COP26: What happened and what it means for DERs

Hover Energy | November 2021

On November 13, representatives from nearly every country in the world concluded two weeks of discussions and negotiations about dealing with climate change. During their time in Glasgow, Scotland, they discussed sustainability challenges and successfully agreed on several policy changes that will indeed have a lasting impact. The world watched and responded with varying degrees of enthusiasm about progress made. We’ve pulled the initial Agreements text from the final Glasgow Climate Pact and onsite reports from BBC News and iNews and compiled this summary for you. These excerpts are in italics below.  We are confident the following is an accurate assessment of what you can conclude from the Event.

The Glasgow Climate Pact, this Conference’s version of the 2015 Paris Climate Accord, was the centerpiece of the evening, setting out plans for countries to cut emissions further and faster in the next decade. In addition, several goals were set to accelerate the shift to clean power, curb deforestation, set parameters for international carbon trading, and align on how much money wealthier nations should invest in poorer countries to support their efforts to curb the effects of climate change.

What is a “COP”:  “COP” stands for “Conference Of the Parties” and refers to the group in attendance at these Climate Conferences. All parties to the resulting ‘Pact’ or ‘Agreement’ become “Parties” to said Pact or Agreement by signature. This was the 26th COP, thus the title COP26.

COP26 by the numbers: 25,000 delegates from 200 countries; 10,000 police officers from across the U.K.; approximately 100,000 protestors; +1.5ᵒC temperature change goal; ~200 countries submitting new plans to reduce their emissions; $100bn requested from wealthy countries to help poorer nations. In addition, over US$130 Trillion in total commitments for finance, which is over 40% of the world’s assets.

Cutting emissions:

Under current climate plans presented ahead of Glasgow (COP26), emissions in 2030 will put the world on track for 2.4°C of warming, an outcome scientists say would be catastrophic. To chart a safer course, the Glasgow Climate Pact admitted more action to cut emissions this decade would be needed.  After much wrangling, the Pact sets a challenge for nations to come back next year with improved 2030 targets that are in line with the Paris Agreement’s goal of keeping warming well below 2°C and closer to 1.5°C. 

That means countries with weaker climate plans, such as China, Australia, Saudi Arabia and the U.S., will be under pressure to produce bolder plans by the end of next year. But expect battles over this: think Australia vs. China.  The U.N. is also directed to assess climate plans every year, turning each annual COP into a pressure point for nations to commit more.

Why does this matter? This is important because as world leaders agree in principle to these goals, they now return to their countries and set policy in accordance with them. Those policies directly impact financing, tax incentives, building codes, water & forest preservation, market acceptance and the specific speed at which either fuel elimination or renewable alternatives must be implemented to achieve compliance with the Agreements.

What does it matter to the DER/Microgrid Industry? Most of the Glasgow Climate Pact directly relates to clean energy and the energy transition, or decarbonization, at large. The general goal is to “electrify” everything, and yet the power must still be generated by some means. Renewable resources are currently the primary answer to this question. While much was made of the potential for Hydrogen solutions and increased storage capacity as well as their reduced costs, Wind & Solar remain the Pact’s primary focus.  Distributed Energy was given tremendous attention during the Conference and is anticipated to receive massive government subsidization, grant access and other local tax incentives to facilitate its proliferation in every corner of the world. The market has very few answers at the moment other than deploying, at scale, more DERS/microgrids and large-scale wind and solar, so this matters a lot!

 

Coal & Fossil Fuels:

Delegates agreed to “accelerate efforts towards the phase-down of unabated coal power” and accelerate the phase-out of “inefficient fossil fuel subsidies.”  This marks the first time fossil fuels have been explicitly included in a U.N. climate agreement.  Even the 2015 Paris Climate Accord didn’t go this far, so it is a big deal.

The reference to “unabated” coal refers to power plants that do not have carbon capture and storage technology fitted, which applies to the vast majority of plants in operation worldwide. This follows other promises made at the summit to phase out coal use and stop financing for new fossil fuel projects. Campaigners say taken together the promises mark the beginning of the end for fossil fuels.

Why does this matter?  Perhaps the most dramatic impact of the Glasgow Climate Pact is that it sets the world on a global pathway to zero fossil fuel usage.  While many believe the private sector in the developed world has been heading that way anyway, there is now a global agreement stating that it needs to happen, and it is now officially a “Global” goal.  That is a first for any COP, and that is significant for all of us.

What does it matter to the DER/Microgrid Industry? Specifically, as the world moves away from fossil fuels, navigating the mix of how we can supply enough power for the needs of the world and specifically to the built environment becomes increasingly tricky. Wind and solar generation are intermittent and historically have not been proven to provide a ‘baseload system’ for buildings without storage. That is beginning to change, and the smart technologies available today, combined with some new generation technologies, are making DERs and distributed renewable assets not only more acceptable but preferable, thanks to the added resiliency they provide versus offsite assets. It’s a pivotal moment for our industry to be delivered a global agreement stating that renewables will pave the way forward.  The total addressable market is no longer just a trillion market here in the States….it’s now a self-declared, publicly announced, multi-trillion-dollar (US$130 Trillion) market globally and is only projected to grow. 

 

Climate finance:

The failure of rich countries to meet a long-standing promise to mobilize $100 billion per year in climate finance by 2020 dogged the Glasgow summit. The final pact notes with “deep regret” the failure to meet the target on time and commits nations to deliver on their promises every year through to 2025.  Glasgow also saw countries start work on a new goal for financing post-2025.

Why does this matter? Well, $100 billion deployed by the top ten wealthiest countries alone gets to $1.0 trillion in additional capital specifically dedicated to decarbonization of some kind. Whether it's green bonds, tax incentives for renewable deployments, or grants for projects that reduce GHG emissions, this is a significant amount of capital deployed directly into our sector.  Now, multiply that by a factor of 5, for the next five years of reaching that goal each year, and we are expected to see US$5.0 trillion deployed, and that does NOT include the financing commitment mentioned above of US$130 trillion, which comes from financial service entities worldwide and dwarfs this US$5.0 trillion mark. So regardless of how you measure it, there is no shortage of capital being deployed.

What does it matter to the DER/Microgrid Industry? Massive financing from both the governments/nations in attendance and from the private sector from all of the developed nations means projects that make sense will see the light of day.  Any project that delivers a reasonable return, which arguably is the very definition of “sustainability,” should have the necessary access to capital it needs to be deployed.  DERS/Microgrids are increasingly seeing tremendous growth, and this should accelerate the projects that deliver the best chance to achieve Net Zero and, indeed, Real Zero at some point.  It also seems clear that many projects may actually get financed that end up not delivering on promises, simply due to the abundance of capital chasing too few technologies/solutions.  While we may have to be careful to weed out the non-performers, this is likely to result in some real wins for innovation, as risk profiles for capital deployment are eased due to the volume of capital committed.

 

‘Adaptation’ funding:

‘Adaptation’ is the U.N. jargon to describe financing to help poorer countries become more resilient against wilder weather caused by climate change.  Investments could include new sea defenses, more robust power grids, or better early warning systems for extreme weather events. 

Funding for adaptation has historically lagged behind so-called ‘mitigation’ efforts to cut emissions, but developing countries say that needs to change. So, under the Glasgow Climate Pact, richer countries promised to double the funding available for adaptation by 2025, taking it to around $40 billion per year.

Why does this matter? Well, it matters because it is a lot of money, and after failing to meet their commitments from COP21 in Paris, the so-called ‘wealthy’ countries (the U.S. included, of course) received a great deal of flak for it over the two-week period. However, for 2022, most analysts agree that wealthy countries are likely to pony up and pay this number. So, another $40 billion per year directed toward environmental causes will have some impact. 

What does it matter to the DER/Microgrid Industry? First, many of the countries that stand to most benefit from advancing the installation of microgrids may actually receive some of this funding (e.g., Caribbean, Puerto Rico, several countries in Africa, etc.). Consequently, their businesses and municipalities would likely be granted funds to accelerate decarbonization, something we are already seeing happen in several countries. Investing those funds into net-zero property projects through DERs is both a cost-effective way to get there and a defensible and simple way to deploy that capital. First, it will actually need to be paid, which has not always been the case to date, but if it is, it should be a boost to microgrid deployment around the world.

 

Emissions reporting and transparency:

Arguably the hidden victory of Glasgow was the agreement of new rules on transparency and emissions reporting, which will make it much easier for experts to compare climate progress across countries over the coming years – and spot the laggards. In addition, nations agreed to submit climate plans to a standard five-year timeframe, rather than the current hodge-podge of five- and 10-year plans starting on different dates and using different baselines. 

Nations also agreed to follow standardized emissions reporting practices from 2024, providing the public with regular and more robust information on the state of greenhouse gas emissions and progress toward implementing climate plans.

Why does this matter? This is a HUGE deal because it will ensure no double-counting of how emissions are calculated and also set a standard for global emissions calculations. Until now, an agreement on common standards has been missing for all of the COPs, so many see this as the biggest win for COP26.

What does it matter to the DER/Microgrid Industry?  Long-term, this could have significant implications, even for how we deploy microgrid solutions. Calculating carbon emissions and consequent carbon reductions is already a key topic for most client conversations in our industry. Setting a specific carbon footprint baseline and goal from which an entity then measures its reduction is essential for achieving net-zero goals (more than 100 net-zero goals were accelerated during COP26). Thus, having a standard will directly impact how we present, sell, discuss, and deploy new business going forward, especially as it becomes a more standardized global approach with which all entities are seeking compliance.

 

Carbon trading:

It has taken six years for countries to agree on how the rules governing international carbon markets should work. The system will now allow countries – such as those rich in forest cover – to trade some of their carbon-sucking potential with more polluting nations. The idea is to reward those nations delivering more than their fair share of carbon cuts and protect valuable carbon sinks or basins (places where forests pull carbon out of the air). But there are outstanding concerns that this new system will allow countries and companies to use carbon credits as an excuse to continue polluting. 

Why does this matter? Ultimately, this is a major win for the world's carbon markets and, similar to the reporting and transparency factors, should have a significant impact on how carbon is assessed and standardizing its measurement. There has been tremendous debate over how different markets value carbon credits and if trading was even possible within all the varying jurisdictions, so this truly is a major win.  Is it ripe for some ‘funny business’? Sure, but the more these standards are accepted and traded upon, the larger the markets become and the more liquidity they can offer, and regulations will follow.  Look no further than our own securities markets for examples.

What does it matter to the DER/Microgrid Industry? Initially, we won’t likely notice much change.  However, the more liquidity that markets provide for carbon trading, the more likely clients will use financing to build projects that help them take advantage of that marketplace. For example, if a warehouse can install a microgrid and offset the costs by selling the credits created by the installation, then that warehouse could fund an installation very quickly. Think about how that would help accelerate an entire portfolio of industrial real estate! We’re not there yet, but this is an eventual win for all DERs.

 

Methane:

More than 100 countries agreed upon a scheme to cut 30% of methane emissions by 2030. Methane is currently responsible for an estimated one-third of human-generated warming, so this alone could have a meaningful environmental impact if achieved on schedule.

Two big emitters, Russia and India, haven't joined, but it's hoped they will in the future, and the U.S.-China Agreement (below) did actually incorporate China’s agreement into this scheme as well.

Why does this matter? With methane being such a major contributor to the GHG pool of gases, this impact may be the greatest bang for the buck agreement to come out of COP26. There are many ways to reduce methane emissions, and yet it just hasn’t been a focus in the past. Waste facilities, dumps, and landfills are the most notorious contributors to methane emissions, so working with them to curb methane emissions will be a good thing, even just for cleaning up those facilities. 

What does it matter to the DER/Microgrid Industry? Not much here for DERs other than the possibility that in order to reduce methane emissions, some businesses may need more onsite power, and microgrids may be part of their solution for compliance. The key will be in the enforcement of this agreement. If there is strict compliance, then we could see some opportunity, if there is not, then it won’t have a meaningful impact.

 

US-China agreement:

The world's biggest CO2 emitters, the U.S. and China, pledged to cooperate more over the next decade in areas including methane emissions and the switch to clean energy. China has previously been reluctant to tackle its domestic coal emissions, so this was seen as them recognizing the need for urgent action and, on the surface, a small win at COP26. But it was also seen as a bit of grandstanding by the two biggest polluters in the world, China and the U.S., with very little substance behind it.

Why does this matter? China and the U.S. have not been speaking much lately, so the fact that they agreed to anything is a win. Indeed, that there was agreed-to language that mentions the reduction of ANY fossil fuels by China is a giant step forward. That said, most believe this was more political theater than it was any real, measurable progress from the two nations.

What does it matter to the DER/Microgrid Industry? It may not. But, should the U.S. get as serious as some of these other countries, it will clearly have a major impact on the microgrid industry. 

 

In Summary, COP26 marked a global commitment to addressing Climate Change that took the Paris Climate Accord to the next level. While it may not have achieved all that many hoped for, it is clear that the commitment to full-scale decarbonization is growing. And that fact alone will result in trillions of dollars flowing into a market that is already exploding before our eyes. 

Let’s all steward well and do so together as we step into a season of unprecedented growth.

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