Nine Lessons from the 2020 World Energy Outlook

October 16, 2020

On October 13, the International Energy Agency (IEA) released its latest World Energy Outlook (WEO), the first to cover the effects of the Covid-19 crisis. For long-time readers, this report was a very different one—with hardly any mention of the Organization of the Petroleum Exporting Countries or long-standing concerns about energy security and geopolitics. This report is about climate change and the energy transition. Some results made headlines around the world—about how solar is now the cheapest source of electricity, or how oil demand might evolve over the next two decades. But other big takeaways got lost in the chatter. Below is a list of some of the broader, and perhaps less appreciated, messages from WEO 2020.

Covid-19, on Its Own, Is Not an Inflection Point

The WEO shows that without policy intervention, the Covid-19 crisis does not represent an inflection point for the energy sector. Two of the four scenarios in the report revert to the status quo ante, with the same growth trajectory and patterns as in the past. “Effectively,” writes the IEA, “the crisis puts overall final energy consumption about 2.5 years behind previous World Energy Outlook (WEO) projections.” The behavioral adjustments so far in this crisis—working from home, fewer flights—lead to modest and non-permanent shifts in energy use. The one exception to that statement is coal. In past WEOs, coal consumption was in a long-term plateau, absent more stringent policy; in this year’s forecast, the baseline shows coal in decline over the next two decades. Covid-19 delivered a fatal blow to coal but not much else.

Few Governments Are Pushing a “Green” Recovery, but They Should

The WEO is, in part, an argument for using the Covid-19 crisis to chart a new energy future. But it is largely a document based on “stated” energy policies. At two points, almost in passing, the IEA notes that the ideas around a green recovery have “not featured prominently in the plans proposed to date, except in the European Union, the United Kingdom, Canada, Korea, New Zealand and a handful of other countries.” For all the talk about “building back better,” and the focus on climate change in the public discourse, there is little evidence that countries are doing much more today to accelerate the energy transition than they were before the pandemic. This is perhaps the most significant lesson from the WEO.

Net Zero by 2050 is Hard, Really Hard

For years, the IEA has been pressured to produce a scenario consistent with keeping temperature increases below 1.5 degrees Celsius. This year, the IEA released a “Net Zero Emissions by 2050” case, designed to “have a 50 percent chance of limiting the temperature rise to 1.5 °C.” The results are sobering, demonstrating a step change even from the already ambitious “Sustainable Development Scenario.” In the net-zero emissions case, investment in solar photovoltaics quintuples by 2030, and overall investment in the power sector triples by 2030. Most subcritical and supercritical coal plants either capture emissions or are shut down by 2030. Half the cars sold are electric in 2030 versus 2.5 percent now. Buildings are retrofitted at a record pace, and the industrial sector relies for heat on energy sources that barely exist today. And, on top of that, come 11 behavioral changes—from substituting short-haul flights with video conferencing to limiting the speed of cars to changing the target temperature in buildings. It is hard to read this chapter and not feel overwhelmed by what needs to achieve net zero by 2050.

We Need Negative Emissions

The Net Zero Emissions by 2050 case does not rely on negative emissions to reach its desired target, and, as a result, each possible lever is pulled in full, which demonstrates the enormity of the task before us. The Sustainable Development Scenario reaches net-zero emissions by 2070 and relies on negative emissions to be deployed after 2050 in order to limit temperature rise to 1.5 degrees Celsius. Modeling a course without negative emissions is useful given the challenges that negative emissions entail. But it also shows how difficult it is to reach the 1.5 degrees Celsius goal without negative emissions. Many of the scenarios put forward by the Intergovernmental Panel on Climate Change (IPCC) show a pathway without negative emissions. What the IEA shown is how far-fetched those are in practice.

Put Behavior Back on the Agenda

Another dimension of the Net Zero Emissions by 2050 case is the reliance on behavioral change to complement policy support and technological advances. The IEA assessed 11 changes in behavior and their potential contribution to reducing emissions by 2030. The results are striking in different ways. A pessimist might see in them the burden of reaching net zero by 2050—how much more we need to do. An optimist might see lots of low-hanging fruit that does not cost much—replacing short car rides by cycling, driving more slowly and efficiency, ridesharing, working from home, substituting flights by alternative transport means or video conferencing. To realize these gains, policymakers need to straddle a fine line between nudges and coercion or become more open about the ways in which our behavior must shift to bring it in line with a more sustainable future. It is definitely possible to merely invent our way out the climate change problem. It is just harder and more expensive.

Access to Capital Can Become a Major Problem

Access to capital is a major theme in the WEO, which explores how the availability of capital has enabled the reduction in the cost to deploy renewable energy technologies. But the debt overhang that will follow the Covid-19 crisis would raise risk premia for emerging economies. Utilities can find themselves strapped for cash, as consumers were unable to pay their bills during the crisis. The government guarantees for renewables have helped lessen concerns by financiers about project bankability—these might slowly go away. All these changes raise big questions about how much capital might be available for renewable energy or for electricity networks. It is probably not as issue for advanced economies like the United States, the European Union, or China, but it could become a major issue elsewhere.

Our Progress on Energy Poverty Can Be Reversed

Each year, the IEA comes up with an estimate for the number of people that lack access to electricity and clean cooking services. For the past few years, these numbers have shown a heartening trajectory as more people gained access to electricity (the progress on clean cooking has been modest). This year, the IEA reminds us that progress can be halted and reversed. For the first time since 2013, the number of people who lack access to electricity is likely to rise in Africa, and more than 100 million people might find existing services to be unaffordable, “pushing these households back to relying on more polluting and inefficient sources of energy.” Covid-19 has hit the most vulnerable more, and energy poverty is no exception.

Natural Gas Is Not Transition-Proof

IEA scenarios usually show natural gas doing well in the energy transition, and this year’s outlook is no different. But, for the first time, the IEA adds some qualifying asterisks to that resilience. Past Sustainable Development Scenarios have shown a long-term plateau for gas; this year, they show a decline. The scope for coal-to-gas switching becomes narrower as time goes on and as coal gets phased out in advanced economies. The IEA notes that policy support is essential for gas to grow, especially since demand comes from places where gas is struggling to compete. And in one of the most telling graphics in the whole report, the IEA shows that we can meet demand through 2030 using the liquefied natural gas (LNG) export projects that either exist or are under construction. Notably, this forecast excludes Qatar’s planned expansion because it is not yet under construction. Once that is included, the scope for new LNG projects becomes very narrow—at least in a world where climate action takes priority.

Investment Falls Faster than Demand

The IEA estimates that energy demand might fall by 5 percent in 2020—with oil and coal taking the biggest hit, followed by nuclear and gas; renewables are expected to show a modest gain in 2020. Investment in energy, by contrast, falls by far more, 18 percent, driven by a contraction in investment for oil and gas. If the Covid-19 crisis lasts for several years, this investment cut might fit a more subdued demand environment. If the world takes bolder action on climate change, those cuts might also seem prudent. But these investment curtailments could also cause a price spike in the near to medium term, raising concerns about energy security but also changing consumer attitudes about alternative products and services. The IEA numbers on investment are a reminder that no matter what trajectory we are on, we might still encounter bumps along the way.

Nikos Tsafos is a senior fellow with the Energy Security and Climate Change Program at the Center for Strategic and International Studies in Washington, D.C.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© Copyright 2020 by the Center for Strategic and International Studies. All rights reserved.