‘Net Zero’ to drive net growth in the European utilities sector

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

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%.

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.

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.

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.

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.

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