How might the world’s energy mix evolve by 2050?

Tom Heintzman: Welcome to The Sustainability Agenda, a podcast series focusing on the evolving complexities of the sustainability landscape. I’m your host, Tom Heintzman. Please join me as we explore today’s most pressing issues with special guests that will give you some new perspectives and help you make sense of what really matters.

Frank Pottow: Even though final energy demand grows, you know, one and a quarter percent a year, the amount of primary energy we’re going to need to put into the system will actually go down almost 50 percent over the next 30 years. And that’s what facilitates energy transition, that as we transfer away from fossil fuels to electrify more things, you know, electrify everything, we will start squeezing all this wasted heat out of the system.

Tom Heintzman: In this episode, we begin a new chapter of the podcast, this one focused on the energy transition and in particular, the role of electrification. In today’s episode, we’re starting with a very high level, 100,000 foot overview of the transition in order to give listeners a sense of how various forms of energy may evolve between now and 2050. In future episodes, we’ll be taking a number of deep dives into various segments of the electrification value chain. To assist with providing this high-level overview of electrification, I’m delighted to welcome Frank Pottow, the Co-Founder of GCP Capital, a private equity firm based in New York. GCP Capital Partners was formed as the successor to Greenhill Capital Partners, the merchant banking business of Greenhill and Co. Frank is more than 25 years of private equity investment experience with a focus on energy companies. Good afternoon, Frank. Welcome and thank you for joining us on today’s show.

Frank Pottow: Thanks for having me on the show, Tom. It’s great.

Tom Heintzman: Frank, to begin, you’ve had a long career in energy, primarily oil and gas. Could you briefly summarize your experience just to give our listeners a better sense of your perspective on the issue? Because everybody comes at it from a perspective based upon their experience.

Frank Pottow: I’ve been a private equity investor since 1986, so I guess coming on close to 40 years now and starting in 1992, which is over 30 years ago, I started making private equity investments in traditional energy companies, primarily oil and gas exploration production companies, but also pipelines and oil field service companies. And over that 30-year period, I think I invested in roughly two dozen companies. But stopped investing in new oil and gas companies about 10 years ago. As I started to understand some of the dynamics going on between the energy transition, I look over a broader, longer term perspective, I think that the energy transition is inevitable. And I think that we’re sort of at a pretty key inflection point right about now where the growth in renewable solar and wind in particular are going to start to be more than the growth of global energy demand, which by definition means that we’ll finally get to the point, I think in the next little while, where we’ll start to finally reduce carbon emissions because we’ll start to reduce fossil fuel usage.

Tom Heintzman: Thanks so much, Frank. And that’s really one of the reasons I wanted to have you on the show. Long history of oil and gas investments, but with a strong perspective on how the energy transition is going to play out. We’re trying to tackle a complicated subject today, summarizing the energy transition fuel by fuel. In order to do that, it’d be helpful to start with some fundamental concepts as they facilitate a discussion of the transition. Could youbegin by explaining to the listeners the difference between primary energy, secondary energy, final energy, and useful energy, because those terms I think are going to become important as we start comparing how different fuel types may evolve over the next 30 years.

Frank Pottow: I will be even more succinct because I’m just going to jump from the beginning to the finish line and skip over the two intermediate steps. I think what’s important is primary energy, which is what’s traditionally been measured, which is the energy inputs into the system. That’s what’s measured by the International Energy Agency, the IEA. That’s what’s measured by the U.S. Department of Energy’s Energy Information Administration, which is the EIA. It’s measured by a bunch of non-government organizations. Depending on how you measure different types of oil products, the world consumes about 100 million barrels of oil every day. And the world consumes about 4 trillion cubic feet of natural gas a year and about 8.5 billion tons of coal a year. Each of those forms of hydrocarbon have a certain amount of energy, primary energy, per unit of mass, per unit of barrel of oil or kilogram of coal or cubic meter of natural gas. And when you look at all those numbers and you add them up together, the primary energy input of hydrocarbons into the system is roughly 500 exajoules of energy. Skipping through the two intermediate steps, when you talk about secondary energy, final energy, and useful energy, useful energy is what you need to actually do the work you want. The sad truth of the matter is that roughly 80% of the world’s primary energy is still coming from fossil fuels. And actually 80% of the world’s useful energy is still coming from fossil fuels. Most of the fossil fuel energy that we use is wasted. It’s wasted in the form of heat. So if you think about an automobile, it’s heat going out the tailpipe in emissions. It’s the heat that heats up the engine block to 200 plus degrees Fahrenheit. Same thing with the burned coal to make electricity. You’re losing a lot of the energy in the electricity. Rather than turning the physical turbine to generate the electricity, you’re losing a lot of the energy in the form of heat. Same thing with natural gas. Hydrocarbons in general, you lose roughly 3 quarters of the energy you start with. But the energy system that we have in the world right now, in total it’s about 550 exajoules. And of that 550 exajoules, 45 of them come from green energy. Roughly 15 from solar wind, 15 from hydro, another 15 from a combination of nuclear and biofuels. Together that’s 45. And then the other roughly 500, actually 510 is the exact number last year, exajoules comes from fossil fuels, from what I said earlier, roughly 100 million barrels of oil a day, roughly 4 trillion cubic feet of natural gas a year, and roughly 8.5 billion tons of coal a year.

Tom Heintzman: Okay, perfect. So that’s the world’s current energy mix. And just to recap, fossil fuels a little bit over 80%. Renewables, as we would traditionally know, at solar and wind would represent roughly what percent? It was sort of six or seven percent?

Frank Pottow: Yeah, it’s 6% of primary in terms of useful energy, though it’s about 8% of useful energy. And then hydro, nuclear, and biofuels add those all up together, it’s about 11%. So 8% solar and wind, 11% hydro, nuclear, and biofuels, those add up together to 19%. The other 81% is fossil fuels. That’s of useful energy. Useful energy is really what matters, which is how much energy you use at the end of the day. Just to jump forward to projecting the future here, useful energy demand grows roughly 1 to 1.5% per year. And essentially it’s based on the growth of the human population, which in recent periods has grown roughly 1% a year. And then there’s also per capita energy consumption. And per capita energy consumption goes up, not a lot, but it goes up between a quarter and a half a percent a year. When you multiply those two together, you end up with demand for final useful energy, the thing that comes out the end when you’ve got through all the waste. That’s growing historically and will continue to grow roughly 1 to 1.5% a year. I use a number of 1.25% for doing my own projections.

Tom Heintzman: Okay, so just to recap, we’ve got today’s mix at a little bit of over 80% fossil fuel, and then in useful energy terms about 8% being renewable. And then we have the entire amount growing at 1.25%, 1.5% thereabouts from now till 2050. So now maybe you could just take us through fuel by fuel what we’re seeing in terms of increase in uptake, you know, maybe relying on IEA numbers, but let’s start with renewables and maybe you could just walk us through how those are expected to change from today to 2050.

Frank Pottow: So, renewables, solar grows faster than wind. And what’s measured typically is solar capacity growth. And solar capacity growth, I think, that’s growing pretty high. It’s growing about 30% a year. Wind’s growing about 10%, 12% a year. And frankly, there’s no reason why they can’t continue to grow at very high rates for the next 10, 20 and 30 years. And frankly, the punchline is, if you can grow wind and solar combined at 10 or 11 percent a year, compounded over 27 years, which is the amount of time from sort of now to 2050, it’ll be 16, 17 times larger than it is today. And obviously you take a number like 8 percent and multiply it by 16, you end up with more than 100 percent, which means that if solar and wind can keep compounding at 10-11% a year over the next 27 years, which is actually much slower than the historic rate of growth over the last 5 years, over the last 10 years, over the last 20 years. If that can continue, then by 2050 theoretically, and this assumes you can solve problems like batteries and location and delivery through the grid, solar and wind would have the capacity to deliver 100% of the world’s useful energy demand by 2050. Now just to be clear when I do my modeling, I assume it grows a little bit higher. And I assume that, like I said, useful energy demand is going to grow one and a quarter percent, 1.3% a year. If that grows at one and a quarter percent a year for 27 years, in 2050, the demand for useful energy will be about 40% more than it is today. Of the 550, exajoules of primary energy that we have into the system today, the amount of useful energy is probably less than 200 exajoules. I think that roughly it will grow from about 180 exajoules of useful energy to roughly 250, 260 exajoules of useful energy in 2050. And if solar and wind can continue to grow 10, 11 percent a year and end up being 14, 15, 16 times larger than, I think I said earlier, 15 exajoules currently. If you multiply 15 by 15, that’s 225, which is a pretty big number if you think that the total demand is only going to be 255. COP28 calls for roughly tripling nuclear capacity. Now, nuclear has not been growing. Hydro has not been growing. The reason I talk about solar winds is really the only form of green energy that’s been materially growing. Apart from biofuels, that’s really small. If you can assume that those things can grow not heroic, but like 4% or 5% growth in nuclear and biofuels, then by 2050, they should be roughly three times larger than they are today. So the combined roughly 15 exajoules you get from nuclear and biofuels could be 45, right? Three times 15. If you get 45 from them, you get say 210 from solar and wind, and hydro just sort of plugs along at maybe 1% growth through the course of 15 to 20. Well, right there you’ve got combined green energy supply of 270 exajoules. And I said before, I don’t think the amount of final energy we need is going to be much more than 250. You do need some primary energy bigger than that. It’s not going to be 100% efficient, but we’ll go from a system that’s roughly 33% efficient today to a system that will be over 80% efficient in 2050. Instead of having over 300 exajoules of wasted heat, I think in 2050 we’ll end up with something like 30 or 40 exajoules of wasted heat. If you’ve got final demand of say 250 plus 40, you’re coming on a close to 300 exajoules of demand for primary energy versus, like I said, almost 550 now. So it means that even though final energy demand grows, you know, one and a quarter percent a year, the amount of primary energy we’re going to need to put into the system will actually go down almost 50 percent over the next 30 years. And that’s what facilitates energy transition, that as we transfer away from fossil fuels to electrify more things, you know, electrify everything, we will start squeezing all this wasted heat out of the system, ideally.

Tom Heintzman: Frank, okay. so you’ve distinguished between primary and useful energy. Maybe let’s just apply that in the EV electric vehicle case.

Frank Pottow: A good example of, you know, the difference in final energy versus primary energy is to look at an electric vehicle versus a gasoline-powered car. The average gasoline-powered car in North America gets roughly 25 to 30 miles per gallon, which translates to roughly 9 or 10 liters to go 100 kilometers. And when you look at the energy input of gasoline, which is roughly 120,000 BTUs per gallon and then translate that from BTUs to say kilowatt hours, you end up with it takes almost one kilowatt hour roughly 900 watt hours for gasoline powered vehicle to travel one kilometer. If you look at an electric vehicle like the Tesla Model 3, I think it has a range of roughly 300 miles or 500 kilometers from a battery size of 70 or 80 kilowatt hours and if you do that math you end up with something like 150, 160 watt hours to go a kilometer. The amount of energy input you need for a gasoline car to go the same distance, i.e. do the same amount of work as an electric vehicle is almost five or six times greater. And that’s a good example of just the much higher energy efficiency in an electric car. And one of the reasons for that, Tom, is because electric cars have regenerative braking. When you brake in a gasoline car, all the energy that you’ve built up, the kinetic energy is translated into heat friction on the brake pads and it’s wasted. Whereas if you brake in an electric car, it recharges the battery and you capture that. Now there’s other reasons too like electric cars tend to be much more lower coefficient of drag than most gasoline cars. But that regenerative braking is one reason why for example the Prius hybrid gets roughly twice the gas mileage of a gasoline car, you know, that’s similar. But Prius might get 50 or 60 miles per gallon. That’s a Prius we know with no plug.

Tom Heintzman: Got it. How do you see the path forward? How do we transition? How long does it take? What do you see that transition looking like?

Frank Pottow: I actually tried to model out an interesting waypoint, which is let’s look at between now and 2030 because that’s not that far away. And then you got another 20 years from 2030 to 2050. I think that if you assume that the final energy demand is going to grow roughly the same over both periods, between now and 2030 and then from 2030 to 2050, and population growth is actually slowing down. So it may be that it grows slower. Maybe it grows one and a half percent a year for the first 10 years and one percent a year for the next 20 years, I mean, I don’t know the answer. But if you assume not necessarily historic Herculean growth, if you have new solar and wind installations, which have grown dramatically, like I think last year was up over a third, solar and wind installations globally, I think, were something like 450 gigawatts. I think there was roughly a 30-plus percent increase. Because you’ve got such a relatively small install base, even if installations are growing at 10% a year, you can have the installed base of capacity growing 20% a year. In other words, when people talk about growth, they typically talk about capacity growth, not generation growth, at least most of the studies I read. I think it’s reasonable to think that if we can just average 10% growth in additions which will end up being 20% compounded capacity growth between now and 2030, which I think is not heroic. Then I think you can end up with solar and wind providing roughly, from instead of 8%, over 20% of the world’s final energy demand, just by 2030, which is seven years from now. So it’s a pretty dramatic increase.

Tom Heintzman: There are some influences that would be going the other direction. You are still seeing coal increasing in China and India and Pakistan and elsewhere. How do you see this transition playing out on the longer timeframe?

Frank Pottow: I think it’s going to take 30 years, as I said, and that’s in a pretty good scenario for renewables to be the lion’s share of the primary energy supply. In the interim, we do have a real problem with coal, because coal is growing. I think China has, under construction or approved for construction, more coal-fired power plants than we have operating in the United States of America. I think people don’t have a sense of just how much coal is growing in other parts of the world. And frankly, those parts of the world have a real focus on energy security and economic growth, which you need energy to provide. They’re not going to let go of their coal resources until they come up with some other source to back up solar and wind, to solve for intermittency, to solve for the demand of their people growing their per capita’s income. I think one way you can do that is by substituting coal with natural gas, which is what we’ve done in the United States of America quite successfully. Here in the U.S., we’ve taken the majority of our coal use for power and replaced it largely with natural gas, also with solar wind, but mostly the growth in solar wind has fed the growth in demand. In terms of replacing out coal, the lion’s share of that’s been done by replacing it with natural gas via power. And the reason why that’s a good thing is because natural gas is much more energy dense than coal. And it may seem funny to talk about a gas, a gas that you can’t see being dense. It’s not particularly volumetrically dense, but it’s very gravimetrically dense. In other words, dense per unit of mass. So roughly coal has 20 megajoules of primary energy per kilogram, whereas natural gas has almost 60 megajoules of coal per kilogram of natural gas. In other words, you need roughly a third as much mass of natural gas to get the same amount of energy as coal. Another important fact is when you’re burning it to produce electricity, you need roughly the US average last year or the most recent report of statistics were 7,730 BTUs to generate a kilowatt hour of power and a kilowatt hour of power is 3412 BTUs. It’s less than 50% efficient to burn natural gas to generate electricity. You’re putting in 7730 BTUs, you’re getting out 3412. But if you’re using coal, you’ve got to use over 10,000. The number is 10,500. So obviously 10,500 is like 50% bigger than 7730. So not only is natural gas much more energy dense than coal, and remember, it’s kilograms that generate CO2. We measure CO2 in kilograms or tons. We measure it by mass. So you need a third the mass when you burn natural gas because A, it’s more energy dense and B, it burns more efficiently. And that’s what we’ve done in America. We’ve replaced the largest portion of our coal-fired generation with natural gas-fired generation. And also solar and wind. And eventually solar and wind I think will displace natural gas. But I think there’s an important role for natural gas to play if we want to reduce CO2 emissions as fast as possible, substituting in as much coal as we can with natural gas as quickly as we can.

Tom Heintzman: Well, Frank, thanks so much for your input. We had a big task to cover today’s energy mix, project the growth out to 2050, discuss how the various forms of energy may evolve between now and 2050 and explore a bit of the challenges with transition and the role potentially for natural gas in the transition. So we covered a lot of ground. Thank you so much for joining the show today and to the listeners for tuning in. If you’d like to learn more about how electrification trends will impact your business, join us for CIBC’s Electrification Summit on June 11, 2024, in Toronto. The summit will bring together leaders in energy markets, companies in the midst of electrifying their operations, financial sponsors, lenders, and policy experts to discuss how electrification is core to achieving net zero. To register, please contact your CIBC Relationship Manager. Please join us next time as we tackle some of sustainability’s biggest questions, providing you different perspectives to help you move forward. I’m your host, Tom Heintzman, and this is The Sustainability Agenda.

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