At the COP28 climate conference in Dubai more than 120 countries signed a pledge to triple global renewable energy capacity and double the average annual rate of energy efficiency improvements by the end of the decade. Arguably this was the most consequential commitment to emerge from the conference with analysts calculating the two measures could deliver close to three quarters of the emissions reductions needed by 2030 under the International Energy Agency’s net zero pathway1.
The good news from a climate perspective is that the target is attainable. Led by China, renewable energy capacity additions grew by 64% over the past year to almost 515 gigawatts and further growth is expected. We estimate renewable energy generation capacity will surpass thermal generation capacity for the first time this year, with renewables set to account for 45% of global power output by 2030 and 69% by 2050. But what does this shift from an energy system dominated by hydrocarbons to one dominated by electrons mean for commodity markets and our industry? Some of the answers are more obvious than others, but all of them are important in shaping the future direction of our business and how we connect the resources needed to power, build and decarbonise the world.
Estimating future energy demand is, of course, challenging and there is significant uncertainty about future trends during a time of rapid technological change. Take artificial intelligence – or AI. Training AI models, in particular those used in natural language processing or image recognition, requires significant amounts of energy to cool servers and hardware. According to a recent study, AI could consume as much energy as a country the size of the Netherlands by 20272. At the same time, the realignment of supply chains because of an increasingly complex geopolitical backdrop, and the trend toward ‘nearshoring’ is changing where energy is needed and consumed.
In terms of the changing power mix, the rapid build out of renewables will drive strong demand for metals, in particular copper and aluminium, which are critical for grid development due to their high electrical conductivity. It will also benefit zinc and steel. For example, to meet the projected growth in electricity demand the length of power lines globally will need to increase from 81 million kilometres in 2020 to 109 million kilometres by 2030, an increase of 35%. Currently 3 million to 4 million tonnes of copper and aluminium are consumed each year in grid expansion. According to our research Trafigura Research, this will need to rise to 10 million tonnes by 2030 and 14 million tonnes in 2040. More renewable power also means less stability on the grid because of the intermittent nature of wind and solar energy. To balance the fluctuations in supply and demand caused by different weather patterns, we see a growing role for gas as a source of base load power – at least until multi-hour energy storage and other scalable solutions can address the challenge of intermittency.
It also important to note that what we think of gas today could be very different in the future. “Gas” could also include renewable hydrogen, biomethane or natural gas. But the wider point is that we see natural gas supporting the next phase of the energy transition. We forecast gas demand will increase over the course of this decade and beyond. Gas also benefits from replacing coal in power generation because it generates significantly less carbon dioxide per unit of energy produced.
In anticipation of these changes, we have invested significant time and resources in building our gas, power and renewables business into a strong third pillar for Trafigura, sitting alongside the more established oil and petroleum products and metals, minerals and bulk divisions. In 2022 we signed an agreement to provide significant volumes of natural gas to Germany for four years, sourcing molecules from our global network of suppliers. This includes the long-term contracts we have secured with major US producers of liquified natural gas (LNG).
We like to think of LNG as a virtual gas pipeline linking producers in one part of the world with consumers in another part of the world, providing a flexible and secure source of energy, which we can manage along the entire supply chain. For example, using our network work of leased pipelines, we are able to carry natural gas from fields in Texas and New Mexico to liquefaction plants on the US Gulf Coast.
From here the gas is shipped across the Atlantic to regasification plants in Europe and then put into storage or delivered to customers such as big utility companies where the molecules are used to generate electricity. Through our power business we can sell that electricity to large consumers on terms matched to their needs. In fact, we see our power business playing a broader role in helping to balance supply and demand across Europe and to that end we have established a 24/7 power trading hub in Copenhagen, alongside our existing teams in Singapore, Switzerland and the US.
Understanding power markets is no easy task, as it requires the ability to process and analyse huge volumes of data. At Trafigura we now have a team of data scientists and a strong research capability that allows us to crunch billions of data points every day and make sense of this information. Of course, we realise that not every industry can be electrified. There are some hard-to-abate industries like steel-making, chemicals and cement where different solutions will be required. It is here that we see hydrogen produced using renewable energy as having a role to play. That’s why we are developing one of Europe’s largest green hydrogen production projects in Denmark.
These are just some of the ways our business is evolving in response to the major shifts that are underway in the global energy system. The transition to a low carbon future cannot happen instantly and we will need multiple fuels, technologies and solutions (such as carbon dioxide removals) to achieve a net zero future. But one thing is clear; we will not get there without the services, solutions and expertise that our commodity industry provides.
2) https://research.vu.nl/en/publications/ the-growing-energy-footprintof-artificial-intelligence
