A few years back, the fossil fuel sector was doing just fine while renewable and alternative energy investments were considered a wildcard because the sector was regarded as unchartered territory. But with the shift to clean energy and the war against climate change in full swing while fossil fuels continue to face their biggest existential crisis in history, the momentum has overwhelmingly shifted to lower carbon fuels. Paris-based International Energy Agency, IEA, has just released its flagship publication, the World Energy Outlook 2020, which provides a comprehensive view of how the global energy system could develop in the coming decades. The organization notes that this year’s exceptional circumstances require an exceptional approach, meaning the usual long-term modeling horizons have been retained, but the focus for the World Energy Outlook 2020 is firmly on the next 10 years, exploring in detail the impacts of the Covid-19 pandemic on the energy sector, and the near-term actions that could accelerate clean energy transitions.
The report is decidedly bearish for fossil fuel; however, the silver lining is this: A global economy on the skids will lead to the biggest drop in CO2 emissions on record with renewables playing an even bigger role in the electricity generation mix. In fact, the projected 2.4 gigatonnes (Gt) decline in annual CO2 emissions will dial the emissions clock back to where it was a decade ago.
Other than that, the report is mostly negative for the fossil fuel industry, so brace yourself.
Nearly every analyst agrees that the Covid-19 crisis has wrought more disruption to the energy sector than any other event in the sector’s history. What remains debatable is the extent of the damage.
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Well, according to the IEA, battered global energy demand is still likely to stage a rebound even in the worst-case scenario, but the extent of that rebound will largely depend on the climate change policies that the world governments adopt going forward.
The IEA has modeled 4 likely scenarios for the global energy sector:
- The Stated Policies Scenario (STEPS), is the first one of these wherein Covid-19 is gradually brought under control in 2021, and the global economy returns to pre-crisis levels in the same year. This scenario accommodates the policy intentions and targets that governments have announced so far, backed up by detailed measures for their realization.
- The Delayed Recovery Scenario (DRS) is essentially the same as STEPS, but models a situation whereby a prolonged pandemic causes lasting damage to the global economic prospects. With DRS, the global economy will return to its pre-crisis size only in 2023, meaning energy demand growth over the decade will end up being the lowest since the 1930s.
- In the Sustainable Development Scenario (SDS), renewable energy is likely to enjoy a huge surge thanks to clean energy policies and investment that will place the energy system on track to achieve sustainable energy objectives in full, including the Paris Agreement.
- The new Net Zero Emissions by 2050 case (NZE2050), is essentially an extension of the SDS analysis. In this scenario, many companies and countries target net-zero emissions by around mid-century, putting global emissions on track for net-zero emission by 2070.
Bearing this in mind, here are some of IEA’s interesting findings
#1. Pandemic effects to be felt for decades
Source: IEA
IEA says that global energy demand is set to drop by 5% in 2020, with energy investment dropping a shocking 18%.
But here’s the really bad news: In the best-case-scenario (STEP), global energy demand will not fully recover to pre-Covid-19 levels until 2023.
A slightly worse-case scenario (DRS) delays energy demand recovery by another two years to 2025.
Energy demand growth over this period is 9% in the case of STEPS but only 4% in the DRS. Mind you, the demand growth is expected to mostly happen in emerging markets such as India, while the advanced economies are likely to continue on a declining trend.
More alarming: Oil and gas sectors will bear the brunt of this declining demand, with 2040 production cut by nearly 50% when calculated by present value.
Oil and gas production could be cut by half
Source: IEA
#2. Oil becomes the next tobacco sector
This is what oil bulls probably don’t want to hear: The oil sector could very much soon face the same fate as the tobacco sector by entering a phase of terminal decline.
The IEA has reiterated pretty much what oil bears have been saying: In a not-so-distant universe, renewable energy is likely to increasingly gain ascendancy while fossil fuels take a back seat.
Even in the best-case scenarios (STEPS and the DRS), oil demand will continue to rise but hit a plateau in the 2030s.
The IEA, however, notes that the forecast decline is not cast in stone.
Indeed, the organization says that rising incomes in emerging markets and developing economies could create a strong underlying demand for mobility that could possibly offset reductions in oil use in more developed parts of the world.
But at the same time, IEA notes that transport fuels are no longer a reliable engine for growth. Indeed, fuel demand for passenger cars is likely to peak in both the STEPS and the DRS, due to improving fuel efficiency as well as robust growth EV sales. Oil use for longer-distance freight and shipping varies according to the outlook for the global economy and international trade.
The petrochemicals sector could come to the rescue, with plenty of scope for the demand for plastics to rise, especially in developing economies.
None of this will matter, though, if governments become really aggressive with climate change goals, with oil demand forecast to decline by nearly 35% in a Sustainable Development Scenario.
Source: IEA
#3. No reprieve for coal If the oil situation is bad, then the coal sector is in dire straits.
The IEA says that the coal sector is forever doomed, with the COVID-19 having catalysed a structural fall in global coal demand.
Even in the best-case scenario (STEPS), coal demand will never recover to pre-crisis levels with coal likely to fall below 20% in our global energy mix by 2040 for the first time since the Industrial Revolution.
Related: Is U.S. Shale Finally Bouncing Back?
IEA notes that rampant coal phase-out policies, the rise of renewables, and competition from natural gas are likely to lead to the retirement of 275 gigawatts (GW) of coal-fired capacity worldwide by 2025 (13% of the 2019 total), including 100 GW in the United States alone and another 75 GW in the European Union. Even projected increases in coal demand in developing economies, especially in Asia, are likely to be markedly lower and nowhere near enough to offset falls elsewhere.
#4. Natural gas fares better than other fossil fuels
In past articles, we have discussed how natural gas has almost universally become the renewable energy bridge that is rapidly replacing coal in our electricity generation mix thanks mainly to its significantly lower greenhouse gas emissions profile. Natural gas emits about 45% less CO2 than the cleanest coal (sub-bituminous) and 28% less than heating oil for the same amount of energy produced.
The IEA says natural gas might or might not face a similar fate to other fossil fuels depending on the policies governments adopt.
In STEPS, natural gas could enjoy a 30% rise in demand by 2040 thanks mainly to huge demand growth in South and East Asia. At the same time, this is the first time that IEA foresees a decline in gas demand in advanced economies over a similar timeframe. Indeed, an uncertain economic recovery is likely to jeopardize the development of LNG export facilities approved in recent years.
In other words, the natural gas trajectory is very much likely to be dictated by the climate change targets that governments will set over the next couple of years.
#5. Solar becomes the new king of electricity
Source: IEA
The IEA has reported that so far, the renewables sector has proven to be the most resilient during the ongoing crisis.
Indeed, global use of renewable energy is likely to grow 1.0% Y/Y over the course of the year, mainly due to new wind and solar PV projects completed over the past year coming online. Renewables tend to be more resilient to lower electricity demand than other sources mainly because they are generally dispatched first due to favorable regulation and/or their lower operating costs.
While wind energy, especially offshore wind, is likely to continue enjoying robust growth, solar energy is likely to come out on top.
In a STEPS scenario, renewables will meet 80% of the growth in global electricity over the next decade. So far, hydropower has remained the largest renewable source of electricity’. However, the IEA has forecast that solar will be the main driver of growth as it sets new records for deployment each year after 2022, with onshore and offshore wind taking second and third place, respectively.
Change in global electricity generation by source and scenario, 2000-2040
Source: IEA
That pretty much explains why solar stocks have lately become hot property.
By Alex Kimani for Oilprice.com
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Alex Kimani
Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com.
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5 Major Takeaways From The IEA's World Energy Outlook 2020 - OilPrice.com
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