Coronavirus response can ‘reshape the future of energy,’ IEA says in annual report

The world’s response to Covid-19 can “reshape the future of energy” for years to come, the International Energy Agency said Tuesday in its annual World Energy Outlook report.

The IEA report underscored that most important of all is how the crisis will ultimately affect the transition to clean energy.

The report noted that while the clean energy transition continues to gain momentum, faster and bolder structural changes are needed if the world is to reach net-zero carbon emissions.

“The Covid-19 crisis has caused more disruption than any other event in recent history, leaving scars that will last for years to come,” the Paris-based agency said in a statement. “Covid-19 unleased a crisis of exceptional ferocity on countries around the world …The crisis is still unfolding today — and its consequences for the world’s energy future remain highly uncertain.”

Going forward, IEA believes that renewables will take “starring roles,” and solar will take “center stage,” driven by supportive government policies and declining costs.

“I see solar becoming the new king of the world’s electricity markets,” said Fatih Birol, IEA’s executive director. “Based on today’s policy settings, it is on track to set new records for deployment every year after 2022.”

On the other hand, IEA forecasts that coal demand will not return to pre-coronavirus levels, and that it will account for less than 20% of energy consumption by 2040, for the first time since the Industrial Revolution. Oil will remain “vulnerable to the major economic uncertainties resulting from the pandemic,” with demand starting to decline after 2030, the agency said.

Due to the ongoing impacts of Covid-19, the IEA expects global energy demand to fall by 5% in 2020, with oil and coal consumption falling 8% and 7%, respectively.

Natural gas demand is expected to decline by 3% this year — the largest decline since it became a major source of fuel in the 1930s — but the agency sees an uptick in demand over the next decade driven by growth from emerging economies. The outlook has been revised slightly since April, when the agency predicted energy demand could drop 6% in 2020.

As is customary, the report outlined the impacts of several different scenarios rather than just one given the number of variables in flux. But in a departure from recent years, the IEA chose to focus more heavily on the pivotal next 10 years.

Under the “Stated Policies Scenario,” Covid-19 will be brought under control in 2021 and energy demand will rebound to its pre-crisis level in 2023, while the “Delayed Recovery Scenario” models a slower economic recovery from the pandemic, with energy demand not rebounding until 2025.

The other two — the “Sustainable Development Scenario” and “Net Zero Emissions by 2050” — outline the necessary steps to reach stated climate goals. In the former scenario, net-zero emissions are achieved by 2070, while in the latter, aggressive policies mean the goal is met by 2050.

“It is too soon to say whether today’s crisis represents a setback for efforts to bring about a more secure and sustainable energy system, or a catalyst that accelerates the path of change,” the report said.

The only energy source expected to grow this year is renewables. Much of the growth is generated from solar, and that’s set to continue in the years to come as prices decline, making solar a cheaper power source than new coal and gas-fired plants.

Under the stated policies scenario, renewables are on track to meet 80% of the growth in electricity demand over the next 10 years. By 2025, renewables will overtake coal as the primary means of producing electricity. If more aggressive policies are adopted, renewables will play an even larger part in the next five or so years, according to the report.

However, one obstacle stands in the way of renewables-generated power: the outdated electrical grid.

“Without enough investment, grids will prove to be a weak link in the transformation of the power sector, with implications for the reliability and security of electricity supply,” IEA said.

The coronavirus pandemic hit the oil industry hard earlier this year as shelter-in-place orders led to a drop-off in fuel demand. Ultimately, coronavirus erased “almost a decade of growth in a single year.”

Demand for 2020 as a whole is expected to be 8 million barrels per day less than in 2019, although the agency expects demand to climb again in 2023. The agency expects an uptick through 2030, at which point “oil demand reaches a plateau.” Much of the return to growth will stem from emerging and developing economies, most notably India. In the delayed recovery scenario, however, oil demand won’t recover until 2027.

IEA noted that while some of the coronavirus-induced changes are negative for oil demand — including working from home and travel restrictions — some side effects are supportive, such as an aversion to public transportation and the continued popularity of SUVs, among other things.

While declining demand sent oil prices tumbling earlier this year and has kept them lower for longer, a lack of investment in the industry could lead to future fluctuations in prices.

The report noted the steep economic consequences for countries that rely on oil production.

“Now, more than ever, fundamental efforts to diversify and reform the economies of some major oil and gas exporters look unavoidable,” IEA said. The agency pointed to large oil companies writing down the value of their assets as a “palpable expression of a shift in perceptions about the future.”

Global energy-related emissions are on track to drop 7% this year as economies around the world shut down to slow the spread of the virus. But the IEA noted that this approach will not lead to long-term declines, since the shutdowns are in response to a one-off event rather than a structural change.

“The economic downturn has temporarily suppressed emissions, but low economic growth is not a low-emissions strategy — it is a strategy that would only serve to further impoverish the world’s most vulnerable populations,” noted Birol. “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 our climate goals,” he added.

The report emphasized that simply reducing emissions is not enough. Instead, existing infrastructure needs to be updated or retired, and significant investments must be made in areas like carbon capture.

Some countries, including Canada and New Zealand, as well as the European Union, have announced climate plans in line with IEA’s sustainable development scenario. But if the world is to reduce emissions at the rate required, IEA stresses that there needs to be global coordination.