(Happy summer all. I’m a little slow on the reposts. This is from a month ago, following up another post on my analysis on the North America clean economy agreement. In short, it’s aggressive, but do-able. I also did an interview for SeaChange Radio on this piece. There was some discussion — and some debate in the comments section of the radio program — about whether we need nuclear to meet the 50% renewable target. My point was that while nukes are incredibly expensive, especially to build new plants, the question is whether we should shut down existing nuclear assets while building the clean economy future. I think it could be unwise given the very short time frame to get global emissions under control. We need a bit more time to get storage up to scale also.)
Within a week, two continents embarked on widely divergent paths. Europe’s union took a potentially fatal blow, while North America committed to a deeper relationship: Canada, the U.S., and Mexico issued a joint commitment to building a clean economy. It’s a big step forward for cross-border cooperation, and the ramifications for energy producers and users (that is, everyone) could be enormous.
The North American Climate, Clean Energy, and Environment Partnership covers a lot of ground. The biggest commitments are:
- Generating 50% clean power by 2025
- Reducing methane emissions from the oil and gas sector by 40% to 45% by 2025
- Aligning appliance, equipment, and vehicle fuel efficiency standards
- Further integrating the electric grid across borders to build resilience and security
- Implementing policies that support the historic Paris climate accords — i.e., limiting global temperature rise to 2 degrees celsius, and perhaps even holding it to 1.5 degrees celsius
- Phasing out fossil fuel subsidies by 2025, and calling on G-20 to do the same
The agreement touches on a range of other issues that could impact many industries. But just looking at these big commitments, they’ll clearly reverberate through governments and business in six key ways.
The U.S. must lead on renewables. The 50% clean power target initially made the biggest splash, and for good reason. Let’s unpack what it means for the energy system. The goal sounds aggressive, but the continent is closer than you’d think. The definition of “renewable” here includes not just the obvious (wind, solar, and geothermal), but also the more controversial sources of hydropower and nuclear. By that broad definition, North America is already at about 38%. So the goal is tough, but achievable.
But make no mistake: according to my model, reaching the goal is almost entirely on the shoulders of the United States for two big reasons. First, the U.S. generates 82% of the energy on the continent. Second, Canada is already well beyond the 50% mark (with 59% from hydro alone). So even if Mexico hits its aggressive target of going from 22% to 35% renewable, the U.S. will have to go from 33% to 46%.
It’s a big move. In a simplistic scenario where the U.S. only built more wind power, we would need to add 3 times as much as we did over the last decade. If only solar, we would need to average eight times the amount built in 2015, every year, through 2025. The growth in renewables is phenomenal, so the sector could be up to the task. But there’s a problem in another part of the equation, nukes, which could shift attitudes toward that source of power.
I spoke with Cristin Lyon, the Partner and Practice Lead for Grid Transformation for management consulting firm Scott Madden. She pointed out that states and utilities are currently planning to
No matter what your view on nuclear power, the math gets harder if we close those down during this critical decade in the climate fight. But, even so, the economics of renewable energy continue to get better fast. And the growth of corporate renewables is accelerating. Big guys like Google, Apple, Dow, Owens Corning, Microsoft, Cisco bought 3.4 Gigawatts of wind and solar last year.
There will be increased pressure on utilities and energy giants. A deep shift in energy markets, including the agreement’s goals on making the grid more flexible and resilient, will change how utilities and energy companies need to operate. It’s continuing the bad news for coal — but that’s already priced into those companies’ valuations, which have dropped more that 90% in the last 5 years.
Utilities, too, will face more regulations and pressure to increase the percentage of renewable energy on their grids. To aid in this, the U.S. government will need to lean into the Clean Power Plan, which pressures energy providers to cut carbon (that is, assuming the eight Supreme Court justices leave the law standing after temporarily freezing it while challenges move through the lower courts).
The natural gas industry will have to face its “leakage” problem. The new partnership’s methane goal is particularly fascinating. A bit of history: As the fracking boom took off, carbon emissions in the U.S. actually went down…in theory. Measured at the power plant, natural gas burns much cleaner, so the numbers initially looked good.
But methane leakage at fracking sites, in long distance gas pipelines, and in transportation — really everywhere in the value chain — goes largely unmeasured. It’s a huge problem. Since raw, unburned methane can trap 100 times more heat than CO2, many studies suggest that the natural gas business is actually worse for the climate than coal. But the industry doesn’t really know for sure. This commitment should put pressure on gas producers to get their house in order, measure emissions better, and stop the leakage.
The three countries individually, or the continent as a whole, will have to put a price on carbon. As citizens and policymakers consider how to limit global warming to the level agreed to in Paris, a whole range of aggressive policies will need to be on the table. We certainly can’t hold the world to 1.5 degrees, or probably even 2, without increasing the price on carbon and incentivizing faster investment in clean energy. Luckily, North America has some
Clean tech will win big. These governments will continue to direct spending toward cleaner technologies. That helps drive costs down for everyone buying efficiency products and renewable energy. Rising standards for appliance and vehicle efficiency raises the prospects for those companies who can meet the challenge. Clean tech companies making all of these technologies will see fast-rising demand. In short, it’s all good news for the clean economy providers, as well as the millions of people working in those industries.
Corporate targets for clean energy and GHG reduction will have to be rethought.This is a smaller point, but if the agreement does result in a grid that’s much greener, there’s an interesting ramification for how high businesses set their sights. A large and growing number of companies — over half of the world’s largest businesses — have set energy and greenhouse gas goals (and a growing list of global leaders are setting ambitious, science-based targets).
These companies — which often don’t know exactly how they’ll, say, cut carbon in half by 2025 — may find their task a lot easier. Since a big part of a most companies’ carbon footprint comes from the grid-based energy they use, as the grid itself gets greener, the companies decarbonize without technically doing anything. This is great news for companies seeking carbon reductions, but a greening grid should encourage more aggressive goal setting.
But all of the above assumes some continuity of government. All bets are off if Donald Trump wins the Presidency. He’s said many times that climate change isa hoax and denied that California is in a drought. His recent energy speech in North Dakota pushed for more fossil fuel production. For her part, Hillary Clinton laid out an ambitious climate plan (albeit one without a price on carbon). So if the polls hold out, President Clinton will likely continue this impressive legacy of cross-border cooperation.
The U.S., Canada, and Mexico have put their foot to the pedal to accelerate the move to the clean economy in North America. The business of making, using, measuring, or conserving energy will likely never be the same.
(This post first appeared at Harvard Business Review online.)
(Andrew’s book, The Big Pivot, was named a Best Business Book of the Year by Strategy+Business Magazine! Get your copy here. See also Andrew’s TED talk on The Big Pivot.
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