Net Zero Readiness Report: Electricity

The last two years have seen renewable electricity used to respond to economic sanctions as well as decarbonization targets. The Russian government’s invasion of Ukraine in February 2022 and the resulting need to replace supplies of Russian natural gas led the European Commission to accelerate and enhance existing plans to extend renewable generation, through its rapidly developed REPowerEU plan outlined in March 2022 and published in May of that year. In a recent assessment the commission says that installation of wind and solar generation both rose by nearly 50 percent in 2022 compared with 2021 while use of natural gas (for heating as well as electricity generation) was 18 percent lower between August 2022 and March 2023 compared with the previous five-year average for those months.¹

The EU’s use of renewables to tackle a potential energy crisis was an important moment according to Mike Hayes, Climate Change and Decarbonization Leader, Global Head of Renewable Energy, KPMG International: “It put decarbonization solutions and particularly renewable energy at the center of the energy debate,” he says. However, the sharp rises in energy costs resulting from the removal of Russian gas have also highlighted the energy trilemma involved in balancing price, availability and decarbonization.

Globally, spending to develop low carbon energy is now significantly higher than that for fossil fuels. The International Energy Agency predicts that clean energy will receive US$1.8 trillion (in prediction for spending on clean energy) of investment in 2023 compared with US$1 trillion for coal, gas and oil, with this year seeing more investment in solar energy than oil for the first time.² However, the shift in investment is yet to make much of an impact on the overall mix of energy sources used to generate electricity. In 2022, renewables, hydroelectricity and nuclear combined generated 38 percent of the world’s electricity according to annual data published by the Energy Institute, a professional membership body, but coal remained the single biggest source producing 35 percent with natural gas second at 23 percent.³ 

While some countries are replacing coal with low carbon sources, fast-growing economies including China and India are adding both fossil fuel and low carbon generation to try to meet rapidly increasing demand. Anish De, Global Head of Energy, Natural Resources and Chemicals, KPMG in India, says India is developing more generation from nuclear, hydrogen and solar as well as storage capacity. “But that doesn’t change the balance that much,” he says, as the country has also increased coal generation rapidly over recent years.⁴

Among renewable technologies, offshore wind and solar have particularly strong potential over the next few years. Offshore wind is less constrained than onshore developments, which have to compete with other land uses and planning regulations. Floating platform technology currently under development will allow turbines to be installed in deeper seas than those fixed to the seabed, opening new areas of ocean for generation. Countries with large areas of territorial waters such as Canada, China, France, Ireland, Japan, the UK and the US are among those developing offshore wind.

Meanwhile, solar power looks likely to become an increasingly important export for countries with enough sunlight and land to produce it, with those in the Middle East and north Africa having massive potential to use new interconnector cables to sell electricity to Europe. Several countries are showing renewed interest in nuclear generation, both conventional large plants and new small modular reactors (SMRs), given this does not produce greenhouse gas emissions from production.⁵

Connecting renewable generation to consumers typically requires the re-engineering of electricity grids, most of which were designed to distribute predictable levels of electricity from a few large power plants rather than handle lots of far-flung sites with intermittent production. Many operators are building new power lines, connection points and substations as well as changing the way they manage their grids or have plans to do so.

New renewable generation may be essential in decarbonizing economies and slowing climate change, but it often causes impacts on local environments, wildlife and biodiversity. Some projects are also be opposed by those living nearby including indigenous people, such as Sámi communities in Norway and Sweden who oppose wind turbines as they affect their reindeer.

Projects can also be delayed by overstretched supply chains, although several countries are making efforts to develop local production of components including solar panels, as well as difficulties sourcing critical minerals. While renewable energy projects can now be established with well-tested development processes that use reliable technologies to generate electricity at reasonable cost, there are still barriers to overcome.

Government policies look likely to continue to encourage greater adoption of renewable electricity generation, including the US Inflation Reduction Act, REPowerEU and similar policies elsewhere. Financial incentives introduced by governments such as carbon taxes and levies including the EU’s Carbon Border Adjustment Mechanism will incentivize companies to make greater use of low carbon electricity and individuals will similarly be influenced by tax breaks and regulations on electrification of vehicles and in some countries home heating, although some will cause political controversy. “We are going to see a lot more policy measures to help drive us towards low-carbon electrification,” says Hayes.