How can a market war for sustainable fuel resources be prevented?

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Ameya Hadap, Specialist, Climate Innovation, World Economic Forum, Thibault Villien De Gabiole, Lead, Industry Decarbonization – Trucking, World Economic Forum, Laia Barbarà, Acting Head, Climate Strategy, World Economic Forum

• With the growing demand for greener alternatives, the competition for renewable resources has intensified.
• We must address fair distribution, supply chain solutions, technological advancements, policies and the importance of investment and partnerships to accelerate the allocation of renewable resources by 2030.
• Industry specialization and equitable allocation provide a blueprint for mitigating resource competition, while the imperative of manufacturing at scale underscores the need for global collaboration.

Amid a global drive towards sustainable energy, here we aim to untangle the complexities of allocating limited renewable resources among industrial and mobility sectors. Finite renewable hydrogen, electricity and biomass feedstocks beg the question of whichindustries are most in need of sustainable feedstocks.

With the growing demand for greener alternatives, the competition for renewable resources has intensified, prompting key players to address pressing questions about fair distribution, innovative supply chain solutions, technological advancements, effective policies and the importance of investment and partnerships to accelerate the allocation of the limited renewable resources by 2030.

In this article, we reflect on how to better ensure a collaborative spirit among sectors, instead of a cannibalizing approach to feedstock allocation in the race to decarbonize first.

The future green energy mix

The future energy mix will require an all-of-the-above approach, with efficiency profiles, transport limitations and supply chain considerations shunting demand centres to different energy sources. Many key clean technologies (electric vehicles, heat pumps and water heaters, to name a few) will draw their energy from the grid — with those electrons produced from zero-carbon sources — while others will need to rely on clean fuels, such as biofuel, hydrogen and others. Each one of these resources lends itself to particular use cases. This raises the stakes of the allocation question.

For example, hydrogen, a promising clean energy carrier, relies on water and clean power as feedstock. And, with climate change destabilizing global weather patterns — drought can threaten hydropower and nuclear power installations, for instance, while rising global temperatures are forecast to reduce wind speed around the world — the availability of renewable energy sources for hydrogen production alongside electricity generation is not guaranteed. Regions, such as the south of Spain, facing water shortages, highlight the need for a nuanced approach to utilize available resources to make hydrogen efficiently.

The dilemma of allocating green power to hydrogen production or directly greening the grid has become a contentious element of transition debates. The answer will be contingent on the existing energy mix, with a key factor being the current carbon intensity of the grid. Striking the right balance is imperative for an effective energy transition.

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What’s the World Economic Forum doing about the transition to clean energy?

Moving to clean energy is key to combating climate change, yet in the past five years, the energy transition has stagnated.

Energy consumption and production contribute to two-thirds of global emissions, and 81% of the global energy system is still based on fossil fuels, the same percentage as 30 years ago. Plus, improvements in the energy intensity of the global economy (the amount of energy used per unit of economic activity) are slowing. In 2018 energy intensity improved by 1.2%, the slowest rate since 2010.

Effective policies, private-sector action and public-private cooperation are needed to create a more inclusive, sustainable, affordable and secure global energy system.

Benchmarking progress is essential to a successful transition. The World Economic Forum’s Energy Transition Index, which ranks 115 economies on how well they balance energy security and access with environmental sustainability and affordability, shows that the biggest challenge facing energy transition is the lack of readiness among the world’s largest emitters, including US, China, India and Russia. The 10 countries that score the highest in terms of readiness account for only 2.6% of global annual emissions.

To future-proof the global energy system, the Forum’s Shaping the Future of Energy and Materials Platform is working on initiatives including, Systemic Efficiency, Innovation and Clean Energy and the Global Battery Alliance to encourage and enable innovative energy investments, technologies and solutions.

Additionally, the Mission Possible Platform (MPP) is working to assemble public and private partners to further the industry transition to set heavy industry and mobility sectors on the pathway towards net-zero emissions. MPP is an initiative created by the World Economic Forum and the Energy Transitions Commission.

Is your organisation interested in working with the World Economic Forum? Find out more here.

Key policies for shaping the green fuel market

The emergence of champions in both demand and supply chains is essential for successfully navigating the energy transition. Companies committing to energy transition targets serve as exemplars on the demand side, driving the push for cleaner alternatives. An equally critical need exists, however, for leaders spearheading the transition in the supply chain, steering industries away from traditional fossil fuels towards green molecules.

While the current supply meets existing demand, the pivotal question revolves around the timeline – how fast can production and demand align with climate ambitions? The market is deemed unlikely to regulate itself to achieve this alignment; crucial government interventions are necessary to ensure price stability and to incentivize production and demand.

Regulations, such as procurement mandates, play a significant role in incentivizing investments in green technologies or sustainable fuels. Similarly, carbon pricing is increasingly considered across industries as a powerful tool, capable of creating a level playing field and incentivizing the adoption of green alternatives. The success of the Emissions Trading System (ETS) in Europe served as a testament to the transformative potential of the carbon pricing mechanism.

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The market alone is insufficient to address the competitiveness challenge of alternative energies against the price and energy potential of fossil fuels. Policy intervention is essential to incorporate climate damage externalities into the overall cost of consuming fossil fuels. Without these measures, achieving a net-zero future remains unattainable.”— Maarten Wetselaar, CEO of Cepsa

Moreover, a robust certification scheme will be vital to prevent fraudulent production and enhance the premium value of clean energy feedstock. The European consumption of used cooking oil (UCO) serves as a poignant example, having more than doubled since 2015, primarily driven by its use in biodiesel for cars and trucks and expectations of it becoming a key component in sustainable aviation fuel (SAF). However, challenges arise as there have been reported instances where virgin oils, such as palm oil, are suspected of being falsely labelled as “used.” This deceptive practice aims to exploit the elevated value attributed to genuinely green fuels, emphasizing the critical need for a comprehensive, audited and globally recognized certification system to foster customer trust and guarantee the origin and nature of the product.

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Implementation of carbon pricing, traceability and reporting schemes are incentivizing decarbonization at lowest cost in the industrial sector, especially cement, but their full effectiveness depends on addressing carbon leakage and ensuring clear monitoring, reporting and accounting rules are in place.”— Maria Mendiluce, CEO of We Mean Business Coalition

This extends to the key role of establishing stringent standards for the mitigation of the environmental impact of biomass production. These standards serve as crucial guidelines, encompassing practices that promote biodiversity conservation, responsible land use management and sustainable agricultural methods.

Industry specialization and feedstock allocation

Industry specialization is a potential more organic solution to alleviate the competition for the same resources. By diverting different types of energy to different industries, the pressure on identical feedstock can be alleviated, fostering a more sustainable and equitable approach.

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There are certain industries that, for example, have the ability to operate using completely static forms of power. That’s where direct connection to wind or solar becomes extremely powerful… because you have energy loss or energy erosion as you transport green fuel in a non-green manner. We’re also looking at helping people understand how they can use solid-state batteries so as to not compete for lithium-ion resources. So we think about specialization of industries.”— Brandon Daniels, CEO of Exiger

Specialization and allocation informed by market conditions and physical limitations is the subject of a growing body of work aimed at analyzing the most efficient ways to decarbonize a given industry. For example, hydrogen may be well suited for the decarbonization of steel manufacturing, but less well suited as a fuel for smaller passenger vehicles (as compared to other decarbonization pathways). Roland Berger and BloombergNEF, among other organizations, are pioneering such work in an effort to optimize the deployment of these rapidly growing fuels. Additionally, to drive the same type of cost reduction experienced by the solar industry, large-scale manufacturing of key components will need to grow. Electrolyzers are of particular concern, with their production currently concentrated in just a few countries.

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It’s all about manufacturing. The climate war will only be won if manufacturing ramps up. So the strategic question is… can policymakers around the world find ways to actually create the supply chain that we need? We need an Airbus for electrolyzers, a Boeing… Let’s start with the factories. We can do it in five years if we get our act together.”— Marco Alverà, CEO of Tree Energy Solutions

The way forward

To conclude, the dual focus on demand and supply chain champions, coupled with strategic government interventions, will be a linchpin for successful decarbonization. Incentivizing production and demand through mechanisms like carbon pricing, mandates and certification schemes is imperative for accelerating the transition to cleaner alternatives.

Industry specialization and equitable allocation provide a blueprint for mitigating resource competition, while the imperative of manufacturing at scale underscores the need for global collaboration.

As the world grapples with the urgency of climate action, these learnings serve as guiding beacons for shaping a sustainable and resilient energy future.