The International Energy Agency recently published is World Energy Outlook 2023 which assesses the evolving nature of energy security and examines what needs to happen at the COP28 climate conference in Dubai to hit the 1.5 °C goal. Published only shortly after the Hamas attacks and the Israeli military response, it clearly cannot have factored in fully the economic implications of that conflict.
Overall, the summary takes a positive tone:
- There are effective ways to improve energy security and tackle emissions – a new clean energy economy, led by solar PV and electric vehicles (EVs), provides hope for the way forward
- All fossil fuels should peak before 2030 – thanks to policies supporting clean energy like the Inflation Reduction Act in the US the projected pace of change is picking up in key markets around the world.
- China’s growth rate has huge implications. Momentum behind China’s economic growth is ebbing and there is greater downside potential for fossil fuel demand if it slows further.
- Emerging and developing economies are on track to reach their national energy and climate targets, through clean electrification, improvements in efficiency and a switch to lower- and zero-carbon fuels
- Ample global manufacturing capacity offers considerable upside for solar PV
but concludes “we need to go much further and faster, but a fragmented world will not rise to meet our climate and energy security challenges”.
The Outlook explores three scenarios exploring the implications of various policy choices, investment and technology trend. Projections are produced using the IEA’s large-scale modelling framework, the Global Energy and Climate (GEC) Model. All the scenarios take into account not only energy and climate-related policies but also consider the scale and location of manufacturing capacity for various components of the clean energy system that have become important variables in scenario construction and design.
The scenarios are:
- The Stated Policies Scenario (STEPS)is based on current policy settings and also considers the implications of industrial policies that support clean energy supply chains as well as measures related to energy and climate. STEPS looks in detail at what governments are actually doing to reach their targets and objectives across the energy economy and is now associated with a temperature rise of 2.4 °C in 2100.
- The Announced Pledges Scenario(APS) assumes that governments will meet, in full and on time, all of the climate-related commitments that they have announced, including longer term net zero emissions targets and pledges in Nationally Determined Contributions (NDCs),and explores what that would mean for the energy sector. The APS is associated with a temperature rise of 1.7 °C in 2100.
- The Net Zero Emissions by 2050 Scenario (NZE)maps out a transition pathway that would limit global warming to 1.5 °C. Each passing year of high emissions and limited progress makes achieving the goals of the NZE Scenario more difficult but the recent acceleration in clean energy transitions means that there is still a pathway open to achieving its goals.
In STEPS, global total energy demand has an average annual growth rate of 0.7% up to 2030, around half the rate of energy demand growth over the last decade. Demand continues to increase from 2030 through to 2050, with a growth emerging market and developing economies more than offsetting a decline in advanced economies.
In the Announced Pledges Scenario (APS), total energy demand declines by an average of 0.1% per year until 2030, thanks to faster deployment of renewables, increased energy efficiency and more rapid electrification than in the STEPS.
In the Net Zero Emissions by 2050 (NZE) Scenario, electrification proceeds even faster, improving the efficiency of the energy system and leading to a decline in primary energy of 1.2% per year to 2030.
Source: World Energy Outlook 2023
Source: World Energy Outlook 2023
Despite the impressive detailed quantitative modelling by the GEC model in the report, the “scenarios” explored are fundamentally variants of a “high, medium, low” approach to futures thinking. There are critical (acknowledged) assumptions underpinning each scenario that could lead to either higher or lower emissions and temperature rises.
- GDP growth: This is assumed to be at an average of 2.6% per year to 2050 in all three scenarios, though the modelling does take into account regional variations. Clearly this is a highly uncertain assumption, as is its relationship to fossil fuel demand. We saw how the Russian invasion of Ukraine drove up oil and gas prices. The “energy security” debate that followed had conflicting arguments of exploiting domestic oil deposits and stimulating renewables. Economic shocks could reduce governments’ willingness to invest in renewables.
- Global population expands from 8 billion today to 9.7 billion in 2050, again with regional variations. Decline in fertility rates could well accelerate, not only in the already challenged West but in higher growth economies too as women’s education continues to grow. Again, the balance of effects on fossil fuels and renewables is a political decision.
But given the projections are looking as far out as 2050, there are many other uncertainties that should be built into scenarios.
- Extent of social cohesion as opposed to tribalism: likely to severely impact political action on climate change, and hence the swing between STEPS and APS
- Similarly, on a global scale the survival of multi-lateral agreements versus protectionism will affect global trade patterns and economic growth. How effective will new free trade blocks like CPTPP become?
- Advances in green technology could accelerate the shift from fossil fuels and the reduction of emissions; battery technology, carbon capture, tidal power are all contenders. NZE relies on this.
- But green developments (EVs etc) may be limited by a shortage of lithium deposits and rare earth metals
- Increasing intensity of computer usage, notably with AI systems, will massively increase energy demand, with the New York Times suggesting demand would equal that of an entire country.
- More extreme weather events should be built into all scenarios, as much of the damage to environment has already been done. Breaching tipping points with globally catastrophic impacts is probably becoming increasingly likely.
- The NZE scenario risks creating “stranded assets” in the fossil fuel industry as reserves have to remain unexploited. The impact on the global financial system is potentially huge.
Ultimately, it is clear that the range of uncertainties is very high. The WEO analysis does provide a powerful base case, but even with all that work, we must still anticipate a wider range of possible outcomes than before.
Written by Huw Williams, SAMI Principal
The views expressed are those of the author(s) and not necessarily of SAMI Consulting.
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