[Burning issue] World Energy Outlook Report 2022

energy

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Context

  • Recently, the International Energy Agency released its flagship World energy outlook report. The report analyses the current and future energy of the world and specific regions.
  • In this context, this edition of the burning issue is highlighting the key observations made in the report about the energy scenario of the world and the relevant way forward.

About the WEO Report

  • The World Energy Outlook report is the International Energy Agency’s annual publication
  • and is recognized as the authoritative source for global energy projections and analysis.
  • The report presents detailed projections of production, energy demand, trade and investment, and fuel by fuel region-wise.
  • It offers crucial insights into the world’s energy demand and supplies under various scenarios and the implications for energy security, climatic goals, and economic growth.

Three Possible Scenarios

The Outlook has explored three scenarios that provide a framework for thinking about the future of energy and exploring the implications of various policy choices, investment trends, and technology dynamics. The scenarios are:  

  • Stated Policies Scenario (STEPS): which looks not at what governments say they will achieve, but at what they are actually doing to achieve the targets and objectives they have set out, and assesses where this leads the energy sector.  
  • Announced Pledges Scenario (APS): which examines where all current announced energy and climate commitments – including net zero emissions pledges as well as commitments in areas such as energy access – would take the energy sector if implemented in full and on time.  
  • Net Zero Emissions by 2050 Scenario: which maps out a way to achieve a 1.5 °C stabilization in global average temperature and meet key energy‐related UN Sustainable Development Goals. 

Key findings of the report – World View

(A) Global energy crisis and the world economy:

  • Russia’s invasion of Ukraine has sparked a global energy crisis. According to the report, Russia’s actions have turned a rapid economic recovery from the pandemic into full‐blown energy turmoil.
  • The crisis has stoked inflationary pressures and created a looming risk of recession, as well as a huge USD 2 trillion windfalls for fossil fuel producers above their 2021 net income.

(B) Is the crisis a boost, or a setback, for energy transitions?

  • With energy markets remaining extremely vulnerable, today’s energy shock is a reminder of the fragility and unsustainability of our current energy system. A key question for policymakers is whether the crisis will be a setback for clean energy transitions or will catalyze faster action.
  • Climate policies and net zero commitments were blamed in some quarters for contributing to the run‐up in energy prices, but there is scant evidence for this.
  • In the most affected regions, higher shares of renewables were correlated with lower electricity prices, and more efficient homes and electrified heat have provided an important buffer for some – but far from enough – consumers.

(C) Policy responses are fast‐tracking the emergence of a clean energy economy

  • New policies in major energy markets help propel annual clean energy investment to more than USD 2 trillion by 2030.
  • Clean energy becomes a huge opportunity for growth and jobs, and a major arena for the international economy. As markets rebalance, renewables, supported by nuclear power, see sustained gains; the upside for coal from today’s crisis is temporary.
  • The increase in renewable electricity generation is sufficiently fast to outpace growth in total electricity generation, driving down the contribution of fossil fuels for power competition.

(D) Fossil fuel peak into view now

  • For the first time, a WEO scenario based on prevailing policy settings has the global demand for each of the fossil fuels exhibiting a peak or plateau.
  • In the STEPS, coal use falls back within the next few years, natural gas demand reaches a plateau by the end of the decade, and rising sales of electric vehicles (EVs) mean that oil demand levels off in the mid‐2030s before ebbing slightly to mid‐century.
  • Global fossil fuel use has risen alongside GDP since the start of the Industrial Revolution in the 18th century: putting this rise into reverse while continuing to expand the global economy will be a pivotal moment in energy history.

(E) Led by clean electricity, some sectors are poised for a faster transformation

  • Investments in clean electricity and electrification, along with expanded and modernized grids, offer clear and cost‐effective opportunities to cut emissions more rapidly while bringing electricity costs down from their current highs.
  • Today’s growth rates for the deployment of solar PV, wind, EVs and batteries, if maintained, would lead to a much faster transformation than projected in the STEPS, although this would require supportive policies not just in the leading markets for these technologies but across the world.
  • Supply chains for some key technologies – including batteries, solar PV and electrolyzers – are expanding at rates that support higher global ambition.

(F) Efficiency and clean fuels get a competitive boost

  • Today’s high energy prices underscore the benefits of greater energy efficiency and are prompting behavioral and technology changes in some countries to reduce energy use.
  • Demand for cooling needs to be a particular focus for policymakers, as it makes the second‐ largest contribution to the overall rise in global electricity demand over the coming decades (after EVs).
  • In the STEPS, cooling demand in emerging and developing economies rises by 2 800 terawatt‐hours by 2050, which is the equivalent of adding another European Union to today’s global electricity demand.
  • This growth is reduced by half in the APS because of tighter efficiency standards and better building design and insulation bolstered by stronger policy support – which are brightening the prospects for many low‐emissions fuels.

However, there is a FLIP SIDE too

(A) Rapid transitions ultimately depend on investment

  • A huge increase in energy investment is essential to reduce the risks of future price spikes and volatility and to get on track for net zero emissions by 2050.
  • From USD 1.3 trillion today, clean energy investment rises above USD 2 trillion by 2030 in the STEPS, but it would have to be above USD 4 trillion by the same date in the NZE Scenario, highlighting the need to attract new investors to the energy sector.
  • Governments should take the lead and provide strong strategic direction, but the investments required are far beyond the reach of public finance. It is vital to harness the vast resources of markets and incentivize private actors to play their part.
  • Shortfalls in clean energy investment are largest in emerging and developing economies, a worrying signal given their rapid projected growth in demand for energy services.

(B) What if transitions don’t pick up?

  • If clean energy investment does not accelerate as in the NZE Scenario then higher investment in oil and gas would be needed to avoid further fuel price volatility, but this would also mean putting the 1.5 °C goal in jeopardy.
  • In the STEPS, an average of almost USD 650 billion per year is spent on upstream oil and natural gas investment to 2030, a rise of more than 50% compared with recent years. This investment comes with risks, both commercial and environmental, and cannot be taken for granted.

India-specific observations in the report

  • Coal and gas production to peak: India’s coal generation and oil imports are going to peak in 2030, while gas imports will double around the same time.
  • Challenge of electricity sufficiency: The primary challenge for the country is going to be about meeting its rising electricity demand. It said India will have to find out ways to meet this increasing demand with renewables and nuclear on a scale that is large enough to reduce the use of “unabated coal‐fired generation”, which provides nearly three‐quarters of the electricity supply currently.
  • 2nd Largest coal producer now: It revealed that India became the world’s second‐largest coal producer in 2021 (in energy terms), overtaking Australia and Indonesia, and that it plans to increase domestic production by more than 100 million tonnes of coal equivalent (Mtce) by 2025 from the current levels.
  • Again rise in coal demand: Coal demand in India rose rapidly between 2010 and 2019, mainly as increases in electricity demand were largely met through coal‐fired power. Coal use in India dropped by 7 percent in 2020 due to the pandemic, but increased by 13 percent in 2021, therefore already surpassing the 2019 levels.
  • Rising energy demand: India becomes the world’s most populous country by 2025 and, combined with the twin forces of urbanisation and industrialisation, this underpins rapid growth in energy demand, which rises by more than 3 percent per year in the stated policies scenario (STEPS) from 2021 to 2030. It sees the largest increase in energy demand of any country,
  • Possible energy security: Even though India continues to make great strides with renewables deployment and efficiency policies, the sheer scale of its development means that the combined import bill for fossil fuels doubles over the next two decades in the STEPS, with oil by far the largest component. This points to continued risks to energy security. 
  • Oil imports to peak soon: Coming to oil imports, the IEA found that in the APS, India’s oil imports will peak in the 2030s and fall below the current level by 2050.

What should be done for a better energy transition

  • Affordable transition: A focus on affordable, secure transitions based on resilient supply chains from non-renewables to renewables should be made. A new energy security paradigm is needed to maintain reliability and affordability while reducing emissions. The Outlook includes ten principles that can help guide policymakers through the period when declining fossil fuel and expanding clean energy systems co‐exist.
  • Scale up clean energy technologies: Synchronise scaling up a range of clean energy technologies with scaling back fossil fuels.
  • Promote energy efficiency also: Tackle the demand side and prioritize energy efficiency. The energy crisis highlights the crucial role of energy efficiency and behavioral measures to help avoid mismatches between demand and supply.
  • Inclusive energy economy: Reverse the slide into energy poverty and give poor communities a lift into the new energy economy.
  • Bring down the cost: Collaborate to bring down the cost of capital in emerging markets and developing economies. The cost of capital is a signal of the real and perceived risks associated with the investment, and it is higher in many emerging markets and developing economies than elsewhere.
  • Promote supply chain resilience: Ensure diverse and resilient clean energy supply chains. High and volatile critical mineral prices and highly concentrated supply chains could delay energy transitions or make them more costly.
  • Foster the climate resilience of energy infrastructure: The growing frequency and intensity of extreme weather events present major risks to the security of energy supplies.

Conclusion

  • The energy crisis promises to be a historic turning point towards a cleaner and more secure energy system. The alignment of economic, climate and security priorities has already started to move the dial toward a better outcome for the world’s people and the planet.
  • Much more remains to be done, and as these efforts gather momentum, it is essential to bring everyone on board, especially at a time when geopolitical fractures on energy and climate are all the more visible. This means redoubling efforts to ensure that a broad coalition of countries has a stake in the new energy economy.
  • The journey to a more secure and sustainable energy system may not be a smooth one. But today’s crisis makes it crystal clear why we need to press ahead.

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