In 1962, President John F. Kennedy informed the American public that the United States would embark on a programme to put the first man on the moon, “not because it is easy, but because it is hard”. The “space race” spawned a technological revolution that shaped the world as we know it.
Almost 60 years on, US President Joe Biden has set an equally challenging, transformative goal of achieving net zero emissions in the US power sector by 2035 and the broader economy by 2050.
The President’s move comes on the heels of Europe’s highly ambitious net zero emission targets and ahead of the 26th United Nations Climate Change Conference (COP26) in Glasgow, Scotland, in November. The targets are undoubtedly bold. The question is, can the US meet its new moonshot mandate?
After examining the proposals in detail, we believe the Biden administration will struggle to achieve its ambitious goals. Technological limitations, policy design, market structures and even the political and constitutional foundations of the United States create roadblocks that will impede the pace of progress. Even so, efforts to meet them will bring about major change in the US market that will help lower global carbon emissions.
President Biden came into office as the US energy market was already decarbonising. The new Infrastructure Investment and Jobs Act, a flow of capital into new energy technologies and a global investor focus on environmental and social governance (ESG) promise to accelerate the change necessary for a net zero world. Just as electrification transformed the US economy in the 1920s and 1930s and the space race spawned a technological revolution, this “second electrification” will have far-reaching effects and presents huge growth opportunities for those companies able to grasp them.
HORIZONS
One giant leap:
President Biden’s vision for repowering America
September 2021
David Brown, Head of Markets and Transitions, Americas
Ram Chandrasekaran, Head of Road Transport
Brian Mcintosh, Research Director, North American Power Service
Ed Crooks, Vice Chair, Americas
Chris Seiple, Vice Chairman, Energy Transition and Power & Renewables
Contents
Transforming the US to a zero carbon economy
Pathways and roadblocks on the route to net zero
Houston, we have a (few) problem(s)
Plenty of issues to resolve at ground control
Back at the table: US climate diplomacy at COP26
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Chris Seiple
Vice Chairman, Energy Transition and Power & Renewables
Chris works with the more than 150 researchers in our Energy Transition team to bring thought leadership to our research and business strategy, leveraging his more than 25 years of global power industry experience.
Chris began his career as a consultant working on electric deregulation policy and strategy development at Cambridge Energy Research Associates (CERA), now part of IHS, where he worked first in the US on the global power team and then led the European gas and power research based in Paris, France.
Chris later joined GE Energy Financial Service where as the SVP of Investment Strategy, he helped underwrite debt and equity investments in power assets. He then moved into a role managing a 2,000 MW portfolio of gas and coal assets owned by GE EFS, as well as overseeing the development and startup of Linden VFT.
Chris spent the past decade leading Genscape’s power analytics, software and monitoring businesses and came to Wood Mackenzie through its acquisition of Genscape.
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Pathways and roadblocks on the route to net zero
The course that President Biden has set is broadly aligned with Wood Mackenzie’s roadmap for a world on course to limit global warming to a highly ambitious 1.5 °C. It will take tremendous effort. All sectors of the energy industry will have to be transformed. The use of oil and gas for transport and heating will need to be largely replaced by electricity, and that electricity will have to be produced with zero emissions.
Even in our base-case scenario – which we view as the most likely outcome – US zero-carbon generation capacity from wind, solar, nuclear and hydro is likely to grow rapidly, to about 1,170 GW in 2035. That corresponds to a rise of roughly 845 GW from 2020 levels. The new US goals require even faster growth.
Wind and solar power would have to become the largest sources of generation by 2035, alongside massive expansion in carbon capture and zero-carbon hydrogen. We further calculate that for the US to achieve its goals, total energy demand would have to peak at the end of 2021.
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Houston, we have a (few) problem(s)
Even in a net zero economy, not all hydrocarbons will be removed from the US energy system. They will be needed to back up renewables in the power market and in many industrial processes. Emissions from fossil-fuel combustion will have to be captured. In our net zero scenario, the US needs to reach 1 billion tonnes per annum of carbon capture and storage capacity by 2050, up from 25 million today.
The Infrastructure Investment and Jobs Act expands support for carbon capture, utilisation and storage (CCUS). The 45Q tax credit, introduced in 2008 and expanded in 2018, incentivises carbon removal with credits of US$34 per tonne of carbon dioxide in 2020, rising to US$50 per tonne in 2026. The infrastructure deal takes incentives a step further by focusing national policy on building new transport infrastructure, outlining goals to focus on industrial-sector emissions and identifying options to lower overall costs through reduced taxes.
We see others measures that would accelerate CCUS:
Conclusion:
Back at the table: US climate diplomacy at COP26
The United States is likely to fall short of President Biden’s lofty aspirations. But by setting those goals, he has put the US back at the negotiating table with a chance to influence global climate policy at and around COP26 in November 2021.
All major economies are trying to identify the pathways to net zero emissions. The United States has a similar level of climate ambition to the European Union – a global leader in climate policy. But the implications of net zero commitments are huge. Supply chains for raw materials, the geopolitics of energy, and global energy prices will all change radically in a net zero world.
The Biden administration will need to work with other global leaders to define policies that accelerate decarbonisation. Key among them are setting near-term policies for low-carbon technology innovation, creating carbon market policies and addressing energy subsidies across the world.
The Biden administration has made one giant leap with its proposals at home. It must make another abroad.
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Transforming the US to a zero carbon economy
Back down to earth: scaling carbon removal to a net zero world
The Infrastructure Investment and Jobs Act attempts to expand hydrogen markets rapidly. The Regional Hydrogen Hub Program is intended to develop projects in at least four locations, with at least two located in regions with the largest natural gas resources. The hubs are designed to focus on multiple end-use segments across power, industry, heating, and transport. This is a positive signal for hydrogen markets and decarbonisation, but carbon price support will influence the pace and scale of implementation.
The US will need to take several approaches to deploying hydrogen. Blue hydrogen, produced from natural gas with CCUS, is likely to dominate on the US Gulf Coast. Petrochemicals and other heavy industries in Texas and Louisiana provide ample demand centres, while proximity to the natural gas industry and limitations on wind- and solar-based hydrogen provide a clear opportunity for blue hydrogen to decarbonise this region. Green hydrogen, produced via water electrolysis, is likely to dominate in regions with the strongest wind and solar resources. The administration has also outlined that at least one hydrogen hub should be based on nuclear energy, known as yellow hydrogen.
We see a range of carbon price support for low-carbon hydrogen of US$40 to US$60 per ton as being needed for it to be commercially viable by 2030. Accelerating low-carbon hydrogen faster than that would require carbon prices to be higher – up to US$150 per ton for green hydrogen in heavy industrial applications. Enacting a national carbon price would be politically challenging in the US and it is not an idea the Biden administration has advocated. Support for low-carbon hydrogen may have to come from multiple sources: federal loan or grant programmes, for instance, combined with cost-abatement support from state budgets.
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August 2021
Squaring the carbon circle for oil and gas
The oil and gas sector is on notice. Stakeholders are demanding greater accountability when it comes to reducing carbon emissions along the value chain. Net zero Scope 1 and 2 emissions by 2050 are now the industry standard. Scope 3 emission reductions are coming – with significant implications for corporate strategies and capital allocation.
The pressure is rising from stakeholders in large part because the pressure is rising for stakeholders to decarbonise their own portfolios. This is nothing new, but the momentum is inexorable, driven by the underlying facts of climate change. Signatories to the Net Zero Asset Managers initiative, for instance, now account for almost half of global assets under management, while members of the new Net Zero Banking Alliance already account for a quarter of global banking assets in 27 countries.
Carbon-related investment criteria and policies are still inconsistent and unevenly applied. However, standards will mature and converge – perhaps soon. The pool of investors that will agnostically invest in the oil and gas sector status quo will continue to shrink. And ahead of the United Nations Climate Change Conference (COP26) later this year, governments are setting increasingly ambitious national emission reduction targets. Stricter, mandatory corporate climate reporting will follow.
It’s incredibly rare for an industry to get decades-long notice that its business is under threat. Firms cannot ignore the inevitable; the only strategic dilemma here pertains to time and pace. Not only has the oil and gas industry been afforded that luxury of a warning, but it has received it when a wall of cash is about to come its way. Now is the time to reinvest cash flows from higher oil prices into building a sustainable business for future decades.
US emissions are not on course for net zero
Source: Wood Mackenzie
Electrification means using energy more efficiently across the board. Electric vehicles (EVs), for instance, are around four times more efficient at converting energy to movement than internal combustion engine vehicles. Heating buildings with heat pumps is three times more efficient than using gas or oil-fired boilers. Huge gains can be made from improving the energy performance of our buildings, through simple measures such as insulation. Digitalisation will also enable the smarter use of energy in buildings, industrial processes and in cities worldwide. These assumptions are all key elements of reaching a net zero pathway in the US.
In the following table, we compare our base-case outcomes with our net zero scenario.
The US power sector is not ready for net-zero lift-off
Providing carbon tax credits for at least 20 years would give infrastructure investors the clarity they need. The 45Q credit ends once a facility is in service for more than 12 years. CCUS or direct air capture (DAC) projects have long payback periods, similar to liquid natural gas (LNG) terminals or power plants, so extending the timeline of tax-credit availability should provide reassurance to investors.
Offering grants for the most expensive carbon-capture technologies, such as DAC, and heavy industrial applications would help plug the funding gap in early-stage technologies. Critically, these initiatives need to focus on boosting carbon capture from hard-to-decarbonise sectors.
New commercial models are required. Similar to regulated utilities, carbon hubs may need to be promised a fixed return on investment to attract capital. A whole new sector could emerge: the “carbon utility”.
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Plenty of issues to resolve at ground control
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Scaling up net zero investing
Proposals for climate-related spending in the US today fall far short of the US$10 trillion we think will be required between 2021 and 2050 to achieve the administration’s objectives for cutting emissions.
Investors will need a better set of incentives to reallocate capital, as government funding clearly cannot reach the necessary scale. Two infrastructure bills – a bipartisan one valued about US$1 trillion and a Democratic one valued at US $3.5 trillion – were vigorously debated over the summer.
There is a much larger amount of private capital looking to invest in decarbonisation. For example, the Net Zero Asset Management Initiative has 128 signatories, with US$43 trillion in assets under management globally, committed to supporting investing aligned with net zero emissions by 2050 or sooner.
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Ed Crooks
Vice-Chair, Americas
Ed Crooks joined Wood Mackenzie in 2019 as Vice-Chair, Americas. Based in New York, he covers the full range of commodities, technologies and sectors, with a particular focus on climate policy, economics and the energy transition. He writes Wood Mackenzie's popular Energy Pulse newsletter, analysing the latest developments in the world of energy.
Before Wood Mackenzie, he was an award-winning energy editor for the Financial Times, first in London and then in New York. He joined the FT in 1999 as economics editor. He previously worked as an economics correspondent for BBC News, a reporter for Investor’s Chronicle magazine, and an economic researcher at the Institute for Fiscal Studies. He also served on the UK government’s Sustainable Development Commission.
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Brian Mcintosh
Research Director, North American Power Service
Brian is the Research Director for our North America Power Service, bringing more than fifteen years of power industry experience to his role. His team provides data and analytics with forecasts covering the North America power and renewables markets.
Brian joined Wood Mackenzie in 2019 with the acquisition of Genscape. During more than ten years with Genscape, he served in several roles, including product owner of the power market analytics service. In that role he managed a team of analysts and meteorologists focused on providing forecasts, analysis and commentary on the near-term power markets.
Earlier in his career, Brian was a power trader at International Power America, where he was responsible for hedging and asset optimisation for power generation in ERCOT, PJM, ISO NE and MISO.
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Ram Chandrasekaran
Head of Road Transport
Ram is the global lead for transportation and mobility, based in Houston.
He has more than 12 years of experience in the automotive industry, including product development, systems modelling, vehicle prototype testing and battery pack testing and modelling. He also has a wealth of knowledge in government regulations for corporate fleet fuel economy and processes for achieving them.
Prior to joining Wood Mackenzie, Ram spent six years at Ford Motor Company, working on tools and methods for predicting thermal response, optimising software release and fuel economy for hybrid and electric vehicles.
We believe the Biden administration will
struggle to achieve its ambitious goals.
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David Brown
Head of Markets and Transitions, Americas
David Brown has been with Wood Mackenzie since 2011, when he initially developed energy demand forecasts for European markets.
In 2014, he relocated to Beijing to manage our gas, power and coal markets teams and product manage the China Gas and Power Service.
Based in Houston since mid-2016, he is now responsible for the Energy Markets Service and contributes to our long-term cross-commodity and energy transition analysis.
Missed our previous editions of Horizons? Download them here.
Edition 7 | July
Edition 6 | June
Edition 5 | May
We believe that
66% clean generation by 2035 is more feasible
Wood Mackenzie base-case outlook vs. net zero scenario for the United States (2050)
Source: Wood Mackenzie
Net zero EV adoption will pose major challenges for power markets
In August, President Biden signed an executive order setting a goal that 50% of all new passenger cars and light trucks sold in the US by 2030 be zero emissions, including battery electric vehicles, plug-in hybrids and fuel-cell vehicles. Our net zero scenario for the US transport sector suggests annual EV sales through the end of the decade would need to be around 50% higher than in our base case, which shows a zero-emissions market share of only 27% in 2030.
Key measures that would accelerate EV adoption in the United States include expanding the number of EVs eligible for tax breaks, making tax credits available at the point of sale, establishing incentives for at least 10 years and increasing incentives from US$7,500 to US$12,500 per vehicle. Combined, these steps would kick EV sales into high gear.
EV sales that reach a net zero pathway will pose a challenge for power markets, though. New EV buyers would on average see a 20% to 30% increase in their household power consumption. If they charge their cars during their peak consumption hours, utilities could face customers whose maximum demand will double. When and how consumers charge their EVs will need to be closely managed in a net zero world. Should EV sales accelerate beyond our base case, transmission providers and utilities would need to sharpen their focus on managed charging, reliability and grid resilience to handle the surge in power demand.
Wood Mackenzie EV sales forecast base-case vs. net zero scenario
Source: Wood Mackenzie
Wood Mackenzie implied carbon-abatement cost ranges for our US net zero scenario (US$)
Source: Wood Mackenzie
Multiple orbits: Clearer hydrogen policy support is needed
Wood Mackenzie Levelized Cost of Hydrogen for the United States
Source: Wood Mackenzie
Wood Mackenzie US net zero scenario: cumulative capex in new supply (2020-2050)
Source: Wood Mackenzie
The priority areas for investment to put the US on a net zero pathway include:
Make it so, Joe
The wide range of investment opportunities means there are options available for a range of investors. Transmission should attract pension funds, with a lower risk appetite, helping to underpin the massive build-out in cross-state power lines. Riskier, higher-return options, such as energy storage and carbon removal, can be financed by venture capital and private equity.
cross-state infrastructure for high-voltage power transmission
a carbon abatement-cost fund to support carbon removal capacity, such as CCUS, DAC and low-carbon hydrogen
energy storage technologies for both long-duration solutions in the power sector and for distributed, behind-the-meter, demand-side management
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A bold solution to financing the transition to zero-carbon energy would be a national “net zero investment fund” to help channel private capital, similar in scale to Fannie Mae and Freddie Mac, the government-sponsored enterprises that support housing finance and together manage US$5 trillion in assets. To increase the speed and scale of investments, the new fund could establish a “net zero dividend” for early-stage technologies, price carbon into investment decisions, fund direct grants and provide 15- to 20-year financing for large infrastructure projects.
To boldly go…
Making the changes required to put the economy on a path to net zero is particularly challenging in the US because of its system of government. The separation of powers and federalism put constraints on executive authority, and President Biden’s ability to make progress towards his climate objectives will be more limited than for his counterparts in many other countries.
The bipartisan Infrastructure Investment and Jobs Act has plenty of energy-related provisions, including US$65 billion for power infrastructure, US$15 billion for EV charging and buses and new incentives for carbon capture and hydrogen. However, the Democrats’ much larger US$3.5 trillion plan, including a proposed new “clean electricity performance programme” to achieve 80% carbon-free electricity by 2030, has been more contentious.
President Biden can use executive actions and regulations to try to drive down emissions, but those will face legal challenges and could be reversed by future administrations. Regulations governing emissions from the electricity sector have been disputed in the courts for many years and it remains unclear what view judges will take in future legal battles.
The Obama administration’s Clean Power Plan, setting limits on CO2 emissions from electricity generation, was stayed by the Supreme Court in 2016. But in January 2020, the DC Circuit court struck down the Trump administration’s more lenient regulations and called on the Environmental Protection Agency to put forward a new set of rules.
The limits to presidential authority
Edition 8 | August
The US goal of a net zero power sector by 2035 is one of the most ambitious decarbonisation targets globally and one of the most difficult to implement. On one hand, proposed policies will accelerate zero-carbon supply by way of an extension of investment and production tax credits and the Clean Electricity Performance Program. These incentives, combined with the cost competitiveness of renewable technologies, makes adding wind and solar relatively inexpensive. On the other hand, solutions that maintain reliability and resilience are both expensive and full of unknowns.
As wind and solar expand and coal retreats, markets will need to identify how much battery storage is needed. The power outages in Texas caused by storm Winter Storm Uri in 2021 are an example of what the power sector will need to handle. Still conditions reduced wind power output across broad swathes of the US, and when freezing temperatures in Texas forced some fossil fuel plants offline, blackouts were unavoidable. Without the gas, coal and nuclear plants that kept running, the supply shortfall would have been even worse.
A multi-day storage solution is needed in a net zero world, but major technology innovation will be required to provide it. The remaining gas-fired power plants will need to be fitted with carbon capture and storage, but the technology’s ability to deal with large-scale carbon emissions in the power sector needs to be proven. More high-voltage transmission lines will need to be deployed, too, along with more progress on advanced transmission technologies.
In short, we think achieving a net zero US power sector by 2035 will be extremely challenging. Based on our understanding of technologies, market policies, the challenges of quickly building transmission lines and the electrification of energy, we believe that 66% clean generation by 2035 is more feasible.
Percent of wind and solar in the Texas Power market February 2021
Source: Wood Mackenzie
David Brown, Head of Markets and Transitions, Americas
Ram Chandrasekaran, Head of Road Transport
Brian Mcintosh, Title
Wind and solar power would have to become the
largest sources of generation by 2035,
alongside massive expansion in carbon capture and zero-carbon hydrogen.
will need to be closely managed in a net zero world.
When and how consumers charge their EVs
President Biden’s ability to make progress towards his climate objectives
will be more limited than for his counterparts
in many other countries.
Join the debate.
Get in touch with Chris
Chris Seiple
Vice Chairman, Energy Transition and Power & Renewables
Chris works with the more than 150 researchers in our Energy Transition team to bring thought leadership to our research and business strategy, leveraging his more than 25 years of global power industry experience.
Chris began his career as a consultant working on electric deregulation policy and strategy development at Cambridge Energy Research Associates (CERA), now part of IHS, where he worked first in the US on the global power team and then led the European gas and power research based in Paris, France.
Chris later joined GE Energy Financial Service where as the SVP of Investment Strategy, he helped underwrite debt and equity investments in power assets. He then moved into a role managing a 2,000 MW portfolio of gas and coal assets owned by GE EFS, as well as overseeing the development and startup of Linden VFT.
Chris spent the past decade leading Genscape’s power analytics, software and monitoring businesses and came to Wood Mackenzie through its acquisition of Genscape.
Join the debate.
Get in touch with Ed
Ed Crooks
Vice-Chair, Americas
Ed Crooks joined Wood Mackenzie in 2019 as Vice-Chair, Americas. Based in New York, he covers the full range of commodities, technologies and sectors, with a particular focus on climate policy, economics and the energy transition. He writes Wood Mackenzie's popular Energy Pulse newsletter, analysing the latest developments in the world of energy.
Before Wood Mackenzie, he was an award-winning energy editor for the Financial Times, first in London and then in New York. He joined the FT in 1999 as economics editor. He previously worked as an economics correspondent for BBC News, a reporter for Investor’s Chronicle magazine, and an economic researcher at the Institute for Fiscal Studies. He also served on the UK government’s Sustainable Development Commission.
Join the debate.
Get in touch with Brian
Brian Mcintosh
Research Director, North American Power Service
Text here
Join the debate.
Get in touch with Ram
Ram Chandrasekaran
Head of Road Transport
Ram is the global lead for transportation and mobility, based in Houston.
He has more than 12 years of experience in the automotive industry, including product development, systems modelling, vehicle prototype testing and battery pack testing and modelling. He also has a wealth of knowledge in government regulations for corporate fleet fuel economy and processes for achieving them.
Prior to joining Wood Mackenzie, Ram spent six years at Ford Motor Company, working on tools and methods for predicting thermal response, optimising software release and fuel economy for hybrid and electric vehicles.
