Goldman Sachs Research finds decarbonization is at a turning point

Published on14 DEC 2023

Efforts to decarbonize the global economy are reaching a turning point. Last year’s cost inflation is starting to reverse for some key clean-energy technologies such as solar and batteries, which is improving the affordability of lower carbon energy, according to Goldman Sachs Research.

In 2023, some clean technologies have become more expensive while others less. Our analysts’ Carbonomics cost curve for 2023 shows the impact of lower energy prices from fossil fuels (which can make renewable energy comparatively more expensive), higher interest rates (which can increase construction costs for things like offshore wind energy), as well as declining battery costs and economies of scale in electric vehicles, which are making those technologies more affordable.

“From here on, the deflationary forces are likely to win, and this brings back an affordability to the decarbonization path that not only accelerates it but makes it more attractive to the consumer,” says Michele Della Vigna, head of Natural Resources and Carbonomics Research in Europe, the Middle East, and Asia for Goldman Sachs Research.

We spoke with Della Vigna about the findings from his team’s latest Carbonomics report, his takeaways from Goldman Sachs’ fourth annual Carbonomics conference in London, and the year ahead.

Your latest Carbonomics report includes new cost projections to decarbonize the global economy. What are the key changes you found?

When we did our update of the cost curve last year, everything was inflationary. Clean tech was becoming more expensive across the board. Now it's a mixed picture. A couple of areas are still inflationary, mostly wind power. But other areas have started to turn strongly deflationary, like solar and batteries, making renewable power and electric vehicles more affordable to the consumer.

And my sense is it's a turning point. From here on, the deflationary forces are likely to win, and this brings back an affordability to the decarbonization path that not only accelerates it but makes it more attractive to the consumer.

What clean power technologies stand out to you? 

One technology we have added to the cost curve this year is biogas, which is a little bit niche, but very profitable and very important, especially because it allows to decarbonize some of the harder-to-abate sectors like transport, residential, and industry without having to reinvent the entire infrastructure. You can simply put net-zero renewable natural gas into the existing gas pipelines.

What were some of your takeaways from the fourth annual Goldman Sachs Carbonomics conference in London, which had more than 30 CEOS presenting strategies for energy transition?

There were three main ones. First is that investors remain deeply engaged with sustainability and decarbonization. The fact that attendance reached 1,000 this year clearly shows the interest. However, I do think that there is an evolution in the frameworks, and the focus now is on a more realistic energy transition, looking for Environmental, Social, and Governance (ESG) improvers with a material investment in green capex, rather than on exclusion and divestment.

This is an evolution of the ESG movement, and it can engage some of the larger capitalization companies that are involved in energy and in transport.

The second point goes back also to our analysis of the cost curve, and shows this mix of inflation and deflation, but really some important rays of hope that costs are starting to come down. If they do, we’re going to see an acceleration of activity, especially in solar and electric vehicles on the back of these lower costs.

What was the third takeaway?

There was some skepticism on policy. Last year, all of the focus was on the Inflation Reduction Act and how much capital that was going to unlock. There still is a lot of excitement about it, but also a more realistic view that we're going into an election year in the US. That means there are some risks around policy, and that it's better to rely on lower-cost technologies that enhance affordability rather than just relying on government incentives.

Is there an area or technology that has been most affected by this new attitude?

The hydrogen sector has probably been most affected by it because it's higher on the cost curve and more reliant on policy incentives. We certainly see a much more realistic view on its pace of development.

What were your takeaways from COP28 climate summit in Dubai?

I personally think that three announcements have the most concrete consequences: The step-up in green capex in the Gulf Coast region — that we estimate to be greater than $600 billion in the coming decade; the commitment to triple renewable power, linked to better affordability; and the oil and gas decarbonization charter committing 50 companies to end routine flaring and methane emissions.

As you look back on 2023, and you've seen how policy, technology, market prices all played out, what has been the biggest surprise for you?

Technological innovation — especially across batteries, solar, bioenergy, and carbon capture. It's been a year when the private sector and the listed companies have really taken a major step forward from an innovation perspective.

What are some other promising developments?

We’ve seen some progress with carbon markets. We saw the Chinese scheme introduced in the last two years. We are seeing Europe introducing the Carbon Border Adjustment Mechanism (CBAM) in 2026, and we are seeing several initiatives on global voluntary carbon markets. But it's just not evolving fast enough, and I think it remains one area where we need a substantial acceleration.

A second one could be technological innovation involving what I call the renewable molecules — clean hydrogen, carbon capture, and bioenergy. We're seeing a lot more focus, a lot more activity there. That has not happened before. We've got a much broader and more exciting range of technologies.

Going back to your Carbonomics report again, what is your outlook for 2024?

It will be a complex year from a policy perspective. There's going to be a lot of uncertainty through 2024. At the same time, I believe that the financial and corporate sector will step up investment and will accelerate the deployment of infrastructure, especially in the areas of decarbonization that are becoming cheaper and more affordable like solar and electric vehicles.

So, my sense is, it will be an important year of progress even though the political debate may end up being very divided.

In looking at your research on the cost curve, is the spending and investment in place to reach climate goals?

Progress is clear. Innovation is clear.

But if for climate goals we mean staying well within 1.5 degrees (Celsius) of global warming, we are clearly off track. Let me give you a couple of examples.

In the last year we've had global emissions going up 1% to reach a new historical high, coal demand is up 3%, and we've seen $1 trillion of direct incentives in hydrocarbons. All of that clearly doesn't put us on track for the 1.5-degree scenario.

We are also at the midpoint between the 2015 Paris agreement and its 2030 targets. If we aggregate all of the government pledges of decarbonization, we get to flat emissions. The 1.5-degree scenario would require emissions to be down over 50% by 2030. That just gives us a scale of how off track we are.

What makes you optimistic?

The deep engagement of corporates, the rising amount of capital spending around green energy, and the improved frameworks of investors around energy transition.

All of that will lead to technological innovation, and I think there is much to celebrate. But at the same time we need to have a realistic assessment, and the fact that the 1.5-degree scenario unfortunately is becoming increasingly challenging.

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