A new perspective on decarbonising the global energy system Matthew Ives, Luca Righetti, Johanna Schiele, Kris De Meyer, Lucy Hubble-Rose, Fei Teng, Lucas Kruitwagen, Leah Tillmann-Morris, Tianpeng Wang, Rupert Way & Cameron Hepburn April 2021 About this report A report for the UK-China Cooperation on Climate Change Risk Assessment Phase 3 project, funded through the prosperity programming of the Foreign, Commonwealth and Development Office and developed in cooperation with The Royal Institute of International Affairs (Chatham House) ● Authors • Matthew C. Ives | Institute for New Economic Thinking & Smith School for Enterprise and the Environment, University of Oxford, UK • Luca Righetti | Future of Humanity Institute, University of Oxford, UK • Johanna Schiele | Harvard Kennedy School, Harvard University, USA • Kris De Meyer | Earth Sciences, University College London, UK • Lucy Hubble-Rose | Communicating Climate Science Policy Commission, University College London, UK • Fei Teng | Institute of Energy Environment and Economy, Tsinghua University, Beijing, P. R. China • Lucas Kruitwagen | Smith School for Enterprise and the Environment, University of Oxford, UK • Leah Tillmann-Morris | Smith School for Enterprise and the Environment, University of Oxford, UK • Tianpeng Wang | Institute of Energy Environment and Economy, Tsinghua University, Beijing, P. R. China • Rupert Way | Institute for New Economic Thinking & Smith School for Enterprise and the Environment, University of Oxford, UK • Cameron Hepburn | Smith School for Enterprise and the Environment, University of Oxford, UK Please direct any correspondence to: [email protected] Acknowledgements We are very grateful to the Foreign, Commonwealth and Development Office for funding this project under its prosperity programming and for the ongoing research support that underpins this report from the Oxford Martin Institute for New Economic Thinking and Baillie Gifford. 2 Abstract An analysis of historical cost trends of energy technologies shows that the decades- long increase in the deployment of renewable energy technologies has consistently coincided with steep declines in their costs. For example, the cost of solar photovoltaics has declined by three orders of magnitude over the last 50 years. Similar trends are to be found with wind, energy storage, and electrolysers (hydrogen-based energy). Such declines are set to continue and will take several of these renewable technologies well below the cost base for current fossil fuel power generation. Most major climate mitigation models produced for the IPCC and the International Energy Agency have continually underestimated such trends despite these trends being quite consistent and predictable. By incorporating such trends into a simple, transparent energy system model we produce new climate mitigation scenarios that provide a contrasting perspective to those of the standard models. These new scenarios provide an opportunity to reassess the common narrative that a Paris-compliant emissions pathway will be expensive, will require reduced energy reliability or economic growth, and will need to rely on technologies that are currently expensive or unproven as scale. This research provides encouraging evidence for governments that are looking for greater ambition on decarbonising their economies while providing economic growth opportunities and affordable energy. This report should be referenced as: Ives, M.C., Righetti, L., Schiele, J., De Meyer, K., Hubble-Rose, L., Teng, F., Kruitwagen, L., Tillmann-Morris, L., Wang, T., Way, R. & Hepburn, C. 2021. A new perspective on decarbonising the global energy system. Oxford: Smith School of Enterprise and the Environment, University of Oxford. Report No. 21-04. 3 Contents • A new perspective on decarbonising the global energy system: Summary 7 • Introduction 13 Changing the ‘policy mood music’ 14 How to read this report – a roadmap 15 • Section 1: How models inform decision-making on climate 17 Understanding the costs and consequences of climate change 17 How climate mitigation scenarios are developed 18 The range of scenarios modelled 20 Opportunities for improvement 22 How are decision-makers currently using climate mitigation scenarios? 24 Setting climate targets, plans, policies, and strategies 25 Other uses of climate mitigation scenarios 29 • Section 2: Empirical technological progress trends and the need for a fresh look at the future 30 New clean energy opportunities 30 Historical development of energy system reporting 33 How have scenarios changed over time? 35 Historical technology cost trends 37 Technology cost forecasting 39 Modelling technological change 42 Assessing model cost forecasts and projections 42 What causes the projections to go so wrong? 44 Improving the estimation of technology costs 46 • Section 3: A probabilistic technological change model for estimating the cost of the global energy transition 48 Introduction 48 The PTEC Energy System Model 49 A simple and transparent model for forecasting technological change in the global energy sector 49 Components of the PTEC model 51 Energy system omissions 52 Primary, final, and useful energy 52 Deploying technologies in the PTEC Model 53 Experience exponents across technologies 53 The uncertainty of future costs 54 Managing the intermittency problem 55 4 The two PTEC energy transition scenarios 56 Constructing a scenario in PTEC 56 The Stalled and Decisive Transition Scenarios 57 The Stalled Transition scenario 57 The Decisive Transition scenario 59 • Section 4: Comparing our emission scenario projections with the IEA and IPCC scenarios, to 2040 and beyond 60 Introduction 60 Equilibrating PTEC scenarios with those of the IEA and IPCC 61 A comparison with the IEA emissions scenarios 62 Background on the IEA World Energy Outlook 62 Primary energy demand 63 Final energy demand, and electricity generation in 2040 65 Change in final energy consumption by scenario 67 Cost per MWh by technology across scenarios 68 Annual emissions by fuel 69 Total global energy system cost comparison 71 Comparison to IPCC future emissions scenarios 71 The IPCC Scenario Matrix 71 Comparing the PTEC and IPCC emissions scenarios 72 • Section 5: The barriers to a decisive transition and the opportunities presented by this research 73 Introduction 73 Barriers to a decisive transition 73 Mainstream climate mitigation models 73 Navigating the socio-technical transition 75 The “just” transition, gender and inclusiveness, and energy insecurity 77 Transition risks and stranded assets 78 Regional differences in the costs of technologies 79 Energy security and the intermittency problem 80 Is an interim solution required? 81 Competition from fossil fuels 81 The opportunities presented by the Decisive Transition 82 PTEC’s conservative assumptions about costs and tech growth 82 The empirical evidence 82 A methodology for incorporating probabilistic technological change 83 • Section 6: Conclusions 85 The Implications of this work 85 Expectations around the overall cost of transition to a Paris Compliant Scenario 85 Expectations around the speed of transition 86 Nationally Determined Contributions (NDCs) 86 Expectations around the make-up of energy technologies in the future 86 Expectations around the transition risk 87 5 Concluding remarks 88 Current energy transition models are important, but there is space for a wider view 88 New collaborative thinking is needed around delivering a decisive transition 88 Much work to be done, but the future looks much better 88 • Appendix A: Climate mitigation models and authorities 89 Climate impact, mitigation, and adaptation models 89 The key authorities that produce scenarios 91 The IPCC 92 The IEA World Energy Outlook and energy technology perspectives 93 Other sources of scenarios and climate mitigation modelling 93 Other uses of climate mitigation scenarios 96 Determining risks, regulations, and recommendations 96 Determining adaptation requirements 98 Litigation 99 Assessing the costs and benefits of proposed projects 99 • Appendix B: additional PTEC model details 100 Endogenous technological change 100 Wright’s Law 100 Applying Wright’s Law to renewable technologies 101 Substituting these in we get our final equation: 102 Solving for a Cost Path 102 Forecasting accuracy: mean versus median 103 Experience curves for fossil-fuels 103 Levelised cost of energy and vintages of capital stock 104 • Appendix C: Creating the PTEC emission scenarios 105 Introduction 105 Calculating the emissions from the global energy system 106 Equilibration with IEA 2018 emissions 106 IEA full scenario comparisons 111 Equilibration with IPCC emissions in 2018 112 The Scenario Matrix architecture 112 Accounting for missing non-energy sector components 115 Calculating radiative forcing and global warming for each scenario 117 • Appendix D – Estimates of physical climate damages 118 Climate damages analysis results 118 The FUND-Hector model 119 Scenarios and data 120 • Glossary 121 • References 126 6 A new perspective on decarbonising the global energy system ● Summary for Policymakers A rigorous analysis of the historical cost trends of energy technologies shows that the decades-long increase in the deployment of key renewable energy and storage technologies (e.g., solar, wind, batteries, and hydrogen) has gone hand-in-hand with consistent steep declines in their costs. For example, the cost of solar PV has declined by three orders of magnitude (more than 1000-fold decrease) as it has become more widely deployed over