What will the future of energy look like? by Scott Nyquist

I’ve said a number of times that I won’t predict things like oil prices. I’m sticking to that, but of course others are braver. Three good sources are the International Energy Agency (IEA), the US Energy Information Administration, and my own company, McKinsey, which does a regular Global Energy Perspective. I thought it might be interesting to see what they have in common—and not.

The most important thing to know is that in important ways, the sources agree.

Renewables strengthen: All three see an optimistic—even sunny—future for sources of renewable energy, notably wind and solar. In its annual World Energy Outlook, the IEA noted that, in 2016, for the first time solar and wind net capacity additions exceeded that of coal and gas—119 gigawatts to 79 (Note: capacity measures the maximum that a given facility could produce, not what it does. Given the intermittency of wind and solar, their actual output is usually considerably less than the headline number.)

Depending on the regional environment—both in terms of weather and of policies—renewables are now often the low-cost option, according to McKinsey. Sharply falling battery prices will further improve the economics. In the period to 2050, it estimates that about 80 percent of future capacity will be in the form of renewables, followed by gas, with the majority from China and India. After 2030, solar and wind, McKinsey says will grow an astonishing five times faster than anything else.

The IEA is only slightly less bullish, estimating that renewables will account for two-thirds of global investment. By 2040, it sees renewables accounting for 40 percent of the global power supply—about double the current level. The EIA is less bullish still; although it agrees that renewables will grow the fastest of all options (2.8 percent a year), with two-thirds of that wind and solar, it puts the renewable share of electricity generation at 31 percent in 2040.  

Coal falters: The dirtiest fossil fuel, in terms of both pollution and greenhouse-gas emissions, is unloved but still an important part of the global energy supply. And it is likely to remain so, although it will decline in relative importance. McKinsey estimates peak coal demand comes in 2028, and then begins to decline. That global figure obscures starkly different regional trends. McKinsey sees demand rising in India, Africa, and much of Asia, and falling in Europe, North America, and in particular China (down by 30 percent). The IEA broadly agrees, noting that coal capacity has risen by 900 gigawatts since 2000, and estimating only another 400 by 2040. But energy use rises even faster, so that the overall share of coal declines. So in India, for example, while considerably more coal is used in 2040, its share of power actually falls, to less than half of the total in 2040. The EIA’s numbers are slightly different for India, but in the same direction.

While coal’s future looks decidedly shaky, not so for other fossil fuels, which all sources see continuing to be of major importance as the demand for power and energy continues to grow, particularly outside the OECD. Even if electric vehicles begin to gain considerable market share, for example, oil will still be needed for aviation, freight, and petrochemicals. And it is likely that additional natural gas resources will be exploited—at the brisk rate of almost 2 percent a year to 2040 in non-OECD countries, according to the EIA. Here is the EIA’s take on future consumption patterns, which is broadly similar to the others.

Greenhouse-gas emissions plateau: But not soon, and not far enough to meet the promise agreed to in Paris in 2016 to limit global temperature rises to 2 degrees and preferably less. In every region and sector, “energy intensity” is improving; that is, it takes less power to generate a dollar of GDP. That is why emissions are rising more slowly (or in some countries, falling) even as the global economy grows. The WEO thinks emissions in China—the world’s largest—will flatten by 2030, and that emissions from the power sector will grow only 5 percent by 2040, even as global GDP more than doubles. McKinsey’s projections are similar, with global emissions peaking in 2030 before beginning a very gradual decline. Neither sees the world coming anywhere near the 2-degree pathway, which would require less than 15 gigatons emitted, compared to the estimated 32.8 gigatons, due to increases in industry and transport.

Electric vehicles make inroads: Both agree that the world’s love affair with the car will continue; the WEO projects there will be 2 billion vehicles on the road by 2040, twice as many as now. One implication of that is that for the near future, there will continue to be considerable demand for oil—about 105 million barrels a day by 2040, says the WEO, up from about 96 billion now. Beyond that period, though, things get more interesting. The key question is oil prices. If they stay low, then consumers have little economic reason to switch to electric vehicles (EVs). If they rise, the dynamics change markedly. McKinsey sees oil demand flattening a little sooner, with “peak demand” in 2037, driven by efficiency improvements and the rise of EVs. McKinsey estimates EVs, which now account for less than 1 percent of the global fleet, will hit 20 percent by 2030 (for cars) and 12 percent for commercial vehicles. But given there could be a billion more vehicles on the road, that still means great demand for oil to drive them. According to the EIA, the transportation sector’s share of liquid fuels consumption will be about the same in 2040 (55 percent) as it is now, even though the use of natural gas and electricity triples.

These projections do not—and by definition cannot, account for the unpredictable. There are a number of areas where disruptions could change the trajectory of energy demand and use. For example, the development of large-scale carbon capture and storage could make coal much more attractive; ditto for the development of cheap and ubiquitous battery storage for renewables. The recent history of natural gas, in which the deployment of fracking technology has revolutionized the industry, is a case study in how new and unexpected technologies can make the most thoughtful predictions obsolete.  

That is, of course, why I don’t make them.