McKinsey & Company recently released its ‘Global Energy Perspective 2021,’ which states that while energy demand rebounds to 2019 levels in one to four years, it would not return to the previous growth path.
The report says that electricity and gas rebound more quickly than oil demand, while coal does not return to pre-COVID-19 demand levels.
In 2020, the total energy demand dropped by 7 % due to reduced economic activity resulting from COVID-19. It will take until late 2021 to see energy demand return to pre-COVID levels.
The report states that until 2035, heavy industry, particularly iron and steel, and cement, is expected to show net growth driven by economic growth in India and the Association of Southeast Asian Nations (ASEAN).
According to McKinsey, given the unparalleled size of many economic-recovery packages, the focus of the stimulus measures plays a key role in shaping energy systems in the decades to come.
The report presents five key insights from the Global Energy Perspective Reference Case.
Long-term demand impact of COVID-19 is modest
In the longer term, fundamental shifts in the energy system would continue, and the coming decades will see a rapidly changing landscape. Demand for fossil fuels peaks in 2027, as electrification increases and the role of renewables in power systems, grows rapidly.
These shifts would accelerate in the coming years, as decarbonization and climate change are increasingly important on global policymakers and business leaders’ agendas.
Power wins, and hydrogen changes the landscape
The report claims that power consumption would double as energy demand rises, increasing its share of final energy consumption from 19% to 30% in 2050. COVID-19 has a limited impact on long-term power demand growth. Simultaneously, low-cost renewables dominate power markets, out-competing existing fossil assets in most regions before 2030.
By 2036, half of the global power supply will come from intermittent renewable sources.
According to the International Energy Agency’s (IEA) latest report, ‘Renewables 2020,′ India would be the largest contributor to the renewable upswing in 2021, and the country’s annual additions are expected to double in 2021 compared to 2020. Many auctioned projects are expected to become operational in 2021, which will lead to growth next year.
As green hydrogen becomes cost-competitive in the 2030s, ‘indirect’ power demand for electrolysis accounts for approximately 40% of electricity demand growth from 2035 to 2050, primarily in industry and transport.
To enable a shift to intermittent resources, both traditional capacity and new, flexible capacity are needed to ensure system security. Batteries play an important role, but gas also remains relevant to cover longer spells of low output for renewables.
Peaks in fossil-fuel demand continue to occur earlier
According to McKinsey, oil-demand growth slows in the current decade and peaks in the late 2020s, driven by the decline in road transport and the impact of COVID-19. Demand in major markets, such as the United States and the European Union, has peaked and shown a gradual decline for more than a decade.
Continued demand growth is driven by chemicals and aviation, as well as by emerging economies. However, despite a significant decline, new oil supply is still needed in the foreseeable future. Gas demand continues to grow until the late 2030s. Sectors with the largest growth include chemicals, other industry, and buildings in non-OECD Asia and the Americas.
Following the peak, declining demand for gas is driven by the power sector, as gas shifts its role from baseload provider to flexibility provider. Coal continues its decline. In the power sector, gas and, increasingly, renewables are more economical alternatives.
Despite the long-term decline in demand for all three fossil fuels, each plays a key role in the global energy landscape.
The report claims that without other decarbonization policies, more than half of all global energy demand would come from fossil fuels by 2050. Under the ‘accelerated transition,’ both coal and oil demand will be 22% lower than 2050 (and 52 and 27 % lower against 2019, respectively).
Change is too slow to reach the 1.5°C Pathway
However, the projected CO2 emissions in the ‘Reference Case’ are far from pathways that would limit global warming to 1.5°C. The global energy-related emissions in the ‘Reference Case’ remain flat until 2030, followed by a gradual, approximately 25% decline until 2050.
By contrast, CO2 emissions need to reach net-zero by 2050 to move to the ‘1.5°C Pathway’. The coming decade is particularly crucial, requiring a decline in more than 50% global emissions by 2030. This requires substantial and rapid changes in how societies around the globe fuel their economies.
Despite the increased momentum toward decarbonization, many governments still need to translate ambitious targets into specific policies. The ‘Reference Case’ can be interpreted as a sign that additional ambitious initiatives and policy measures are needed to move closer to the 1.5°C Pathway.
Investment flows remain stable over the next 15 years
Following recovery from the COVID-19 shock, investments in the energy systems would steadily grow toward 2035. Despite some fundamental shifts in underlying drivers, such as the rapid growth in renewables and peaking oil demand, the energy investment mix remains remarkably stable. Shifts in volumes are offset by further declines in renewables’ cost and increasingly expensive oil and gas supply.
Under the ‘Reference Case,’ oil and gas still represent 50 percent of energy investments by 2035. Investments in power-generation assets remain nearly flat, as strong growth in installed capacity is matched by a strong decline in capital expenditures for renewable technologies.
Oil and gas investments grow by an average of 3% a year through 2030 versus 2020 lows, despite slowing demand growth driven by increasingly expensive projects to replace depleting existing production.
Given the growing attention of governments, investors, and customers to the energy transition, the profitability of all energy segments continues to vary significantly among countries and through cycles. In light of these substantial shifts, business leaders and investors face important strategic questions. To navigate the transition, they must identify and track key signposts that indicate the direction and speed of change.
According to the International Energy Agency’s (IEA) latest report, ‘Renewables 2020′ India would be the largest contributor to the renewable upswing in 2021, and the country’s annual additions are expected to double in 2021 compared to 2020. Many auctioned projects are expected to become operational in 2021, which will lead to growth next year.
Meanwhile, global electricity demand is expected to rebound modestly next year, led by China, India, and other emerging economies, according to a new report by the IEA.
Rahul is a staff reporter at Mercom India. Before entering the world of renewables, Rahul was head of the Gujarat bureau for The Quint. He has also worked for DNA Ahmedabad and Ahmedabad Mirror. Hailing from a banking and finance background, Rahul has also worked for JP Morgan Chase and State Bank of India. More articles from Rahul Nair.