The Great Transition

1. The global energy transition from fossil fuels to renewables is accelerating

Energy transitions are not new. Beginning several centuries ago, the world shifted from wood to coal. The first oil well was drilled over 150 years ago. Today we are at the start of a new energy transition, one that takes us from an economy run largely on coal and oil to one powered by the sun and the wind.

A fundamental shift is underway in how the world produces and consumes energy. Driven by concerns over climate change, air pollution, and energy security, countries are rapidly moving away from fossil fuels toward renewable energy sources like solar and wind. This transition is happening faster than many predicted, with renewable energy costs plummeting and adoption accelerating.

The energy transition involves changes across multiple sectors:

• Electricity: Shift from coal and gas to wind, solar, and other renewables
• Transportation: Move from gasoline/diesel vehicles to electric vehicles
• Buildings: Improving energy efficiency and electrifying heating/cooling
• Industry: Adopting clean technologies and improving efficiency

While previous energy transitions took many decades, the current shift to renewables is compressing change into just years or a decade. This rapid pace is driven by dramatic cost reductions in clean technologies, strong policy support in many regions, and growing recognition of the urgent need to address climate change.

2. Solar power is experiencing explosive growth and rapidly declining costs

In 1972, they cost over $74 per watt. The average price as of mid-2014 was less than 70¢ per watt—99 percent cheaper.

Solar energy costs have plummeted, making it increasingly cost-competitive with fossil fuels in many parts of the world. This precipitous price decline has driven exponential growth in solar installations globally. Key developments include:

• Crystalline silicon PV module prices fell from $79/watt in 1976 to $0.30/watt in 2015
• Global solar capacity grew from 1.4 GW in 2000 to 760 GW in 2020
• Solar is now the cheapest source of new electricity in many sunny regions
• Rooftop solar adoption is accelerating, allowing consumers to generate their own power

Factors behind solar's rapid growth:

• Economies of scale in manufacturing
• Technological improvements boosting efficiency
• Supportive government policies like feed-in tariffs
• Declining costs for inverters, racking, and other balance of system components
• Growing investment from both traditional energy companies and new players

As costs continue to decline, solar is poised to become a dominant global energy source in the coming decades, fundamentally reshaping electricity systems.

3. Wind energy is becoming a dominant electricity source in many countries

In 2013, wind farms generated 34 percent of Denmark's electricity. Portugal's wind share was 25 percent. Spain and Ireland came in at around one fifth each.

Wind power is surging globally, with rapidly increasing capacity and falling costs making it a major contributor to electricity generation in many countries. Key developments include:

• Global wind capacity grew from 17 GW in 2000 to 743 GW in 2020
• Wind provided over 20% of electricity in several European countries by 2020
• Offshore wind is expanding rapidly, opening vast new energy resources
• Wind is often the cheapest source of new electricity generation

Factors driving wind energy growth:

• Dramatic increases in turbine size and efficiency
• Improved wind forecasting and grid integration
• Supportive policies like renewable portfolio standards
• Declining costs for turbines and balance of system components
• Growing corporate demand for clean energy

Wind energy's variability can be managed through improved forecasting, transmission expansion, and integration with other renewable sources and energy storage. As costs continue to fall, wind is set to become a cornerstone of global clean energy systems.

4. Nuclear power faces economic challenges and declining global market share

Nuclear power, once lauded as an energy source that would be "too cheap to meter," is becoming too costly to use.

Nuclear energy is struggling to compete economically with increasingly cheap renewable energy and natural gas in many markets. While nuclear still provides about 10% of global electricity, its share has been declining as plants retire and new projects face cost overruns and delays. Key challenges include:

• High and rising costs for new nuclear plants
• Safety concerns, especially post-Fukushima
• Challenges with radioactive waste storage
• Competition from cheaper renewables and natural gas

Nuclear power's outlook:

• Existing plants struggling to compete economically in some markets
• Few new plants under construction outside of China and Russia
• Some countries phasing out nuclear altogether (e.g. Germany)
• Potential for small modular reactors, but still in early stages
• Continued role in some countries' decarbonization plans, but limited growth

While nuclear may play a role in some countries' energy transitions, its high costs and other challenges mean it is unlikely to be a major growth area in the global shift to clean energy.

5. Coal use is peaking in many countries due to environmental and health concerns

We may wake up one morning in the not-too-distant future and realize that the world has reached a tipping point on coal. Use of this fuel will be declining worldwide, as it already is in many countries.

Coal is facing a reckoning as countries recognize its severe health and environmental impacts. Many nations are rapidly phasing out coal power in favor of cleaner alternatives. Key developments include:

• Coal use has peaked and is declining in many developed countries
• China's coal consumption growth has slowed dramatically
• Financing for new coal plants is drying up globally
• Alternatives like wind and solar are increasingly cheaper than coal power

Factors driving coal's decline:

• Growing awareness of health impacts from air pollution
• Climate change concerns and carbon pricing policies
• Cheaper alternatives in wind, solar, and natural gas
• Corporate and investor pressure to move away from coal
• Challenges with water use and pollution from coal mining/power

While coal use continues to grow in some developing countries, its long-term outlook is one of structural decline as the world transitions to cleaner energy sources. This shift will have major implications for coal-producing regions and companies.

6. Geothermal and hydropower offer steady renewable energy with some limitations

Geothermal resources around the world are richest in areas of high tectonic activity.

Geothermal and hydropower provide reliable baseload renewable energy, but have geographic limitations and potential environmental impacts. Key aspects include:

Geothermal:

• Provides steady power output, unlike variable wind and solar
• Limited to areas with suitable geology, mostly near tectonic plate boundaries
• Relatively small global capacity, but growing with new technologies
• Can provide both electricity and direct heat for various applications

Hydropower:

• Largest source of renewable electricity globally
• Provides energy storage and grid balancing capabilities
• Limited by suitable river systems and rainfall patterns
• Environmental and social concerns around large dam projects

Both geothermal and hydropower will likely play important but geographically limited roles in the clean energy transition, complementing more widely available wind and solar resources.

7. Electric vehicles and energy storage are critical to the clean energy transition

UBS expects that by 2020 battery costs will be slashed in half, making electric vehicles cost-competitive with traditional cars.

Transportation electrification is accelerating rapidly, driven by falling battery costs and supportive policies. This shift is critical for decarbonizing the transportation sector and providing mobile energy storage to support variable renewables. Key developments include:

• EV battery costs fell from $1,000/kWh in 2010 to $137/kWh in 2020
• Global EV sales grew from 450,000 in 2015 to 3.1 million in 2020
• Many countries and automakers planning to phase out internal combustion vehicles

Energy storage developments:

• Rapidly falling costs for lithium-ion and other battery technologies
• Growing deployment of grid-scale battery systems
• Potential for EVs to provide vehicle-to-grid services
• Emerging long-duration storage technologies (e.g. flow batteries, hydrogen)

The combined growth of EVs and stationary energy storage will be crucial for enabling high penetrations of variable renewable energy and decarbonizing transportation.

8. Policy support and economic factors are driving the shift to renewable energy

Governments have used several basic policy instruments to support the move to carbon-free renewable sources of energy.

Supportive policies have been crucial in driving the initial growth and cost reductions of renewable energy technologies. As renewables become increasingly cost-competitive, market forces are taking over as the primary driver of adoption. Key policy approaches include:

• Renewable portfolio standards requiring utilities to source clean energy
• Feed-in tariffs guaranteeing prices for renewable electricity
• Tax incentives for renewable energy projects and electric vehicles
• Carbon pricing through carbon taxes or cap-and-trade systems
• Fuel efficiency standards for vehicles
• Building energy efficiency codes

Economic factors driving the transition:

• Rapidly falling costs for wind, solar, and batteries
• Rising costs for fossil fuel extraction and power generation
• Growing corporate demand for clean energy
• Investor pressure on companies to address climate risks

The interplay of supportive policies and improving economics is accelerating the global energy transition, with market forces increasingly taking the lead.

9. Developing countries can leapfrog to distributed clean energy systems

For the roughly 1.3 billion people in the world living in communities not yet connected, it is now often cheaper and more efficient simply to install PV panels rooftop-by-rooftop than to build a central power plant and transmission infrastructure.

Distributed renewable energy offers developing countries the opportunity to bypass centralized fossil fuel systems and provide clean, affordable energy access. This leapfrogging approach can accelerate economic development while avoiding the pollution and climate impacts of traditional energy systems. Key aspects include:

• Solar home systems and mini-grids providing electricity to remote areas
• Mobile payment systems enabling pay-as-you-go energy access
• Productive uses of renewable energy supporting economic development
• Avoiding costly investments in centralized generation and transmission

Benefits of distributed clean energy in developing countries:

• Faster and cheaper energy access than grid extension
• Improved health outcomes from reduced indoor air pollution
• Local job creation in sales, installation, and maintenance
• Enhanced energy security and resilience
• Reduced dependence on imported fossil fuels

By embracing distributed clean energy, developing countries can chart a more sustainable development path while providing energy access more quickly and affordably than traditional approaches.

Last updated: October 2, 2024