Special edition: Is Europe equipped to reach net zero? 🌱

- We bring you a special edition of our flagship newsletter analyzing the economics of accelerating the energy transition. --------------------------------------------------------------- In today's special edition: - At our Carbonomics conference today in London, senior leaders from Goldman Sachs will join executives and policymakers to assess the current economics of energy transition, [and Europe's path to a sustainable, reliable, and affordable energy future.]( - “We're at the beginning of a very long path." — [Here's what might be required for Europe to successfully transition to net zero](. - And how important could clean hydrogen be for global de-carbonization efforts? [Take our quiz](. (Was this newsletter forwarded to you? [Sign up now.]( --------------------------------------------------------------- Senior leaders weigh in on Europe's energy crisis Russia's invasion of Ukraine has irrevocably changed Europe's energy landscape. We asked [senior leaders across Goldman Sachs]( for their analysis of what's at stake and how energy in the region might be made more secure, affordable and sustainable. Among the senior leaders interviewed (L-R): Gonzalo Garcia, Michele Della Vigna, Philippe Camu, Letitia Webster Gonzalo Garcia, co-head of Investment Banking in EMEA, says “weaponization” of energy by Russia in its war against Ukraine “has brought to the forefront Europe's critical, decades-long dependence on abundant, stable and cheap energy.” This, Gonzalo says, has been a pillar that supported Europe's industrialization through the 20th century. “European industry and consumers were the most logical market for Russia's abundant gas reserves: It was and still is the cheapest source of energy available for Europe.” With a sudden interruption of that cheap and abundant supply, Europe finds itself ill-equipped to make a fast and easy transition to other energy sources, says Michele Della Vigna, head of Natural Resources Research in Goldman Sachs' research group. “Investments in what we call traditional energy (oil and gas) fell 57% from 2014 to 2020. Moreover, total energy investments have fallen by 22%. That means not only was there an abrupt drop in the traditional energy space, but investments in renewables, which are currently smaller in scale and require higher capital intensity, didn't keep pace.” Significant policy support should be able to encourage the investments and changes necessary to move Europe to a new energy footing, but the challenges are considerable, and require a multifaceted approach that uses all available tools and strategies. “There's a trifecta we need to solve for in every single industry,” says Letitia Webster, head of Sustainability for Private Investing, Asset Management. “We need to create additional access, at an equivalent price, and simultaneously decarbonize. That's true for everything from the fuel that powers heavy industry and consumer autos, to every single consumer retail product bought each day.” --------------------------------------------------------------- The path to net zero: Managing the transition Europe's energy crisis has highlighted the weaknesses in the region's energy system that must be overcome on the way to net zero. “We're at the beginning of a very long path,” says Michele Della Vigna [on the latest episode of Exchanges at Goldman Sachs](. “We think we need to unlock an extra $1 trillion dollars per annum of global investment in energy over the next five years.” - Revenge of the old carbon economy. Due to years of underinvestment, higher oil, gas and coal prices — which are likely to be a reality for most of decade — will accelerate the energy transition. “What's driving the improvements in the economics of decarbonization is the higher cost of hydrocarbons, as the progress of carbon markets has been slow,” Della Vigna notes. - Uncertainty around global regulation has slowed the pace of investment in energy. For example, the heavy industry, heavy transport, and oil and gas sectors are reinvesting between 20% and 40% less of their cash flow in their businesses, according to Della Vigna. However, “regulatory certainty could bring back their reinvestment rates to the long-term history,” he says. “And that, by itself, could unlock half a trillion dollars per annum on a global basis.” - New regulations, such as the U.S. Inflation Reduction Act, could pave the way for greater clean tech investment. “The U.S. with the Inflation Reduction Act is now becoming the country where clean tech applications are most profitable and will be done in the largest scale. So the U.S. has a real chance of regaining leadership in clean tech technologies, having been a little bit on the side for the last 10, 15 years.” --------------------------------------------------------------- The decarbonization cost curve: A mixed picture The decarbonization cost curve charts how expensive it is to remove carbon from the global economy and bring us closer to net zero. In GS Research's fourth annual update, this year's cost curve paints a mixed picture versus 2021. Clean technologies have moved lower on the cost curve, which means the cost to remove carbon from power generation, industrial sectors and buildings has become cheaper. But technologies substituting oil have become more expensive, leading to a higher price to remove carbon from some forms of long-distance transport. For example, using electric vehicles in rural areas and aviation biofuel are now more expensive. Still, the annual cost of reaching net-zero carbon continues to improve, mostly because higher oil and gas prices are making greener substitutes more affordable. --------------------------------------------------------------- Winter may be better than expected for European households Plentiful natural gas supplies and mild weather across Europe are creating optimism that the continent may be able to avoid shortages and blackouts this winter. But coming up with a sustainable solution to the gas shortage will require investments in projects that are only expected to come online in three or four years, [according to Goldman Sachs Research.]( “Our view is that Europe can get through this winter without blackouts because of how much natural gas storage was built. The problem is we get to spring, and we must do it all over again,” Samantha Dart, senior energy strategist at Goldman Sachs Research, [says on an episode of Exchanges at Goldman Sachs](. “The only sustainable solution to this problem is for Europe to get its hands on additional supplies of natural gas. The problem is that projects being built to supply more natural gas are only set to come online in 2025 and 2026, so it's going to be a couple more years of big challenges for Europe.” Meanwhile, “the surge in energy prices, high inflation, is going to push [Europe] into recession both as firms cut back on production and as consumers need to tighten the belt given the hit to incomes,” says Jari Stehn, chief European economist at Goldman Sachs Research. “But at the same time, we think the recession is going to be fairly shallow, pretty moderate in terms of its depth, which is really related to the risk of rationing having fallen, given the rebalancing the gas market that we've seen, the additional fiscal support, and then also data that has held up relatively well so far.” --------------------------------------------------------------- BRIEFINGS brainteaser: How important could clean hydrogen be? Clean hydrogen, which is produced using renewable energy, has emerged as a critical technology to reach net-zero carbon emissions. According to GS Research estimates, by what percentage could it help reduce global greenhouse gas emissions? A) 5% B) 10% C) 12% D) 15% Check the answer [here](. --------------------------------------------------------------- Highlights you might have missed We have covered the complex, global economics of the energy transition all year: - [How Europe can replace Russian gas and still achieve its net-zero emissions goals]( - [Technology and disruption are levers to global progress]( - [The $6 trillion plan: unleashing new waves of green investment]( - [Companies should think ‘circular' to cut waste, costs and emissions]( - [Value through values: sustainability is growth investing]( --------------------------------------------------------------- --------------------------------------------------------------- Some of the images used in this newsletter are sourced via Getty Images. The data provided in this newsletter is for information purposes only and should not be construed as investment or tax advice nor as a recommendation to buy, sell, or hold any particular security. 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