CERAWeek Charts Out the Energy Transition

CERAWeek by S&P Global 2023, held in Houston, Texas, March 6–10, hosted more than 7,200 delegates and 1,000 speakers from 90 countries. The attendance smashed the previous high watermark of approximately 6,000 delegates set in 2022.

This conference is often referred to as the Davos of the Energy World. Keynote speakers included the CEOs of Chevron, Exxon, Total, OXY, Hess, and Cheniere, as well as the U.S. Department of Energy Secretary Jennifer Granholm and U.S. Senators Joe Manchin and Lisa Murkowski. But the wizard behind it all, Dan Yergin, the founder of CERA in 1983, provides the perspective and insight that draws the crowd.

Looking back one year, the two biggest events affecting the energy world have been:

• The ongoing war in Ukraine and the related destruction of the Nord Stream Pipelines during September 2022. The short-term and long-term effects are being felt beyond Europe as energy markets for oil, gas, and LNG are truly worldwide.
• The U.S. Inflation Reduction Act passed into law by President Biden on Aug. 16, 2022. This legislation included $369 billion in green energy grants and subsidies to accelerate the reduction of carbon in the energy mix. The Inflation Reduction Act is the Big Kahuna of funding that was the talk of the conference.

Energy Transition

Over the years, the big topic of discussion has evolved from global warming to climate change and now to the energy transition. Yergin pointed out that this is not our first energy transition. “The first energy transition was from wood to coal in the 18^th century,” he said.

Oil was used as early as the 13^th century in Britain, as the cost of wood had gone up. But it emerged as a distinctive industrial fuel only in January 1709 when English metalworker Abraham Darby proved that coal was a more effective means for iron production than wood.

Energy transitions have hardly been swift. Although the 19th century is known as the “century of coal,” that century actually still ran, in the words of energy scholar Vaclav Smil, on “wood, charcoal, and coal residues.” It was not until 1900 that coal supplied half the world’s energy demand.

Oil was discovered in the United States in 1859. More than half a century later, on the eve of World War I, Winston Churchill directed the conversion of the Royal Navy from coal to oil for technological reasons—speed, flexibility, ease of refueling, and the elimination of crews shoveling coal. But it took until the 1960s, a century after it was discovered, for oil to overtake coal as the world’s number-one energy source.

Until now, energy transitions have unfolded over long periods of time. They have really been energy additions rather than transitions. Meanwhile, in the six decades since oil overtook coal as the world’s number-one energy source, the global consumption of coal has almost tripled.

The current climate-driven energy transition is meant to be achieved quickly—in fewer than 25 years. And it is meant to be transformative. Coal is to disappear, and the European Union anticipates that hydrogen will provide 25% of its total energy by 2050. Yet hydrogen provides less than 2% today.

Energy Trilemma

The push toward a decarbonized future faces a dilemma. As it involves the balancing of three elements, it is being called the energy trilemma.

Security: There must be a reliable supply of electricity and other primary energy sources to carry out our lives efficiently and without frequent interruption.

Sustainability: That the sources of energy can be produced continuously without causing undo harm to the environment of our planet.

Affordability: As we attempt to transition from carbon-based fuels to other energy sources, will the result be affordable to individuals in both advanced and developing countries and preserve a suitable energy foundation for what today is a $100 trillion global economy?

The pressure has increased to accelerate many of the 2050 carbon emission targets toward 2030. But it sometimes seems that the scale of what is being attempted is underestimated. Huge increases in the annual production rates of lithium, copper, and other minerals will be needed to make these transitions.

Yergin refers to this as one of the “bumps in the energy transition.” The faster we try to proceed with a transition from gasoline to electric cars and natural gas fuel to hydrogen fuel, the more potential there is for damage to the affordability component of the trilemma.

There has not been ample time for innovative technology to evolve that reduces the cost of mining, processing, and manufacturing the new fuels and materials that are needed for a smooth transition.

For example, technology exists to capture carbon from the exhaust stack of a coal-fired boiler or from a gas turbine. But currently, the process is not affordable. A new process called direct air capture is evolving that breathes in atmospheric air and directly removes CO₂ for injection into a cavern or an oil and gas formation. Occidental Petroleum (OXY) made a major announcement at the conference of its investment into direct air capture. OXY likes the modularity of direct air capture and has the opportunity to build plants at locations where CO₂ is needed, specifically at an oilfield that can boost production when injected with CO₂. This idea might not appeal to some of the green energy proponents who would prefer to avoid any utilization of CO₂ that produces more oil and gas even though it brings about a net reduction in CO₂ emissions.

Inflation Reduction Act

Technologies like carbon capture and hydrogen production are supported by the Inflation Reduction Act. As soon as it was signed into law, the wheels of investment started turning rapidly. During the balance of 2022, more than $50 billion of its funding was committed to projects. The big winners have been wind, solar, and hydrogen projects.

Green hydrogen, in particular, has gained tax credits that can be “stacked.” This means than credits can be earned for a wind farm or solar project that makes electricity for an electrolyzer to produce green hydrogen. In addition, credits can be earned for investment in the electrolyzer as well as a payment of $3/kg for the hydrogen produced. But the current cost of industrial H2 today remains very high: 90 cents/kg.

The goal of reaching net-zero CO₂ emissions by 2050 seems unrealistic. While the EU and the United States are making huge financial investments, how do we tackle global CO₂ emissions when China and India, the two largest coal-consuming countries, are not on board? In 2022, China approved for construction 106 GW of coal-fired power at 22 sites. Compare China’s annual new coal construction (106,000 MW) to 2022 worldwide orders of natural gas-fired turbines (49,000 MW).

Imbalance among the legs of the energy trilemma has brought about a transition from natural gas to hydrogen yet more new coal is being added to the worldwide energy mix. Why? Coal-fired power wins the affordability leg of the trilemma in many regions of the world despite a lack of subsidies.