World Energy Outlook: The road ahead is uncertain, but the transition needs to be promoted

In the past two years, geopolitical conflicts and energy shortages in Europe have changed the global energy landscape. The issue of sustainable development, which originally occupied the "C position", has begun to temporarily give way to energy security, price rationality and industrial competitiveness, and the momentum of energy transition has weakened. In fact, the energy transition outlook depends on multiple variables and their interdependencies. Changing costs, the pace of technological progress, and policy uncertainty mean different energy paths, making the future of fossil fuels even more unpredictable. What is clear, however, is that it is increasingly difficult to achieve the goal of limiting global warming to 1.5 degrees Celsius. Still, record growth in areas such as electric vehicles and renewables will drive global acceleration towards a net-zero future.

Energy consultancy Wood Mackenzie's latest World Energy Outlook 2023 predicts that by 2040, solar and wind will account for the largest share of the global energy mix. Realizing this vision requires sufficient investment, both in support of renewables and in fossil fuels, in order to provide mobility for renewable energy development. It is expected that the total energy investment will increase from 1.5 trillion US dollars in 2021 to 2 trillion ~ 3.2 trillion US dollars in 2040, but its share of GDP may not change significantly. The dilemma of ensuring the security of energy supply on the one hand and protecting the livability of the planet on the other hand makes the future uncertain for the energy sector, especially the fossil fuel industry.

Whether the supply chain can keep up with the pace of the energy transition is a challenge that the energy industry must address now and in the foreseeable future. Material shortages, production bottlenecks, and inadequate land supply all threaten to slow the momentum of renewable energy. In the World Energy Outlook 2023 report, Wood Mackenzie examines the changing global energy landscape and analyzes the current state of the global energy transition, predicting the speed and warming of the energy transition with five different scenario models and assumptions, revealing the dilemmas and challenges that will be faced in the process of energy transition, and may provide guidance for the fossil fuel industry to seek a breakthrough.

The energy transition has a bumpy road ahead

Wood Mackenzie projected five different scenarios and concluded that the pace of the global energy transition is accelerating, but the future path of the energy transition is fraught with uncertainty from a technology perspective, geopolitical risks or consumer behavior perspectives, making it extremely difficult to develop an effective resilient investment strategy that can cope with different scenarios. It also means that decision-makers must be able to multitask, like a computer's operating system, to achieve long-term decarbonization goals while also taking into account short-term economic returns.

Wood Mackenzie's projections are based on different underlying assumptions, such as those about the speed of the technology process and the level of policy implementation. Significant reductions in carbon emissions have been achieved under different scenarios, but the global warming results obtained in most scenarios are between 1.6~2.9 degrees Celsius, and the goal of mankind is to control the temperature rise within 1.5 degrees Celsius. The projection scenario takes into account non-CO2 emissions and non-energy emissions from sectors such as agriculture, forestry and waste disposal. Wood Mackenzie believes that to limit warming to less than 1.5 degrees Celsius, significant carbon reductions are needed, and that carbon reductions over the next decade are the most critical.

Demand for fossil fuels is peaking fast, but it will remain dominant in the short term

Wood Mackenzie's World Energy Outlook 2023 predicts that global demand for fossil fuels will peak in 2030. Coal demand will fall sharply in the coming years, but demand for natural gas and oil will continue to grow further, and oil and gas will remain a core part of the world's energy mix for decades to come.

In 2040, due to the huge role of gas-fired peak shaving in renewable energy generation, the total demand for natural gas will continue until the goal of large-scale battery storage is achieved. In 2040~2050, the outlook for natural gas demand will vary depending on the hypothetical scenario, with stable growth in the most conservative scenario and a sharp decline in the pace of renewable energy and electrification under the "accelerated transition" scenario.

Total oil demand will continue to grow for most of 2030; There will be a decline after 2030, but the decline in oil demand will vary widely under different scenarios. Under the "Deliver on the Promise" scenario, oil demand will almost halve by 2050, driven by slower growth in car ownership, improved energy efficiency in road transport engines, and continued electrification of transportation. In the "transition deceleration" scenario, oil demand will fall by only 3% over the same period, due to material and infrastructure constraints, slower global vehicle electrification, and limited adoption of alternative fuels in aviation, maritime and chemical sectors.

Renewable energy will eventually become the main body of the energy structure

Renewables will continue to grow rapidly due to their extremely cost-competitive nature. In many parts of the world, renewable energy generation has the lowest construction cost, making it the first choice for new power generation facilities. By 2030, renewable energy power generation will account for 45%~50% of global power generation, and by 2050, it will account for 65%~85%, of which solar power generation will contribute the most, followed by wind power generation.By 2050, the demand for renewable energy will double or even triple compared to the current level, but its power generation emissions will be reduced by 17%~71%. However, renewable energy projects are also challenged by supply chain shortages, cumbersome and time-consuming approval procedures, and related issues related to grid construction.The use of nuclear energy and carbon capture, utilization and storage (CCUS) technologies will reduce the burden of renewable energy project construction, but this will largely depend on the political situation and future costs. Coal (which has no CCUS to address its carbon emissions) is likely to be phased out, and hydrogen power plants, which contribute to grid stability, are likely to generate more electricity.

Although energy investment has increased, the proportion of GDP has remained unchanged

The annual total investment in the energy sector is expected to grow at a rate of 2%~4% per year (this rate is roughly in line with the growth of global GDP), and by 2040, the total investment will reach 20,000~3.2 trillion US dollars.Increasing regulation of decarbonization in various countries has led to a decline in demand for fossil fuels. However, in 2040, the proportion of fossil fuel investment will still be between 20%~40% (excluding transmission and distribution). This is partly due to the fact that the development costs of fossil fuel projects are increasing, while the development costs of green technologies are decreasing.

Overall, the focus of investment will gradually shift from fossil fuels to green technologies and transmission and distribution. In 2015, investment in renewable energy power generation and decarbonization technologies accounted for only 20% of the total investment, and by 2040, this proportion will reach 40%~50%.Investment in decarbonization technologies will have the highest annual growth rate of 6%~11%, mainly benefiting from the strong development of EV charging infrastructure and CCUS. By 2040, the majority of decarbonization investments are expected to be in charging infrastructure and CCUS.

In a more aggressive scenario, total operating expenditures (e.g., fuel costs) continue to decline as investments increase as investments shift toward capex-intensive technologies such as renewables.

Although the absolute proportion of investment in the energy sector to GDP has increased, the proportion of investment in the energy sector to GDP has remained stable at 1.2%~2.2% in all years and forecast scenarios.

The development of energy transition is at risk of slowing down

Delivering on global climate commitments will require a coordinated response from different regions and industries, but even in the mildest transition scenario, there are multiple bottlenecks that need to be overcome, including land availability, energy infrastructure availability, manufacturing capacity, consumer affordability, investment willingness and material availability.The risks associated with developing green hydrogen will be relatively high, as green hydrogen requires the highest demand for infrastructure and scale, as well as the scale of investment required.Most energy transition technologies rely on scarce materials, especially electric vehicles and wind power, which will be constrained by material supply bottlenecks.Cost reduction remains a serious challenge. Electric vehicles and heat pumps are expected to be the first to be economically viable, but significant upfront investment is still needed to achieve this vision, and renewables will be cost-competitive under the "accelerating the transition" and "delivering on promises" scenario.In addition, these bottlenecks could limit the development of currently known technologies, and shortages could lead to a spike in energy prices, but they would also create new investment opportunities and drive innovation.