World Energy Outlook: The road ahead is uncertain, but the transition needs to move forward

In the past two years, geopolitical conflicts and energy shortages in Europe have changed the global energy landscape. The sustainable development issue, which originally occupied the "C position", began to temporarily give way to the security of energy, the rationality of prices and the competitiveness of the industry, and the power of energy transformation has weakened. In fact, the prospects for the energy transition depend on a number of variables and their interdependence. Changing costs, the pace of technological progress, and policy uncertainty mean different energy paths, making the future of fossil fuels even more uncertain. What is clear, however, is that the goal of limiting global warming to 1.5 degrees Celsius is increasingly difficult to achieve. Still, record growth in areas such as electric vehicles and renewable energy will accelerate the world's progress towards a net zero emissions future.

The latest edition of Wood Mackenzie's World Energy Outlook 2023 predicts that solar and wind will account for the largest share of the global energy mix by 2040. Realizing this prospect requires sufficient investment, both in support of renewables and in fossil fuels, to provide mobility for renewable energy development. Total energy investment is expected to increase from $1.5 trillion in 2021 to $2 trillion to $3.2 trillion in 2040, but its share of GDP may not change significantly. In the dilemma of securing energy supplies on the one hand and protecting the habitability of the planet on the other, the energy industry, especially the fossil energy industry, has a difficult road ahead.

Whether the supply chain can keep pace with the energy transition is a challenge that the energy industry must address today and in the foreseeable future. Material shortages, production bottlenecks, and insufficient 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 status quo of the global energy transition, predicting the speed and warming of the energy transition with five different scenario models and assumptions, revealing the difficulties and challenges that will be faced in the energy transition process, or can be a breakthrough for the fossil energy industry.

The energy transition has a rocky road ahead

Wood Mackenzie forecasts five different scenarios, and the broad conclusion is that the global energy transition is accelerating, but the future path of the energy transition is full of uncertainty, whether from the perspective of technological development, geopolitical risk or consumer behavior, and it is extremely difficult to develop effective resilient investment strategies to cope with different forecast scenarios. It also means that policymakers, like a computer's operating system, must be able to multitask, for example, in order to achieve the long-term goal of decarbonization while also considering the short-term economic returns.

Wood Mackenzie's forecast scenarios are based on different underlying assumptions, such as assumptions about the pace of technological processes and the level of policy implementation. Large reductions in carbon emissions are achieved under different scenarios, but most of them range from 1.6 to 2.9 degrees Celsius of global warming, compared with the target of 1.5 degrees Celsius. The 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 keep warming below 1.5 degrees Celsius, carbon emissions must be greatly reduced, and the next decade of carbon reduction is the most critical.

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

Wood Mackenzie's World Energy Outlook 2023 report predicts that global demand for fossil fuels will peak in 2030. While coal demand will decline significantly in the coming years, demand for natural gas and oil will still 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 peaking in renewable energy generation, total gas demand will continue to increase until large-scale battery storage targets are achieved. The outlook for gas demand in 2040-2050 varies depending on the scenario, with steady growth in the most conservative scenario and a sharp decline in renewables and electrification under the "accelerated transition" scenario.

Aggregate oil demand will continue to rise through most of 2030; There will be a decline after 2030, but the decline in oil demand varies widely between different scenarios. Under the "keep the promise" scenario, oil demand will almost halve by 2050, driven by slower growth in car ownership, more efficient road transport engines and continued electrification of transport. In the "transition deceleration" scenario, oil demand will decline by only 3% over the same period, due to material and infrastructure constraints, slower global vehicle electrification, and limited use of alternative fuels in aviation, maritime, and chemicals.

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

Renewable energy is extremely cost competitive and will therefore continue to grow rapidly. In many parts of the world, renewable energy generation has the lowest construction costs, and thus has become the first choice for the construction of new power generation facilities. By 2030, renewable energy will account for 45 to 50 percent of global electricity generation, and 65 to 85 percent by 2050, with solar contributing the most, followed by wind. By 2050, renewable energy demand will double or even triple compared to today, but emissions from electricity generation will be reduced by 17% to 71%. However, the construction of renewable energy projects also faces the challenges of supply chain shortages, cumbersome and time-consuming approval procedures, and related issues such as the construction of power grids. The use of nuclear power and carbon capture, utilization and storage (CCUS) technology will ease the burden of building renewable energy projects, but much depends on the political situation and future costs. Coal (which has no CCUS to deal with its carbon emissions) could be phased out, and hydrogen power plants, which help improve grid stability, could generate more electricity.

Energy investment has increased, but its share of GDP has remained the same

Total annual investment in the energy sector is expected to grow by 2% to 4% per year (a rate roughly in line with global GDP growth), reaching $20,000 to $3.2 trillion by 2040. The increasing regulation of decarbonization has led to a decline in demand for fossil fuels. However, in 2040, the share of fossil fuel investment will still be between 20% and 40% (excluding transmission and distribution). This is partly due to the increasing cost of developing fossil fuel projects, while the cost of developing green technologies is falling.

Overall, the investment focus will gradually shift from fossil fuels to green technologies and transmission and distribution. In 2015, investment in renewable power generation and decarbonization technologies accounted for only 20% of the total investment, but by 2040, the share will reach 40% to 50%. Investments in decarbonization technologies will have the highest annual growth rate, ranging from 6 to 11 percent, driven by strong growth in EV charging infrastructure and CCUS. The majority of decarbonisation investment by 2040 is expected to be in charging infrastructure and CCUS.

In the more aggressive scenario, investment increases while total operating expenses (such as fuel costs) fall, as investment shifts toward capex intensive technologies such as renewable energy.

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

The development of energy transition faces the risk of slowing down

Delivering on global climate commitments will require a coordinated response across regions and sectors, but even in the mildest transition scenario, there are multiple bottlenecks that need to be overcome, including land availability, energy infrastructure, manufacturing capacity, consumer affordability, investment willingness, and material availability. The risks of developing green hydrogen will be relatively high, because green hydrogen has the highest demand for infrastructure and scale development, and the scale of investment required is also large. Most energy transition technologies rely on rare materials, and electric vehicles and wind power in particular will be constrained by material supply bottlenecks. Reducing costs remains a serious challenge. Electric vehicles and heat pumps are expected to be the first to become economically viable, but significant upfront investment is still needed to achieve this vision, and renewables will be cost-competitive under the "accelerated transition" and "deliver on the promise" scenarios. In addition, these bottlenecks could limit the development of currently known technologies, and shortages could lead to a spike in energy prices, but this would also create new investment opportunities and drive innovation.