Fossil fuels to take a back seat in the global energy landscape

29 January 2021 6 min. read
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Covid-19 has caused a short-term dip in global energy demand, while a long-term shift away from oil and other fossil fuels takes on a new pace in the backdrop. A new McKinsey & Company report explores the future of global energy consumption.

McKinsey surveyed over 2,000 executives globally, presenting them with four scenarios on how the economy will emerge from the crisis – each with a varying level of virus containment and policy effectiveness. Based on their responses, the broad expectation is that the virus will be contained and growth with resume in the short term.

Factoring in these expectations, McKinsey & Company modeled the future of energy consumption between now and 2050, with some interesting results. Number one is the Covid-19 impact, which appears to have dented energy demand across all segments – electricity, oil, gas and coal.

Covid-19 impact on energy demand

Travel restrictions, subdued aviation, unused offices and non-existent commutes took energy consumption as a whole down in 2020, although some segments appear to be hit worse than others. With at-home consumption offsetting the lack of commercial usage, electricity saw a relatively small decline.

Oil demand plummeted in the wake of the crisis, making for a much deeper trough than electricity. Natural gas also faced a steep fall, although the most devastating demand shock came in the coal segment.

At the same time, the researchers stress that this is just a minor blip in the big picture – particularly in a scenario where the virus is contained. Demand for electricity and natural gas could break through pre-Covid levels as early as this year if the economy recovers, while oil would bounce back by 2022.

Coal is the outlier here. The fossil fuel might well recover some demand, but pre-Covid levels remain out of the question – owing to the fact that coal demand already peaked back in 2014 and has been on the decline ever since. Indeed, the story of coal actually reflects a more fundamental trend in the global energy landscape – one far more disruptive than Covid-19.

“While the pandemic has certainly provided a substantial shock for the energy sector across all fuel sources, the story of the century is still a rapid and continuous shift to lower-carbon energy systems,” explained Christer Tryggestad – global leader of McKinsey’s Electric Power & Natural Gas and Oil & Gas practices.

The future energy landscape, 2015-2050

The energy mix

As of last year, coal and gas serve the majority of global power needs. Oil and nuclear power also hold a sizeable market share, while renewables remain marginal in their influence. This picture might look a little different by 2050. Power consumption in itself is expected to double over the next three decades according to McKinsey, while renewables will account for more than half of this consumption.

Several factors are at play here – mostly driven by a global shift towards more sustainable life over the last decade and more. Within this theme, fuel is more energy-efficient than ever, while decisive electric vehicle adoption is expected to kick in over the next decade. From an industry perspective, renewable sources will likely become cheaper than fossil fuel plants over the next decade – sparking unprecedented investments in the space.

In the backdrop, a rapid rise can be traced in the production of green hydrogen – sustainably produced, zero-emission liquid hydrogen that can be used as a fuel substitute. Per the report, advances in this space will prove pivotal for energy consumption worldwide.

Peaks in fossil-fuel demand

While good for the planet, these developments are decidedly bad news for fossil-fuel producers. As mentioned, coal demand peaked in 2014 and is already on the dip. By 2050, coal will have seen a 40% drop in demand compared to 2019. Oil and gas have not peaked yet, although the report expects this peak to come in 2029 for oil and 2037 for gas – placing the aggregate fossil-fuel peak at an imminent 2027.

The ensuring decline will take oil down by 10% of current demand levels, while gas’ late peak allows it to still be higher than current levels in 2050. At any rate, current trends are markedly taking global energy consumption to a more sustainable place.

Meeting global warming targets

That being said, this rate of change is what McKinsey refers to as the ‘reference case’ – a scenario where current trends persist as they are. The problem is that the reference case – while on track to sustainability – will still fall short of the 1.5 degree celsius global warming limit set in the Paris climate agreement.

Global energy-related CO₂ emissions

Indeed, the researchers used scenario-based modeling not only for the Covid-19 economic recovery but also for the future of energy. Besides the reference case as things are now, the global energy market could go through an ‘accelerated transition’ scenario or a ‘delayed transition’ scenario. In the former, certain high-impact trends unfold at a rapid pace, speeding up the overall transition process.

The latter marks a scenario where crisis policies fail to lay the foundation for a green transition, pushing everything back by a few years. Irrespective, even these scenarios fall short of the 1.5 degree target. This is where McKinsey’s 1.5 degree pathway comes into play – where the energy transition is driven by ambitious policies, implemented at a global scale.

“There is still a long way to go to avert substantial global climate change. According to our estimates, annual emissions would need to be around 50 per cent lower in 2030 and about 85 per cent lower by 2050 than current trends predict to limit the global temperature increase to 1.5ºC.The importance of policies has increased in the past year. Despite the increased momentum towards decarbonisation, many governments still need to translate ambitious targets into specific actions,” concluded Tryggestad.