zero will create opportunities but should also offer the chance to leverage transferable skills across the oil and gas workforce (Krauss 2023). The number of new positions created by the transition is expected to dwarf the number of jobs lost. The World Economic Forum, for example, predicts that the transition to clean energy will generate 10.3 million net new jobs globally by 2030 (Wallach 2022), more than offsetting the 2.7 million jobs expected to be lost in fossil fuel sectors. The Forum projects that job gains will likely be largest in electrical efficiency, power generation, and the automotive sector. Many of the new positions will require engineering skills. Unfortunately, McKinsey and others report that most new engineering graduates are not focusing on careers in energy but instead seek jobs in IT and artificial intelligence (Abenov et al. 2023; ASEE 2021). The United Kingdom is at the forefront of analyzing the suitability of its engineering workforce for a net zero carbon future (Hardisty 2022), and NZC electrification projects are expected to create over 400,000 new jobs there by 2050. In the United States the energy transition is projected to create 500,000 to 1 million new jobs in the 2020s. Regulatory Policy As the difference in European and US wind farms shows, renewable energy technologies will not scale uniformly across all economies. They may be more rapidly and widely deployed if matched with economies that can accommodate and support them with the financial wherewithal, a strong regulatory environment and enforcement provisions, and a skilled workforce. Most companies in the energy area are aware of potential changes in the regulatory environment; they anticipate them and try to stay out in front of them. Being at the vanguard can be a competitive advantage, especially if it means being viewed as an environmentally responsible company by employees, shareholders, and the public. A “Disorderly Transition” A 2022 Bain & Co. survey of 1,000 executives across the national and international energy and natural resources sector reported “a growing consensus” that the transition will be “disorderly” (Parry et al. 2022). Concerns about a disorderly transition are due to problems associated with raw materials and talent acquisition and challenges in matching business models to a changing business environment (a form of scalability). The Bain & Co. survey also showed that the executives had very different ideas about the timing to achieve net zero carbon: 42 percent felt that it could be achieved by 2050, and 25 percent felt that it would not be achieved until after 2070; the median date projected by the executives was 2057. Conclusions There are no simple strategies to assuage energy industry decision makers’ concerns related to critical raw -materials availability, adequate experienced technical staffing, and scalability. As recommended by the IEA (2021b), diversification of raw material sources and greater emphasis on -recycling while focusing on environmental compliance may increase the supply of copper, nickel, cobalt, and rare earth elements. Enhancing interest in STEM careers—and especially engineering—may help address the anticipated shortage of technical professionals in the energy industry, given, as noted above, that many more jobs will be created than destroyed in the energy transition. Both -reskilling and training of the next generation of engineers will be important, but the reality is that experienced technical professionals develop their expertise over decades. Success in the rapid, widescale deployment of efficient energy technologies can likely be improved by matching the technologies to economies that have a capable workforce as well as well-conceived policies and subsidies. That said, the widespread availability of new technology will probably remain constrained by about a decade between invention and commercialization. Compounding this inherent constraint, the Bain & Co. report notes that “executives are finding it challenging to square the traditional demands of their business—delivering products safely, securely, reliably, and affordably—with new demands to operate more sustainably and with a smaller carbon and ecological footprint. To succeed they’re facing new challenges such as finding the right talent and navigating the policy regimes” (Parry et al. 2022). Unless industry executives’ concerns are addressed, their predictions for achieving net zero carbon may likely be more accurate than those of nonindustry experts. References Abenov T, Franklin-Hensler M, Grabbert T, Larrat T. 2023. Has mining lost its luster? Why talent is moving elsewhere and how to bring them back. McKinsey & Company. ASEE [American Society for Engineering Education]. 2022. Engineering and Engineering Technology: By the Numbers (2021). Climate Champions. 2021. What’s the cost of net zero? Nov 3. UN Framework Convention on Climate Change. Davis SJ, Lewis NS, Shaner M, Aggarwal S, Arent D, Azevedo IL, Benson SM, Bradley T, Brouwer J, Chiang Y-M, & 22 others. 2018. Net-zero emissions energy systems. -Science 360(6396):eaas9793. Hardisty M. 2022. Sleepwalking towards a net zero skills shortage. Chemical Engineer, Dec 15. 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Empirically grounded technology forecasts and the energy transition. Joule 6(9):2057–82. Wei YM, Han R, Wang C, Yu B, Liang Q-M, Yuan X-C, Chang J, Zhao Q, Liao H, Tang B, & 3 others. 2020. Self-preservation strategy for approaching global warming targets in the post-Paris Agreement era. Nature Communications 11:1624.  Government decision makers and policymakers are also subject to the constraints discussed in this article, albeit to a somewhat lesser extent. I focus here on industry concerns.  The 10 sectors are solar, wind, hydro, concentrating solar--thermal, bioenergy, geothermal, nuclear, electricity networks, EVs and battery storage, and hydrogen.  Princeton Andlinger Center for Energy and the Environment, “Net-Zero America: Potential Pathways, Infrastructure, and Impacts,” 2021 (https://netzeroamerica.princeton.edu/?explorer=pathway &state=national&table=ref&limit=200) About the Author:Tom Degnan (NAE) is the Tony and Sarah Earley Professor in Energy and the Environment Emeritus, University of Notre Dame, and -manager (ret.), Breakthrough and New Leads Generation, ExxonMobil Research and Engineering Co.