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Low-cost renewables expected to dominate power market by 2030

McKinsey report predicts fossil fuels will never return to pre-pandemic growth curve and behavioural shifts due to coronavirus are minor compared to long-term shifts such as decreasing car ownership.

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The pandemic has certainly provided a substantial shock for the energy sector
The pandemic has certainly provided a substantial shock for the energy sector

The combined impacts of Covid-19 and electrification are forecast to bring fossil fuel demand-peak forward to 2027 with oil peaking in 2029 and gas in 2037, new research finds.

 

According to management consulting firm McKinsey & Company’s The Global Energy Perspective 2021 report, the pandemic has resulted in a “profound reduction” in energy demand, from which it expects to take between one- to four years to recover. Demand for electricity and gas is expected to bounce back more quickly than demand for oil.

 

Growing fuel efficiencies

 

However, the report notes demand for fossil fuels will never return to its pre-pandemic growth curve. Over the long-term, the impacts of behavioural shifts due to the pandemic are minor compared to ‘known’ long-term shifts such as decreasing car ownership, growing fuel efficiencies and a trend towards electric vehicles, whose impact is estimated to be three- to nine times higher than from the pandemic by 2050.

 

Low-cost renewables are expected to dominate the power market by 2030 as they become cheaper than existing fossil plants while green hydrogen will become cost competitive by 2030 which McKinsey describes as a game-changer for the sector. Almost half of global capacity will be in solar and wind by 2035. In overall terms, power consumption is forecast to more than double by 2050 as energy demand increasingly electrifies.

 

“While the pandemic has certainly provided a substantial shock for the energy sector across all fuel sources, the story of the century is still a rapid and continuous shift to lower-carbon energy systems,” said Christer Tryggestad, senior partner at McKinsey.

 

“The share of electricity in the energy mix is set to grow by around 50 per cent by 2050 and it’s set to capture all global energy growth as hydrocarbon consumption plateaus. However, in our reference case, fossil fuels continue to play a significant role for the foreseeable future.”

“While the pandemic has certainly provided a substantial shock for the energy sector across all fuel sources, the story of the century is still a rapid and continuous shift to lower-carbon energy systems”

Indeed, while energy systems around the world will shift to renewables, which are able to compete with the marginal cost of fossil power already today in most places, by 2050 more than half of all global energy demand continues to be met by fossil fuels in McKinsey’s reference case scenario.

 

“There is still a long way to go to avert substantial global climate change. According to our estimates, annual emissions would need to be around 50 per cent lower in 2030 and about 85 per cent lower by 2050 than current trends predict to limit the global temperature increase to 1.5ºC,” added Tryggestad.

 

“The importance of policies has increased in the past year. Despite the increased momentum towards decarbonisation, many governments still need to translate ambitious targets into specific actions. Additionally, given the unparalleled size of many economic recovery packages post-Covid-19, the focus of the stimulus measures will play a key role in shaping energy systems in the decades to come.”

 

The findings are taken from four scenario outlooks, conceived by McKinsey:

  • 1.5ºC pathway: McKinsey’s top-down view of how a pathway that limits global warming to 1.5ºC could look across sectors and energy products, taking economic and technical feasibility into consideration
  • accelerated transition: a progressive view, driven by governmental response to COVID-19 and “next normal” behavioural changes. This scenario assesses the impact of 10 conceivable shifts happening at an accelerated pace (uptake of EVs, recycling, renewables and hydrogen)
  • reference case: outlook on the continuation of existing trends. This scenario reflects our expectations of how current technologies can evolve and incorporates current policies and an extrapolation of key policy trends
  • delayed transition: post-pandemic, the societal focus is on economic recovery; energy transition continues at a lower speed; lower incentives to invest in decarbonisation technologies, and low fossil fuel prices delay cost parity.

The Global Energy Perspective 2021 report presents specific outlooks per fuel type such as natural gas, oil, coal and hydrogen. It also discusses carbon emissions and offers a detailed perspective on the McKinsey 1.5ºC pathway. This includes a look at the implications for business leaders and policy makers, comprising a view on value pools and an energy investment outlook.

 

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