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Carbon capture and storage facility
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Consider this for a moment: Total global carbon dioxide (CO2) emissions from 1751 to 1946 equalled 207 billion tonnes. The same amount of global CO2 emissions was recorded in just the past six years.1

1 Data for CO2 only, does not include land-use offsetting and cannot be directly compared to United Nations Framework Convention on Climate Change (UNFCCC) data.

While Europe’s CO2 emissions peaked in 1987, and 2018 emissions were 10% below those of 2010, reductions in Europe and other industrialised countries have been more than offset by increases in emissions from Asia, Africa, the Russian Federation and the Middle East. Emissions from these regions have increased anywhere from 8-50% since 2010, with no sign of plateauing.

Historical evolution of yearly CO2 emissions by region since 1965
Graph of historical evolution of yearly CO2 emissions by regions since 1965

Source: BP Energy Databook 2019

Further steps must be taken to reduce emissions and the European Union and United Kingdom both have ambitious targets to achieve ‘Net Zero’ emissions by 2050. The recent European Green Deal proposed a combination of government and public authority spending, plus incentives for public and private investment to reach Net Zero, placing utilities at the forefront of an investment boom which Barclays Research values at up to €3.7 trillion over 31 years.

Our Research analysts have identified four investment themes directly linked to utilities in the quest to reach ‘Net Zero’.

1. Decarbonisation of electricity

The first step toward Net Zero has already been taken by utilities. To date, the coal to gas switch, as well as rising renewable penetration, have driven significant carbon reductions in Europe. The costs of renewable generation from gas and wind have collapsed, making renewables the likely first choice for infrastructure investment projects. At the current capital cost, we see a maximum penetration of 70-80%.

Graphic showing pricing of decarbonising coal and natural gas

Source: Barclays Research

2. Electrification of the economy

Once electricity is decarbonised, the next step is to electrify the economy; electricity providing higher-quality energy than other forms of energy. Current EU final energy consumption is circa 21% electric power, and this could rise to over 60% of the economy by 2050, driven by electrification of transport, heating and industry. Electrification is a way of achieving both decarbonisation and lower total energy consumption – a win-win scenario. For example, electric vehicles (EVs) use only 25% of the energy of conventional vehicles, and electric heat pumps perform 4-5x better than conventional solutions. As such, we see significant power demand growth for EVs, which could contribute as much as 0.2% compound annual growth rate (CAGR) to power demand growth over 2020-50E. Electrification of heating would have a larger impact, particularly if domestic heating goes electric. We forecast that domestic heating could contribute up to 1.8% CAGR in power demand over 2019-50E.

Carbon pricing for electrification of the economy

Source: Barclays Research

3. Decarbonisation of other fuels

While decarbonisation of electricity and electrification of the economy will go a long way toward Net Zero, we anticipate material residual demand for other fuels. The utilities sector could fulfil this demand by providing carbon-free hydrogen to the non-electrified sectors of the economy to replace natural gas. We estimate that the cheapest solution today is ‘blue’ hydrogen, made from natural gas reformation, but in the future we believe ‘green’ hydrogen, produced by wind and solar via electrolysis, could develop into a competitive niche market. Driving natural gas consumers to hydrogen will be contingent on convergence with Chinese electrolyser costs, plus lower power prices.

Graphic showing cost of decarbonising other fuels

Source: Barclays Research

4. Storing and removing carbon

Completely removing carbon-emitting fuel sources will be a longer-term challenge. However, removal methods such as Land Use, Land-Use Change and Forestry (LULUCF), Carbon Capture and Storage, and Bioenergy with Carbon Capture and Storage (BECCS) can make up for the continued use of such fuels. While these methods may prove to be pivotal to reaching Net Zero, substantial investment is required to reach competitive pricing. Current estimates of costs for Carbon Capture and Storage are £73/tonne of carbon, while for BECCS the estimated cost is as high as £150/tonne of carbon, although we believe it could be lower than £100/tonne if existing power stations are retrofitted at scale rather than built new.

Graphic shownig costs of storing and removing carbon

Source: Barclays Research

Investment over the next 30 years

We believe that the energy transformation revolution will need to include a mix of these mechanisms, and a holistic approach, including regulation, is required.  No single technology will become dominant and different regions will develop different solutions. Key beneficiaries of the forecast investment include renewables generators, power infrastructure enablers, hydrogen and CCS generators, gas transmission decarbonisers, and related energy services.

Read the full report

Authorised clients of Barclays Investment Bank can log in to Barclays Live to read the full report.

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About the analysts

Dominic Nash joined Barclays in December 2018 as head of European Utilities research. Prior to this, Dominic was head of utilities, renewables, infrastructure and transport research at Macquarie. Dominic started his utilities career in 1998 working for Offer (now Ofgem) on utility retail deregulation. He joined the Credit Suisse European utilities team in 2000. In 2005 he moved to Credit Suisse prop trading, where he became head of their global utilities, renewable and infrastructure investments. In 2010 he returned to research at Liberum Capital. Dominic holds a PhD (Chemical Engineering) from the University of Cambridge.

Peter Crampton is an Equity Research analyst covering the European Utilities sector, focusing on Northern and Western Europe. He joined Barclays in November 2018 and has over fifteen years' experience analysing European utilities. Peter joined from Macquarie and previously also worked at UBS, RBS and ABN AMRO. He graduated from the Vienna University of Economics & Business and is a CFA charterholder.

Jose Ruiz joined Barclays in August 2019 as Southern European Utilities analyst. Prior to this, Jose was utilities analyst at Macquarie for six years. Jose started his career in 1995 working as a Spanish utilities, oil and telecoms analyst at a local Spanish broker. In 2000 Jose joined CaixaBank equities division as technology and utilities analyst and in 2002 he moved to Exane BNP Paribas as a South European utilities analyst. Jose holds a Bachelor in Business Administration and Economics degree from the University of Barcelona.

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