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Carbonomics: Updated cost curve shows …

This report provides an update to Goldman Sachs’ Carbonomics cost curve, which models the cost of achieving net zero carbon emissions across over 100 decarbonization technologies globally. The cost curve compares the carbon abatement potential and costs of technologies in power generation, transport, buildings, industry and agriculture.

This year’s updated cost curve shows diverging trends between the power sector and the transport sector. Technologies at the lower end of the cost curve in power generation, dominated by renewable power, see costs increase due to factors like cost inflation, higher interest rates and lower commodity prices. Meanwhile, technologies at the higher end in transport benefit from ongoing battery cost deflation, bringing electric vehicles closer to cost parity with internal combustion engines.

Overall, the cost curve has flattened further since its inception, with the lower half moving higher in cost and the upper half declining. Achieving the first 50% of decarbonization is now estimated to cost 1$ trillion annually, up from 0.7$ trillion last year. However, the cost of the final 25% has declined to 0.6$ trillion from 1.1$ trillion.

Power generation cost curve moves higher due to clean tech inflation and interest rates

In the power sector, the cost curve update reflects the impact of several factors:

  • Clean technology project costs have risen due to inflation, most prominently in offshore wind. Higher interest rates have also pushed up the cost of capital for renewables projects.
  • Wholesale power prices have fallen from peaks last year, making gas substitution appear less attractive economically versus renewables.
  • As a result, the levelized cost of electricity for solar, onshore wind and offshore wind has increased 11-42% year-on-year in key markets like Europe.

These factors have contributed to a tripling of the weighted average carbon abatement cost for power generation technologies in the cost curve, from 20$/ton last year to 66$/ton. Around 35% of total decarbonization relies on clean power according to the analysis.

Solar power remains significantly cheaper than wind, at around half the cost, providing it some advantage. However, cost inflation has slowed the decline in renewable energy costs seen over the past decade.

Transport cost curve declines on ongoing battery deflation

In contrast, the transport sector sits at the higher end of the cost curve and sees significant downward movement this year. This is driven by ongoing battery cost declines supporting electric vehicles.

Battery pack prices are expected to fall another 25% by 2030 according to the analysis. Lower raw material costs like lithium and simpler integration of battery cells into vehicles are helping to drive this.

As a result, the weighted average carbon abatement cost for transport technologies declined 30% year-on-year, from 600$/ton to 422$/ton.

Falling battery costs are bringing the target payback period for electric vehicles versus internal combustion engines forward. The analysts estimate this critical 3-year parity point could be reached in mid-decade in both China and the US.

Bioenergy plays a role across sectors

The report also incorporates several decarbonization technologies relying on bioenergy like biogas and biomethane. These renewable gases can play a role in power, transport, buildings and industry according to the analysis.

While bioenergy solutions currently sit at the higher end of the cost curve, incentives and returns are improving their competitiveness versus fossil fuels in countries like Germany, France and the US. Regulatory momentum is growing for renewable gases.

Power generation remains the largest consumer of biogas currently. Biomethane also offers potential in transport as a low-carbon fuel and for heating buildings by substituting natural gas infrastructure.

Policy tailwinds but political uncertainty remains

The US Inflation Reduction Act is expected to drive around $500 billion of clean energy project announcements according to the report. However, uncertainties around specifications and delays could push some investments back.

Overall political uncertainty and differing levels of climate ambition between jurisdictions continue to pose challenges for decarbonization planning and investment decision-making according to the analysts. Stable, long-term policies will be important to support the energy transition.

In conclusion, the updated cost curve shows clean power generation becoming relatively more expensive due to clean tech inflation and rates. But battery cost declines are driving major improvements in transport decarbonization. Bioenergy also has an important cross-sector role to play if incentives can improve its competitiveness.