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Opinion

Tensions Loom for Energy Transition

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The Ukraine conflict and energy crisis threatened to derail the low-carbon energy transition — but the latest evidence points to critical ongoing momentum. New research from Energy Intelligence’s Energy Transition Service argues that, in spite of short-term headwinds, the transition is set to continue its acceleration over the 2020s, led by faster rollout of clean energy technologies, and partly aided by supportive policies. And the odds suggest that an even faster transition is more likely than a slowdown. But while the current, relatively modest pace of change may be more comfortable for the fossil fuel industry, the energy transition is still set to be uneven and untidy. Over this decade we expect to see volatile dynamics, deeper geographical differences, and the potential revival of pressures for more drastic action.

Technology Emerges as Key Driver

Global upheaval in 2022 raised risks that energy security fears, elevated materials costs and gathering economic headwinds would deflect or delay the global energy transition. But the signs now point to continued action, led by the swift rollout of clean energy.

2022 saw rapid expansion of low-carbon energy technologies, with ultra-fast deployment in China leading the way. Electric vehicle sales again broke records, with new plug-in auto sales across China, Europe, the US, Japan and South Korea hitting about 9 million, bringing their combined fleet up to 25 million — growing at an annual rate of over 50% since 2015. Wind and solar also continued their rapid growth with global new capacity additions in 2022 reaching around 400 gigawatts (more than double the average annual rate since 2010). For other technologies like hydrogen, and carbon capture and storage (CCS), burgeoning interest and swelling pipelines of proposed projects may herald a rapid ramp-up this decade.

Other indicators are less clear. Climate policy has been back in focus thanks to COP27, but wider signals are mixed, amid geopolitical tensions and energy security worries. Even as clean energy technology gathers its own momentum, there is still a pivotal role for policy, helping turn long-term emissions goals into near-term action, facilitating technology rollout, penalizing carbon-intensive activities, and helping steer investment.

Global policy, via the UN, remains a core focus. Egypt’s COP27 saw some action on climate finance and wealthier nations agreed to set up a “loss and damage” fund. But there was much less progress accelerating vital emissions cuts, highlighting the limits to the UN approach. Instead, other more agile multilateral cooperation is gaining significance — including a range of new pledges (like on methane) and partnerships (as with South Africa and Indonesia). Policy is also advancing at national and regional levels, including the US Inflation Reduction Act and the EU’s REPowerEU. For all their variations, such initiatives provide key support for finance, investment and implementation efforts.

Elsewhere, a global economic recovery could boost clean energy investment conditions, but downside risks remain. Global growth will likely slow in 2023 amid rising borrowing costs and geopolitical uncertainty, but should recover in 2024; easing virus-related restrictions in China may help too. High fossil fuel prices could also support clean energy investment. But we see clear geographical differences, with greater economic pain (and more impetus for clean energy investments) in Europe. In contrast, major energy exporters, as in the Middle East, have leeway both to reinvest in oil and gas, and also expand greener energy spending. Finally, the financial sector’s focus on climate risk and environmental, social and governance evolved amid the energy crisis in 2022, with less urgency than in recent years.

An Accelerating Transition

Surveying this complex, shifting picture, we see the chances of our central scenario — Accelerate — rising slightly. This case sees the energy transition build momentum over the 2020s, driven primarily by the most mature, clean energy technologies, with further partial backing from other drivers.

In this scenario, we expect to see accelerating deployment of solar, wind and battery options — in the face of only moderate cost and supply-chain obstacles — plus modest progress scaling up hydrogen and CCS. The policy outlook remains more mixed: key countries keep expanding ambitions, but these are balanced against other economic and energy security priorities, while global policy progress remains slow. And we see economic trends (and oil and gas markets) offering modest backing, offset by some headwinds and by their naturally cyclical nature. In this scenario, energy companies and investors continue to pursue climate goals, but at a measured pace.

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Beyond this base case, our slower Blowout scenario gained added attention amid strains on the global energy system in 2022, and remains possible. Blowout sees climate policy support weaken, while clean technologies fall short and investment stalls, leading to a slower, patchier transition — at least this decade. But 2022 has not halted the transition and the odds of this scenario playing out have eased.

An even quicker transition is still more likely than a slower one. Our Boost case presents a plausible faster pathway, with a self-reinforcing cycle of advances in policy, technology and costs supporting a swift transition. Faster still, our Net-Zero scenario sees rapid, transformative shifts in the global energy system, starting almost immediately, to allow the world to keep to a 1.5°C pathway. However, despite net-zero’s role shaping the energy transition debate in recent years, on current trends this scenario looks ever less likely to play out.

Faster, But Not Fast Enough

Even on its current, relatively modest trajectory, the energy transition is set to be uneven and untidy, with deep geographical differences, dynamics that ebb and flow, and potential rising pressures for more drastic action — with critical consequences for energy firms.

Firstly, geographical disparities in the pace of the transition — already evident in recent years — have deepened and hardened due to the strains of the energy crisis. We see countries and regions pursuing diverging policy priorities, employing different policy tools, and with wide variations in likely future policy stability. As a result, the energy industry will face a disorderly patchwork of differing market dynamics, varying regulation, and diverse social pressures, complicating operational and investment decisions. Divergent views on energy — including strained relations between oil and gas producers and consumers — also tie into a wider rise in geopolitical tensions.

The industry outlook also remains subject to highly variable market signals, as spiking energy prices in 2022 amply illustrated. This results in sharp shifts in the transition narrative. In a hotly contested debate, cyclical and volatile commodity and energy markets will continue to send out fluctuating signals on the pace and direction of the transition. Underlying investment trends may well persist through these cycles, but social and political attitudes risk getting caught up in an intense debate that regularly shifts course.

More fundamentally, even the current — relatively modest — tempo of the transition is much faster than some realize, with the seeds of disruptive change already sown. The energy transition is no longer merely theoretical. It is increasingly playing out in real time, as large-scale, clean energy investment gathers pace. The most likely scenarios, like our Accelerate case, point to a peak in world oil demand by the end of this decade. Alongside a peak sooner for coal use, and slower easing of gas demand growth, it now looks more likely that overall global fossil fuel demand will peak by the early 2030s, before commencing a long-term, lasting decline.

Finally, despite this gathering momentum, the world remains far from aligned with Paris goals. Today’s most likely scenario — our Accelerate case — points to global temperatures rising up to 2.5°C. Alongside greater scientific certainty, actual climate impact is now set to be ever more evident this decade, with more frequent extreme weather events already making headlines. Oil and gas firms may currently enjoy some breathing space, due to revived finances, and because of their strategy shifts in recent years. Firms have set new, tougher emissions goals and are ramping up a wide range of low-carbon investments. But given the world’s current transition pathway, we anticipate that acute pressures for much faster cuts in emissions — and sharply reduced fossil fuel use — could revive as soon as the mid-2020s.

Alex Martinos is director of Energy Transition Research at Energy Intelligence.

Topics:
Low-Carbon Policy, CO2 Emissions, Renewable Electricity , Hydrogen, Carbon Capture (CCS), Emerging Technologies
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