The International Energy Agency (the “IEA”) on 13 October 2020 published the 2020 edition of its flagship “World Energy Outlook 2020” report (“WEO2020”) with an aim of providing “a comprehensive view of how the global energy system could develop in the coming decades”.
In recognition of the significant impact of COVID-19 on the global energy sector, the IEA has taken a new approach in drafting WEO2020, which focuses on four alternative pathways by which the sector may recover. These pathways are:
- Stated Policies Scenario (STEPS) – In this scenario, during 2021 COVID-19 is gradually brought under control and the global economy then returns to pre-COVID levels of output. This scenario therefore reflects the current stated energy policy intentions and targets, insofar as they are backed up by detailed measures for their realisation.
Delayed Recovery Scenario (DRS) – This scenario is designed around the same policy assumptions as the STEPS, but envisages a slower global economic recovery, with a return to pre-COVID levels not occurring until 2023. Under this scenario, the rate of energy demand growth over the following decade is the lowest since the 1930s.
Sustainable Development Scenario (SDS) –This scenario reflects the same public health outcomes as the STEPS, but in policy terms a surge in clean energy policies and investment puts the energy system on track to achieve sustainable energy objectives in full. This includes the Paris Agreement, energy access and air quality goals. The IEA Sustainable Recovery Plan, published in June 2020, is fully implemented, and puts global CO2 emissions on track for net zero by 2070. The SDS focuses on three of the United Nations’ Sustainable Development Goals (SDGs): SDG3 to reduce the severe health impacts of air pollution, SDG7 to achieve universal access to energy and SDG13 to tackle climate change. The Irish Climate Action Plan 2019 is also based upon SDG 13.
Net Zero Emissions by 2050 (NZE2050) – This scenario extends the SDS analysis by assuming that due to greater decarbonisation efforts across countries and companies, global CO2 emissions are put on track for net zero by 2050.
Key take-aways for the energy sector
Global energy demand
Prior to COVID-19, energy demand was projected to grow by 12% between 2019 and 2030. Growth over this period is now forecast at 9% in the STEPS, and only 4% in the DRS.
Renewables see rapid growth in all scenarios, solar being the most successful. Solar PV projects are said to be consistently cheaper than new coal- or gas-fired power plants in most countries, and to offer “some of the lowest cost electricity ever seen”. In the accompanying press release, IEA Executive Director Dr Fatih Birol stated “I see solar becoming the new king of the world’s electricity markets… If governments and investors step up their clean energy efforts in line with our SDS, the growth of both solar and wind would be even more spectacular – and hugely encouraging for overcoming the world’s climate challenge.”
Oil and gas producers are facing losses and investment has fallen by one third compared to 2019. Demand for oil drops in 2020 and while it never recovers to pre-COVID levels, it climbs back up in both STEPS and DRS. Without a greater policy push, such as is seen in the SDS, there will not be a significant decline in oil demand. COVID-19 has acted as a catalyst in the global falling coal demand, with decreases in all scenarios and its share in the 2040 energy mix falling below 20% for the first time since the Industrial Revolution. Natural gas fares better, but only because of certain policy contexts in specific regions. A 30% rise in global natural gas demand by 2040 is concentrated in South and East Asia, whereas the STEPS projects a slight decline in gas demands in advanced economies.
WEO2020 notes that the rise in poverty levels following the pandemic may have made basic electricity services unaffordable for more than 100 million people worldwide who had electricity connections, reversing several years of progress. Reference is also made to the 580 million people in Sub-Saharan Africa who lacked access to electricity in 2019 and who may end this year the same way. The immediate public health and economic crisis has pulled governments’ attention from efforts in improving this situation.
WEO2020 notes that electricity grids could prove to be the weak link in the transformation of the power sector, given the 80% increase in the requirement for new transmission and distribution lines worldwide. There is a disparity in many countries between the spending required for smart, digital and flexible electricity networks and the revenues available to grid operators, creating a risk to the adequacy of investment under today’s regulatory structures.
Likelihood of reaching climate action targets
WEO2020 is quite clear that, as things stand, the world is not set for a decisive downward turn in emissions. Both STEPS and DRS envisage an increase in emissions as the global economy recovers. The IEA notes that only an acceleration in structural changes to the way the world produces and consumes energy could break the emissions trend for good. For example, it notes that avoiding new emissions is not enough, if nothing is done about emissions from existing infrastructure, then climate goals are out of reach. This would involve retrofitting, repurposing or retiring fossil fuel-fired power plants.
WEO2020 states that “A step-change in clean energy investment, in line with the IEA Sustainable Recovery Plan, offers a way to boost economic growth, create jobs and reduce emissions.” However, it goes on to note that only a handful of countries outside the EU are following anything like this path. For the NZE2050 to enable net decarbonisation by 2050 is said to require drastic change in the next ten years which, due to the effects of COVID-19, is considered unlikely by the IEA.
WEO2020 serves as a useful stock-take of the global energy picture. It demonstrates that notwithstanding the effects of COVID-19 and uncertainty around its longevity, the basic tenets of decarbonisation remain as they were pre-virus: governments will have a critical role in choosing the future path of carbon emissions. The IEA affirms that “our secure and sustainable energy future is a choice – for consumers, investors and industries, but most of all, for governments.”