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IEA says Energy Markets Changed ‘for Decades to Come,’ Sees Fossil Fuels Declining by mid-2020s
Amid a “profound reorientation” in international energy markets due to a supply disruption following Russia’s invasion of Ukraine, global demand for natural gas, coal and oil is expected to peak or plateau by the mid-2030s, the International Energy Agency (IEA) said Monday.
In its annual World Energy Outlook (WEO-2022), the IEA said the global energy crisis is causing “profound and long-lasting changes that have the potential to hasten the transition to a more sustainable and secure energy system.” Notably, the outlook includes a prognostication that Russian fossil fuel exports will never return to the levels seen in 2021.
The global energy watchdog said the crisis is delivering “a shock of unprecedented breadth and complexity,” with the biggest tremors in the markets for natural gas, coal and electricity. Significant turmoil also has been seen in oil markets, necessitating two oil stock releases of “unparalleled scale” by IEA member countries to avoid even more severe disruptions.
Alongside short-term measures aimed at shielding consumers from the impacts of the crisis, many governments are now taking longer-term steps, IEA researchers noted.
Some are seeking to increase or diversify oil and gas supplies, and many are looking to accelerate structural changes, they said. The most notable responses, according to IEA, include the U.S. Inflation Reduction Act; the European Union’s (EU) Fit for 55 package and REPowerEU; Japan’s Green Transformation (GX) program, and Korea’s aim to increase the share of nuclear and renewables in its energy mix. China and India also have ambitious clean energy targets.
Based on the latest policy settings, the WEO-2022 has coal use falling back within the next few years and natural gas demand reaching a plateau by the end of the decade. Meanwhile, rising sales of electric vehicles (EV) mean that oil demand would level off in the mid-2030s before ebbing slightly by mid-century.
“This means that total demand for fossil fuels declines steadily from the mid-2020s to 2050 by an annual average roughly equivalent to the lifetime output of a large oil field,” IEA researchers said. “The declines are much faster and more pronounced in the WEO’s more climate-focused scenarios.”
The IEA noted that global fossil fuel use has grown alongside gross domestic product since the start of the Industrial Revolution. “Putting this rise into reverse will be a pivotal moment in energy history.”
At the same time, the recently enacted measures by governments are seen by the IEA helping to propel global clean energy investment to more than $2 trillion/year by 2030, a rise of more than 50% from today. As markets rebalance in this scenario, the upside for coal from today’s crisis is temporary as renewables, supported by nuclear power, see sustained gains, according to the agency. As a result, a high point for global emissions is reached in 2025.
“Energy markets and policies have changed as a result of Russia’s invasion of Ukraine, not just for the time being, but for decades to come,” said IEA Executive Director Fatih Birol. “Even with today’s policy settings, the energy world is shifting dramatically before our eyes. Government responses around the world promise to make this a historic and definitive turning point towards a cleaner, more affordable and more secure energy system.”
The IEA sees the share of fossil fuels in the global energy mix falling from around 80% to just above 60% by 2050. Global carbon dioxide (CO2) emissions, meanwhile, are projected to fall back slowly from a high point of 37 billion tons per year to 32 billion tons by 2050.
This would be associated with a rise of around 2.5 degrees C in global average temperatures by 2100, “far from enough to avoid severe climate change impacts,” according to IEA. “Full achievement of all climate pledges would move the world towards safer ground, but there is still a large gap between today’s pledges and a stabilization of the rise in global temperatures around 1.5 degrees,” the agency said.
More Clean Energy Needed
IEA researchers said current growth rates for the deployment of solar photovoltaic (PV), wind, EVs and batteries, if maintained, would lead to a much faster transformation of energy markets. However, this would require supportive policies not just in the early leading markets for these technologies but across the world.
Supply chains for some key technologies – including batteries, solar PV and electrolyzers – are expanding at rates that support greater global ambition, according to the agency. However, stronger policies are essential to drive the huge increase in energy investment that is needed to reduce the risks of future price spikes and volatility, it said. Subdued investment because of lower prices in the 2015-2020 period made the energy sector much more vulnerable to the sort of disruptions seen in 2022, the agency added.
While clean energy investment rises above $2 trillion by 2030 in the WEO-2022, it would need to be above $4 trillion by the same date in a more climate-friendly scenario that would achieve net zero emissions by 2050, according to IEA. This highlights the need to attract new investors to the energy sector, it said. At the same time, “major international efforts are still urgently required to narrow the worrying divide in clean energy investment levels between advanced economies and emerging and developing economies.”
Birol added, “The environmental case for clean energy needed no reinforcement, but the economic arguments in favor of cost-competitive and affordable clean technologies are now stronger – and so too is the energy security case. Today’s alignment of economic, climate and security priorities has already started to move the dial towards a better outcome for the world’s people and for the planet.
“It is essential to bring everyone on board, especially at a time when geopolitical fractures on energy and climate are all the more visible. This means redoubling efforts to ensure that a broad coalition of countries has a stake in the new energy economy. The journey to a more secure and sustainable energy system may not be a smooth one. But today’s crisis makes it crystal clear why we need to press ahead.”
Winter A ‘Perilous Moment And Testing Time’
Notably, Russian fossil fuel exports never return to the levels seen in 2021 in any of the scenarios examined by the IEA in the WEO-2022. Russia’s reorientation to Asian markets particularly is challenging in the case of natural gas, according to the agency.
Russia’s share of internationally traded energy, which stood at close to 20% in 2021, falls to 13% in 2030, while the shares of both the United States and the Middle East rise.
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“For gas consumers, the upcoming Northern Hemisphere winter promises to be a perilous moment and a testing time for EU solidarity – and the winter of 2023-24 could be even tougher,” IEA researchers said. “But in the longer term, one of the effects of Russia’s recent actions is that the era of rapid growth in gas demand draws to a close.”
The WEO-2022 shows global gas demand rising by less than 5% between 2021 and 2030 and then remaining flat through to 2050. Momentum behind gas in developing economies has slowed, notably in South and Southeast Asia, according to the IEA. “This is putting a dent in the credentials of gas as a transition fuel,” according to researchers.
That said, with unrelenting geopolitical and economic concerns, IEA said energy markets remain “extremely vulnerable, and the crisis is a reminder of the fragility and unsustainability of the current global energy system.”
As part of the WEO-2022, 10 principles were outlined by IEA researchers that aim to help guide policymakers through the period when declining fossil fuel and expanding clean energy systems co-exist. Both systems are required to function well during energy transitions in order to deliver the energy services needed by consumers, Birol noted.
“And as the world moves on from today’s energy crisis,” he said, “it needs to avoid new vulnerabilities arising from high and volatile critical mineral prices or highly concentrated clean energy supply chains.”
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