IEA (2021), World Energy Outlook 2021, IEA, Paris https://www.iea.org/reports/world-energy-outlook-2021
There are unmistakeable signs of change. In 2020, even as economies sank under the weight of Covid-19 lockdowns, additions of renewable sources of energy such as wind and solar PV increased at their fastest rate in two decades, and electric vehicle sales set new records. A new energy economy is coming into view, ushered forward by policy action, technology innovation and the increasing urgency of the need to tackle climate change. There is no guarantee that the emergence of this new energy economy will be smooth, and it is not coming forward quickly enough to avoid severe impacts from a changing climate. But it is already clear that tomorrow’s energy economy promises to be quite different from the one we have today.
Electricity is taking on an ever-more central role in the lives of consumers and, for an increasing number of households, it promises to become the energy source on which they rely for all their everyday needs: mobility, cooking, lighting, heating and cooling. The reliability and affordability of electricity is set to become even more critical to all aspects of people’s lives and well-being.
Electricity’s share of the world’s final consumption of energy has risen steadily over recent decades, and now stands at 20%. Its rise accelerates in future years as the pace of transitions picks up. In the NZE, electricity accounts for around 50% of final energy use by 2050 (around 30% in the APS). Given that electricity delivers useful energy services with better efficiency than other fuels, the contribution of electricity is even higher than these numbers would suggest.
The rise of electricity requires a parallel increase in its share of energy-related investment. Since 2016, global investment in the power sector has consistently been higher than in oil and gas supply. The faster that clean energy transitions proceed, the wider this gap becomes, and as a result electricity becomes the central arena for energy-related financial transactions. In the NZE, investment in power generation and infrastructure is six-times higher than in oil and gas supply by 2030.
Clean technologies in the power sector and across a range of end-uses have become the first choice for consumers around the world, initially due to policy support but over time because they are simply the most cost-effective. In most regions, solar PV or wind already represents the cheapest available source of new electricity generation. Based on total costs of ownership, the case for electric cars in many markets is already a compelling one.
In the new energy economy, the huge market opportunity for clean technology becomes a major new area for investment and international competition; countries and companies jostle for position in global supply chains. We estimate that, if the world gets on track for net zero emissions by 2050, then the annual market opportunity for manufacturers of wind turbines, solar panels, lithium-ion batteries, electrolysers and fuel cells grows tenfold to USD 1.2 trillion by 2050, around 3.5-times larger than in the STEPS. These five elements alone would be larger than today’s oil industry and its associated revenues.
The new energy economy involves varied and often complex interactions between electricity, fuels and storage markets, creating fresh challenges for regulation and market design. A major question is how to manage the potential for increased variability on both the demand and supply sides of the energy equation. The variability of electricity supply will be affected by rising shares of wind and solar PV, putting a huge premium on robust grids and other sources of supply flexibility. The variability of demand will be shaped by increasing deployment of heat pumps and air conditioners (the latter especially in developing economies, where current ownership levels are low), and could be exacerbated by poorly sequenced recharging of EV fleets or by cold snaps, heat waves or other extreme weather events. Without effective policies to prepare for and manage these fluctuations, the daily variation of demand could increase on the basis of announced pledges to 270 gigawatts (GW) in the European Union (from 120 GW today) and over 170 GW in India (from 40 GW) by mid-century.
Digital technologies play crucial roles in integrating different aspects of the new energy system. Sectors that have hitherto operated largely independently (such as electricity and transport) become connected in new ways with the rise of electric mobility, and grids need to cope with a much greater diversity and complexity of flows as many new players, including households, enter the arena as producers. Managing the platforms and data required to keep this system operating effectively becomes a central part of the new energy economy, as does mitigating associated cybersecurity and data privacy risks.
Clean electrification is the dominant theme in the early phases of the transformation of the global energy economy together with the quest for improvements in efficiency. Over time, however, continued rapid deployment in these areas needs to be accompanied by clean energy innovation and the widespread use of technologies that are not yet readily available on the market. These technologies are vital to decarbonise areas such as heavy industry and long-distance transport that are not readily susceptible to electrification for one reason or another, and they include advanced batteries, hydrogen electrolysers, advanced biofuels, and new technologies for the capture and use of CO2, including direct air capture. Building these additional pillars of the new energy economy requires early and sustained investment in energy R&D and an accelerated programme of demonstration projects.
These changes redirect global flows of trade and capital. The combined share of hydrogen and critical minerals (such as lithium, cobalt, copper and rare earths elements) in global energy-related trade rises to one-quarter of the total in the APS, and takes a dominant share in the NZE as the value of fossil fuels trade declines significantly. This completely upends the present dynamics of international energy-related trade, and it is accompanied by a major shift in energy-related financial flows: the decline in the value of trade in fossil fuels causes the dollar-denominated revenues accruing to producer economies from oil and gas exports to decline significantly over time.
The new energy economy depicted in the NZE is a collaborative one in which countries demonstrate a shared focus on securing the necessary reductions in emissions, while minimising and taking precautions against new energy security risks. However, the APS highlights the possibility of new divisions and fragmentation as countries proceed at different speeds through energy transitions. By the 2030s, for example, the APS sees the production of “green” steel in economies that have pledged to reach net zero alongside the continuing use of traditional emissions-intensive methods elsewhere, deepening tensions around trade in energy-intensive goods. There could be a gulf too in international investment and finance: increasingly stringent disciplines applicable to financial flows may mean that capital from the “net zero” world does not flow very freely to countries undergoing slower transitions. Successful, orderly and broad-based transitions in which countries enjoy the benefits of global trade will depend on finding ways to lessen and manage the potential tensions in the international system that are highlighted in the APS.
Achieving net zero emissions requires an unparalleled increase in clean energy investment. In the NZE, annual investment in clean energy rises to USD 4 trillion by 2030, more than tripling from current levels. Mobilising such a large investment will be challenging, but the investment required to secure clean energy transitions offers an unprecedented level of market opportunities to equipment manufacturers, service providers, developers and engineering, procurement and construction companies along the entire clean energy supply chain.
In the NZE, the combined size of the market for wind turbines, solar panels, lithium-ion batteries, electrolysers and fuel cells represents a cumulative market opportunity to 2050 worth USD 27 trillion. At over 60% of the total, batteries account for the lion’s share of the estimated market for clean energy technology equipment in 2050. With over 3 billion electric vehicles (EVs) on the road and 3 terawatt-hours (TWh) of battery storage deployed in the NZE in 2050, batteries play a central part in the new energy economy. They also become the single largest source of demand for various critical minerals such as lithium, nickel and cobalt.
Advanced economies and China have been building up their research and development (R&D) programmes and increasing spending on clean energy innovation, but patterns of spending will change as deployment expands everywhere in the world. In the NZE, the Asia Pacific region is home to 45% of the estimated market for clean energy technologies by 2050, and the share of the market accounted for by North America and Europe is lower than it was earlier in the period.
Many countries are seeking to develop manufacturing expertise and capabilities that would allow them to use some locally produced products to meet domestic demand, and also to participate in global supply chains and to license related intellectual property. Energy start-up companies have an important part to play in this. Despite the pandemic, record-breaking levels of capital have flowed to clean energy technology start-ups, with investment in 2021 expected to surpass the USD 4 billion in early-stage equity raised in 2019, which was the previous peak year. The United States still accounts for around half of the capital being invested, but Europe was the only major region to increase investment in 2020 and China’s share of the market has risen from 5% in the 2010-14 period to over 35% in the last three years.
Governments everywhere are also actively seeking to attract additional talent. India and Singapore have launched government initiatives to support international clean energy entrepreneurs. China, Japan and United States have recently made high-level commitments to energy R&D and innovation, framing it as a critical area of technological competition in coming years. In Europe, public initiatives like the European Battery Alliance are actively seeking to create new value chains. There is a momentous opportunity for the best innovators to capture a share of emerging value chains that have huge future potential.