Goldman Sachs Research has reported that the global push towards achieving net zero emissions is at a critical juncture. The costs of certain clean technologies, such as solar and batteries, have undergone significant shifts in 2023, with some becoming more expensive and others becoming more financially accessible. This trend is expected to enhance the affordability of decarbonization.
Goldman Sachs’ analysis of the Carbonomics cost curve for 2023 reveals that reduced energy prices from fossil fuels are influencing the costs of renewable energy sources. This can lead to an increase in the cost of renewable energy. Additionally, rising interest rates have made construction expenses for projects, particularly offshore wind energy, more expensive. However, declining battery costs and the benefits of scaling up production of electric vehicles have made these technologies more economically viable.
Michele Della Vigna, the head of Natural Resources Research in Europe, the Middle East, and Asia at Goldman Sachs Research, has highlighted a significant shift in the affordability of clean technology. He stated that “From here on, the deflationary forces [solar and batteries] are likely to win, and this brings back an affordability to the decarbonization path that not only accelerates it but makes it more attractive to the consumer.” According to their analysis, the cost curve has been consistently flattening since 2019. The 2023 cost curve suggests that the cost to remove 75% of planet-warming emissions remains the same as in 2022. However, the lower half of the cost curve has seen an increase in costs, primarily due to rising interest rates and cost inflation. This has resulted in a 25% increase in the renewable power sector.
Furthermore, there has been a significant improvement in battery costs for the transport sector, making high-cost decarbonization more affordable. The sector has become 30% cheaper due to improved batteries, lower raw material costs, and simpler cell-to-vehicle integration.
Looking ahead to 2024, one crucial aspect to monitor will be the level of policy support for decarbonization. While policy support has reached $500 billion through the Inflation Reduction Act (IRA), political uncertainties and delays in certain areas may cause project delays. However, Della Vigna expects increased investment from the financial and corporate sectors, particularly in areas of decarbonization that are becoming more accessible and cost-effective. Solar installations and electric vehicles stand out as particularly promising areas for investment.
Despite these positive developments, the current level of investment and spending may not be sufficient to achieve climate goals. Della Vigna points out that global emissions have risen by 1% over the past year, reaching an all-time high. Coal demand has also surged by 3%, and there has been a substantial $1 trillion worth of direct incentives for hydrocarbons. These trends are not aligned with the pathway to achieve the 1.5-degree Celsius scenario. Additionally, the world is now halfway between the 2015 Paris agreement and its 2030 targets, and the commitments made by governments thus far only lead to flat, not declining, emissions. To meet the 1.5-degree scenario, emissions would need to decrease by more than 50% by 2030, highlighting the significant deviation from the required path to meet climate objectives.
At the recent COP28 climate conference in Dubai, three announcements stood out for their impact on the market. Firstly, there is a growing green capital expenditure in the Gulf Coast region, estimated by Goldman Sachs Research to be over $600 billion over the next decade. Secondly, there is a commitment to ramp up renewable power generation, which can improve the affordability of clean technologies. The International Energy Agency’s updated Net Zero Roadmap shows that achieving the most emission reductions will require tripling global installed renewable energy capacity to 11,000 GW by 2030. Lastly, the Oil and Gas Decarbonization Charter formed by 50 companies aims to achieve zero methane emissions and end routine flaring by 2030.