Musings from COP28: Climate action secures a key win; focus deepens on methane and renewables

US clean energy market gets a reality check

The global climate initiative secured a major and almost unexpected win. The Conference of the Parties (COP), the decision-making body of the United Nations Framework Convention on Climate Change (UNFCCC), included in its final communique from the COP28 summit an explicit call on countries to take action to transition away from fossil fuels in the energy system, “in a just, orderly and equitable manner”. This unprecedented agreement was reached in the eleventh hour after leaders wrangled for days over various proposals to commit to a “phase out” or “phase down” of fossil fuels.

The historic agreement marked the close of COP28 in Dubai, where nearly 200 nations were represented, attracting a record number of attendees in the history of the global climate conference, and with it came unprecedented media coverage. Rystad Energy participated in COP28, providing informational briefings on the latest status of climate performance, along with all challenges, bottlenecks and pain points the world is dealing with on the back of the energy transition push and challenging macroeconomic outlook.

The main learning this year was the greater focus on increased visibility and mitigation efforts for methane emissions. The climate finance framework reaching a level of maturity, the return of nuclear energy back on the agenda, a global commitment to renewable energy targets were the other major themes of the two-week long climate marathon.

On methane emissions, we observed significant progress in the measurement and mitigation, with the COP28 discussions culminating in a Global Methane Pledge (GMP) being signed by more than 150 countries, including the US, which together with the European Union, were the main proponent of the pledge. At COP28, GMP partners announced over $1 billion in new grant funding for methane action, new commitments and legislation from oil and gas methane emitters and transformational data tools, which will bring the world closer to the goal of cutting methane emissions at least 30 percent by 2030. The US has been emitting around 25 million tonnes of methane per year since 2010, based on the standard methane accounting methodology of the Environmental Protection Agency (EPA). Complexities around the accurate accounting of methane emissions are well known, and various alternative estimates – typically based on remote sensing and extrapolation techniques – sometimes put “true” methane emissions from the US at more than 50 million tonnes per year, or more than twice the official EPA number. Regardless of how large the real methane footprint is, it is undoubtedly a very significant driver of total greenhouse gas emissions (GHG) in the country. Even 25 million tonnes translate to 750 million tonnes of CO2e on 100-year global warming potential basis (AR6 equivalence factors) and methane accounts for 12% of nationwide GHG emissions. However, if a 20-year global warming equivalence is used instead, the US’ methane footprint has increased to more than 2 Gtpa of CO2e, or 25-30% of the total GHG footprint. The commitment from oil and gas producers to significantly reduce methane by 2030 is surely a game changer as the sector currently accounts for about one third of the total methane footprint – comparable to agriculture, which accounts for another one third of the methane footprint, predominantly originating from enteric fermentation and manure management.

Prior to COP28, we observed significant progress around methane mitigation efforts not only from the US, but also from China and the EU. During COP28, 50 major producers, including both national oil companies and independents, signed the Oil and Gas Decarbonization Charter pledging to reduce their methane footprint by 2030 and eliminate routine flaring. The agreement featured signatures from several top American producers: ExxonMobil, EQT Corporation and Occidental Petroleum. Other COP28 developments in the methane space included the World Bank launching a program to address methane emissions and the food production industry clearly showing increased focus on methane emissions through the Dairy Methane Alliance.

Beyond methane, a lot of tangible discussions at COP28 were dedicated to climate finance and advancements in the area of low carbon electricity generation. We witnessed the establishment of a $700 million loss and damage fund, which was perceived as a major milestone, but in practical terms represents just a fraction of where the fund size needs to be eventually. The UAE also launched the Alterra fund, worth $30 billion, with a target to mobilize a staggering $250 billion in private and other state financing targeting emission reductions in the Global South.

A fair amount of attention at COP28 was paid to nuclear energy and 22 countries, including the US, signed the nuclear declaration, pledging to triple nuclear capacity by 2050. Overall, while we were walking around the COP conference halls this year, it felt like nuclear industry had a very strong presence, with a lot of discussions about nuclear fusion and small modular reactors (SMRs) at various booths. Even so, media attention was still concentrated on even more influential global renewables and energy efficiency pledge signed by about 120 countries, who committed to tripling their renewable capacity by 2030 and doubling their energy efficiency. It was indeed a big victory for the renewable sector. Yet, we must view these targets in the context of the underlying economic reality and regulatory environment prevailing currently.

The US domestic renewable energy outlook got a healthy boost last year on the back of Inflation Reduction Act last fall. Solar and wind project developers got full clarity on the extension of the Production and Investment Tax Credits (PTC and ITC). The credit amounts themselves saw significant uptick (under some conditions), the domestic solar manufacturing sector was incentivized, and a much need battery-energy storage (BESS) segment was finally supported with tax credits applicable to standalone BESS projects. While other clean energy segments, such as CCUS, clean hydrogen and geothermal all saw significant activity revisions on the back of the Inflation Reduction Act, there was no doubt that traditional renewables drove the upward revisions in the topline of low carbon energy spend in absolute terms. Prior to the Inflation Reduction Act, we expected the annual size of the US low carbon energy market to grow from around $75 billion in 2021-2022 to about $100 billion in the second half of the current decade. A wave of new project announcements, across both generation project developers and manufacturers has pushed our estimated market size for 2030 toward $200 billion – driven predominantly by the improved solar and wind energy outlook. Still, it is fair to say that the upward momentum following the Act lasted through the second quarter of the year. The trend began to revert since May on the back of a persistent weakness in the macroeconomic outlook and a high interest rate environment. Most renewable energy stocks are down by 20-50% so far this year on the back of increased debt service pressure and an uncertain investment thesis for many greenfield utility-scale solar and wind initiatives. At the end of the day, we should remember that like almost every other energy segment in the US, renewables are driven by traditional market economy considerations. Historically, renewable energy was always perceived as a low-risk and low-return investment opportunity at a project level and hence, the majority of renewable developers operate with high leverage ratios to boost their expected returns on equity. In the period that saw rapid renewable energy growth in the US (2010-2021), access to cheap financing was abundant, with the Fed rate staying close to zero. Yet, the Fed rate of 5.5% has already sent corporate debt rates for new, less established renewable developers into a high single-digit zone – far above the after-tax project level rates of return expected on new solar and wind projects across most of the country at current power purchase agreement (PPA) levels. It will be fair to say that PPAs are seeing an upward pressure at the moment, but it comes with a significant lag, and ultimately cost implications for end-consumers.

The current economic situation has already resulted in some project delays and cancelations, taking down our low carbon energy spend outlook by about 10% for the next five years. We are still talking about a growing market, but longer the current economic reality persists, the more likely it is for a continuous clean energy slowdown in the US. The Inflation Reduction Act set very ambitious energy goals and provided the framework to create a strong domestic clean energy sector, with a local supply chain. Yet, the Act’s implementation has had an unfortunate overlap with major geopolitical and economic shocks at a macro level. In our view, it is more important than ever before for US policymakers and domestic industry players to stay committed to the ambitious targets, navigating through the temporary economic and permitting obstacles, so that the country is positioned to emerge as an even stronger leading player globally once the economy is out of the current downcycle.

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Artem Abramov  

Head of Clean Tech Research

Jon Hansen  

Vice President, Clean Tech Research

(The data and forecasts contained in this column are Rystad Energy’s and the opinions are of the authors.)