A Tale of Two Cities

The roadmap to reducing fossil fuel dependence
A Tale of Two Cities: The roadmap to reducing fossil fuel dependence

The recent Net Zero report of the International Energy Agency (IEA), published in May, garnered headlines with its surprising conclusions. It called for a cessation of new fossil fuel exploration, and a concerted effort to curtail production and use in generation. While many applauded the new view given the IEA’s close connection to oil-producing countries, the report sparked a predictable backlash.

The report laid out a detailed roadmap for decarbonising the energy sector. By providing over 400 milestones across all sectors and technologies, it identified a variety of paths that market players could take to get to a broadly similar end state: a radical reduction in energy-related emissions by 2050.

Deloitte wanted to explore what were some of the different paths suggested by the IEA, and what would need to change if specific locales were to adopt them.

While much of the impetus for energy transition will be at a national level, our focus is on cities. Deloitte has developed an Energy Transition Index[1] that assesses the readiness of major cities in selected countries to move towards a low-emissions future.

We compare and contrast two cities in two countries that could not be more different: Dubai in the UAE and (Greater) Manchester in the UK. At first glance, they share some interesting similarities: They have roughly the same population, around three million people, and similar national wealth levels (measured as GDP per capita), around US$41,000. Neither city is the country’s capital, meaning they must set their own course within a broader national economic and regulatory context.

In other ways they are quite dissimilar: they have a different focus on sectors to decarbonise; different political, policy, institutional and legal systems; and different infrastructure legacies that will require adaptation. If Dubai is about invention, Manchester is about reinvention.

The choice of such apparent extremes is deliberate, in order to highlight the various options, opportunities and obstacles that will dictate the path forward.

[1] We analysed 22 cities in 17 countries: Australia (Melbourne and Sydney), Brazil (Sao Paulo), Canada (Toronto and Vancouver), China (Shanghai), Indonesia (Jakarta), Ireland (Dublin), Italy (Rome), Japan (Tokyo), Portugal (Lisbon), The Netherlands (Amsterdam), New Zealand (Auckland), Saudi Arabia (Riyadh), Singapore, Spain (Barcelona), Sweden (Stockholm), United Arab Emirates (Dubai), the United Kingdom (London and Manchester), and the United States (Los Angeles and Washington DC).

The IEA’s net zero report: time to fast-track the phase out of fossil fuels

In the desired outcome scenario in the IEA report, the consumption of fossil fuel—coal, oil and natural gas—falls from almost 80 per cent of total energy supply in 2020 to slightly over 20 per cent by 2050, when fossil fuel use is confined to sectors where clean tech options are not readily available, at facilities where abatement is installed, and to goods where they are a key ingredient, such as plastics.

  • Coal: The first to be phased out, having peaked in 2014. Unabated coal demand drops by 90 per cent to just one per cent of total energy use in 2050.
  • Oil: Demand declines by 75 per cent, from 90 mb/d in 2020 to 24 mb/d in 2050.
  • Natural gas: The last fossil fuel to see use significantly curtailed. Demand falls by 55 per cent, to 1,750bn cubic metres.

Although there is a range of views about when demand for each of these fossil fuels will peak, to be followed by their decline, we compared the UN’s Inevitable Policy Response (IPR) baseline scenarios to the IEA’s net zero numbers to highlight how much faster the transition would have to happen under the IEA’s projections. See Figure 1.

Figure 1 . World fuel demand, UN IPR and IEA net zero projections to 2050

To achieve the rapid curtailment of fossil fuel use, the IEA suggests a timeline for fundamental and far-reaching changes that should happen in the four main sectors where fossil fuels are used: electricity generation (and heat); industrial; buildings; and transport. See Figure 2.

Figure 2: Key milestones on the IEA’s pathway to net zero

For any entity that was basing its phase-out of hydrocarbons on a more graduated timeline, the adoption of the IEA’s targets will require it to move faster and more ambitiously. The decade 2020-2030 will be decisive, when much of the groundwork must be prepared and the required technologies scaled and deployed.

The IEA estimates that the total annual investment in energy will need to rise to over US$ 4 trillion by 2030, compared to just over US$1 trillion in the years 2016-2020. New power plants, new factories, building retrofits, EV charging networks, and energy-efficient white goods are just some of the areas where new infrastructure and equipment will be required.

The IEA acknowledges that the world will continue to consume fossil fuels for decades to come. Countries like the UAE are relying on future fossil fuel revenues to fund their energy transition.

Yet, expectations could change abruptly, especially in developed countries, if there are sharp drops in demand. We are already starting to see the introduction of more stringent regulatory regimes, such as reductions in fossil fuel subsidies and increases in carbon taxes; changes in investor appetites and willingness to finance fossil fuels; a rise in legal actions and resulting liabilities; and a shift in consumer preferences in Western countries. The ‘slow and steady’ approach that minimises economic disruption may not hold.

And finally, the IEA’s timelines will not be met without strong and effective partnerships. Governments need to act and bolster their long-term pledges with specific near-term policies and measures. Corporates whose business models are based on the use of fossil fuels must now rethink them. And people should be made aware of how the choices they make every day contribute to the global demand for polluting fuels—and should be encouraged to shift to something greener.

What the energy transition means for Dubai and Manchester

The roadmap in the IEA report contains over 400 detailed milestones spanning all sectors and technologies. Various factors will shape the speed, scope and options available for energy transition in different parts of the world: their levels of fossil fuel dependence, and differing sources of comparative advantage. Some cities and countries are further than others along the transition path.

Implementing the transition will happen largely at the city level. Cities account for approximately 66 per cent of global energy supply—and are where 75 per cent of all greenhouse gas (GHG) emissions are generated. They are increasingly where people live—about 55 per cent of the world’s population today and forecast to be 70 per cent in 2050. Cities are the powerhouses of economic growth.

They don’t often have free rein to shape their own destiny, but “[c]ities and subnational government have greater ability than national governments to create and lead multi-sectoral networks involving various levels of government, private sector and civil society.”

Dubai, UAE

Glitzy, cosmopolitan Dubai is the largest city in the UAE, and the best known. The economy of Dubai itself relies very little on oil and gas directly—its share of GDP is only about one per cent. The government has sought to develop Dubai as a regional financial, business, and logistics hub, and has invested heavily in its tourism and service sectors.

Yet its location as the central trading hub in the UAE, a petrostate, and in the wider Gulf region means that, indirectly at least, oil and gas markets will continue for some time to be the driving force for Dubai’s economic development. The IEA estimates however that annual per capita income from these commodities could fall by as much as 75 per cent by the 2030s.

Dubai has a certain amount of autonomy within the federal system of the UAE. The centralised, coordinated approach in Dubai means that the centre of decision-making is at the state level, not at the corporate level. This can enable faster decision-making and rapid response to changes as circumstances dictate.

Dubai has made a number of pledges on climate change and net zero to various international bodies, with a focus on the decarbonisation of electricity and transport.

The city has its own energy strategy, the Dubai Clean Energy Strategy 2050, which is more ambitious than the federal plan for the UAE. Its aim is to produce 75 per cent of Dubai’s energy from clean sources by 2050. The interim target, to 2030, is for a mix of natural gas (61 per cent), clean coal (7 per cent), solar (25 per cent) and nuclear (7 per cent). As part of this strategy, it is the first Arab Gulf state to commission a coal-fired power plant. The $3.4 bn Hassyan plan comprises four 600 MW units whose operations are being phased in from 2020 through 2023.

Dubai has a number of important strengths it can play to in its transition away from fossil fuels. See Figure 3 for our assessment of Dubai.

Figure 3. How we scored Dubai’s ability to transition

The city uses natural gas for most of its energy use—something it will need to reduce in future. It has enormous potential for solar and could do a lot more to increase its installed capacity of renewables— beyond its 25 per cent target for 2030.

The city’s economic development took off in the 1980s, meaning that much of its infrastructure is relatively new and able to accommodate new technologies. This gives it good scores for innovation ability and the smartness of its grid.

Its Green economic potential scores lower due to the percentage of its trade in green products; the relatively low proportion of its workforce employed in green industries (despite services being an important part of its economy overall); and its ranking on Green Complexity Potential, which rates the economy’s future competitiveness in green products.

Our overall view is that Dubai has one of the more difficult road maps in energy transition but it is well positioned to make the change. Its relatively new infrastructure is comparatively energy efficient, and it has the potential to develop a world-beating capability in solar, hydrogen and CCS technologies. However, its location in an oil-and-gas-orientated part of the world exposes it to contingencies that could severely impact its ability to manoeuvre.

Manchester, UK

Greater Manchester, by contrast, has one of the easier road maps to energy transition, but making the change will be difficult. Its economy is already highly diversified, and its power grid is relatively decarbonised. As the largest urban area in the north of England, it is the economic hub of the region.

Its energy consumption is similar to the national breakdown. Buildings account for 36 per cent of use, transport for 35 per cent, industry 11 per cent and electricity 18 per cent. See Figure 4.

Figure 4. Manchester’s energy use, 2018 to 2038

Source: Electricity North West, Cadent

The local authorities in the region have announced their own plans, prioritising a 50 per cent reduction in carbon emissions from buildings, energy use and transport by 2025, and reaching net zero by 2038, 12 years ahead of the national government’s target. The plans also envision an overall reduction in annual energy use, from 51.5 TWh in 2018 down to 39.2 TWh in 2038.

The decarbonisation of home heating will need sustained attention. Over 80 per cent of buildings use natural gas for heating and cooking, one of the highest rates in our cohort.

Most of Greater Manchester’s housing stock was built before the 1980s, and approximately a third before WWII. Future options for energy transition will likely include a mix of electrification, hydrogen, heating networks and hybrid options. But the region will need to work in alignment with the national strategies, infrastructure and incentives to craft options that are attractive to residents of its 1.1 million homes.

Efforts to electrify city fleets and to encourage more public and active transport use are moving forward quickly. Almost 100 per cent of the fuels used in transport are petroleum products, due to high personal vehicle use and the prevalence of diesel as the main fuel for freight and commuter rail systems.

The central government has committed to ending new car sales of internal combustion vehicles (approximately 2.5m vehicles per year nationally) by 2030. The Greater Manchester Transport Strategy 2040 (published before the government’s net zero plan) aims for 50 per cent of daily trips to be made by mass transport or active modes, through an expansion of bus and light rail systems, and an increase in the cycling infrastructure.

Greater Manchester is starting from a relatively strong position: it is a thriving city in an advanced economy. See Figure 5 for our scores.

Figure 5. How we scored Manchester’s ability to transition

The UK economy is very diversified, and its oil and gas industry is small, occupying around one per cent of GDP.

Manchester’s renewable energy consumption is the same as the UK national average: 13 per cent. Interestingly, the UK punches above its weight when it comes to deployment of solar energy and Greater Manchester’s plans include a large amount of rooftop solar in its planned energy mix.

A potential challenge will be in how the city finances its transition. It can benefit from the central government’s planned Levelling Up agenda and the provision of funding that is likely to be made available. Unlike Dubai, which can use government-related entities to fulfil larger national goals, Greater Manchester will need to incentivise private sector companies to participate, and to devise ways of getting its citizens to adopt lifestyle changes.

Decarbonisation considerations for cities

A comparison of the two cities, with two very different sets of ambitions and advantages, demonstrates the specific constraints and contexts that are at play. The IEA report’s 400-plus suggestions offer a variety of paths to energy transition. Cities will need to have a clear understanding of their particular strengths, weaknesses, opportunities and threats when crafting their net zero plans:

  • The level and form of government involvement, the city’s capabilities, and its ability to set a credible roadmap and implement will be critical;
  • The role of the citizens, how willing they are to support the transition, and how much they are expected to pay for it; and
  • The commercial and industrial organisations that will need to make meaningful changes to their business models and, in some cases, lead the charge.

Figure 6 suggests some key considerations that must be woven into any plan of action.

Figure 6. Considerations when charting a path to net zero

Government involvement is key, at different levels. Whether it’s to establish national policies for economic transformation, or to set targets or standards or incentives for buildings and fuel, government action can dictate how fast or slow, and how joined up or piecemeal the energy transition efforts will be.

Dubai is an example of a top-down approach. The government is actively involved in setting multi-sectoral, long-term plans to diversify the economy. It has large stakes in key companies.

In Manchester, by contrast, the government will not have the same role: It needs to establish the road map, and create the right frameworks and incentives. As the decarbonisation efforts are largely in consumer-facing sectors, customer-centric design and innovation is required, and where benefits will be shared mutually to enable citizens and companies to make things happen.

Dubai’s transition will be more fundamental, but it has two key advantages that it can leverage to shift more quickly: its weather and its wealth. Its climate and relatively low population density put it 6th in a global ranking of 61 countries for solar potential. Yet, at present, it only ranks 19th in terms of installed capacity. Here it should go faster and bigger with renewables—at this point, they are not only cheaper than fossil fuels, but they play to Dubai’s natural advantages.

Dubai also has formidable financial firepower that it can deploy through the Investment Corporation of Dubai (a sovereign wealth fund), the UAE’s SWF, the Emirates Investment Authority, and other sources.

Manchester does not have a sovereign wealth fund to deploy although it should get funding from the central government as part of the broader Levelling Up agenda. Its proximity to one of the world’s largest financial centres, the City of London, should enable it to obtain further funding for energy transition. Its economy is already well developed and diversified and its private sector is extensive and able to drive the transition forward. It just needs to have the right regulatory, institutional and financial incentives in place.

Conclusion: pathways

Despite their different strengths and weaknesses, opportunities and threats, a few steps are relevant to all cities:

Rethink existing plans: The thirty-year horizon to 2050 to establish the essential preconditions for success might now have compressed to about ten years. The IEA recommends ceasing all new development of oil and gas fields immediately.

For those in fossil fuel-related industries thinking that the key threat was from government mandates and related regulation, recent events suggest that the pressure could come from multiple sources: the legal system, the boardroom, investors, insurers and even consumer actions. The drastic drop in demand caused in 2020 due to COVID could be a preview of the future state of oil markets.

The economics of power provision are changing quickly. Take the example of Dubai’s clean coal plant. When the deal was made, the agreed price of about 5 cents per kilowatt-hour was cheaper than the price from local solar farms. That is no longer the case.

Current strategies should be stress-tested across shorter timeframes, and across social, technological, environmental, economic and political domains. The aim is to ensure there is a clear view of advantages and disadvantages and where additional capabilities must be brought in.

Then, create a modular set of strategy elements that are resilient and flexible across a variety of plausible timelines. Identify no-regret moves and robust moves and prioritise the sequence.

Form partnerships: Cities are where action needs to happen, but they cannot do it on their own. The transition will “involve simultaneous transformation of several vital, interconnected infrastructure systems” and this requires a system-wide approach, meaning collaboration and partnerships at all levels: country, community, company, citizens.

Move faster: Both cities have net zero plans that are more ambitious and with shorter timeframes than the national plans. The technologies needed to meet their respective goals –methane capture and solar generation for Dubai; alternative heat sources (electric pumps, biofuels, heat networks) and transport types for Manchester—are available and deployed profitably at scale elsewhere.

The IEA calls for a ban on sales of fossil fuel boilers by 2025. The current UK government plan to have 600,000 heat pumps installed per year by 2028 would need to be much more than the 22,000 or so currently installed. This will need a big increase in training and certification of qualified installers. Can the UK accelerate its switch to decarbonised heat sources to meet the IEA timelines?

By having a good understanding of the transition, cities and their civic and commercial partners can take advantage of the opportunities in specific markets, such as transport, small-scale energy systems or building decarbonisation, or in specific business lines, such as energy efficiency retrofits, or electric vehicle charging.

The IEA’s message is clear: The transition is coming, whether or not governments, cities, companies or citizens are ready for it. The pace is about to pick up. The roadmap is clear. It is time for all parties to come together to make it happen.

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Mark Lillie

Partner - Global Tech Strategy & Transformation

Daniel Grosvenor

Power, Utilities and Renewables Leader

Bart Cornelissen

Energy, Resources & Industrials Leader

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Simon Bedford

Real Assets Advisory – Development