Developing advanced energy solutions including storage, clean fuels, carbon removal and advanced nuclear solutions is key to achieving better outcomes for the climate in the form of low emissions, health via clean air, and the economy through job creation.
While better health, economic competitiveness and climate remain key policy objectives of the energy transition, these outcomes are often not reflected in cost and benefit analyses for advanced energy solutions. Instead, calculations tend to focus on the cost of a specific electron or molecule – and the cheapest available alternative.
There are a few exceptions that prove it is possible to account for these outcomes, however. California’s Carbon Neutrality by 2045 plan estimates that, alongside neutralizing CO2 emissions, implementation would produce USD 200 billion of healthcare savings due to reduced air pollution and create 4 million new jobs to develop infrastructure and capacity.
But more often than not, innovators, utilities, energy users and investors don’t get rewarded for generating these benefits – they are not valued and they are not priced into investments.
At the same time, there is an additional cost gap, often called the green premium, when new solutions are compared to legacy solutions that do not offer the same benefits. While some costs are expected to decrease, many solutions will still incur long-term additional costs that need to be paid.
For example, the cost of clean hydrogen could reach as little as USD 0.12 per kilowatt hour (kWh) by 2035, but this would still not be in line with natural gas, the cost of which is expected to be as low as USD 0.09 per kWh in the same year. Sustainable aviation fuel (SAF) will still be up to two times more expensive than kerosene by 2050. And carbon capture will always be a pure additional cost to the emission producer that does not really have an alternative.
Lagging investment in advanced energy solutions
When combined, the green premium and the lack of accounting for the benefits of new technologies pose significant challenges to create viable business cases for the private sector to invest in advanced energy solutions. In effect, investment is lagging despite substantial capital being available.
In 2023, around USD 60 billion was allocated to advanced energy solutions, but this needs to grow almost 10-fold over the next few years. Investment in storage, clean fuels, carbon capture, SAF and advanced nuclear need to exceed USD 500 billion per year by 2030 to align with global net-zero pathways.
In the meantime, economic, health and climate outcomes hang in the balance. To unlock these benefits, we must gain a better understanding of their value and price them into investments to address cost disparity. At the same time, the resulting increased cost of the energy transition – the price to pay for wider benefits – will need to be met by governments, and eventually consumers, while companies must also accept some margin compression.
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Making it work
Closing the direct cost gap remains a critical challenge that will require a multifaceted approach. One lever is to pursue economies of scale and efficiency improvements across the value chain, including in the areas of permitting of advanced energy solutions and regulatory innovation.
A second lever is government funding. It exists in various forms such as subsidies, incentives, and guarantees to help minimize risk and cost, enabling more investment. California has been able to inject almost USD 50 billion from state funds, in addition to the Inflation Reduction Act at the Federal level, to make its Carbon Neutrality Plan by 2045 more attractive to investors.
Another way to cover the green premium cost is by passing it directly to end users and consumers. For instance, decarbonizing aviation by 50 per cent would result in the tripling of fuel costs for airlines as they switch to SAF. If airlines were to preserve margin and pass the entire cost onto passengers, it would result in an increased ticket premium of around 18 per cent. Similarly, an industry study suggests that decarbonizing Europe’s power grid by as much as 95 per cent using advanced energy solutions and renewables would increase bills by roughly EUR 14 per month for a typical household in the EU.
And of course, this additional cost could also be addressed through margin compression by companies. This would be a voluntary decision taken by a company along the advanced energy solution value chain to reduce the difference between the cost of the product or service and its selling price. Although this would narrow profit margins, it could be justified to develop the market, foster long-term sustainability and contribute to broader societal goals around the energy transition. While margin compression could be achieved quickly, it has a limited potential, may adversely deter future investors and could discourage critical innovation.
China is a great example of a country that’s taken a holistic approach to developing advanced energy solutions. Its government uses a blend of tools, addressing this challenge through incentives, subsidies and mandates. This approach has helped China to not only become a global leader in the sector, but to also reduce the green premium of advanced energy solutions through economies of scale.
Building up advanced energy solutions
Substantial capital is available for advanced energy solutions, although the current business case presents a roadblock to seeing that investment flow at the required rate. While the industry develops, society, policy makers and companies must get comfortable factoring in the “hidden” value of these solutions – and paying for it – while also improving costs and creating strong market signals for these innovations.
Every region, country, industry and company will decide on its own approach, but these stakeholders must cooperate with each other. Platforms like the World Economic Forum’s Advanced Energy Solutions community can encourage such collaboration to accelerate – from decades to years – the industrial-scale deployment of innovations such as clean fuels and hydrogen, advanced nuclear, storage and carbon removal.
Addressing the green premium and accounting for the full costs and the benefits of these advanced energy solutions will help shape and accelerate the growth of the industry. Supporting partnerships among innovators, large energy companies, energy users and investors is key. It will help to increase public confidence in advanced energy solutions, boosting technology readiness and demand, and bolstering the business case for these much-needed sustainability solutions.
Source: World Economic Forum
