Global Energy Outlook 2023: IEA and BP Reports
COP27 in Egypt focused attention on the energy transition and the need to accelerate clean energy development and the reduction in greenhouse gas emissions. The recent IPCC synthesis report has further increased the urgency; and the UAE, as host of COP 28 in 2023 is pursuing a serious effort to prepare and mobilize country action ahead of the meeting. The war in Ukraine and high global energy prices in 2022 have increased concerns over energy security and dependence on imported fossil fuels. As we see countries diversifying oil and gas imports and restarting coal plants to meet current needs, there is some debate over whether the situation will set back the clean energy transition or rather help stimulate greater investment in alternatives.
In this context, it is useful to consider two recent analyses: IEA’s World Energy Outlook 2022 prepared before COP27 and the BP’s Energy Outlook 2023, released on January 30, 2023. Both reports address the significant impacts on the global energy market of the war in Ukraine and in general see the events as supporting the development of domestic renewable and non-fossil energy sources.
The BP analysis presents three scenarios: New Momentum that reflects current trajectories with increased commitment to climate change; Accelerated that embodies a more intense decarbonization approach with 75% reduction in emissions by 2050 compared with 2019; and Net Zero that goes further on both supply and demand actions to achieve 95% emissions reduction by 2050.
The IEA Outlook also contains three main scenarios: Stated Policies Scenario (STEP) what reflects latest policy actions by governments; Announced Pledges Scenario (APS) that assumes implementation of current climate pledges; and Net Zero by 2050 Scenario (NZE), that indicates how a 1.5 degree target can be achieved.
Impact of the War in Ukraine
Although a tight global oil and gas market was developing before the Russian invasion of Ukraine as economies recovered from the covid shutdowns and due to inadequate upstream investment after 2014-2015, the war has reduced Russian supplies, forced countries to seek other sources of gas, oil and coal and further increased prices. The IEA sees no evidence that Net Zero policy adoption affected investment in fossil fuel development: “analysis of fossil fuel investment in countries with net zero emissions pledges (68 countries plus the European Union) shows that they are at a similar level to where they were in 2016, and that changes in investment levels in those countries in recent years are not noticeably different from those that have taken place in countries without net zero emissions pledges”.
BP assesses that the war in Ukraine will reduce global energy demand due to slower growth, resulting in slightly lower CO2 emissions. The IMF’s January 2023 World Economic Outlook forecasts a 2.9% growth in 2023, down from the 3.8% historical average but slightly higher than its previous forecast due to better- than-expected performance in the US, Europe, and China.
Overall Peaking of Global Primary Energy Consumption despite Significant Increases in Electricity Consumption in Developing Countries
The assumptions about energy demand are of course critical to considering future energy supply requirements and mixes. The BP analysis assumes a peaking of global final energy consumption in all three scenarios, with a peaking in the Accelerated and Net Zero cases in the late 2020s. In the New Momentum Scenario, demand peaks around 2040 at about 513 EJ. In contrast to this assumption, growth in electricity demand is posited to be robust in all three BP scenarios (75% increase to 2050), driven by increases in developing countries.
Peaking of Oil Demand
Global oil demand is currently around 100 million barrels per day. BP scenarios see a continuing drop in oil demand to 2050 in all scenarios, with the Net Zero going all the way down to 20 million b/d. A combination of improved efficiency and the substitution of EVs and alternatives in the transportation sector drives these declines. Oil production in the major producers, US and Russia, declines and OPEC’s share increases after 2030 due to higher costs in non-OPEC suppliers.
Critical Reduction in Coal Consumption
The IEA Outlook emphasizes the critical need to reduce coal consumption. It states: “There is no way to tackle climate change effectively without a surge in investment in clean power and infrastructure that significantly reduces coal‐fired generation. If the existing fleet of coal‐fired power plants were to operate as they have in recent years for the next 50 years, this alone would take up two‐thirds of the remaining CO2 budget consistent with limiting the global average temperature increase to 1.5 °C.” Despite the recent increases in coal use in some countries, including China and India, the outlooks see a substantial reduction in global coal consumption, with BP seeing coal moving from 40% of current power generation to 10% or less by 2050.
Natural Gas Market Uncertainties
The world is set to see an increasing role of natural gas to at least 2030, especially in LNG Asian importers. The LNG market doubles in the BP New Momentum Scenario by 2050 over 2019 but flattens or falls in the Accelerated and Net Zero cases. Europe expands LNG imports, but the speed of its substitution looks uncertain after 2030. The US and Middle East are established as the dominant LNG suppliers as Australia’s share falls due to high production prices. It appears that higher LNG prices have slowed the substitution of gas for coal in South and Southeast Asia. Of key importance is the rebound of the Chinese economy and its leading LNG import role in the face of minimal expansion of global LNG liquefaction export capacity over the next few years.
Record Growth of Renewable Energy
2022 saw the largest European growth ever in renewable energy development. Countries seeing energy security benefits from clean energy development. Huge growth is posited in all the BP and IEA scenarios, with record capacity additions of 450-600GW per year seen in the Accelerated and Net Zero scenarios. Renewables increase to account for 50-75% of power generation by 2050. But like European overdependence on Russia imports, renewable energy dependence on China for critical minerals, processing, and technology is huge and the diversification of supply chains will take time. Financing for renewable is uneven between industrial and developing countries; and the US IRA and EU Green Deal programs reduce company focus on the developing countries. Overall, $4 trillion in clean energy financing is needed today compared to the current level of about $1.4 trillion. An expansion of IFI funding in developing countries is critical, especial with the expected growth of demand in these countries.
Role of Other Alternatives
The BP analysis sees alternative non-fossil sources as playing an important role in the Accelerated and Net Zero scenarios of up to 25% of the total 2050 mix in power generation. Significant increases (possibly a doubling) in nuclear power are assumed, especially in China. Low-carbon hydrogen use rapidly expands in the 2030-2050 timeframe to over 300 million tons per annum in Accelerated and Net Zero scenarios, with significant substitution for gas and coal in the industrial sector and some applications in transportation and power. The studies also see a role for carbon capture in industry (e.g. cement and iron and steel) and power (natural gas and some coal). Significant challenges in developing infrastructure for carbon capture, e.g., CO2 pipelines, are a constraint.
Peaking of Emissions But Limited Declines in Emerging and Developing Countries
The IEA Outlook sees emissions peaking in the STEP by the mid-2020s at 37 GT. But this scenario results in a temperature increase of 2.5 degrees. In the Accelerated Pledges case emissions fall to 32GT in 2030 and 12GT in 2050, resulting in about a 1.7-degree temperature rise. About 40% of the 2030 emissions reduction in this case come from advanced economies. Emerging and developing markets only reduce emissions by 4% in 2030.