On October 27th, the International Energy Agency (IEA) published its World Energy Outlook 2022 (WEO 2022) (1). This landmark report charts a path to exit the energy crisis by transforming the energy system to limit global warming to 1.5°C. To follow it, the age of fossil fuels must swiftly end and be replaced by a clean energy and efficiency era, thus requiring a total transformation of the energy investment landscape. For financial institutions, this notably means following two key complementary rules: 1) ending all financial services to fossil fuel development, and; 2) massively ramping up clean energy and efficiency investment, thus investing nine times more in it than in fossil fuels by 2030. 

The age of fossil fuels is coming to an end…

According to the IEA, and for the first time, fossil fuel demand and production will decline even if the world goes on with “business as usual”. Merely upholding current climate pledges – as in the IEA’s Announced Pledges Scenario (APS) – significantly accelerates this movement, sending the demand for all and each fossil fuels into decline by 2030 

Natural gas is not shielded from this movement, on the contrary the Russian war and energy crisis ended the “transition fuel” narrative that the gas industry spent so long to advertise 

Concretely, each and all fossil fuels are the energy of the past, not the future, and no longer a sound investment for the sector. However, this does not mean the energy and climate transition will happen at a pace sufficient to address the climate crisis and reach carbon neutrality by 2050. 

…And we must end it much faster if we are to avoid catastrophic global warming

The use of each fossil fuel drops significantly by 2030 and drastically by 2050 in the IEA’s Net Zero by 2050 (NZE) scenario consistent with global warming above 1.5°C. Coal, gas and oil energy supply decline respectively by 47, 23 and 22% by 2030 already, and by as much as 69, 51 and 47% from 2030 to 2040. Globally, the share of total final consumption for energy directly provided by unabated fossil fuels falls from nearly 60% in 2021, to around 45% in 2030, and to only 5% by 2050. 

The fast-reducing fossil fuel demand means that no new fossil fuel supply projects are needed in the NZE. The IEA underlines that No one should imagine that Russia’s invasion can justify a wave of new oil and gas infrastructure in a world that wants to reach net zero emissions by 2050.” Similarly, there is no further need for additional LNG capacity beyond what exists or is under construction. 

The new era is the one of renewable power generation and clean energy…

Electricity “becomes the new linchpin of the global energy system” in the NZE scenario, providing more than half of total final consumption and two-thirds of useful energy by 2050.  For this increased electricity use to be compatible with climate mitigation, electricity sectors reach net zero emissions by 2035 in advanced economies, and by 2040 globally in the NZE.  

These milestones are achieved thanks to massive renewable energy deployment. Annual renewable capacity additions quadruple from 290 GW in 2021 to nearly 1 200 GW in 2030, and averages above 1 050 GW from 2031 to 2050. These additions bring the share of renewables in electricity generation from 28% in 2021 to over 60% in 2030, and nearly 90% in 2050. Wind and solar take the lion’s share of this growth. Their integration is facilitated by capacity additions of hydropower and other dispatchable renewables tripling and global battery capacity reaching 15% of all dispatchable power capacity by 2030.  

Displaced by renewables, the share of fossil fuels in power generation falls even faster than in the total energy supply: 

  • Unabated coal in global electricity generation falls rapidly from 36% in 2021 to 12% in 2030, and to zero percent by 2040 and beyond. “No new unabated coal fired plants are needed” in the NZE.  
  • Natural gas-fired generation peaks by 2025 before starting a long-term decline. By the time the global electricity sector reaches net zero emissions in 2040, the unabated use of natural gas is 97% lower than it was in 2021.  
  • So-called “low-carbon” power generation with fossil fuels develops but remains rare, making up for 3-5% of global electricity generation in 2050. 

 Energy savings from efficiency as well as behavioral changes are fundamental to facilitate a much faster rise in the share of clean electricity supply. They amount to around 110 EJ compared to “business as usual” by 2030 in the NZE scenario, equivalent to total final energy consumption of China today. This enables total energy supply to decline by 10% over the coming decade. 

…And it requires financial institutions to set a new investment landscape

Energy investment accounted for just over 2% of global GDP annually between 2017 and 2021, and this rises to nearly 4% by 2030 in the 1.5°C Scenario Fossil fuel investment progressively drops, replaced by a clean energy investment surge:  

  • Annual spending on the fossil fuel supply falls from its current level of around USD 830 billion to around USD 455 billion in 2030 (about half of the levels seen over the past five years). These lasting fossil fuel investments are used to ensure that supply from existing fossil fuel projects does not fall faster than the decline in demand and to reduce emissions from the fossil fuel supply chain20.   
  • Clean energy investment reach USD 4.2 trillion in 2030, more three times their 2021 level21, compared to a mild 25% increase in 2022 compared to the 2017-2021 average. Private sources are the main contributor to the clean investment surge, with around 70% of the total in 2030. 

Concretely, for every USD 1 spent globally on fossil fuels in 2030, more than USD 9 is spent on clean energy in the NZE.  

To conclude, the new energy landscape that appears in the WEO 2022 can be boiled down to two complementary key rules for financial institutions: 1) Ending all financial services to new fossil fuel production and LNG projects and the companies that develop them; 2) Immediately ramping up clean energy investment – prioritizing wind, solar, energy efficiency and energy grid investment – to reach a ratio of USD 9 invested in it for every USD 1 spent on fossil fuels. While these rules are not sufficient to ensure the alignment of a financial institution with climate goals, disregarding them means failing yet another litmus test for climate credibility and responsibility. 

 

Read our note on WEO 2022

Notes:

  1. IEA, World Energy Outlook 2022, 2022