On Tuesday, the International Energy Agency (IEA) published a long-awaited report on how the world gets to net-zero carbon emissions by 2050 – its so-called “pathway”.
So overwhelmed was its website by all the people trying to access the report, and the accompanying presentation, that the website crashed.
If we were employees of the fossil fuel industry trying to see what their long-term career prospects were, then I don’t imagine they stayed on the page very long…
“NO NEW FOSSIL FUEL PROJECTS”, go the headlines.
Starting from now. Today. In May 2021.
The IEA, long seen as an advocate and apologist for the fossil fuel industry, has turned on a metaphorical dime and gone powerfully in the other direction.
You see, the IEA has never done this before. It has never tried to offer a practical, data-based pathway for how we actually get from A to B, from our current global energy system to an alternative system.
The alternative system, of course, is one where temperatures don’t rise to dangerous, indeed cataclysmic, levels in the next few decades.
In fact, the IEA has been something of a laughing stock amongst energy transition advocates in recent years, as its miserly forecasts for renewable energy growth up to this point have been completely outpaced by reality.
The (in)famous chart showing its misguided forecasts from the last 20 years can be found here and is well worth a look.
Anyway, the IEA has finally turned it around here, I reckon.
Let us start from the beginning…
Why this report matters
IEA executive director Fatih Birol outlined three things that he observed as the world emerged from the Covid-19 pandemic.
Firstly, records would be broken in terms of electric vehicle (EV) sales.
Secondly, records would be broken in terms of renewable energy generating capacity added worldwide.
That’s great news, but there’s a problem that has emerged with the re-opening of the world economy – as large (and small) countries move beyond lockdowns and restrictions.
Here is the problem, which is the third thing seen by Birol: despite the gains made in those two areas, emissions are still growing strongly.
That’s what motivated the IEA to attempt this report, and why the agency did it now. It wants to show what needs to be done, and when, because we are running out of time.
Many governments have come out and made brilliant commitments, which is very promising, Birol says. But this rhetoric must be backed up by action. The IEA’s report is aimed at helping policymakers decide what actions to take and how soon they need to be taken.
In short, the report is a kind of roadmap.
A couple of weeks ago, when the governments of the UK and the United States announced new and more aggressive emissions reductions targets (UK down 78% by 2035 and the US 50% by 2030), I said that it felt like we’d started a new global arms race, but with the long-term objective of Mutually Assured Salvation rather than the risk of Mutually Assured Destruction.
The latest race is a global contest, with net zero CO2 emissions the goal.
Birol discussed a similar concept, but he made some key points. It’s not a race anyone can win. Rather, it’s a race where everyone needs to finish, or no one wins.
In short, a truly global effort is required.
Collectively, we need to:
- Make the most of existing technologies – like solar, wind, EVs and batteries
- Innovate for new solutions – to decarbonise things like industry, heavy freight, aviation, maritime transport, steel and coal making, and other things we can’t yet do efficiently or economically
- Reduce fossil fuel use – by a lot.
In relation to that last point, consider some hard numbers from the IEA’s report.
Oil demand is projected to fall, according to the IEA’s model, from over 90 million barrels per day (mbpd) to around 24 mbpd. That is a truly enormous drop, and one that has profoundly negative consequences for most oil supplying companies and countries.
If that happens, only the very cheapest oil will be sold, so only the lowest cost producers will be able to stay in business. Most of those producers will be in the Middle East, where the oil is so accessible and plentiful that each barrel costs very little to extract.
As a result, the share of oil supply held by the Middle East countries would rise in this scenario from a third to over half.
For most oil producers outside the Middle East, the IEA estimates that their revenues will fall by around 75%. In some countries, there will be dire economic and social consequences if they fail to diversify quickly enough.
Big Oil can pretend no longer
So this report is a warning for those countries, and for big oil companies who are still pretending that they can sell all the oil in their reserves.
There really is no place now, for that kind of thinking.
Carrying on, the leading researcher and modeller on IEA’s team outlined how solar power will grow from 1% of energy today, to 20% in 2050.
In doing so, solar power will become the largest source of energy in the world over the next 30 years.
Contrast that with the outlook for oil.
For investors, the big picture is very clear indeed.
The IEA’s pathway to net zero, framed against other existing roadmaps, is impressively unconvinced by things like carbon capture, or bio energy.
Rather, it has a keen focus on the cheapest, most available and easiest things we can do.
Simple things include ramping up solar and wind massively, as well as electrifying transport.
They include cutting down, slowly but steadily, on our energy consumption – through energy efficiency measures like building retrofits, or LED lighting.
The IEA estimates that fully 50% of the transition can be achieved with current technologies – led by the two main ones, battery storage and EVs.
The remaining 46% is achieved by technologies which are currently under development.
Meanwhile, only 4% of the total is taken up by change on our part: that means cycling and walking a bit more, while flying and eating beef a little less.
The IEA has decided not to place its hopes on hugely expensive technologies like nuclear fusion or carbon capture and storage (CCS), which are currently not possible or not economic.
We’d assess the IEA’s pathway to net zero as being very pragmatic.
The next decade will be critical
According to the IEA’s pathway, the following will need to happen between now and 2030:
- Sales of EVs should grow 18-fold
- Revenue from renewable power sources should rise fourfold
- Energy efficiency should improve by a third
- EVs should be 60% of car sales.
Hydrogen needs to have an extraordinary nine years too, growing from below 1GW of production capacity today (from electrolysers), to 850GW.
Investors concerned about the short-term volatility in share prices in the hydrogen space, take note!
What does all this mean for jobs?
The IEA’s estimate is that by 2030 the pathway will create 14 million additional jobs, and 16 million more by 2050. Meanwhile, five million fossil fuel-based jobs are at risk.
Additional care and attention will need to be paid to communities which rely of the fossil fuel industries.
With some optimism though, the IEA notes that there is a lot of cross-over in terms of skills and retraining potential – e.g. from offshore oil and gas to offshore wind, or from coal mining to lithium mining.
The milestones along the pathway are many and varied
A few final striking points from the IEA’s report presentation were as follows.
A key challenge will be in critical minerals – lithium, cobalt, steel, copper, aluminium…
Supply of these will need to grow by over 300%. This is just more evidence that energy transition commodities can be a great part of any inflation-proofing portfolio strategy.
However, rising demand for these minerals is also a source of concern.
These minerals are about as geographically concentrated as oil in some cases, and they will cause similar geopolitical issues. Rising costs also have the potential to slow down the transition, and the roll out of the key technologies.
Finally, the IEA has laid out roughly 400 interim milestones which must be met on the path to net zero.
They include getting hydrogen capacity from 250MW today to 850GW in 2030 – 3,400-times growth in just nine years (though the IEA noted that work on over 100GW of projects is already underway).
Also, electricity generation needs to have reached net zero by 2040, in order for the global economy to reach net zero by 2050.
And in 2040, with generation at net zero, solar and wind will have gone from high single-figure contributions to global power, to 70%. At that point, they will dominate the energy mix like fossil fuels do today.
The IEA’s report is powerful, authoritative and pragmatic.
It is a roadmap that permits little progress for oil companies or producer countries who are claiming they will be able to sell everything they hold in stated/proven reserves.
For investors, the volatility in financial markets in the recent past is less important than the exciting prospects which are becoming much clearer – thanks in part to the IEA’s latest report.
The energy transition is accelerating, and you don’t want to be left behind.
For the long-term energy transition investors among you, I encourage you to join Sam Volkering and I at Exponential Investor, our free sister publication.
You may have heard by now, but if not, I have some sad news!
After an incredibly enjoyable and interesting year writing to you, UK Uncensored is closing down.
I hope you’ve found my many musings, ramblings and warnings helpful throughout one of the most interesting investing years in history….
I’ll say more on this next week, but for now, I’ll just say you can keep hearing from me at Exponential Investor, where Sam and I will be joining forces to help you protect and grow your wealth, and keep interesting content flowing into your inboxes at the same time.
Until next time,
Editor, UK Uncensored