Wind and solar power will need to expand to account for over 50% of global power generation by 2040 for the world to stand a chance of meeting the Paris Agreement’s target of keeping temperature to 2℃ above pre-industrial levels. But this will require an unprecedented marshalling of investment in carbon-curbing technologies, with current expectations that coal, oil and gas could still be making up the vast majority of primary energy supply as the planet heads for a 2.8℃-3℃ rise by mid-century, according to Wood Mackenzie.
Get the market insight you need into the global oil & gas industry's energy transition – from the new newsletter from Upstream and Recharge. Sign up here
The research group, in the ‘base case’ of its latest Energy Transition Outlook (ETO) report, calculates even keeping to this civilisation-threatening temperature rise will cost a total of $25trn over 20 years. In this scenario, electricity’s share of final energy consumption would inch up to reach 26% from 22% today and the “world risk relying on fossil fuels for decades to come”, with oil and gas use not peaking before 2040.
“Considering the pace of hydrocarbon demand decline and the need for some key new technologies [such as as-yet-uncommercialised green hydrogen and carbon capture and storage (CCS)], we are seeing a challenging picture for the energy transition in our [ETO] but also [for]the investment needs to meet the energy demand [forecast],” said David Brown, Wood Mackenzie’s Americas head of markets and transitions, in a briefing.
“Electrification and efficiency improvements slow emissions growth in our [base case] outlook. We see energy emissions peaking at 36.3bn tonnes in 2030 and then falling approximately 4% by 2040, still about 2.6% higher than 2019 levels.”
But fossil fuels are still foreseen supplying around 80% of primary energy supply by 2040, Brown noted, “which is a far cry from the 50% maximum needed for the world to reach net zero by 2050”.
“The challenges that governments are facing has created this surge in sovereign debt where roughly 25% of global GDP [gross domestic production, or $20trn] has been allocated to addressing the Covid crisis, which is pushing debt to historically high levels in some markets.”
“Even with this said, it is our view that the world has an opportunity to tackle the economic recovery and climate change crisis at the same time.”
Kara Nutt, a director within WoodMac’s downstream consulting arm, pointed to the fact that “the sums governments are planning to spend over the next few years [to develop a coronavirus vaccine, offset unemployment, rebuild public health systems and restore economies] are of a similar order of magnitude to those needed to truly tackle climate change”.
“So we do see there is a clear opportunity here to accelerate the [energy] transition.”
We do see there is a clear opportunity here to accelerate the [energy] transition
Despite a doubling of solar and wind plant worldwide in the past five years to 1.25TW, the two sectors’ contribution to total primary energy demand growth was around 25%, with hydrocarbons still making up 75%, meaning renewables “did not even meet the incremental energy demand let alone drive any fuel displacement”.
According to WoodMac’s calculus, the share of solar and wind in total energy will reach 8.5% compared to 2.7% today, rising to 17% if nuclear and hydropower is factored in. In the power sector, however, their growth in the energy mix would equate to 30% by 2040 from 10% this year, with Europe and the US hitting 43% and 52%, respectively, while China gets to 28% by 2040.
The main “obstacle blocking the path” to the world meeting the Paris target is the emissions-intensive capital stock already embedded in the global energy system, according to the ETO, as more than half of the total energy and industrial capacity in the power, cement, steel, refining, chemicals and automotive sectors “is young and needs to last a few decades to run its course”.
Reaching WoodMac’s ‘2℃ scenario’ would require peak energy to be passed by 2023, with primary energy use in 2040 dropping around 25% compared to the base case, while electricity consumption climbs by 14% driven by the increased use of electric vehicles and the effort to “electrify everything”.
“While the world is adding renewable power generation capacity and manufacturing electric vehicles, it is still not enough. No efforts have been made to decarbonise the existing infrastructure. Emissions will continue increasing unless there is an incentive to rationalise the carbon-heavy assets or retrofit it with CCS – a Herculean task without an appropriate tax on carbon,” said Prakash Sharma, WoodMac’s Asia Pacific head of markets and transitions .
Green hydrogen and CCS are seen as “vital” to accelerating the pace of the transition, he said. “Going beyond, to 2℃ or lower, means utilising these technologies rapidly to build on the promise of cheaper renewables and decarbonise difficult-to-abate segments of the economy.”
Brown said: “Using our 2℃ pathway scenario, we estimate that Western Europe and the US can reach net zero emissions by 2050, while China and India will take longer to get there as both are on a different energy transition trajectory.”
“Most energy majors ... have started to ramp up diversification efforts. Internal carbon price assumptions have increased up to $70/tonne or higher for new project FIDs [final investment decisions],” said Sharma. “Capital has followed: not just to renewables, but green hydrogen, fuel cells and CCS projects, energy storage and end-user consumer management.”
“The versatility of green hydrogen is remarkable, with three times the energy content compared to fossil fuels. The declining costs of solar and wind power make green hydrogen an attractive proposition. In some nations, green hydrogen production costs will become competitive with fossil fuel-based hydrogen by 2030.”
“While the challenges facing the commercial deployment of green hydrogen and CCS are daunting, both must be part of the solution if the world is to achieve the Paris goal for global warming. To play that role, the technologies will require sustained policy support.”
Brown added: “If world leaders want to maintain any credibility in pledging commitment to the Paris goals, they will need to do more to show how they intend to achieve them. As things stand, we are not going to get there.”