Platforms, hope, and a dose of realpolitik: Pondering the future of energy

With the American political conventions now behind us, the future of US energy policy is …. not clear. 

The Republican platform promises more oil-and-gas exploration and opposes the “war on coal.”  Curiously, it also characterizes coal as a clean energy resource, which must be a typo.  The platform opposes a carbon tax to address climate change, which it does not see as a top priority, and it favors the continued development of natural gas resources.  The Democratic platform emphasizes clean energy, while also promising to lower energy bills—something at the moment that is a contradiction.  It barely mentions natural gas, except to say a Clinton administration would incentivize renewables over gas, and it refers to climate change as an “urgent and severe threat to our national security.” 

Both parties are firmly in favor of efficiency and of a more robust electric grid, policies that are as politically brave as praising Mom.  Both daringly oppose over-regulation. 

In important ways, both parties are missing important points. Sorry, Republicans: coal is not clean. Sorry, Democrats:  No one outside that (smoke-free) platform committee room believes it is possible for the country “to be running entirely on clean energy by mid-century.” 

Both platforms, in a sense, are grounded in hope (that coal can be cleaned up, that dealing with climate change will be painless, indeed profitable….)  So I thought it might be useful, by contrast, to highlight some of the findings my McKinsey colleagues have put together.  This work is informed by the work of many other industry experts and is based on a detailed, bottom-up view of energy demand by country, sector and fuel type. It is, in its own way, a hopeful perspective, but it is grounded in reality.

Here are four of the most interesting insights. 

1. Global energy demand will continue to grow, but more slowly—an average of about 0.7 percent a year through 2050 (versus an average of more than 2 percent from 2000 through 2015). The decline in the rate of growth is due to slower population and economic growth, greater efficiency, a decline in European and North American demand, and the global economic shift toward services, which use less energy. For example, in India, the percentage of GDP derived from services is expected to rise from 54 to 64 percent by 2035.  And efficiency is a forthright good-news story. By 2035, the McKinsey research anticipates that it will take almost 40 percent less fuel to propel a fossil-fueled car a mile than it does now.  By 2050, global “energy intensity”—that is, how much energy is used to produce each unit of GDP—will be half what it was in 2013.  That may sound optimistic, but is based on recent history.  From 1990 to 2015, global energy intensity improved by almost a third, and it is reasonable to expect the rate of progress to accelerate. 
2. Demand for electricity will grow at twice the rate of all other energy sources; China and India will account for 71 percent of new capacity. By 2050, electricity will account for a quarter of all energy demand, compared to 18 percent now. How will that additional power be generated?  More than three-quarters of new capacity (77 percent), my colleagues forecast, will come from wind and solar, 13 percent from natural gas, and the rest from everything else.  The share of nuclear and hydro is also expected to grow, albeit modestly.
   
   What that means is that by 2050, non-hydro renewables will account for more than a third of global power generation—a huge increase from today’s 6 percent.  To put it another way, between now and 2050, wind and solar are expected to grow four to five times faster than every other source of power. 
3. Fossil fuels will dominate energy use through 2050 because of the massive investments that have already been made, and also because of their superior energy intensity and reliability. The mix, however, will change. Gas will continue to grow quickly, but the global demand for coal will likely peak around 2025. Growth in the use of oil, which is predominantly used for transport, will slow down, as vehicles get more efficient and more electric. By 2050, coal will be down to just 16 percent of global power generation (from 40 percent now) and fossil fuels to 38 percent  (from 66 percent now).  Overall, though, coal, oil, and, gas will continue to be 74 percent of primary energy demand, down from 82 percent now. After that, the rate of decline is likely to accelerate. 
4. Energy-related COemissions will rise 14 percent in the next 20 years. Around 2035, though, they will flatten and then fall, for two main reasons. First, cars and trucks will be cleaner, due to more efficient engines and the deployment of electric vehicles (EVs). In a scenario where the global sales of EVs (including hybrids and battery-powered plug-ins) could be as high as 50 percent, “peak oil” —in terms of demand, not supply—could come as soon as 2030.  Second, there is the shift in the power industry toward gas and renewables discussed above.  The countervailing trends are that there are likely to be some 2 billion more people by 2035 and global GDP will rise by about half over that period.  All those people will need to eat and work, and that means more energy.   

The world is full of unpredictable and sometimes wonderful surprises, so I accept that these numbers are unlikely to be perfect.  As with any forecast, they are based on assumptions— about China, for example, as well as about oil prices, economic growth, and the rate of technological change. Other sources see different outlooks.  But our work is based on an analysis of current conditions, historical data, and country-level assessments—the world as it is, not as what we would like it to be.

The role of the next US administration—and the one after, and the one after that—will be to consider, respond, and adapt to these dynamics.  And, perhaps, to do so with not only reality in mind but also a sense of proportion, even of humility.  Because one of the major findings that cuts across all these trends is that while the actions of the United States matter, in global terms, the more important action is elsewhere.