Powering Progress: Navigating the Energy Transition and Shaping a Sustainable Future
As Lazard publishes our 17th annual version of our Levelized Cost of Energy+ (“LCOE”) analysis, together with our ongoing analysis of storage (LCOS) and hydrogen (LCOH), it is clear that the “energy transition” is not only necessary but also a significant challenge. Although cost reductions, technology improvements, and progress to-date have been impressive, and a shift to cleaner energy is essential to reducing the potentially catastrophic risks associated with climate change, the transition will be lengthy and expensive and will involve fossil fuels for an extended period – a core fact that has been too often glossed over.
A variety of challenges complicate the energy transition (including technological limitations, antiquated transmission and other infrastructure, regulatory and geopolitical considerations, and capital scarcity), but increasing power demand is arguably the most fundamental today. Driven by the rapid growth of artificial intelligence, data center deployment, reindustrialization, onshoring, and electrification, the demand for around-the-clock power has never been greater.
To meet that demand, the world requires additional and reliable generating capacity. Despite increasing LCOEs observed over the last two years, the broader trend over the past two decades is substantial LCOE declines for renewable energy technologies. The implication is that the cost-competitiveness of renewable energy will lead to the continued displacement of fossil fuel generation. One key finding from this year’s LCOE, though, is the increasing price competitiveness of existing gas-fired generation as compared to new-build renewable energy technologies.
So, even as we increase renewable energy, which faces the challenge of intermittency, we also need complementary fully dispatchable generation to obtain the same level of reliability. Gas-fired generation remains the most efficient way of providing this complementary generation. The complexity of needing a variety of energy sources underscores that the LCOE is just the starting point for resource planning and has always reinforced the need for a diversity of energy resources across electrons and molecules.
To fully support the energy transition, the industry will need continued maturation of selected technologies not included in the scope of our analysis (e.g., carbon capture, utilization and sequestration, long duration energy storage, new nuclear technologies, etc.). Furthermore, in addition to technological innovation, transitioning to a more sustainable, low-carbon energy system requires substantial investments and innovative financing mechanisms. The capital needed across, among other areas, complicated infrastructure projects, new technologies, grid and infrastructure modernization, and energy efficiency is tremendous and will require significant expertise, experienced leadership, innovative business models and cross-border cooperation to attract and mobilize the necessary capital.
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In all these areas, government policies can help shape markets and guide behavior. The Inflation Reduction Act is potent and incentivizes investment beyond what otherwise would take place. While certain elements of the comprehensive legislation are still being implemented and interpreted, the results of our LCOE indicate the significant impact that policy can have on the economics of the energy sector.
Beyond the power grid, continued innovation is critical for harder to abate sectors that rely heavily on fossil fuels or high-temperature requirements. Heavy industries (i.e., steel, cement, chemicals, etc.), aviation, shipping, long-haul trucking, agriculture, energy-intensive manufacturing, among others, present their own set of unique challenges and require tailored solutions.
The results of our LCOE reinforce, yet again, that while there have been significant advancements in renewable energy technologies, there is an ongoing need for a diversity of energy resources to ensure a secure, reliable, and resilient energy system that can adapt to changing conditions and demands. While Lazard’s LCOE analysis will continue to evolve over time, we will remain committed to serving our global clients, who remain our highest priority.
To read the full report visit: Levelized Cost of Energy+ | Lazard
By Peter Orszag and Samuel J. Scroggins
Aerospace Engineering (Ret.), Engineering Fellow
4moA lot of words and speculation - learn to start your thoughts with an executive summary! Next, you don’t accomplish any kind of transitions without 2 things - infrastructure and historical facts for establishing a baseline - I don’t see it here so I don’t buy it! We don’t pull major transitional actions out of the genie’s bottle! I’d encourage you to try this again! More basis please!
Co-Founder at Heavier Than Air Brewing Co
4moThe answer is to use multiple sources and technologies. The problem is that this affects the cost. EV's exceed grid capacity. Wind energy is toxic and kills birds. Solar takes 50 plus years to generate the energy used to produce them and will end up in a landfill. Hydrogen technology shows promise but not there yet. Current petroleum technology still has a place but has a limited time. Nuclear has safety issues. Maybe we need to reduce usage?
Assembly Worker at Homeward Bound of Marin
4moUnfortunately the big fossil fuel energy consumers like the US and China haven’t changed their habits much when you look at the big picture. Brazil and India are more concerned about economic growth. And China and Russia are more concerned about military conquest and economic dominance. So actions by individuals and state and local governments as well as private companies can only make a very small difference. Unfortunately many people can’t look beyond their self interests.
Engineer at Northrop Grumman
4moWe are not past this point yet