Goldman Sachs on the low carbon economy

Overview: A growing Low Carbon Economy

 

As world leaders gather for the Global Climate Summit in Paris, we highlight the impact of tightening emissions regulation on our coverage. This structural challenge is reflected across the GS SUSTAIN approach, from our Governance and Risk Management framework (GRM) to the Competitive Positioning frameworks of our sector teams in key sectors such as autos and utilities. In this report we focus on how evolving low carbon technologies are beginning to reshape global industries. We identify LEDs, solar PV, onshore wind, and hybrid & electric vehicles as clear front runners in the emerging low carbon economy, now a $600 bn+ pa revenue opportunity. As they benefit from growing regulatory pressure and cost reductions, these technologies are taking market share in lighting, power generation, and autos. In the process they are not only delivering emission reductions at the Gigatonne scale, but also changing competitive dynamics, with ripple effects across our coverage.

2015 shapes up as a watershed year for the low carbon economy.

 

Wind and solar are on track to exceed 100 GW in new installations for the first time and on our estimates now save a gigatonne in CO2 emissions per year. In autos, the VW scandal has highlighted growing emissions-related compliance and reputational risks. In coal, the market cap of the top four US coal companies has dropped by over 90% in 2015 as they have struggled with a combination of cheap gas, renewables, emission regulations and weak exports; and in the UK, the government has announced that coal-fired power generation will cease altogether by 2025.

 

This is not the beginning of the end for fossil fuels; but marks the end of the beginning for the low carbon economy. Oil, gas and coal generate two-thirds of electricity, power over 75% of industry and fuel 95% of the global transport fleet. However, they also emit c.32 gigatonnes (Gt) of CO2e per annum, and public pressure to find ways to reduce this is increasing (a theme we have highlighted in past reports, see GS SUSTAIN Change is coming: A framework for climate change May 2009; GS SUSTAIN What is the climate for change? October 2013). Solutions range from switching from coal to less polluting gas, boosting efficiency (e.g. in cars), as well as introducing transformative lowcarbon technologies, the focus of this report.

 

While the policy debates often center on 2030 forecasts and 2050 targets, we expect the greatest market dislocations to occur between 2015 and 2025. We estimate that in 2015-2020, new wind and solar installations will add the oil equivalent of 6.2 mn barrels per day (mbpd) to global energy supply. This is more than the 5.7 mbpd US shale oil production added over 2010-15. Our analysts expect China to add 23 GW coal and 40 GW gas power capacity by 2020, but this compares to 193 GW of wind and solar the country will add at the same time. In lighting, our analysts forecast that LEDs will account for 69% of light bulbs sold and over 60% of the installed global base by 2020. In autos, ouranalysts expect carmakers to sell c.25 mn hybrid and electric vehicles by 2025 –10x more than today and a $600 bn+ revenue opportunity.

 

In this report we explore where and how the low carbon economy is taking shape, and how it is likely to impact emissions and competitive dynamics. At GS SUSTAIN, we see the low carbon economy as a growing, structural trend shaping our coverage, which we find reflected in some of our Competitive Positioning frameworks for relevant industries (e.g. in autos and utilities). We also see growing reputational and

compliance risks, which we try to assess as part of our GS SUSTAIN Governance and Risk Management (GRM) framework. In this report we focus on how technology and regulation will change markets in the next ten years, and leave the analysis of evolving global environmental challenges and policy recommendations to better-positioned observers.