IEA Identifies Four Scenarios for Rebuilding Global Energy Markets

Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--The global challenges facing governments and energy companies are similar to the questions governments face after a war or natural disaster: In rebuilding, should we limit ourselves to recreating the system as it was? Or should we build differently for the future, using recently acquired knowledge to fix structural problems to create a system that is different and superior to the previous one?

That, in essence, is how the International Energy Agency (IEA) (Paris, France) frames the global energy and environmental challenges confronting a world still being reshaped by the COVID-19 pandemic. In its flagship publication, World Energy Outlook 2020, released October 13, the IEA created four scenarios--two were variants of "business as usual" and two envisioned more aggressive government action--that government leaders, energy companies and non-governmental organizations could use to guide their actions over the next decade or so.

Capital outlays and government policies will go a long way in determining which, if any, of the four scenarios will be pursued by governments, energy companies, financiers and others as the world simultaneously tries to manage the current COVID-19 pandemic and plan for a post-coronavirus future.

Click on the image at right to see how primary energy demand would rise or fall under its four scenarios between 2019 and 2040.

Here is how the energy agency described the two "business as usual" scenarios:

The Stated Policies Scenario (STEPS) is based on today's policy settings and an assumption that the pandemic is brought under control in 2021. In this scenario, global GDP also returns to pre-crisis levels in 2021, and global energy demand in early 2023, but outcomes vary sharply by fuel. Renewables meet 90% of the strong growth in global electricity demand over the next two decades, led by continued high levels of solar PV deployment, but global coal use never gets back to previous levels. By 2040, coal's share in global energy demand dips below 20% for the first time in modern energy history.
• In the Delayed Recovery Scenario (DRS), the same policy settings lead to different energy outcomes because a prolonged pandemic has deeper and longer lasting economic and social impacts. Global GDP does not recover to pre-crisis levels until 2023, and global energy demand only returns in 2025. Oil demand flattens out below the 100 million-barrels-per-day (BBL/d) mark, some 4 million BBL/d below the level in the STEPS. Behavioral changes due to the pandemic affect the oil outlook in multiple ways, but the DRS, like the STEPS, does not yet show oil demand reaching a clear peak.

The IEA provided detailed projections of energy supply and demand, by fuel and global region, for only one of the "business as usual" cases--the Stated Policies scenario--and one of the more aggressive scenarios, the Sustainable Development scenario.

Before moving on to IEA's description of its two more aggressively interventionist scenarios, here's what the agency projected about North American energy supply and demand for the Stated Policies scenario through 2040:

• Oil production in the U.S., Canada and Mexico rises from 23 million BBL/d in 2018 (baseline year) to 27.7 million BBL/d in 2025 and 28.9 million BBL/d in 2030 before falling to 27.3 million BBL/d in 2040.
• Oil demand across North America falls from 22.8 million BBL/d in 2018 to 22.1 million BBL/d in 2025, 21.7 million BBL/d in 2030 and 19.3 million BBL/d in 2040.
• Natural gas production from those three countries rises from 38.1 trillion cubic feet (Tcf) in 2018 to 45.3 Tcf in 2025, 45.9 Tcf in 2030 and 46.4 Tcf in 2040.
• Natural gas demand in the three-nation region rises from 37.4 Tcf in 2018 to 40.6 Tcf in 2025, 40.9 Tcf in 2030 and 41 Tcf in 2040.
• Coal production in North America falls from 581 million tons in 2018 to 331 million tons in 2025, 253 million tons in 2030 and 178 million tons in 2040. Production falls 5.2% per year on a compounded basis between 2019 and 2040.
• Coal demand across the U.S., Canada and Mexico falls from 497 million tons in 2018 to 266 million tons in 2025, 204 million tons in 2030 and 125 million tons in 2040, for a compound annual decline of 5.7% over the 2019-2040 period.

The World Energy Outlook 2020 noted that the two "business as usual" scenarios "produce a much slower rebound in (carbon dioxide) emissions than was seen after the 2008-09 financial crisis. However, they do not deliver a decisive break in the trend for (growing) global CO2 emissions. A slightly lower trajectory for emissions in the Delayed Recovery scenario than in the Stated Policies case is due to reduced economic activity, rather than structural changes in the way that energy is consumed or produced. A higher carbon intensity of the economy in this scenario illustrates the peril of mistaking low growth for a solution to climate change."

The two "business as usual" cases would seem to offer less risks and lower amounts of investment compared to the two more aggressive scenarios IEA developed.

The IEA also created two other scenarios, where governments move more aggressively to rebuild energy systems using cleaner resources in order to minimize CO2 emissions and counter rising temperatures. Both scenarios envision broader and deeper government actions to structurally transform the energy sector. These other two scenarios, described below, "require massive investment in new, more efficient and cleaner capital stock."

• The Sustainable Development scenario sees a near-term surge of investment in clean energy technologies over the next 10 years. Along with action to reduce emissions from existing infrastructure, this is enough to make 2019 the definitive peak year for global CO2 emissions. In this case, CO2 emissions are nearly 10 gigatons lower than in the Stated Policies scenario by 2030. Reductions in air pollutant emissions produce significantly cleaner air than experienced during the 2020 lockdowns.
• The Sustainable Development scenario sets out a possible pathway for a very ambitious transformation of the energy sector which incorporates full implementation of existing net-zero pledges for 2050 and earlier. The Net Zero Emissions by 2050 case, explored in detail for the first time in this outlook, sets out what additional measures would be required over the next 10 years to put the world as a whole on track for net-zero emissions by mid-century. Achieving this goal would involve a significant further acceleration in the deployment of clean energy technologies together with wide-ranging behavioral changes.

In projecting energy supply and demand for North America in the Sustainable Development scenario to 2040, the IEA said:

• Oil production in the U.S., Canada and Mexico rises from 23 million BBL/d in 2018 (baseline year) to 25.8 million BBL/d in 2025 before falling to 24.1 million BBL/d in 2030 and 19.9 million BBL/d in 2040. On a compounded rate, production falls 1% per year over the 2019-2040 timeframe.
• Oil demand across North America falls from 22.8 million BBL/d in 2018 to 19.9 million BBL/d in 2025, 17.4 million BBL/d in 2030 and 11.1 million BBL/d in 2040. Demand falls by 3.5% per year on a compounded rate between 2019 and 2040.
• Natural gas production from those three countries rises from 38.1 trillion cubic feet (Tcf) in 2018 to about 44 Tcf in 2025 before falling to 36.5 Tcf in 2030 and 25.7 Tcf in 2040. Over the 2019-2040 period, production falls by 2.2% on a compounded annual basis.
• Natural gas demand in the three-nation region rises from 37.4 Tcf in 2018 to 38.7 Tcf in 2025 before falling to 32 Tcf in 2030 and 22 Tcf in 2040. Demand falls 2.6% on a compounded annual rate between 2019 and 2040.
• Coal production in North America falls from 581 million tons in 2018 to 155 million tons in 2025, 102 million tons in 2030 and 65 million tons in 2040. Productions falls 9.6% per year on a compounded basis between 2019 and 2040.
• Coal demand across the U.S., Canada and Mexico falls from 497 million tons in 2018 to 101 million tons in 2025, 59 million tons in 2030 and 42 million tons in 2040, for a compound annual decline of 10.5% over the 2019-2040 period.

To realize the Sustainable Development scenario, the IEA calculated that energy sector investment would need to rise about 60%, to nearly $3 trillion per year, in the second half of the current decade compared with what it was between 2015-2019. Most of the incremental spend would go to clean energy and electric networks. Around the world, renewables-based power investment doubles to more than $600 billion a year, supported by additional spending on the expansion and modernization of electricity networks and battery storage, while nuclear investment rises by 80%. On the demand side, heavy incremental investment would be required to increase the efficiencies of buildings, industrial processes and transportation. Spending also would need to rise for research, development and deployment of electric vehicles and carbon capture, utilization and storage (CCUS).

Click on the image at right to see an estimate of energy capital spending to hit the goals of the Sustainable Development scenario in fuels production, electric power and end-use technologies.

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