Ed examines the forces shaping the energy industry globally
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The world has changed dramatically during 2020, but one stark fact remains the same: we are not on course to achieve international goals for limiting the impact of climate change. The Covid-19 pandemic has caused one of the biggest shocks to energy demand in the industry’s history. But the rebound is already well underway, and over the coming years the underlying trends driving demand growth are likely to reassert themselves. Renewable energy, battery storage and electric vehicles are growing fast, but not fast enough to shift annual global greenhouse gas emissions off a trajectory of continued increases up to about 2030, and only gradual decline thereafter.
In the 2015 Paris climate agreement, the governments of nearly 200 countries agreed to act to limit the rise in global temperatures since pre-industrial times to “well below” 2 °C. The base case in Wood Mackenzie’s new Energy Transition Outlook, representing our view of the most likely outcomes, shows that current trends put the world on course for more like 3 °C of warming.
The Paris goal is still achievable, but it will take three critical changes
First, an urgent and sustained effort by the world’s governments to change the course we are on, backed by popular support that means climate policy can survive successive changes of government.
Second, it will require an acceleration in innovation. Not so much to find entirely new ideas for decarbonisation — the technologies needed for a 2 °C world all exist today — but more to take those technologies, including “green” hydrogen and carbon capture and storage, from the demonstration stage or scattered use to widespread deployment.
Third, it will take a surge in investment in low-carbon energy, not just in end-user markets but right the way up the supply chain. A 2 °C world is one with hugely increased demand for battery raw materials and other metals, and ramping up production to meet that demand will be extremely challenging for the metals and mining industries.
Bringing about the change of direction towards a 2 °C world has been made more difficult by Covid-19. Like the coronavirus itself, the slump in the world economy has effects that will last long into the recovery. The pandemic has hit both supply and demand for natural resources, and for many commodities the impact on supply, caused by a squeeze on investment spending, will last longer than the impact on demand.
Needed: a boom in battery raw material production
Electric vehicles, energy storage and renewable power generation will be vital technologies for shifting the world towards a path with just 2 °C of warming, and all of them will require steep increases in production of materials. For batteries in particular, both for EVs and for stationary uses, the world will need a boom in production of lithium and other critical metals. The pressure on investment caused by the global economic downturn raises the difficulty of delivering that growth.
Even in Wood Mackenzie’s base case forecast, there is rapid growth in battery production. The number of EVs on the road is projected to hit 323 million by 2040: a 36-fold increase from today. That forecast implies annual demand for batteries for EVs soars from 142 gigawatt hours in 2020 to 1594 GWh in 2030 and 4750 GWh in 2040. Electric vehicles already dominate global lithium demand, and next year they will become the world’s largest end-use for cobalt as well.
Depending on the pace of the recovery, supply constraints for some of those metals, particularly cobalt and nickel, could start to bite in the next few years. In the base case, our forecasts show “supply gaps” – meaning not physical shortages, but tighter markets that put upward pressure on prices to incentivise additional production – opening up for cobalt in 2029 and for nickel in 2026.
If EV adoption accelerates in line with the pace required to limit global warming to 2 °C, those gaps could emerge even sooner. In Wood Mackenzie’s 2 °C scenario, the expected number of EVs on the roads in 2040 is almost three times the number in the base case, at about 900 million. In that world, there would be even steeper increases in demand for materials, even given innovation in advanced battery chemistries and energy density improvements. Deficits could emerge in 2025 for cobalt and 2024 for nickel.
Supply gaps loom for oil and gas
Shortfalls in investment also threaten to create problems for future supplies of oil and gas. Total capital spending across the energy and mining industries is expected to be down 16% this year compared to 2019. Next year, capital spending in the oil and gas industry is expected to drop again.
Absent the concerted global effort to get on to the 2 °C path, oil demand is expected to resume its steady upward climb, although the pace is likely to slow significantly after 2025 or so as increasing efficiency and the growth of EVs begin to bite into road fuel consumption. In the Wood Mackenzie base case, peak demand for oil does not arrive until around 2039, with petrochemical feedstocks continuing to grow through the 2030s even as gasoline consumption starts to decline.
In that base case forecast, market tightness for oil starts to emerge around 2027. Worldwide oil production from fields now on stream is expected to drop from about 96 million barrels a day this year to 75 million b/d by the end of the decade. With high demand growth, driven by a strong global recovery, the oil market could tighten as soon as 2024.
Global demand for gas is also expected to level off around 2040. For at least the next decade, however, our base case projects strong growth in demand for LNG. Significant volumes of new LNG capacity are under construction, but the crisis of 2020 has put a brake on new final investment decisions, and production from existing projects will soon start to decline. A supply gap starts to emerge in 2024 in our base case, or in 2023 with high demand growth.
Given the time needed to bring new LNG capacity on stream, producers will be looking at potential investment decisions in the near future to meet demand in the mid-2020s and beyond. A key issue in those decisions will be the possibility of an accelerated shift away from gas, driven by policies such as the EU Green Deal, that could weaken demand in the 2030s.
A 2 degree world needs a rapid scale-up of newer technologies
In our 2 °C scenario, the world is more efficient and more electrified. Total primary energy use in 2040 is down 14% compared to the base case, but electricity consumption is up 29%, partly because of the increased use of EVs. More of that electricity comes from renewable sources, too: wind and solar account for 30% of 2040’s power generation in the base case, and 51% in the 2 °C scenario.
However, that more rapid pace of adoption of renewables and EVs is not enough. To put emissions on course for 2 °C of warming, the world is expected to need a rapid scale-up of technologies that are not completely new, but definitely still in their early stages of deployment.
The central problem is that there are proven solutions readily available for only about 50% of the world’s greenhouse gas emissions from energy use. Solar and wind power work at scale, electric cars are in mass production and growing fast. But for steel and other energy-intensive industries, zero-emissions solutions are still in their infancy. Long-duration energy storage is a problem that the industry has yet to crack. Electric heavy trucks remain unproven, and biofuels and electric propulsion for aviation are still in development.
Even for power generation, there are limits to the potential of variable renewables. High proportions of wind and solar power in the generation mix can lead to curtailments and negative pricing, driving down the returns from additional investments. Good electricity market design, adequate interconnection, storage and demand response become increasingly essential for maintaining grid stability.
Two sets of technologies that can help with both the hard-to-decarbonise sectors and grid stability are carbon capture, use and storage (CCUS), and “green” hydrogen, produced by electrolysing water using solar and wind power. Neither has yet achieved widespread deployment, but both remain promising.
Green hydrogen is today much more expensive than “grey” or “brown” hydrogen produced from natural gas or coal. But its costs are falling fast, and Wood Mackenzie expects that it will be at parity with hydrogen from fossil fuels by 2030 in some places and in 2040 in large markets including the US, the EU and Australia. In areas with high renewable energy potential, the cost of green hydrogen could by 2040 drop below US$10 per million btu, making it cheaper on an energy-equivalent basis than some of the more expensive forms of oil production and power generation.
The use of hydrogen in energy systems has been debated for decades. US President George W. Bush launched a hydrogen initiative in 2005. But its prospects look better now than they have done for some time.
There has been a clear acceleration of interest in hydrogen over the past year. Last October, green hydrogen projects using a total of 3 GW were announced. Today, it is 15 GW. Twelve countries have aspirations to become “hydrogen societies” by 2050, including Japan and South Korea.
Carbon capture technologies have similarly been available for decades but remain a niche market. Activity has been on the rise: there are nearly 65 projects in operation, mostly in North America, and there are a further 40 or so under development. There will be about 55 million tonnes of CO2 captured this year, and in the base case forecast Wood Mackenzie projects that will roughly double to 111 million tonnes in 2030.
However, policy frameworks worldwide are not currently adequate to support the scale of deployment needed to put the world on a path to 2 °C of warming. The costs of emissions avoided vary widely, from US$32 to US$194 per tonne of carbon dioxide, but even at the low end are well above the current global average carbon price of about US$22/tonne CO2 equivalent in markets where it is priced.
Various new approaches are being tried, including methanation, synthetic fuels and mineralisation and, if successful, they could potentially lower the total cost of capturing and storing carbon. But all these technologies are still at early stages, and will take time to show whether they can be commercially viable.
If the world is to achieve the Paris goal for global warming, green hydrogen and CCUS will have to be part of the solution, and that means sustained policy support. Attracting the investment to lift these technologies from the demonstration phase to full commercialisation needs higher carbon prices and, ultimately, a coherent, global carbon policy.
The COP 26 climate summit that was to have taken place in Glasgow this year has been rescheduled for November 2021. If world leaders want to maintain any credibility in pledging commitment to the Paris goals, they will need to do more now to show how they intend to achieve them. As things stand, we are not going to get there.
Complete the form at the top of the page to download the free executive summary of Wood Mackenzie's 2020 Energy Transition Outlook.