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Energy Outlook: Energy crisis adds spark to green transition

Renewables sector benefits from spiralling costs and supply squeezes of fossil fuels

 

A massive upheaval has taken place in energy markets since our last Energy Outlook in June 2021. The world is now in the grip of a global energy crisis, where consumers and businesses are grappling record high prices and restricted supplies, and many are turning to green energy sources to fill the gap.

Rapid economic growth following the pandemic recession, featuring strong consumer demand and supply chain bottlenecks had led to rising inflation and pressure on energy markets. These challenges then became more acute when Russia invaded Ukraine. This action exacerbated the inflationary environment and has resulted in a squeeze on oil and gas supplies, especially for Europe.

Running parallel to this is the fact that the world needs to address climate change and significantly reduce our reliance on fossil fuels. Many governments are taking steps to support the growth of green energy. Could renewables solve the current energy crisis?

My team of economists wanted to look deeper at these questions and we each took an area to focus on. Senior Economist, Afke Zeilstra, looked in more detail at the renewables sector. Economist, Dana Bodnar, took on oil, Senior Economist, Theo Smid, reviewed gas and I explored how all of these areas come together in the global energy mix.

Green energy growth boosted by oil and gas supply issues

Prior to the energy crisis, the term ‘energy security’ was usually used to refer to unreliability issues with renewables. Thick cloud cover and a drop in wind levels will result in lower energy outputs for solar and wind farms. However, Russia’s invasion of Ukraine has shone a spotlight on the fact that any market that has to import fuel may be at the mercy of geopolitical tensions. In Europe, in particular, reliable access to gas has been severely disrupted by Russia’s war and the EU now plans to sever its reliance on Russian gas.

With access to reliable supplies under threat, and the spiralling costs of the global energy crisis, businesses and governments are increasingly turning to domestically generated renewable energy.

This is most visible in the EU and US where the REPowerEU strategy and Inflation Reduction Act are driving growth in renewables. In terms of capacity, China leads the world. China currently generates the most wind and solar power and will add the most capacity in both the medium and long term.

While the energy crisis is undoubtedly driving growth in the green energy sector, will this free us from our reliance on oil and gas? The answer is ultimately yes, but in the medium term at least, fossil fuels will be needed to support the global transition to clean energy. For example, as the energy mix of vehicles on our roads changes from petrol to EV, so more electricity will be required to run them. This trend towards increased electrification is part of the reason why oil and gas demand is currently peaking.

Transitioning to clean energy is not a simple case of flicking a switch from gas to electricity. Transitioning to renewables will require huge investments in electricity grids throughout the world in order to cope with the increased capacity increased electrification will require. How quickly and successfully this can be achieved remains to be seen.

Peaking demand for oil will be followed by long-term decline

Oil markets are currently experiencing a high level of volatility. This is largely due to uncertainties around how Chinese demand will grow following the lifting of zero-Covid policies, as well as the supply pressures caused by the war in Ukraine.

Oil prices are now peaking. However, the global transition to clean energy sources, including renewables, is beginning to drive a long-term decline in both price and demand for oil. This will be most evident in advanced economies, where electrification is growing fastest, particularly in areas such as automotive.

By the time we reach 2050, oil production will be concentrated in oil-rich countries and OPEC is likely to control its largest global share yet. Oil prices will be significantly lower than they are today, with some predictions suggesting a barrel price of USD 24.

The world loses its taste for gas as it joins oil in a pattern of decline

The outlook for gas markets will echo those of oil in several regards. This includes the pattern of current volatility and peaking demand, followed by a long-term decline driven in large part by the global transition for renewables.

Although Russia is likely to retain its position as the world’s leading supplier of gas, demand is likely to reduce by as much as 40% by 2050. In addition to the clean energy transition, this will be driven by the desire of many European countries to reduce reliance on Russian gas and the associated geopolitical risks to energy security.

In the short-term, demand growth is forecast for the Middle East and Asia (especially China and India). However, the tipping point is likely to arrive around 2030, when global demand for gas will start to decline.

How do the current volatilities impact the energy mix?

The energy outlook is turbulent and full of uncertainty. Fortunately, the current global energy crisis is not without a silver lining: it is accelerating the clean energy transition. However, curiously perhaps, in the short term we are likely to see an increase in the use of fossil fuels as energy grids try to accommodate demand caused by growing levels of electrification.

How this will impact businesses remains to be seen, although it is likely that businesses may be faced with increased levels of energy risk.

In our Energy Outlook Report we explored two major scenarios: the Announced Policies Scenario (APS) and the Net Zero Emissions Scenario (NZE) based on published actions and pledges respectively. Under the APS developed by the International Energy Agency, fossil fuel prices are higher and energy demand cleaner by 2050. Under the NZE greenhouse gas emissions are limited to a net rate of zero and global warming is limited to 1.5˚C.

Regardless of how the current energy crisis unfolds, one thing is clear; the world needs to reduce global warming drastically and quickly. A central part of this will involve the transition to clean energy and will require significant investment and effort on a global scale.

Download the Energy Outlook report

 

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