Energy Transition Hits Some Inconvenient Economic Trends

The worldwide energy transition is running into difficult economic realities, two speakers said Tuesday at an energy conference in Oklahoma City, Oklahoma, organized by the Federal Reserve Banks of Kansas City and Dallas.

Ken Medlock III, senior director of the Center for Energy Studies at Rice University (Houston, Texas), told conference attendees that China plans to bring on 100 new coal mines by 2026. "The non-OECD countries, which comprise about 6.8 billion people, is where the energy action is today and likely will be for the foreseeable future. Demand for coal is huge and rising, and most of that demand will take place in non-OECD Asian nations."

He added that today, India is where China was around 2000--poised to embark on a huge surge in energy demand, most of which will be met through hydrocarbons.

"The developing world is leaning into oil, gas and coal," Medlock said. But he added that long-term projections like his were, by their nature, "notoriously horrible and unreliable."

He did add that renewable energy, such as solar and wind, are growing rapidly, over 20% per year on a compound annual growth rate (CAGR), but they start from a small base compared to coal, oil and natural gas.

The growing electrification of the world will be dominated by fossil fuels, he predicted, adding that two-thirds of the world's oil production today comes from national oil companies, which increasingly are led by OPEC+.

Bernadette Johnson, vice president of strategic analytics for Enverus (Austin, Texas), told conference attendees that, in the U.S. at least, "it is much harder and riskier to make money in renewable energy than it used to be. The market is really hard, and there a lot of risks and costs ahead."

She listed over a dozen global forces that could affect future demand for renewable energy, including the future demand for hydrocarbons, the evolution of emissions markets, digitization of the utility industry, progress on infrastructure, energy end uses, energy storage and the ability of renewable developers to obtain financing on acceptable terms.

On the financing issue, she noted that internal rates of return (IRR) for oil and gas investments are greater than they are for renewable energy investments. "Renewable investments are improving for renewables, but they don't hold a candle to oil and gas investments."

"Money managers are starting to back away from funding solar and wind projects and are instead moving to oil and gas investments, which provide higher returns."

She said another obstacle facing renewable energy development, at least in the U.S., is lack of federal funding. She said the Inflation Reduction Act provided no funds for transmission projects. However, another recent federal law, the Infrastructure Investment and Jobs Act, did set aside billions to spur transmission project construction.

Against this backdrop, Johnson showed projections that global electric demand will rise by 116% by 2050. "Electrification is happening, people are using more electricity," she told conference attendees."

The scope of problems facing energy transition is huge, orders of magnitude harder than we once expected. Energy markets are complex and intertwined, even if you don't think they are. It's not a question of building more solar farms."

"Plus, in the U.S., the interconnection queues are full. We estimate that 80% of proposed renewable energy projects don't happen."

"We can get to cleaner energy," Johnson concluded, "but if we exclude natural gas from the equation, it's going to require a lot of money and we'll probably need some technology breakthroughs in hydrogen and geothermal," as well as long-duration energy storage.

Contact us?for more information.

If you want more news,?click here.