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The world's response to Covid-19 may "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 underlined that what matters most is how the crisis will ultimately affect the clean energy transition.
The report found that while the clean energy transition continues to gain momentum, faster and bolder structural changes will be needed if the world is to achieve net zero carbon emissions.
"The Covid-19 crisis has caused more disruption than any other event in recent history and has left scars that will last for years," the Paris-based agency said in a statement. "Covid-19 has sparked a crisis of extraordinary savagery in countries around the world … The crisis is still unfolding today – and its consequences for the world's energy future remain highly uncertain."
In the future, the IEA assumes that renewable energies will play "leading roles" and solar energy will be "in focus", driven by supportive government measures and falling costs.
"I see solar becoming the new king of the world's power markets," said Fatih Birol, IEA Executive Director. "Based on today's policy settings, setting new records for deployment every year after 2022 is on track."
On the other hand, the IEA predicts that demand for coal will not return to pre-coronavirus levels and that for the first time since the industrial revolution it will account for less than 20% of energy consumption by 2040. Oil will "remain vulnerable to the major economic uncertainties arising from the pandemic," and demand will gradually decline after 2030, the agency said.
Due to the ongoing effects of Covid-19, the IEA expects global energy demand to decrease by 5% in 2020, with oil and coal consumption falling by 8% and 7%, respectively.
Natural gas demand is projected to decline 3% this year – the biggest drop since it became a major fuel source in the 1930s – but the agency sees demand spike over the next decade, driven by growth in emerging markets . The outlook has been revised slightly since April when the agency forecast that energy demand could fall by 6% in 2020.
It is too early to say whether today's crisis will be a setback in efforts to create a safer and more sustainable energy system or a catalyst that will accelerate the path of change.
IEA's World Energy Outlook report
As usual, the report described the impact of several different scenarios rather than just one in terms of the number of variables in flux. In contrast to the last few years, however, the IEA decided to concentrate more on the crucial next 10 years.
Under the Stated Policies Scenario, Covid-19 will be brought under control in 2021, and energy demand will return to pre-crisis levels in 2023, while the Delayed Recovery Scenario models a slower economic recovery from the pandemic with energy demand not recovering until 2025 .
The other two – the "Sustainable Development Scenario" and "Net Zero Emissions by 2050" – describe the steps necessary to achieve the defined climate targets. In the first scenario, net zero emissions will be achieved by 2070, while in the second scenario aggressive measures mean that the target will be achieved by 2050.
"It is too early to say whether today's crisis is a setback in efforts to create a safer and more sustainable energy system or a catalyst accelerating the path of change," the report said.
Solar is the "new king"
The only energy source expected to grow this year is renewable energy. Much of the growth is being generated by solar energy, and this will continue in the years to come as prices fall. This makes solar energy a cheaper source of electricity than new coal and gas power plants.
Under the given policy scenario, renewables are on track to meet 80% of the growth in electricity demand over the next 10 years. By 2025, renewable energies will overtake coal as the primary means of generating electricity. If more aggressive measures are taken, renewables will play an even bigger role over the next five years, according to the report.
However, one obstacle stands in the way of renewable electricity: the outdated power grid.
"Without sufficient investment, grids will prove to be a weak link in transforming the power sector, which has implications for the reliability and security of power supplies," the IEA said.
The oil demand reaches a "plateau"
The coronavirus pandemic hit the oil industry hard earlier this year as lodging orders led to a drop in fuel demand. Ultimately, the coronavirus erased "almost a decade of growth in a single year".
Total demand for 2020 is expected to be 8 million barrels per day less than in 2019, although the agency expects demand to surge again in 2023. The agency expects an increase by 2030, by which time "oil demand will plateau". Much of the return to growth will come from emerging and developing countries, particularly India. However, in the delayed recovery scenario, oil demand will not recover until 2027.
The IEA found that some of the changes caused by coronavirus negatively impact oil demand – including work from home and travel restrictions – but some side effects are supportive, such as an aversion to public transportation and the continued popularity of SUVs.
While falling demand caused oil prices to decline earlier this year and keep them low for longer, a lack of investment in the industry could lead to future price volatility.
The report noted the severe economic impact on countries that depend on oil production.
"Fundamental efforts to diversify and reform the economies of some large oil and gas exporters are more inevitable now than ever," the IEA said. The agency noted that large oil companies recorded the value of their assets as "a tangible expression of a shift in perceptions of the future."
Global coordination required
Global energy-related emissions are expected to fall 7% this year as economies around the world close to slow the spread of the virus. However, the IEA noted that this approach will not result in long-term declines as the shutdowns are more a one-off event than a structural change.
"The economic downturn has temporarily suppressed emissions, but slow economic growth is not a low-carbon strategy – it is a strategy that would only serve to further impoverish the world's most vulnerable populations," said Birol. "Governments have the ability and responsibility to take decisive action to accelerate the clean energy transition and get the world on track to meet our climate goals," he added.
The report stressed that simply reducing emissions is not enough. Instead, existing infrastructure needs to be upgraded or decommissioned, and significant investments need to be made in areas such as carbon capture.
Some countries, including Canada and New Zealand as well as the European Union, have announced climate action plans that are in line with the IEA's sustainable development scenario. However, if the world is to cut emissions at the required rate, the IEA stresses that global coordination is needed.