Within a week, two continents embarked on widely divergent paths. Europe’s union took a potentially fatal blow, whileNorth Americacommitted to a deeper relationship: Canada, the US, 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 historicParis climate accords — ie, limiting global temperature rise to2 degreescelsius, 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 US 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 soundsaggressive, but the continent is closer than you’d think. The definition of “renewable” here includes not just the obvious (wind, solar, and geothermal), but alsothe 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 nomistake: according to my model, reaching the goal is almost entirely on the shoulders of the United Statesfor two big reasons. First,the US generates 82% of the energy on the continent. Second,Canadais already well beyondthe 50% mark (with 59% from hydro alone). So even if Mexico hits its aggressive target of going from 22% to 35% renewable, the US will have to go from 33% to 46%.
It’s a big move. In a simplistic scenario where the USonlybuilt more wind power, wewould need to add 3 times as much as we did over the last decade. If onlysolar, wewould need to average eight times the amount built in 2015, every year, through2025. The growth in renewables is phenomenal, sothe 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 currentlyplanning to close some nuclear plants. “To the extent that we continue to take nuclear plants offline,” Lyon said, “we’re going in the wrong direction.”
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. Andthe growth of corporate renewables is accelerating. Big guys like Google, Apple, Dow, Owens Corning, Microsoft, Ciscobought 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 onmaking 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 US government will need to leaninto 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 US actually went down…in theory. Measured at the power plant, natural gas burns much cleaner, so the numbers initially looked good.