Covid-19 has caused more disruption to the energy sector than any other event in recent history
By Charles Ellinas
The International Energy Agency (IEA) released its World Energy Outlook 2020 last week. Its executive director Dr Fatih Birol aptly described the challenges in his introduction to the Outlook: “This has been an extraordinarily turbulent year for the global energy system… The crisis is still unfolding today and its consequences for the world’s energy future remain highly uncertain… We are entering a critical decade for accelerating clean energy transitions…How the world rises to these challenges will define our energy future and determine the success or failure of efforts to tackle climate change… This is the moment for ambitious action.” Strong words but appropriate to the extraordinary challenges and the chaos caused by the Covid-19 pandemic on the global economy and the outlook for energy. Predicting the future of energy has become that much harder.
As the IEA pointed out, Covid-19 has caused more disruption to the energy sector than any other event in recent history, leaving impacts that will be felt for years to come. As a result of the uncertainties over the duration of the pandemic, its economic and social impacts and policy responses, the IEA focused on the next ten-years and considered a number of scenarios to cover a wide range of possible energy futures.
The Stated Policies Scenario (STEPS) is based on all policy intentions and targets announced to date. It assumes that Covid-19 is gradually brought under control and the global economy returns to pre-crisis levels in 2021.
The IEA also considered the impact from a delayed recovery from the pandemic, causing lasting damage to economic prospects. It also modeled what would be needed in the next ten years to put global carbon emissions on track for net-zero by 2050.
None of these scenarios is more right or less right than the others, but without further policy change STEPS is more likely to happen. As such, it provides a warning of the consequences to global climate due to lack of action at a global scale.
- The IEA said that the world is far from putting emissions into decisive decline. There are no shortcuts to achieve this. What is needed is a structural transformation of the energy sector that will require massive investment in new, more efficient and cleaner energy production, as well as “the way we produce and consume energy.” Birol warned that “no sector or country will be unaffected by clean energy transitions.”
IEA’s key findings
- Renewables grow rapidly, with solar becoming the new king of electricity, being consistently cheaper than other fuels. But electricity grids could prove to be the weak link in the transformation of the power sector, with implications for the reliability and security of electricity supply
- The era of continuous growth in global oil demand comes to an end in the 2030s. But in the absence of a major shift in policies, it is still too early to foresee a rapid decline in oil demand
- Natural gas fares better than other fossil fuels, with a 30 per cent rise in global demand by 2040 concentrated in South and East Asia and underpinned by low prices. But an uncertain economic recovery raises questions about the future prospects of the record number of new LNG export facilities approved in 2019
- Oil and gas producers face major dilemmas and risks to investment. Lower prices and downward revisions to demand resulting from the pandemic have cut around one-quarter off the value of future oil and gas production
- Electricity takes an ever-greater role in overall energy consumption, with rising output from renewables
- The world is still a long way from a sustainable emissions recovery. A step-change in clean energy investment offers a way to boost economic recovery, create jobs, reduce emissions and bring improvements in air quality
- Reaching net-zero globally by 2050 would demand a set of dramatic additional actions over the next ten years. This requires countries and companies to hit net-zero emissions targets on time and in full
- Governments must guide the actions of others to avoid unintended consequences for the reliability or affordability of energy supply.
The IEA highlighted the challenges to be faced: “There’s a lot of work to be done in the energy sector. But the actions of the energy sector alone will not be enough. Governments have the capacity and the responsibility to take decisive actions to accelerate clean energy transitions and put the world on a path to reaching climate goals and net-zero emissions.” Policy makers must act. “We are far from achieving our climate goals with the existing policies around the world.”
The future of natural gas
Natural gas demand has been more resilient to the immediate impact from the Covid-19 crisis than coal and oil, but it is still expected to decline three per cent in 2020.
The majority of natural gas demand growth over the next decade is expected to occur outside of advanced economies, especially in China, India, Southeast Asia and the Middle East, spurred by an oversupplied global gas market and low prices.
However, the IEA warns that gas faces significant uncertainty as these economies emerge from the Covid-19 crisis. Despite a lower price outlook, growth prospects for gas continue to rely heavily on policy support in the form of air quality regulations, restrictions on the use of more polluting fuels, and on significant investment in new gas infrastructure. In addition, in more established markets, such as Europe, gas faces competition from increasingly cost-competitive renewables as well as environmental pressures.
Global gas demand is expected to recover, with emerging markets and developing economies leading the growth. Demand in more mature markets remains broadly static or even declines.
Global natural gas markets were in search of balance well before Covid-19 and going into 2020 a significant over-capacity was already visible. They remain amply supplied, and with many LNG projects deferred since the start of 2020 and several upstream projects on ice, global gas markets face an uncertain future. Achieving smooth balancing between LNG supply and demand over the coming years is by no means a given.
The IEA warned that “higher cost development projects… look increasingly difficult to justify,” particularly in Europe, South America and the East Med. That’s why the East Med should focus on making better use of its abundant renewable resources and develop its regional energy markets.
Dr Charles Ellinas, @CharlesEllinas
Global Energy Center