Despite clear evidence of anthropogenic impacts on climate change, strong international support for the Paris Agreement and growing role of clean, sustainable energy sources, energy-related carbon dioxide emissions increased by an average of 1.3% annually between 2014 and 2019. The energy sector accounts for about 80% of anthropogenic CO2 emissions and, as a consequence, plays a central role in ensuring the success of the decarbonization process.
While last year, 2020, was an exception due an impact of the pandemic (emissions decreased by about 7%), a return to a stable upward trend looks like a very likely scenario, at least in the short term. According to some experts, the economic recovery and relatively low prices for fossil fuels will lead to an increase in carbon dioxide emissions in the energy sector by 4.4% or 1.4 gigatons on an annualized basis in 2021.
The changes have started
Meanwhile, as the International Renewable Energy Agency (IRENA) emphasizes the global energy sector has begun to change in recent years thanks to political support and technological innovation. Over the past year, the perception of long-term risks and opportunities by energy leaders has radically increased amid global turmoil.
Renewable energy is already clearly leading in commissioning of new generation capacities – 2020 was a historic high for the wind and solar energy markets. New price records have been achieved for solar generation systems (less than 2 US cents per kWh). In Europe, the share of renewable energy sources in electricity generation exceeded the share of fossil fuels for the first time in history.
Transport electrification is also showing signs of an active energy transition. Thus, global sales of electric vehicles increased by 43% compared to 2019 to 3.2 million units, which is 4.2% of total new car sales.
In essence, the new energy transition is a transition from fossil energy sources to electricity, the global consumption of which is growing. Broadly speaking, active electrification through renewable energy and new energy sources will be the answer to climate change.
The reason is that the world has access to cheap electricity, and it can meet the long-term needs of humanity for energy, be it transportation, heating, etc. Proven zero-election energy technologies are already largely in place today. Renewable sources, green hydrogen and modern bioenergy will dominate the energy of the future.
The pandemic has intensified this trend acting as a kind of mobilization factor. After increasing renewable energy capacity by about 176 GW in 2019, new renewable energy commissioning reached a record 200 GW while the rest of the global energy sector shrank.
Amid the recession caused by the pandemic, demand for oil fell by 8.8% and for coal by 5% in 2020, according to the International Energy Agency. Renewables were the only energy sector to see growth in 2020. The pace and scale of the transition to renewable energy sources has already surpassed the most optimistic forecasts. The International Energy Agency expects renewables to surpass coal as the world's largest source of energy soon, as early as 2025.
Political ambition is clearly growing as more countries and businesses commit to achieving zero emissions. Among other things, Kazakhstan has announced that it will become a carbon neutral state by 2060.
However, the speed of transition is far from the pace required to comply with the Paris Agreement.
The measures and political steps taken now at the international level will only lead to stabilization of global emissions, with a slight decrease by 2050. However, if they are not fully implemented for one reason or another, CO2 emissions could potentially grow by 27% in the next three decades.
In general, according to IRENA estimates, the current intensity of the energy transition will not allow implementation of the concept of carbon-free development and prevention of critical climatic changes. To achieve zero emissions by 2050, CO2 emissions must be reduced by an average of 3.5% on an annualized basis. This is hypothetically achievable, but extremely difficult, and urgent actions are required on several fronts.
Time in this context is of decisive importance, since the delay in the energy transition would lead to critical consequences. A radical shift is needed around readily available energy sources and energy efficiency technologies that can be actively deployed now, including in many developing countries.
Experts believe that an efficient energy transition requires a combination of technologies and strategic approaches, in particular:
• Stabilizing energy demand by improving energy efficiency and moving to a circular economy while maintaining acceptable economic growth.
• Decarbonized energy systems dominated by renewable energy sources to meet growing global needs.
• Electrification of end-use sectors with increased use of electricity in the real estate, industry and transport sectors.
• Expansion of production and use of environmentally friendly hydrogen, synthetic fuels and raw materials for the implementation of the so-called indirect electrification.
• Targeted use of biomass from so-called sustainable sources.
Optimistic forecasts
IRENA has recently provided a scenario for the optimistic development of the global energy transition that will reduce the possible climate warming from 4 °C to 1.5 °C by the middle of this century.
In particular, by 2050, electricity should provide over 50% of total final energy consumption if the leading nations are to meet their climate commitments. Today this figure is only about 21%. Under this scenario, by 2050, 90% of total electricity needs will be met by renewable energy sources (less than 30% now), followed by natural gas with a share of 6%, and the remainder will be covered by nuclear energy.
Wind and solar generation will dominate the structure of electricity generation, providing 63% of global electricity needs by 2050. Other mature renewable technologies (such as hydropower, bioenergy, geothermal and concentrated solar energy) and new technologies (such as ocean power) are also positioned to play an important role in the decarbonization of global energy.
The upside potential is boosted by the cost factor: Three quarters of onshore wind farms and 40% of solar power systems commissioned in 2019 will generate more electricity for their entire life cycle than any alternatives from the fossil fuel sector. And three-quarters to four-fifths of the electricity from continental wind and solar power plants commissioned in 2020 through auctions or tenders fared better than the cheapest option using fossil fuels.
The installed capacity of renewable energy sources will have to increase from more than 2.5 thousand GW today to more than 27.7 thousand GW in 2050. That is, more than ten times. On an annualized basis, this requires more than 840 GW of new renewable capacity each year, compared with about 170-200 GW added in recent years. First of all, the growth will be provided by solar and wind (both continental and offshore) stations.
By the middle of this century, the installed capacity of solar energy under the analyzed scenario can reach more than 14 thousand GW, and wind power – more than 8.1 thousand GW. Hydropower, biomass, geothermal power, concentrated solar power and ocean technology will account for the remaining projected growth in renewable energy.
According to the IRENA forecast, the production of fossil fuels for the period under review will decrease by more than 75%, while the total consumption of fossil fuels will constantly decrease from 2021. However, fossil fuels will continue to play an important role, mainly in energy and, to some extent, industry, providing 19% of primary energy supplies in 2050. Oil and coal production will decline the fastest, while natural gas will peak around 2025 and then begin to decline as well.
Natural gas will be the largest remaining fossil fuel source by 2050 (70% of total fossil fuels used), at about 52% of today. Natural gas production will amount to 2.2 trillion cubic meters compared to about 4.2 trillion cubic meters today. About 70% of natural gas is consumed in power plants and in the production of so-called «blue hydrogen», as well as in industry. World oil production will drop to just over 11 million barrels per day that is about 85% lower than now.
Coal production will decline more dramatically, from about 5.75 billion tonnes in 2018 to nearly 240 million tonnes per year in 2050. In particular, the use of coal in the energy sector by 2030 will significantly decrease – up to 55% compared to current levels, and it will be almost completely phased out by 2050.
At the same time, the above mentioned IRENA scenario seems to be difficult to implement, especially in case of protracted structural problems in the global economy. Rather, it acts as a kind of hypothetical benchmark for all stakeholders while real indicators will be much more modest by 2050, especially in developing countries that do not have access to sufficient long-term investments and technologies.
Thus, despite the colossal growth in renewable energy sources, the most plausible scenario indicates that fossil fuels will still make up half of the energy balance in 2050, according to S&P Global Platts Analytics.
Some countries, especially resource economies, may completely torpedo initiatives towards carbon-free development. Despite its status as an advanced economy, Australia is one example of how difficult this path will be: its government continues to support the coal industry and refuses to accept climate targets under the Paris Agreement.
Moreover, the harsh winter of 2021 in the United States and Europe has clearly shown that it would be difficult to ensure the stability of the energy system without traditional energy. Trying to forcefully and thoughtlessly eradicate fossil fuels is simply unrealistic but its impact on the environment can be reduced. Low-carbon commodity markets are able to stimulate low-carbon oil and gas production and more efficient supply chains.
The world needs more effective legislation, action and incentives to promote changes in the behavior of producers and consumers in terms of achieving the desired climate outcomes.
Investment in short supply
The investment issue is a very significant problem for implementation of the above mentioned optimistic scenario of the International Renewable Energy Agency. In particular, investments in the energy sector will have to be increased overall by at least 30%.
BloombergNEF experts also state that while hundreds of billions of dollars are already invested globally in decarbonizing the energy system, further dramatic increases in investments are urgently needed as costs come down. Among others, technologies such as electric heating, carbon capture and hydrogen production attract only a small fraction of the overall investments. That is, it confirms the IRENA thesis that the world needs trillions of dollars annually to ensure the achievement of climate goals.
It should be recalled here that the investments in energy transit and decarbonization exceeded $ 501 billion in 2020. This is a record volume that is 9% more than the previous year despite the economic turmoil caused by the pandemic and the economic crisis.
The states' current national plans call for a cumulative investment of nearly $98 trillion in energy systems over the next three decades. At the same time, the previously announced economic stimulus packages will actually send about $5 trillion to sectors that have a large impact on carbon emissions (agriculture, industry, energy, transport, etc.), and only less than $1.8 trillion can be attributed to categories of green investments.
To ensure a more sustainable future, significant investments need to be made in an energy system that prioritizes renewable energy, electrification, energy efficiency and related energy infrastructure. The IRENA scenario can be realized with an additional $33 trillion in excess of the planned investment. Thus, the total volume of global investment should be about $131 trillion until 2050, at current prices.
More than 80% of this, or $116 trillion, needs to be invested in energy transition technologies (excluding fossil fuels and nuclear energy) such as renewables, energy efficiency, end-user electrification, power grids, flexible innovation (hydrogen), and CCUS technologies (carbon capture, utilisation and storage). Cumulative investments of more than $24 trillion must be redirected from fossil fuels to energy transition technologies.
In annual terms, investments in the energy sector will need to more than double to $4.4 trillion a year, up from $1.8 trillion invested in 2019. This is equivalent to almost 5% of the current world GDP. While it is relatively easy for energy transition companies to raise capital compared to the commodity sectors, such a dramatic increase in investment is problematic especially given the need to further increase debt obligations. A further reduction in the cost of energy transition technologies is a definite driver but this is not enough.
On the other hand, in the long term, a zero emissions policy can lead to a deep decarbonization of the global energy system. It is already changing the direction of development of the sectors for extraction and processing of fossil energy raw materials. Among other things, in April 2021, 43 of the world's largest banks with total assets of $28.5 trillion, as part of the established Net Zero Banking Alliance, agreed to bring their investment and loan portfolios in line with zero emissions by 2050 or earlier. It is about completely abandoning investment and lending in environmentally unsustainable sectors.
The global oil and gas industry and «traditional» power generation will be forced to significantly increase investments in the energy systems of the future including renewable energy projects, as companies seek to take into account the risks that arise in the long term. Transformational investments are set to expand despite declining confidence in significant industry growth following the Covid-19 pandemic. Thus, priorities shift as investors overestimate the risks of financing sectoral projects, and governments and industry are investing tens of billions of dollars in post-crisis green recovery strategies.
Despite the fact that many oil and gas companies will make acceptable profits if the average oil price is above $40-50 per barrel, experts emphasize that there are signs of exhaustion of their capabilities by traditional cost-cutting methods. The problem with the available instruments of profitability in the oil and gas industry is that most of them are already in use. Increasing profitability has been a consistent priority since at least 2014-2015, with some players finding it increasingly difficult to «squeeze the water out of the sponge».
So business diversification is indispensable, which is also confirmed by the change in business models of global majors towards more active use of the opportunities that renewable energy and a low-carbon future potentially provide.
However, there is an important point to keep in mind. As enthusiasm for green investing is likely approaching to its peak, and analysts warn that investors are actually investing in anything that looks green.
For example, the S&P Global Clean Energy Index, which tracks the value of the shares of 30 companies, has almost doubled over the past year. These stocks were supported by an influx of money into stable funds. By comparison, US blue-chip stocks gained an average of about 16% over the same period. As countries commit to actively cutting greenhouse gas emissions and even moving towards zero emissions, many enthusiasts expect green investment to grow even higher.
This has already led to inflating market assessments of environmentally friendly companies, figuratively speaking, «to the stratosphere», creating the risks of a «collapse» of the emerging bubble. Its collapse could temporarily stall technological progress and weaken the investment attractiveness of certain sectors critical for energy transit.