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Why the impacts of today’s energy shock will be felt for years to come

Date
18 November 2022

Simon Bennett from the International Energy Agency (IEA) summarises the key points from the IEA’s latest World Energy Outlook.

Why the impacts of today’s energy shock will be felt for years to come
Government responses to the energy crisis include Japan’s Green Transformation programme. Image credit: Shutterstock

The global energy crisis, sparked by Russia’s invasion of Ukraine, is causing hardship around the world and shining a spotlight on the flaws in today’s energy system.

Volatile prices are hurting consumers and businesses while greenhouse gas emissions are rising. Air pollution is leading to millions of deaths every year.

The combination of the Covid-19 pandemic and the current energy crisis means that 75 million people who recently gained access to electricity will likely lose the ability to afford that access. Furthermore, 100 million people may no longer be able to cook with clean fuels.

The World Energy Outlook

A key question addressed in the IEA’s World Energy Outlook (WEO) 2022, published in October, is whether the crisis will set back clean energy transitions or catalyse faster action.

The IEA’s view is that this can be a historic turning point towards a cleaner and more secure energy system thanks to the unprecedented response from governments around the world.

This includes, for example:

  • the Inflation Reduction Act in the United States
  • the Fit for 55 package and REPowerEU in the European Union
  • Japan’s Green Transformation programme
  • Korea’s aim to increase the share of nuclear and renewables in its energy mix
  • ambitious clean energy targets in China and India

In the UK, the energy security strategy looks to boost solar and wind deployment as a response to energy security concerns that have been reignited this year.

Our modelling of the trajectory implied by today’s policy settings shows that clean energy investment is set to be propelled above USD 2 trillion by 2030, a rise of more than 50% from today.

An alignment of economic, climate and security priorities has already started to shift the dial towards a better outcome for the world’s people and for the planet.

Clean energy becomes a huge opportunity for growth and jobs, and a major arena for international economic competition.

There’s still a gap between today’s policies and the desired outcomes, but...

However, there’s still a large gap between today’s policies and a 1.5°C stabilisation, despite many government pledges to reach net zero emissions by, or shortly after, 2050.

Achievement of all of these climate pledges around the would keep the temperature rise to around 1.7°C.

In particular, faster progress will be delivered by energy efficiency improvements in the buildings and transport sector.

Had they already been in place, these would have significantly shielded consumers from the effects of energy price rises this year.

...the end of the fossil fuel era is in sight

Now, thanks in part to government responses to the crisis, we project that global natural gas demand under prevailing policies will rise by less than 5% between 2021 and 2030 and then remain flat through to 2050.

The outlook for gas is dampened by:

  • higher near‐term prices;
  • more rapid deployment of heat pumps and other efficiency measures;
  • higher renewables deployment;
  • faster uptake of other flexibility options in the power sector; and,
  • in some cases, reliance on coal for slightly longer.

Consumers have expressed a clear appetite for reducing their exposure to volatile fossil fuels prices. There’s much that governments and energy suppliers can do to help them.

For the first time, a WEO scenario based on prevailing policy settings has global demand for each of the fossil fuels exhibiting a peak or plateau.

Coal use falls back within the next few years, and rising sales of electric vehicles mean that oil demand levels off in the mid‐2030s before ebbing slightly to mid‐century.

This is a highly significant change after nearly two centuries where global fossil fuel use has risen alongside GDP almost in lock step.

Private investment is vital

Rapid transitions ultimately depend on investment. It’s vital to harness the vast resources of markets and incentivise private actors to play their part.

Today, for every USD 1 spent globally on fossil fuels, USD 1.5 is spent on clean energy technologies.

In our scenario that limits temperature rise to 1.5 °C, by 2030-, every USD 1 spent on fossil fuels is outmatched by USD 5 on clean energy supply and another USD 4 on efficiency and end‐uses.

From USD 1.3 trillion today, clean energy investment would rise above USD 4 trillion in 2030.

Investment is needed now

The crisis is fuelling fierce debate over which new energy projects should or shouldn’t go ahead. Energy importing countries are scrambling to replace disrupted supplies of fuels.

But conversations about energy and investment often fail to take into account the considerable lag between investment decisions and when projects actually go live.

Massive investment in clean energy—including energy efficiency, renewables, electrification, and a range of clean fuels—is the best guarantee of energy security in the future.

However, without a surge in clean energy spending, the amounts invested in conventional energy projects also risk falling short of what would be needed to meet potential increases in demand.

Principles to guide policy makers

The IEA’s WEO 2022 includes 10 principles that can help guide policy makers through the period when investment into declining fossil fuel infrastructure and expanding clean energy systems must co‐exist.

During energy transitions, both systems are required to function well in order to deliver the energy services needed by consumers, even as their respective contributions change over time.

Unfortunately, investment today is concentrated in advanced economies and China.

This is leaving many emerging market and developing economies, particularly in Africa, unable to attract the clean energy investments and financing they need.

Widening an already troubling divide

Clean energy spending in emerging market and developing economies (outside China) is stuck at 2015 levels. This means it hasn’t increased since the Paris Agreement was reached.

The cost of capital for a solar PV plant in 2021 in these economies was between two and three‐times higher than in advanced economies and China.

Today’s rising borrowing costs could exacerbate the financing challenges.

Costs of capital reflect a wide range of risks, including policy uncertainty, and are a bigger concern for clean energy infrastructure than for more traditional energy sources.

Batteries and power grids, including interconnectors, are capital intensive and dependent on investments in supply chains, including new mines.

Hydrogen, which is still the most promising way to supply low-emissions fuel to certain industrial and transport applications, also has a complex supply chain. If produced from renewables, it’s reliant solely on mass-produced capital assets, as are solar wind plants.

To trigger investment at a pace that can place energy systems on a more secure footing this decade, governments can help by mitigating risks related to sustainability criteria, international trade, permitting and supply chain alignment.

Read more about the IEA’s World Energy Outlook

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  • Simon Bennett, energy technology analyst at International Energy Agency