Global Energy Outlook: Competitiveness, Policy & Mandates

Five global energy trends were unveiled at our annual Global Energy Outlook (GEO) webinar, stirring up dialogue on current and next-generation energy transition opportunities. This blog is part of a ‘Q&A roundup’ series based on questions posed at the webinar. Missed the webinar? Download the on-demand recording here.

David Hunter, Director of Market Studies, Schneider Electric’s Sustainability Business, addresses policy development and mandates in the global energy market.

How are policies and mandates evolving to deliver the best global outcomes?

The global response to the urgent call of climate science is gaining momentum. Countries, economic blocs, and global organizations are setting ambitious targets, enacting legal mandates and rolling out subsidy and support schemes, all aimed at mitigating the impacts of climate change. The scale of these initiatives is vast and the ambitions are lofty. However, these efforts are not without challenges.

Latest Policy Developments: The United States' Inflation Reduction Act (IRA) is a prime example of the scale of ambition and government support for clean energy economic development. This significant fiscal stimulus is a powerful catalyst for the transition to a greener economy. However, the political landscape in the US is complex and dynamic, especially with significant elections approaching. The differing perspectives of the Democrats and Republicans on the IRA have made investors understandably cautious, considering potential policy changes implemented by the elected party.

While pre-election rhetoric can be abandoned once in office, it's clear that investors and corporations prefer policy stability and predictability over volatility. This is a sentiment that is likely to resonate in the EU and UK as well, where upcoming elections will also be closely watched. Despite political uncertainties, the overall policy direction in these regions tends to be more consensual.

Macroeconomic Environment: The success of clean energy policies heavily depends on macroeconomic conditions. Current headwinds, including elevated inflation, high-interest rates, and global supply chain constraints are impacting investors and developers. According to a 2020 analysis from the International Energy Agency, a 5-percentage point rise in interest rates could increase the levelized cost of electricity from wind and solar by a third, while minimally impacting natural gas electricity costs.

The global energy landscape is experiencing significant shifts, with rising material costs and interest rates leading to project cancellations and re-evaluations of investment plans, such as in US offshore wind. Governments and regulators face the challenge of recalibrating support schemes to reflect these changes. For instance, the UK's recent Contracts for Difference (CfD) auction saw no bids for offshore wind, prompting adjustments to better align with the new cost environment. Despite this, investors remain interested in innovative technologies like battery storage, which now poses a challenge to the economic viability of gas-fired power generation. Nonetheless, grid constraints, including project queues and connection delays, pose significant challenges to investment potential.

Interactions and Competition Between Policies: The competition and potential ‘complementarity’ between European and US green stimulus programs are noteworthy. While the US relies heavily on subsidies for climate-friendly industrial production, the EU uses the Emissions Trading System (EU ETS) to price carbon emissions and promote clean production. This dual approach could potentially be more cost-effective than subsidies alone. However, fears of European manufacturers relocating production to the US have raised concerns about protectionism, potentially stalling collaboration in areas like green mineral supplies. The EU and its member states are also urged to reduce bureaucratic hurdles for companies to benefit from funding programs.

Both Europe and the US face stiff competition from China's formidable EV revolution, despite their strong positions in EV and green hydrogen development, and the US' well-established infrastructure for carbon capture and storage. If regions can limit protectionism and tariffs, and focus on developing areas of natural competitive advantage, the global outcome will likely be more positive.

Meanwhile, countries like China and India are leveraging their low clean manufacturing costs and potential scale. However, some emerging markets face challenges in attracting investment and funding schemes due to their exposure to dollar borrowing. Despite these challenges, the global energy transition presents vast opportunities for those ready to adapt and innovate.

The Path to Success

While targets and incentives may compete, they can also complement each other. Incentives for reshoring supply chains can alleviate bottlenecks and stimulate local economies, but it's crucial to balance this with efficient production allocation based on competitive advantages.

The current macroeconomic environment, characterized by fluctuating interest rates and inflation, has disrupted clean investment economics and strained national budgets. A return to a more stable economic environment is essential for achieving ambitious climate targets and mandates.

A key priority is addressing grid constraints worldwide to facilitate investment decisions and project implementation. For instance, the UK faces a backlog of renewable projects due to lengthy grid connection lead times. Similarly, regions like Southeast Asia require substantial grid infrastructure investment to harness their offshore wind potential. Simplifying planning rules and cutting red tape will be crucial to accelerate investment.

Policy success isn't solely about subsidy levels - a clear and coherent policy environment reduces investor risk and provides clarity for investment decisions. Non-financial support, such as Japan's commitment to conducting geological survey mapping for offshore wind and making it available to developers, can also facilitate investment.

Lastly, the specter of political change adds an element of uncertainty. The impact will largely depend on how election rhetoric translates into policy change. Despite these challenges, the global energy transition presents a promising frontier for those ready to adapt and innovate.