Ignore the fossil noise, the electrotech revolution is happening

The IEA this morning released their annual World Energy Outlook. It is a mix of conservative scenarios for the future and interesting insights into the energy system.

• Fossil demand peaks even in the conservative scenario based on stated policies (STEPS), which is behind the curve of technology adoption
• The scenario that sees continued fossil growth (CPS) depends on unrealistic assumptions about the growth in renewables and EVs 
• Renewables and electrification are the drivers of growth in all scenarios – and likely to be vastly underestimated

Future scenarios

The IEA focuses the analysis on two future scenarios – CPS and STEPS.

1. CPS is in practice a normative fossil fuel scenario best seen as a Carbon Profit Scenario. It answers the question – how would the energy future look if we stop policy action, stop electrotech innovation, and artificially constrain electrotech deployment. It is an interesting thought experiment, but does not merit serious attention as a forecast for the future of the energy system.
2. STEPS is a very conservative forecast for future energy demand, only slightly more optimistic than the CPS. It assumes flat deployment of solar and wind in a world where renewable and battery costs stop falling rapidly. The error is to assume the transition is driven by stated climate policy rather than technology, economic advantage, and the race to the top. The scenario is at variance with the reality that the costs of solar and batteries are still falling on learning curves and electrotech growth is still happening on S curves. This scenario should be taken as a floor, not a ceiling.

Regrettably the IEA has delayed publishing the scenario which was closest to reality – their APS scenario. It will be added to WEO when there is enough NDC data to make their analysis. Until then we would advise analysts to follow the APS scenario from the 2024 WEO if they are looking for data on the most likely future of the energy system.

Interesting insights

As ever, the WEO is a cornucopia of profound insights into the workings of the energy system. To highlight just ten of the many more.

1. We are at peak fossil fuels. Even if you take the conservative STEPS scenario, fossil fuel demand will be in decline by the end of the decade. Oil is on an extended plateau, gas has a little growth, but that is more than offset by the decline expected in coal.
2. Renewables and electrification are the key drivers of growth in all scenarios. Even in conservative STEPS, solar and wind rise from 15% of global electricity supply last year to 39% in 2035. Electricity demand grows seven times as fast as the rest of final energy demand. 
3. Electricity is more important than it looks. Although it’s only 21% of final energy demand, it is the principal energy source for sectors making up over 40% of the global economy. 
4. The emerging markets will be the key driver of the energy system in the next decade. They make up around three quarters of the expected growth in demand. It is for this reason that the emerging market leapfrog is so important.
5. Decline in US electrotech is offset by growth in the emerging markets. In their forecasts for the growth of solar and wind and the growth of EVs, the decline in expectations in the US is matched by the growth in expectations for the emerging markets.
6. AI is part of the electrotech story. AI demand makes up only 10% of the expected growth in electricity demand to 2030 and 3% of the total amount of gas demand, but may reduce primary energy by six times as much (13.5 EJ) as the energy required for AI (600 TWh or 2 EJ) through unlocking efficiency gains across the energy sector. Meanwhile AI is also a key tool to match the supply and demand of electrons in real time.
7. Solar versus LNG is a looming battle of overcapacities as China is building out solar manufacturing capacity and the US is building out LNG export capacity, but they are not both needed. We are confident that solar will win because the arc of energy history bends to energy technologies that are leaner, cheaper and more secure. Even the IEA pointedly asks, where will all the LNG go?
8. Energy costs will fall in the future. Even under the conservative STEPS scenario the household energy bills in advanced economies will fall by 13% to $4,100 a year in 2035 as consumers move from expensive oil to cheap electricity.
9. There are many areas where policymakers need to act rapidly. For example, China dominates refining of 19 out of 20 key energy transition minerals, and simple risk management suggests that this is too risky. Moreover, regulation of electricity has been tooled up for the old fossil system and needs rapidly to be rethought for the electrotech world where solutions to enable flex include demand side management and batteries as well as grids.
10. Fossil fuels are heavy. Fossil mining requires the movement of ten times as much material as critical minerals. Because oil and coal require 6-7 times as much water and rock to be moved as their own weight, the fossil system requires around 100 billion tonnes a year of material movement. Critical minerals require ten times less, even when all their ore movement is taken into account.

Acknowledgements

Cover photo: anatoliy_gleb / Getty images