The global pandemic will have a lasting impact on the energy industry, with oil demand peaking at lower levels even under optimistic assumptions for the oil industry.
Renewable energy is set to outcompete fossil fuels for new power generation, and solar will be “king” going forward, according to the International Energy Agency. Yet, absent more aggressive policies to cut emissions, the pace of the energy transition remains underwhelming.
Long-term energy demand hit
Prior to the global coronavirus pandemic, global energy demand was set to increase 12 percent between 2019 and 2030. However, in its just-released World Energy Outlook, the IEA says that energy demand will grow at a much slower pace. In a scenario that envisions a protracted recovery from the pandemic, energy demand only increases by 4 percent over the next decade. Alternatively, a more optimistic scenario that has the pandemic brought under control as soon as next year still sees energy demand only rising by 9 percent by 2030.
The IEA’s latest WEO adds to the growing consensus that the effect of the coronavirus crisis will last for years, even longer than the pandemic itself.
There has been a long list of forecasts published this year that have attempted to calculate the impact of the pandemic on energy demand. The IEA’s latest WEO adds to the growing consensus that the effect of the coronavirus crisis will last for years, even longer than the pandemic itself.
The agency tends to lean towards conservative estimates regarding the pace of change. BP, for example, now believes that the world has past peak oil demand, a conclusion that the IEA is not yet reached.
Even still, the agency does see weaker long-term demand, which ultimately slices off about one-quarter of the value of future oil and gas production. Middle East oil producers will face increase budgetary pressure going forward, but they are also low-cost producers, ensuring that their production base sticks around for the long haul. Higher-cost output – such as U.S. shale – can no longer count on growth.
In all of the IEA’s scenarios, renewable energy grows rapidly.
In all of the IEA’s scenarios, renewable energy grows rapidly. “With sharp cost reductions over the past decade, solar PV is consistently cheaper than new coal- or gas-fired power plants in most countries, and solar projects now offer some of the lowest cost electricity ever seen,” the IEA report said. In its central scenario, renewables capture 80 percent of new power generation in 2030, with solar the “new king of electricity.”
Faster progress needed
However, even as the IEA argues that the energy transition is well underway and that renewables are poised to take on a more dominant position in energy markets, the pace of change is insufficient to hit emissions reductions targets. For example, while millions of people work from home and those patterns become more entrenched, hitting jet fuel demand, millions of people also avoid public transit and opt for passenger vehicles. More broadly, lower fuel prices could delay the economic advantage of clean technologies, and the economic downturn could sap momentum for the needed policy change, the IEA cautions.
Rather than a steep drop in oil demand, the middle-of-the-road scenario in the IEA’s report sees oil demand plateauing in the 2030s. “The era of global oil demand growth will come to an end in the next decade,” the IEA’s executive director, Fatih Birol, said. “But without a large shift in government policies, there is no sign of a rapid decline. Based on today’s policy settings, a global economic rebound would soon push oil demand back to pre-crisis levels.”
A “step-change in clean energy investment” could boost the economic recovery, create jobs and reduce emissions, the IEA said.
It is against this backdrop – clear signs of a clean energy transition, but still at an insufficient pace – that the IEA makes a full-throated case for green stimulus. A “step-change in clean energy investment” could boost the economic recovery, create jobs and reduce emissions, the IEA said. Outside of the European Union, the UK, Canada, South Korea and New Zealand, clean tech stimulus has not taken center stage.
This year’s World Energy Outlook offers the first detailed look at a net-zero emissions scenario by 2050. In order to get the world on track for net-zero emissions by 2050, rapid progress is required this decade. For example, by 2030, low-carbon electricity needs to account for 75 percent of total generation by 2030 (up from 40 percent in 2019). Roughly half of total cars sold in 2030 needs to be electric, a dramatic increase from 2.5 percent last year. An even more challenging task will be eliminating emissions from industrial sectors such as steel and cement.
While spending trillions of dollars on renewable energy accelerates meaningful change in energy markets, even that level of ambition falls far short of what is needed. For example, the IEA notes that “if nothing is done about emissions from existing infrastructure, climate goals are surely out of reach.”
If today’s infrastructure stays online through the end of its planned lifespan, that alone would lock in temperature increases of at least 1.65 Celsius. In order to halve coal emissions by 2030, for example, the global coal fleet needs to be retrofitted or shut down. Simply adding new solar to the grid is not enough.
The tone of the report is a departure from the agency’s long track record of what critics say is a focus too heavily skewed towards oil and gas. For decades, the top strategic priority for the IEA has been energy security, a goal that was invariably pursued via increasing oil and gas supply. Now, the agency’s raison d’être appears to be shifting. “We are very determined—I am personally very determined—to make the IEA the agency for the global clean-energy transition,” Fatih Birol said.