What is the energy transition?

Total Primary Energy (EJ)

Innovation Peaking Rapid Endgame

change
900
The global energy system is transitioning from a
800
system mainly based on fossil fuels to one
700 renewables
mainly based on renewable energy sources.
600
The shift will involve:
500

400

300
near-term peaking of fossil fuel demand
200

100 fossil fuels

an S curve of renewable growth
0

the endgame for fossil fuel demand

2000

2020

2030

2040

2050

2060

2070

2080

2090
1980

1990

2010

2100
Source: Shell Sky scenario, CTI annotation

What is driving it?

Necessity Policy Technology

Environmental drivers Government actions These 3 major energy sources

enjoy both rapid growth and
need to reduce CO2 International agreements technology-driven learning curves
(G7 & Paris Agreement 2015)
need to control air pollution
need to address water scarcity reduced subsidies to fossil fuels
For each doubling in capacity their
subsidised renewable technologies
costs have been falling by 20%
Geopolitical drivers imposed efficiency targets
increased taxes on fossil fuels
Wind
escaping energy dependence
wish for geopolitical influence Private sector actions
Solar PV
risk that fossil fuel rents end
Divestment movement mobilised Li-ion batteries
capital to drive decarbonisition
Tech giants installing renewables
in their supply chains

Wind Solar PV Batteries

IRENA notes that renewables will be cheaper than fossil fuels in every major region of the world by 2020.
BNEF notes that the initial price of EVs will be comparable with that of conventional cars in the early 2020s.
Wind costs ($/MWh, global average) Solar PV electricity costs ($/MWh, global average) Li-ion battery costs ($/KWh, global average)
450 400 1200
$350/MWh
400
350
$1000/KWh
1000
350
300
300 800
250
250
200 600
200
$150/MWh
150
150 400
$50/MWh 100
100
Fossil-fueled power price range Fossil-fueled power price range $50/MWh
200
50 50 Internal combustion engine equivalent price range
$200/KWh
0 0 0
1980 1990 2000 2010 2020 2010 2012 2014 2016 2018 2020 2010 2012 2014 2016 2018 2020
Source: IRENA Source: IRENA Source: BNEF

Source: “2020 vision: why you should see the fossil fuel peak coming in the next decade.” Carbon Tracker 2018. Research by Kingsmill Bond. Designed by Margherita Gagliardi.
 The emerging market leapfrog
The motor of change now lies in the emerging markets, which is where all the growth in energy demand lies.

Where will the energy demand growth in the next 25 years come from?

27% 19% 19% 12%

India China Rest of Middle

Asia East

12% 7% 7% -5%

Africa Latam Eastern OECD

Europe
Source: IEA

Capital expenditure on renewables ($bn)

Developing countries Developed countries

250
$177 In 2015 developing markets overtook developed markets
200 bn as the largest source of capital expenditure on
150
renewables.

100
In 2017, developing markets spent $177bn on renewable
50 technologies, 1.7 times the spending of the developed
markets.
0
2005

2006

2008

2009
2004

2007

2010

2013
2012

2014

2015

2016

2017
2011

US and China solar PV and wind deployment (GW)

Source: BNEF

China wind China solar PV US wind US solar PV

In 2017, China had 164 GW of wind capacity, 1.9 times 180

that of the US; 131 GW of solar PV capacity, 2.6 times that 160
of the US; and 1.3 million EV, 1.6 times that of the US. 140 China overtook the US
as the largest deployer
120 of solar PV and wind capacity in 2012
100
2017 wind 2017 solar 2017 EVs 80
capacity PV capacity on the road 60
40
US China US China US China
20
0
1.9x 2.6x 1.6x
2000

2004

2008

2012

2016

164GW 131GW 1.3m EVs Source: BP

.Source: “2020 vision: why you should see the fossil fuel peak coming in the next decade.” Carbon Tracker 2018. Research by Kingsmill Bond. Designed by Margherita Gagliardi.
 Mechanics of the transition
There are three ways in which energy transition works its way into the energy system:

Decarbonization of Electrification of
Energy Efficiency
the electricity sector other end-use sectors

In recent years annual efficiency The rapid growth of solar and wind is The third step in the transition is the
gains increased significantly. As a decarbonising the electricity sector. The electrification of end-use sectors such
result, the amount of renewable energy use of fossil fuels in electricity as transport, buildings, and
required in order to create a peak in generation peaked across the OECD industry.
fossil fuel demand is three times lower. in 2007.

Share of final energy consumption

Energy demand growth 2015 (EJ) OECD electricity generation (TWh) from electricity in 2016

18 12000
Solar PV
16 Wind
10000
14 Buildings
Hydro
12 8000 Nuclear
Biomass
31%
10
6000
8 Industry
6 4000
Fossil
26%
4
2000 fuels
2
Transport
0 0 1%
Total without Efficiency Total with
2007
1985

1990

1995

2000

2005

2010

2015
2017
efficiency gains efficiency

Source: IEA Energy Efficiency report 2016 Source: BP Source: IEA

Phases of the energy transition renewables fossil fuels

900

800 phase 1 phase 2 phase 3 phase 4

700
Total Primary Energy (EJ)

600

500

400

300

200

100

2100
2000

2020

2030

2050
2040

2060

2070

2080

2090
2010

Innovation Peaking Rapid change Endgame

Renewables are growing but Fossil fuel Golden period of demand Renewables finally overtake fossil fuels to provide more than 50% of energy.
not yet big enough to supply demand growth for the renewable sector Some of the more difficult sectors of fossil fuel demand will need to be addressed.
all energy demand growth peaks and
starts to fall Source: Shell Sky scenario, CTI

Country sequencing for solar PV and wind 7% North America 2

Share of solar PV and wind in electricity generation 2017

15% EU 3
2 China 6%

2 Latin America 5% 22% Germany 3

2 India 5% 4
50% Denmark

1 Africa 2%

Source: BP

Source: “2020 vision: why you should see the fossil fuel peak coming in the next decade.” Carbon Tracker 2018. Research by Kingsmill Bond. Designed by Margherita Gagliardi.
 Investors will be impacted at the peak
Investors face three types of risk from the energy transition – systemic, country, and company specific.

1 Systemic risk
2 Country risk
3 Company risk

When renewable electricity is cheaper than Countries which are dependent on
fossil fuels, it makes sense to close down fossil fuel exports are vulnerable to
fossil fuel plants. The incumbent energy the ending of rents.
sector has large amounts of potential
stranded assets as the energy transition
progresses. It has the largest built asset
infrastructure in the world, with an Fossil fuel rents
as % GDP 2016 oil gas
estimated build cost of $25tn.
Kuwait 44%
Companies are vulnerable to price
declines, greater competition,
restructuring, stranded assets and
market derating. The sectors impacted
by the energy transition are wide and
not just limited to fossil fuel stocks.
Areas including industrials and
coal
utilities are also exposed.
1%

Iraq 42%
Fossil fuel infrastructure value ($bn) Index weight of fossil fuel related sectors

Saudi Arabia 26% 1% Oil & Gas Industrials Utilities

Extraction Downstream Power generation Other Oman 25% 2%

FTSE100 13% 6% 5%
Qatar 16% 5%
Coal Gas
1475 3617
Azerbaijan 17% 3%

S&P500 7% 10% 3%
Turkmenistan 6% 11%
Pipelines
Oil 2600
Iran, Islamic Rep. 14% 2%
8138

United Arab Emirates 15% 1% Nikkei 11% 2%

Oil Refinery
Algeria 11% 2%
1900
Coal Gas
2020 1403 Oil 1% Emerging
Kazakhstan 10% 1% 7% 7% 3%
222 Market

Russian Federation 7% 3%
3627
Source: World Bank Source: Bloomberg
Source: CTI

Some examples of energy transitions and how they impacted demand and investors
They exhibit a familiar pattern whereby incumbents are impacted right at the start of the transition, as demand peaks.

Incumbent hubris Peak New technology growth Impact on stocks

Coal Peabody’s share price peaked

India and other emerging
markets were expected to Global coal demand In 2016, Peabody
in 2011 at the point when replace China as the key peaked in 2014. filed for bankruptcy.
rapid growth slowed down. drivers of demand growth.

Electricity
Renewables were just 3% of European electricity stocks fell
in Europe In 2007, the electricity industry
total supply and in 2007 it
Variable renewables grew
by two thirds in the six years
in Europe expected demand to fivefold to 16% of electricity
appeared that they could not after 2007 and wrote down
continue to rise and did not see supply in 2017and are still
be incorporated into the grid $150bn of fixed assets in
renewables as a threat. growing.
in major size. thermal generation.

Car The oil sector widely dismissed The car sector has allocated
sector the threat of EV, arguing as late In 2017, the total EV fleet size In 2017 EVs took 22% of the $90bn to EV strategy and has
as in 2017 that they were a drop was 3m, out of 800m cars. growth in total car sales. significantly underperformed
in the ocean of cars. the S&P500.

Source: “2020 vision: why you should see the fossil fuel peak coming in the next decade.” Carbon Tracker 2018. Research by Kingsmill Bond. Designed by Margherita Gagliardi.
 2020s: the transition decade
Percentage use of fuels by sector

2% 3% 7% 4% Fossil fuels compete directly with

44%
95% 16% 22% 21% renewables and with each other
across the energy sector

Competition is most fierce in the

11% electricity sector, and is now set to
41% 34% intensify in the transport sector
Transport Power Industry thanks to the fall in battery prices.
7% 13%

72% 33%

Nuclear Hydro Renewables

21%

Oil Gas Coal

54%

Non- Buildings
combusted
Source: BP

When will fossil fuel demand peak? Year of peak fossil fuel demand
Solar PV and wind Global energy demand growth from 2018
supply growth
We set out a way of calculating the date
1% 1.5% 2%
of peak fossil fuel demand based on the
rapid growth of solar PV and wind in the
electricity sector.
10% 2029 2037 2043
It requires just two primary assumptions –
15% 2022 2027 2030
the growth rate of total energy demand
and the growth rate of solar PV and wind.
20% 2020 2023 2025

Source: Carbon Tracker assumptions

Incremental energy supply (EJ) Hydro

Solar PV Nuclear
assuming 1.3% demand growth and Wind Biomass Fossil fuels
17% solar PV and wind supply growth Our view of 1.3% energy demand
growth and 17% solar PV and wind
12
supply growth is open to question.
We show therefore the date of
10
peak fossil fuel demand using a
range of assumptions for energy
8
demand growth and solar PV and
wind supply. The most plausible
6
scenarios are for a global growth
4
rate of energy demand of 1-1.5%
and solar PV and wind supply
2 growth of 15-20%.

0 This gives a range of 2020 to

2012 2014 2016 2018E 2020E 2022E 2024E 2027 for the date of peak fossil
-2 fuel demand.

Source: BP, Carbon Tracker estimates

Source: “2020 vision: why you should see the fossil fuel peak coming in the next decade.” Carbon Tracker 2018. Research by Kingsmill Bond. Designed by Margherita Gagliardi.