How to Think About the Future

in the future. The net zero targets discussed to copy six or by companies or by countries are inherently forward looking. So one of the most forward looking teams we have at BIENF is the energy economics team, or perhaps I should just say that they look the furthest out because they build different scenarios that go out to the year between now and If certain versions of the future could be true, what steps might need to be taken to

make them true. Enter scenario analysis, which I think I just oversimplified and had a bit of a tendency to do. In today's show. Today I speak with sebhend Best, who is the chief economist at BNF, and he's also the chief author of our new energy Outlook. Now if I put it in another way, he's the guy who leads our team of forward thinkers. We talk about the New Energy Outlook and within it our energy Transition scenario, as well as three new net zero scenarios that were introduced

earlier this year. If you want to read our New Energy Outlook, you can find it at be enough, go on the Bloomberg terminal, or on benof dot com. A quick reminder, we do not provide investment strategy advice, and our full disclaimer is at the end of the show. But for now, let's speak with Seb about the future. Seb, thank you for joining today, pleasure, thanks for having me.

So we are going to talk about benf new Energy Outlook, and we're also going to talk about some net zero scenarios that we did that were an expansion on that this year. But let's first dig into what is the New Energy Outlook we lovingly call NEO. But what is the New Energy Outlook and what's it hoping to achieve?

Great question, right, what is it? It's a big study and it's designed to pull together all the energy analysis that we do across B and e F into long term scenarios, trying to understand what the future energy economy

might look like. So it's a scenario exercise and we do it annually and it's about six people pulling their brains together to hopefully join the dots and provide insight into how all the changes that we're looking at and tracking on a day to day basis manifest into for those of you who are interested in detail, well maybe not super deep detail, but detail on how we go

about modeling in their approach to this. We actually have another podcast by a colleague of subs, Mattias, who goes into that, but today we're going to talk about more the findings and what this tells us about the future.

Now we have this outlook, when is the last time that we did this, So that twenty one New Energy Outlook came out in July, and we do it once a year before that, it was actually October, so the publication date changes somewhat, but it's an annual exercise and every year we try and make it insightful and keep pushing the boundary getting to the you know, the real cold face if you excuse the pun, of the really

big transition questions as we look around the world. So when we look at this year, we did a couple of different things and we looked at net zero pathways. Can you just explain what that means. We will get into the detail of it in a couple of minutes, but what are the net zero pathways this year hoping to achieve? Let me take a step back and just explain a little bit about scenarios a set of which are these net zero pathways. And it's important to recognize

the difference between a scenario and a forecast. A forecast is a prediction we're saying what we think will happen. A scenario is different in the sense that it generally looks much further out, and trying to build a picture of the future in extreme uncertainty with complex dynamics that we can use as an anchor to help us make decisions and take big bets. So we're not trying to predict the future here, we're trying to present plausible pathways.

And for the energy transition, there's a lot of uncertainty, and so we could build loads of different types of scenarios. None of them are wrong, none of them are right, none of them are true, none of them are false. It's just whether they're useful or not useful. And so in near one we developed three different pathways to a net zero emissions economy for the energy sector. And there's

just lots of different ways to get there. So we had to make some decisions about what were the technology mixes that we wanted to investigate that we thought our clients and our readers would find most insightful and most useful as they're making decisions, you know, within this transition. So we produce three different pathways. We called one the green scenario, we called one the red scenario, we called

one the gray scenario. All of them have lots of renewable energy and electric vehicles and the things that we can see happening now. But the scenarios differ by sort of the second phase. If you're like, well, we call phase two technologies. Are we talking about hydrogen, are we talking about carbon capture applications? Are we talking about maybe

small nuclear reactors? How do we get to zero? And there are some pretty fundamental questions about what we might need to see over the next thirty years to get there. Let's talk a little bit about scenarios because these are not new to the industry. Lots of organizations do this how do the net zero scenarios that we've looked at and our approach to looking at net zero, how does it maybe map onto or inter relate with the Intergovernmental Panel on Climate Change or the i p c c

S warming scenarios. Yeah, there are certainly lots and lots of scenarios out there, and it's pretty difficult actually to know which wants to read how to interpret them relative to one another. It's not straightforward. I mean, there's a big, big complex exercises and it gets a bit inside baseball in terms of how they differ, why they differ. There

are some well known scenarios that are used. Perhaps the most important from a climate perspective are the ones that the Intergovernmental Panel and Climate Change put together, because what they essentially do for all the other economic modelers out there who are building scenarios to help them make decisions is they provide us with a relationship between the amount of greenhouse gases and the atmosphere and the impact on

the climate. And so often when we're describing climate objectives in terms of degrees, we need to understand how many emissions that means, and then we have to turn that into a budget, a carbon budget which we can then operate within, and the difference between scenarios is often the definition of that budget, how many miss and have we got to work with, and how that budget is then divided up by different sectors and different countries, and then

which technologies or pathways might be employed within the scenario to get emissions down while continuing to ensure that demand for goods and services and energy within the economy continues to be met. So the i PC scenario is really are looking at the relationship between atmospheric greenhouse gas concentration and temperature, and we can then build from that climate

scenarios that are consistent with certain temperature outcomes. And for the new energy out we built a global emissions trajectory that is consistent with one point seven five degrees of warming. So halfway between two and one point five there's a really really big difference in the total amount of emissions in the system between one and a half and two degrees, and these are the two temperatures that of course everyone talks about in terms of the Paris Climate Agreement. Do

better than two degrees. Pushing towards one point five means that somewhere in there is where governments of the world have kind of agreed to try and head and we can use that as a guide try and set the carbon budget. Our scenarios are right down at the low end therefore, of the I p C c S range, because they have the very very high emissions trajectories and the low and so we're trying to get to one point five or right down the bottom if we continue

on without dramatic policy intervention. From here, we've got to run out of carbon budget to keep within one point five degrees by right. So this is some of the urgency around the next ten years is on the current trajectory. Even with all the renewables being built out, with the record electric vehicle sales and a lot of government interests, we're going to run out of budget pretty soon for two degrees. That point is we buy ourselves at extra

twenty five years almost. It's huge, it's huge. And so these temperature differences seem small all but in terms of the impact on the transition of the economy from dirty

to clean, they're really really big. And see this is a really big problem for modeling because you've got to say, well, what is the right temperature trajectory, how do you possibly decide where the one point five, one point seven, one point nine two point three what the right answer is, and then how do you split that up between sectors between countries, Because if you can't model that, then you don't really know how to model the supply side, which

is all the technologies that get us there. And that's the first challenge with sort of big net zero energy scenarios that we develop. So just to be clear, when we set out to do this, we were aiming for a net zero emissions world, but we didn't have a temperature change in mind. It was just can we get to net zero in specifically the energy world that you know, that's what we're talking about here. This is agnostic of agriculture and other sectors outside of energy. Yeah, the exercise

we do is just energy focused. So we're skipping a whole bunch of emissions that matter, and agriculture and land use and the leaking of methane and other things from pipelines. We're looking at really the core of the of the energy economy, which is the supply, transformation and consumption of energy, whether it be to heat a building, move a car, make an electron, or even actually as a feedstock into chemical industries, you know, things like oil of course go

to make plastics something. So there's a there's a lot of energy accounting in these scenarios. We're trying to track each one of those flows all the way through to the useful economy, which is the things we want, right but what we want is to move around to warm the spaces and cool the spaces that we live in, and we want to make things and build things, and

we need energy to do all of that. What percentage of the remaining carbon budget would you say that the energy industry occupies, so the energy sector makes up over It depends how you do the accounting, but it's certainly towards three quarters of global greenhouse gas emission. That is the really sort of immediate and big challenges to decarbonize the energy sectors, and there's a huge number of different

technology challenges within that. And the outlook, the new energy outlook kind of starts with that end economy and goes, well, what do we need and then how do we do those things? How do we get those things in a zero carbon way over time? And what are the technology transitions that we might anticipate needing to happen to do that. Okay, let's talk about the three different scenarios that we put forward.

Which one do you start with? This isn't picking your favorite child, it's at the very beginning, which one do you want to start with? Well, let me discuss all three at once, and then we can see which one is the most interesting, because I don't think there's one that is right now more likely than the others. In in in a way, these are global technology paradigms rather than sort of bottom up balanced scenarios. Would you say they're

intentionally extreme. They're designed. If you think about a landscape of a future possible worlds, it's very hard to be able to pinpoint. And our job isn't really to pinpoint the future. It's not a prediction. Our job is to describe parts of the landscape that enable people to make decisions in a useful way. And so we've defined with

these scenarios three different technology paradigms. One where we have a lot of green hydrogen, one where we have a lot of nuclear and what we've called red hydrogen, but people call it pink hydrogen, and one where we have carbon capture and storage as the dominant secondary vectors of decabanization.

All three scenarios have loads of renewables, loads of electric vehicles, heat pumps, and other forms of electrification of the economy because these are the things we can kind of do today and the things that are already happening in The big uncertainty around that landscape is what about these secondary solutions, Which ones will emerge, which ones will get to scale, which ones will get cost competitive, And it's quite hard

to pick that for now. So we defined the scenarios based around then assumption that in the future, whether it's the green hydrogen or whether it's the nuclear or whether it's the carbon capture and storage, those are the technologies that that end up dominating. But in reality, actually, since you are talking about all three, hydrogen plays a central role in all three of them in some way, shape or form. It just depends on what we make the hydrogen out of. Why is it that hydrogen appears in

all three net zero scenarios? So hydrogen emerges because you can't electrify everything. But that's the basic conclusion of doing all this sector level analysis is there are things that don't work well with electricity, and we kind of know that obviously like an aeroplane would require very big and

heavy batteries to do long haul flights. Similarly, shipping, you could see certain sort of coastal shipping routes done with electric ships, but for long ocean voyages you need a lot of energy storage and energy density in the form of batteries which make the ships very heavy that displaces

space for cargoes, etcetera. Even in the power sector wind and PV, you can only get you maybe seventy of supply depending on the country, depending on the latitude and the natural resources that country has to work with, which means you've got of the electricity demand in the year

which needs to be met by something else. And what we say is a lot of the energy transition can be met with clean electrons, but there is a significant fraction and what we calculate to be at least of final energy consumption that it's not an electricity based and of that in our scenario is certainly in the green and the red. Around twenty of final energy consumption we think could be hydrogen, and then it matters how you

make the hydrogen. But hydrogen being an energy carrier, being a molecule that looks a little bit more like a fossil fuel than it does like an electron, and therefore has applications in what we might call hard to abate sectors in parts of the economy we can't electrify. And that's why it appears, because it's pretty useful. If we don't use hydrogen, we've got to find other molecule based solutions. It could be synthetic fuels or bio fuels, it could

be carbon capture and sequestration. Continue to use the fossil fuel molecules, but then we deal with the emissions separately. For most of the energy economy outside of power, and certainly in this second phase, clean versions of what we do today are actually quite few and far between. So the questions we have to ask ourselves are what emerges is the most likely solution, and if we don't know that, how could we present different scenarios that reflect different winners.

And that's that's what we've done. So you bring up the hard to abate sectors and how difficult it's going to be in that run to In that run to actual net zero world, there are industries like you brought up late aviation that are proving to be extremely challenging. Now, let's hope for some serious technology breakthroughs that will help

us then. But you also mentioned that the energy transition is happening in many respects in two parts, and there is a big emphasis on the decade that we are sitting in right now and everything we need to deploy. How does it differ across the three different scenarios. Because I took a look at them and I tried to do a quick zoom in, and they look very similar.

I think that's an important conclusion, is that getting to net zero, which is consistent with an orderly transition, if we want to get on track, we want to get on track for one point five degrees or just net zero in then there's a certain trajectory that we have to meet in terms of emission productions every year. And when we do the math on this, what becomes really clear is that we have to go much much faster this decade. And actually the only way you can go

faster is by deploying the things you've got. You can't reduce emissions faster by investing in early stage technology that that's for later, right, But this decade you need to deploy everything you've got and that means you need to have faster and more renewable energy deployment. You need more electric vehicles on the road, you need greater recycling in the industry is you need more heat pumps being put

into buildings can run off electricity. You need a greater penetration of bio fuels or sustainable aviation fuels for airplanes, and you've got to do that at a certain rate to get on track by That doesn't solve your problem, but that keeps you within striking distance of your end goal, and because getting on track is the primary task. Regardless

of the scenario, they do look very very similar. They differ in the way in which we might need to see the ramp up and the scaling of these phase two options, whether that's green hydrogen or carbon caption storage or small module in nuclear reactors or whatever technology set we are thinking about. We're gonna have to scale that up this decade so it's ready to deploy post These are coming from very small percentages of the overall market right now. We need to see almost like a hockey

stick upward of adoption these technologies. In my correct yeah, for those I mean, but even for wind and PV right in our scenarios. We want to see about an average of five gigawatts of wind and sort of giga wats of PV deployed every year out to which is double the PV and about sort of fourish times the amount of wind that we've seen in even in the technologies where we're already doing a lot renewables in particular that are cost competitive today. We just need a rate

of a rate of deployment, a rate of change. It's a lot lot faster than the sort of the organic rate of deployment, which means we need policy intevidual. So let's talk about that. So there's the policy intervention that is needed to create this hockey stick kind of very quick adoption of certain technologies. If we left everything to economics and every country was a complete rational actor in economics,

where would that get us? Because that was the analysis we did the prior year we did our New Energy Outlook, and then we said, okay, if we just looked at a world agnostic of policy, where would that get us from a warming standpoint? I think most people would think that, well, in the absence of policy, we're heading out towards four

or five degrees and the end of days, right. I think what we determined from previous scenario work, and that looks at the underlying economics of technology change where it exists today. So that means we're thinking about where the crossover points are from the new to the old, and in some parts of the economy those crossover points are distant distant. There's not a technology solution that's remotely cost competitive today for steel or cement or shipping, but there

are lots of cheap renewables. Electric vehicles are coming, and depending on how you heat the house, your heat pumps can look attractive as well. So the absence of big climate policy drivers, we get to about three point three degrees of warming, and what that means is that emissions peak and start to decline across the energy economy, but not nearly fast enough to get to zero in. So there's a lot to do beyond the underlying sort of

pace of transition and buy our numbers. I think we need to see emissions down roughly from levels by a lot of that has to happen just from the power sector doing more, because the power sect, you can it's where we have the most cost competitive abatement options to deploy.

So just to add some complexity to this decade, and actually not even this decade, just this year and next year, I can't help but think about the incredibly erratic and may I even say, very high natural gas prices and what that's doing to a number of different countries and the utilities operating there, because this has become what was at one point in time highly regional and now more

much much more of a global marketplace for gas. Analogy, do we see in our scenarios these natural gas prices fundamentally changing the near term future or the long term future. There's always a question to ask in scenario work whether always in the market today is a meaningful signal for the longer term, And invariably it's not. Prices go up, prices go down. They tend to reflect dynamics of the moment.

And what we know is that in the absence of forces that drive the system in a certain direction, and those might be policy or different geo political events or something like that, that you get commodity cycles. The adage that the solution to high prices is high prices is broadly true. High prices should create new supply that drives

prices down. The increases demand that drives prices up, and you play this game and so you get these commodity cycles then more complicated than that, of course, But the question really is is this time different. Do the gas prices that we assume into the future should they be altered by the current crunch on gas? And if so why? Really difficult question, I think the main in thing we've got to ask ourselves is there any reason why that

commodity cycle gets broken? And climate policy is something that can break a commodity cycle, because a commodity cycle relies on demand sort of waxing and waning, and supply waxing

and waning in response to price. If a climate policy environment starts to destroy demand, for example, for a commodity like gas artificially from the market, are you, by putting in place some sort of carbon price or some sort of limit, or even the expectation that in the future we will need less gas, that's going to start nudging

the dynamics of supply and demand for gas. For example, there's a question that if you're a gas developer gas, you're developing gas fields and the prices are really hardh you should want to go and produce more gas. But if you're not confident that the investment you make in that supply is going to pay itself off over the lifetime of that field, then maybe you're going to hold off.

You're going to require greater government sort of guarantees that you're not going to be left with a stranded asset. And as a result, maybe we're not seeing at this point the amount of investment, or haven't seen the amount of investment over the last five to ten years in conventional fuel supply that we might have otherwise if we hadn't had this really big focus on climate decarbonization and essentially a policy shift away from carbon intensive energy sources.

If that's the case, then we might see a lack of new supply, which means that high prices don't forget greater supply, and we might see higher prices for longer.

That leads to a secondary question though to me, which is that ongoing high gas prices politically palatable and is that going to force them to pull back on their climate ambitions or at least enable supply to to enter the market in a more de risked fashion than otherwise might And then we've got lock in of car an intensive asset, So there's a really complicated set of dynamics. In general, higher fossil fuel prices should make cleaner alternatives cheaper.

The problem is is that in a lot of areas you can't just switch. Like my house is heated by gas at the moment, I can't just switch. It's really expensive and complex for me to switch to a new technology option to do that. And and that's me as a householder. But you whold industries that run off gas, for example, they can't switch overnight. That just means upward pressure on prices and inflationary pressure on industrial and sort

of consumer prices, which governments are gonna start singing. And for now, at least in our scenarios, we're not baking that in as a new normal. But we'll see. We may have to do some more sensitivity work on on what a higher gas price might mean for the outcomes. So is this the part of the scenarios that will be running because this team works year round, is it the consumer end of the things that will be under the closer microscope next year? Well, can you we expect

from benf team energy economics for next year. We've got one primary focus and that is to produce a set of country level net zero scenarios that reflect sort of national considerations, the existing policy environment and the elements of path dependency of that policy environment, and the competitive advantages that a particular country might have in certain energy sources, and trying to pull these big global scenarios down to a country level and say, well, what is a pathway

for China, for the US, for Japan, for the UK that can meet these climate objectives taking the national considerations into account. So that's the really big challenge to similar exercise to this year in a way where we've done these big global, big global scenarios, we've got to do it the same sort of thinking for each each economy and a lot of detail. And that's going to require a sort of full power of BENF regionally deployed against it to come up with pathways that we can then

discuss with our clients around the world. And that's that's a pretty exciting thing because that's the question everyone has is how do we get to zero? It's not obvious, it's non trivial, and I think these scenarios can help light the way for people making big, difficult bets on a big uncertain future. I couldn't agree more so, when are we going to see that it's not about future policy, it's actually baking in existing policy on the books. When can we have you back? I think it's the question.

October is when we're aiming for, so there's a little time to wait. Hopefully the way will be worth it. Thank you so much for joining today, Sab, Thanks Danna. Today's episode of Switched On was edited by Rex Warner with Great Stoke Media. Bloomberginny App is a service provided by Bloomberg Finance LP and its affiliates. This recording does not constitute, nor it should it be construed as investment advice, investment recommendations, or a recommendation as to an investment or

other strategy. Bloombergain you should not be considered as information sufficient upon which to base an investment decision. Neither Bloomberg Finance LP nor any of its affiliates makes any representation or warranty as to the accuracy or completeness of the information contained in this recording, and any liability as a result of this recording is expressly disclosed.