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Speaker 1: This is Dana Perkins and you're listening to Switched on

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Speaker 1: the BNAF podcast. It's January, and while we might have

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Speaker 1: stopped wishing our friends a happy new year, many of

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Speaker 1: us are still taking stock of what we learned in

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Speaker 1: twenty twenty four and thinking about how to apply this

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Speaker 1: to the future. As each of us do this, we

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Speaker 1: find out if we are more of a glass half

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Speaker 1: full or half empty kind of person, or perhaps for

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Speaker 1: many of us who work in the clean energy and

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Speaker 1: climate space, maybe we oscillate between them both. On today's show,

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Speaker 1: we're going to bring you something different from our usual

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Speaker 1: BNAF analyst interview. Albert Chung, bn EF's deputy CEO is

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Speaker 1: going to read his recent note titled five Energy Transition

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Speaker 1: Lessons for twenty twenty five. In it, he considers what

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Speaker 1: lessons can be gleaned from the year gone by and

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Speaker 1: how this should inform the journey ahead in just five points.

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Speaker 1: If you like our show and want other people to

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Speaker 1: be able to find it, give us a review or

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Speaker 1: subscribe wherever you get your podcasts. B and EF subscribers

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Speaker 1: will be able to read Albert's note at BNF on

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Speaker 1: the Bloomberg terminal or at BNF dot com. Right now,

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Speaker 1: let's hear Albert's five energy transition lessons for twenty twenty five.

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Speaker 2: Five Energy transition lessons for twenty twenty five. To work

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Speaker 2: in clean energy and climate is to live in a

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Speaker 2: constant state of cognitive dissonance, stuck between good news and bad.

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Speaker 2: On the good side, every year brings continuous growth in

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Speaker 2: clean tech industries, record levels of investment and steady technological advances.

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Speaker 2: This past year was no different. Record numbers of electric

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Speaker 2: vehicles were sold in twenty twenty four, record amounts of

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Speaker 2: clean power capacity were installed, New energy storage technologies gain traction,

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Speaker 2: and when our investment totals are published later this month,

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Speaker 2: we will hopefully see that energy transition investment hit a

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Speaker 2: new record. To watch this space, Yet, despite years of

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Speaker 2: continuous and rapid acceleration, it has never Each winter, BNF

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Speaker 2: analysts spend weeks crunching numbers only to conclude that global

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Speaker 2: energy transition investment is running well below the level required

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Speaker 2: to get on track for net zero by mid century.

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Speaker 2: This year, the story is likely to remain unchanged. Such

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Speaker 2: is the relentless logic of being on a growth curve

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Speaker 2: that sits stubbornly below the curve you want to be on.

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Speaker 2: The dissonance is even stronger this year and has many

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Speaker 2: contributing factors, including the incoming Trump administration, the slowing growth

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Speaker 2: of evs, the struggles of Europe's battery sector, the limited

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Speaker 2: progress on hydrogen and industrial decarbonization, ongoing difficulties in the

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Speaker 2: offshore wind sector, and the COP twenty nine finance deal

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Speaker 2: that left many countries underwhelmed. This sense of unease carries

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Speaker 2: five important lessons that we should absorb as we begin

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Speaker 2: a new year of work in the energy transition. One,

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Speaker 2: the energy transition won't slow down because of the challenges above.

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Speaker 2: The word slow down was never far from the lips

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Speaker 2: of commentators and executives last year, but in reality, our

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Speaker 2: latest estimates indicate that at twenty twenty four was a

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Speaker 2: pretty strong year for clean energy deployment. Solar PV installations

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Speaker 2: were up thirty five percent year on year, wind was

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Speaker 2: up five percent, energy storage installations rose seventy six percent

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Speaker 2: in megal hour terms, and EV sales gained twenty six percent.

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Speaker 2: Note these are BNF estimates that predate the end of

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Speaker 2: twenty twenty four, even stripping out mainland China, a market

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Speaker 2: that can sometimes skew figures does not change the direction

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Speaker 2: of travel, with most of these sectors continuing to grow

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Speaker 2: in the America's and EMEA regions. Onshore wind outside of

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Speaker 2: APAC is a notable exception, with installations down as permitting

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Speaker 2: delays and grid connection queues remain a bottleneck. Newer technologies

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Speaker 2: like clean hydrogen and carbon capture in storage or CCS,

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Speaker 2: have had a tougher year, but here we still see

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Speaker 2: growth on the way. Bnof's latest forecasts are for as

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Speaker 2: much as sixteen million metric tons of annual clean hydrogen

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Speaker 2: production capacity to come online by twenty thirty, up from

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Speaker 2: nearly nothing today, and around two hundred million metric tons

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Speaker 2: per annum of CCS capacity to be installed by then.

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Speaker 2: So even the hard to abate sectors will start to

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Speaker 2: make progress. And what about the Trump effect? Our updated

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Speaker 2: EV sales forecast for the US now sees them accounting

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Speaker 2: for one third of new vehicles sold in twenty thirty,

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Speaker 2: roughly a tripling of today's market penetration. True, this is

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Speaker 2: lower than the forty eight percent penetration expected by twenty

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Speaker 2: thirty under Biden era regulations, but it is still growth.

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Speaker 2: As for clean power. We would still expect more than

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Speaker 2: nine hundred gigawatts of new solar, wind and storage build

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Speaker 2: in the US by twenty thirty five under a scenario

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Speaker 2: in which investment and production tax credits are fully repealed.

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Speaker 2: This is down from our most recent forecast of over

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Speaker 2: one thousand, one hundred gigawatts under existing incentives, but it

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Speaker 2: is still growth. So our first lesson is simple. Clean

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Speaker 2: energy technologies will continue to grow and the energy transition

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Speaker 2: won't slow down, even if it feels hard at times two,

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Speaker 2: this is the hard part of the journey. That the

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Speaker 2: transition is starting to feel hard shouldn't come as aus

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Speaker 2: Many of the easier opportunities have been conquered. Early adopters

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Speaker 2: in richer countries have already bought evs and home solar

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Speaker 2: systems and renewables developers have snapped up the best sites

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Speaker 2: with the cheapest grid connections in the most economically and

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Speaker 2: politically stable markets. These early movers played a critical role

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Speaker 2: in driving down the costs of clean energy technologies and

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Speaker 2: bringing them to scale, but achieving scale means that growth

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Speaker 2: rates will start to fall. At the time of writing,

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Speaker 2: our latest estimate is that EV sales globally grew twenty

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Speaker 2: six percent year on year in twenty twenty four to

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Speaker 2: seventeen point two million units, approaching a quarter of all

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Speaker 2: new car sales. This is undoubtedly strong growth, but it

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Speaker 2: is much slower than the sixty percent and thirty four

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Speaker 2: percent growth rates in twenty twenty two and twenty twenty three.

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Speaker 2: In fact, the growth is starting to look fairly linear.

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Speaker 2: If our projection is right, the global ev market will

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Speaker 2: have grown by a steady three point three to three

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Speaker 2: point nine million units in each of the last four years.

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Speaker 2: Confounding predictions that energy transition technologies always grow exponentially everywhere,

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Speaker 2: we now think the solar sector will do something similar.

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Speaker 2: Annual solar installations likely grew an impressive thirty five percent

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Speaker 2: in twenty twenty four and have quadrupled since twenty twenty,

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Speaker 2: but our team is forecasting just eleven percent growth in

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Speaker 2: twenty twenty five and more or less linear growth thereafter.

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Speaker 2: This is because several advanced markets are reaching high penetrations

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Speaker 2: of solar. Greece and Spain, for example, likely drew more

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Speaker 2: than a quarter of their electricity from solar last year.

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Speaker 2: This drives down midday power prices, necessitating new revenue models

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Speaker 2: and increased storage deployment to push penetration even higher. We

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Speaker 2: know these solutions will come, but they require policy development

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Speaker 2: to open a new frontier for the growth of solar

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Speaker 2: in mature markets. Growth in emerging markets will be the

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Speaker 2: bigger driver in future. India, Pakistan, Turkey, Saudi Arabia and

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Speaker 2: Romania all posted more than fifty percent growth in solar

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Speaker 2: installations in twenty twenty four by our estimates. However, many

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Speaker 2: emerging markets still lack the regulatory market environment needed for

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Speaker 2: large scale clean energy adoption. This next phase of the

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Speaker 2: transition means tackling new problems, Unlocking storage and flexibility in

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Speaker 2: mature renewables markets to drive to higher penetrations, developing renewables

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Speaker 2: in markets that lack the proper technical and commercial arrangements,

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Speaker 2: getting charging infrastructure right to support mass market drivers and

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Speaker 2: truck fleet operators switching to evs, as well as driving

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Speaker 2: demand for clean energy and fuels in aviation, shipping, and

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Speaker 2: heavy industry. Progress is being made on these challenges, and

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Speaker 2: solving them will create new opportunities and stimulate the next

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Speaker 2: cycle of growth in the transition.

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Speaker 1: Three.

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Speaker 2: Be careful not to misinterpret the data in a space

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Speaker 2: as complex and a motive. As the energy transition, real

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Speaker 2: challenges can often be accompanied by exaggerated ones. Let's take

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Speaker 2: the EV sector again, where misinformation or at least to

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Speaker 2: misinterpreted data is common. The EV slowdown story in twenty

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Speaker 2: twenty four was largely focused on the EU, where sales

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Speaker 2: growth did indeed slow down. While most headlines put the

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Speaker 2: blame on consumers not wanting evs, the truth was more nuanced.

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Speaker 2: For example, in summer twenty twenty four, EV sales in

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Speaker 2: Germany slipped by double digits from the year before, but

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Speaker 2: news reporting failed to point out that there had been

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Speaker 2: a surge in sales the year before, triggered by the

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Speaker 2: ending of a subsidy regime. What's more, the European Environment

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Speaker 2: Agency has now confirmed that ninety eight out of one

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Speaker 2: hundred and one automakers met their binding CO two emissions

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Speaker 2: targets in twenty twenty three. The three that didn't are tiny. Crucially,

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Speaker 2: the EU wide targets have remained the same from twenty

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Speaker 2: twenty one to twenty twenty four, so it is somewhat

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Speaker 2: likely that these automakers will have met their targets again

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Speaker 2: in twenty twenty four, and EV sales were roughly flat

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Speaker 2: in Europe in twenty twenty four, not down. In other words,

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Speaker 2: the auto industry is already selling enough evs in Europe

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Speaker 2: to comply with the only meaningful emissions policy they are

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Speaker 2: subject to. Those emissions targets will tighten up to a

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Speaker 2: new level in twenty twenty five, remaining flat again until

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Speaker 2: twenty twenty nine. Given this policy design, a perfectly rational

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Speaker 2: automaker strategy would be to work wait until twenty twenty

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Speaker 2: five before launching new, improved, competitively priced evs, while doing

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Speaker 2: the bare minimum to push EV sales in twenty twenty

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Speaker 2: four and deferring price cuts even as battery prices fail

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Speaker 2: to a new record low. I believe that in retrospect

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Speaker 2: we will see that the EU EV slow down in

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Speaker 2: twenty twenty four was baked in from the start. It

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Speaker 2: was a feature of European emissions policy design, not a bug.

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Speaker 2: Lesson learned, Be careful not to misinterpret the data. Four.

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Speaker 2: A successful transition is a profitable one. It may be

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Speaker 2: a blindingly obvious point, but the past year has reminded

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Speaker 2: us that the energy transition will only succeed if clean

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Speaker 2: energy investments generate risk adjusted returns that meet the requirements

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Speaker 2: of companies and their investors. There is no world in

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Speaker 2: which public or concessional capital alone can solve the climate

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Speaker 2: mitigation challenge. This truism has reared its head in the

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Speaker 2: hydrogen sector, where costs are rising, not falling. Our estimates

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Speaker 2: for levelized costs of clean hydrogen are thirty five percent

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Speaker 2: high on average than two years ago, at three dollars

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Speaker 2: seventy five four to eleven dollars seventy per kilogram, depending

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Speaker 2: on geographical location and other factors. An ammonia auction by

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Speaker 2: Germany's H two Global Foundation last year priced green ammonia

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Speaker 2: imports at double the price of gray ammonia in Western Europe,

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Speaker 2: and there are now very few places in the world

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Speaker 2: where we expect clean hydrogen to compete with the gray

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Speaker 2: variety by twenty fifty. So for prospective industrial users and

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Speaker 2: producers of hydrogen who must make multi decadal investments to

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Speaker 2: adopt greener molecules, meeting any return expectations will depend on

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Speaker 2: regulations such as carbon pricing and subsidy for the foreseeable future.

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Speaker 2: Governments that are serious about driving hydrogen use in sectors

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Speaker 2: such as fertilizers chemicals and steel must make sure that

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Speaker 2: long term incentives, regulations, and demand side policy are in

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Speaker 2: place to support companies and investors down this road. The

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Speaker 2: benefits can be counted not only in terms of carbon emissions,

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Speaker 2: but also enhanced energy security. The offshore wind industry offers

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Speaker 2: a contrasting but equally relevant example. The emergence of zero

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Speaker 2: subsidy offshore wind projects in Europe in the late twenty

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Speaker 2: tens led to a surge in interest across the world,

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Speaker 2: with new opportunities arising in the US and Asia, National

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Speaker 2: and state government agencies set up auction processors to award

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Speaker 2: the cheapest power purchase contracts to the most aggressive bidders,

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Speaker 2: and in many cases those developers were also made to

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Speaker 2: bid competitively for seabed leases or offer other non monetary

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Speaker 2: benefits to make their bids more attractive. This ultra competitive

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Speaker 2: approach has delivered impressively low clean power prices, but has

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Speaker 2: also sown the seeds of other problems. Even before the

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Speaker 2: inflation surge of twenty twenty two to twenty twenty three,

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Speaker 2: wind turbine manufacturer's margins were being squeezed by their over

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Speaker 2: ambitious customers and pressure to invest in ever larger turbine platforms.

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Speaker 2: Rising costs have since led to failed auctions in various

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Speaker 2: countries and a spate of canceled projects in the US

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Speaker 2: and other markets. Only now are lessons beginning to be learned.

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Speaker 2: As recently as December, an offshore wind auction in Denmark

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Speaker 2: failed as developers were expected to pay for the right

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Speaker 2: to develop their power plant with no revenue contract on offer.

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Speaker 2: The risk adjusted returns were simply not there. Against this backdrop,

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Speaker 2: it is no wonder that a number of all oil

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Speaker 2: and gas companies have moved to limit their exposure to

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Speaker 2: offshore wind. This may even prove to be a positive

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Speaker 2: for the industry if it reduces competition and demonstrates that

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Speaker 2: policy regimes still need to attract private sector investment. The

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Speaker 2: same logic applies to financial institutions and their role in

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Speaker 2: the transition, and here we are at an exciting juncture.

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Speaker 2: A growing list of banks, including JP, Morgan City and RBC,

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Speaker 2: have committed to publish their ratios of clean energy financing

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Speaker 2: to fossil fuel financing, and BNP Paraber has set a

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Speaker 2: target of ninety percent, or a nine to one clean

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Speaker 2: to fossil financing ratio for twenty thirty by focusing on

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Speaker 2: the solutions building clean energy and not only the problem

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Speaker 2: fossil fuel emissions. These types of metrics are a big

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Speaker 2: step in the right direction and will likely form a

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Speaker 2: key part of banks transition plans. However, the banks cannot

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Speaker 2: achieve these ratios on their own. For these aims to

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Speaker 2: be realized, the conditions in the real economy must exist

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Speaker 2: to allow attractive risk adjusted returns on energy transition investments,

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Speaker 2: and only government can create those conditions.

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Speaker 1: Five.

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Speaker 2: Geoeconomic competition has become the biggest complicating factor in the

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Speaker 2: two decades that benef has been around. The overarching narrative

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Speaker 2: around multilateral climate action has shifted twice, first from sacrifice

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Speaker 2: to opportunity, and then more recently, from opportunity to competition.

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Speaker 2: During the twenty tens, the narrative of shared sacrifice, where

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Speaker 2: countries look to limit their own responsibility for climate action

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Speaker 2: while pushing more onto others, was replaced by a new

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Speaker 2: narrative of opportunity and leadership. As the twenty twenties began,

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Speaker 2: countries race to show their seriousness about climate action, announcing

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Speaker 2: zero targets and more ambitious nationally determined contributions NDCs and

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Speaker 2: implementing more clean energy policies. Narrow self interest seemed to

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Speaker 2: give way to enlightened self interest. A second shift is

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Speaker 2: now in full swing toward hard nosed calculations of how

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Speaker 2: much economic value and national security benefit countries can capture

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Speaker 2: from the clean energy transition, and how they can compete

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Speaker 2: in these new industries against geopolitical and economic rivals. The

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Speaker 2: narrative of opportunity has not gone away, but it has

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Speaker 2: had a strong dose of realism and competition injected. This

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Speaker 2: shift is understandable and possibly inevitable. For example, there are

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Speaker 2: several major economies in Asia whose large incumbent steel industries

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Speaker 2: are predicated on access to cost competitive coal resources. Some

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Speaker 2: of these countries may never be cost competitive hydrogen producers,

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Speaker 2: so the shift from coal to hydrogen based steel may

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Speaker 2: permanently alter their competitive position in a global industry. These

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Speaker 2: are complex considerations which have not featured in the power

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Speaker 2: sector transition, where competition is mainly domestic. In the clean

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Speaker 2: tech manufacturing industries, especially solar and batteries, many countries are

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Speaker 2: now trying to gain a foothold. However, a massive wave

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Speaker 2: of investment in mainland China in twenty twenty two to

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Speaker 2: twenty twenty three has led to significant over capacity globally,

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Speaker 2: with nameplate capacity outstripping demand by more than double in

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Speaker 2: twenty twenty four. For both technologies, Prices of key technologies

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Speaker 2: have fallen to new lows, speeding the pace of the

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Speaker 2: energy transition but bringing pain to manufacturers. Electoralizer manufacturing sector

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Speaker 2: could be about to experience a similar supply glut, and

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Speaker 2: wind in China has suffered the same fate under these circumstances.

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Speaker 2: Policies in the US, India, Europe and other markets which

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Speaker 2: aim to protect and grow domestic manufacturers, face an uphill struggle,

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Speaker 2: and it doesn't seem like they're getting everything right. In

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Speaker 2: Western markets, where battery factory projects are struggling, evs are

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Speaker 2: still not fully cost competitive. This is despite global battery

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Speaker 2: prices falling twenty percent last year to a new record low,

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Speaker 2: driven by declining battery metal prices and intense competition especially

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Speaker 2: among lithium iron phosphate battery producers in China. In the

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Speaker 2: US and India, developers continue to pay over the odds

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Speaker 2: for solar equipment because of trade tariffs and other barriers.

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Speaker 2: Like the US, the EU is trying to use tariffs

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Speaker 2: to slow imports of Chinese made evs. It is also

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Speaker 2: taking steps to protect its wind sector and its fledgling

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Speaker 2: electoralizer industry from Chinese imports. Policymakers are knowingly or not

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Speaker 2: choosing a costlier transition with the expectation that this will

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Speaker 2: reap economic, security and political benefits. This choice is rarely

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Speaker 2: discussed explicitly, and the phenomenon goes beyond the US and Europe.

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Speaker 2: In twenty twenty four, Turkey, Brazil, and Canada also raised

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Speaker 2: or introduced tariffs for clean tech imports. Chinese and other

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Speaker 2: Asian companies have built a clear lead in new energy

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Speaker 2: manufacturing industries, not only in terms of scale and cost,

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Speaker 2: but also in terms of technology and knowhow. Yet the

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Speaker 2: reality is that many of these clean tech manufacturers are

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Speaker 2: nursing their wounds over low or negative margins while searching

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Speaker 2: for new overseas markets that won't shut them out. For

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Speaker 2: the sake of a successful transition, policymakers around the world

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Speaker 2: should be focused on limiting excess investment in specific oversupplied technologies,

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Speaker 2: while also looking for other investment opportunities where their countries

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Speaker 2: may possess competitive advantage. Not every country needs to be

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Speaker 2: a solar cell and battery maker, and diversifying supplies for

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Speaker 2: security purposes does not have to mean onshoring. At the

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Speaker 2: same time, they must remain focused on creating supportive policy

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Speaker 2: regimes for the transition itself, per lesson number four above,

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Speaker 2: to create demand for clean tech. Shutting out foreign companies

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Speaker 2: will raise the cost of the energy transition for the

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Speaker 2: end user and prevent the spread of much needed technical

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Speaker 2: know how and innovations At a time when both energy

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Speaker 2: security and climate outcomes are at stake. Policy makers would

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Speaker 2: be better off working out how to productively bring the

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Speaker 2: expertise of the world's leading companies onto their shores, whether

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Speaker 2: through joint ventures or intellectual property arrangements, and making sure

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Speaker 2: that they foster a dynamic local industry for installation, operations, maintenance,

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Speaker 2: and end of life management for energy transition technologies. Finally,

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Speaker 2: many countries remain heavily dependent on fossil fuel imports that

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Speaker 2: carry significant geopolitical and energy security risks. As they transition

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Speaker 2: to a cleaner mix, these risks will recede even if

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Speaker 2: key energy transition technologies are imported. Remember that the lights

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Speaker 2: stay on even if clean tech imports are slowed. Geoeconomic

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Speaker 2: competition may be an inevitable feature of the energy transitioned,

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Speaker 2: but policymakers have a choice in how to address it.

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Speaker 2: Those choices, more than anything else, will shape the energy

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Speaker 2: transition in twenty twenty five and beyond. So there you

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Speaker 2: have it, our five energy transition lessons for twenty twenty five.

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Speaker 2: One the energy transition won't slow down. Two, This is

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Speaker 2: the hard part of the journey. Three, be careful not

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Speaker 2: to misinterpret the data. Four A successful transition is a

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Speaker 2: profitable one, and five geoeconomic competition has become the biggest

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Speaker 2: complicating factor. Very best of luck to all those navigating

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Speaker 2: the complexities of the energy transition in twenty twenty five.

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Speaker 1: Today's episode of Switched On was produced by Cam Gray

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Speaker 1: with production assistance from Kamala Shelling. Bloomberg NEF is a

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Speaker 1: service provided by Bloomberg Finance LP and its affiliates. This

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Speaker 1: recording does not constitute, nor should it be construed as

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Speaker 1: investment in vice, investment recommendations, or a recommendation as to

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Speaker 1: an investment or other strategy. BLOOMBERGINNIF should not be considered

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Speaker 1: as information sufficient upon which to base an investment decision.

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