IEA (2022), World Energy Outlook 2022, IEA, Paris https://www.iea.org/reports/world-energy-outlook-2022, Licence: CC BY 4.0 (report); CC BY NC SA 4.0 (Annex A)
The world is in the middle of a global energy crisis of unprecedented depth and complexity. Europe is at the centre of this crisis, but it is having major implications for markets, policies and economies worldwide. As so often is the case, the poorest and most vulnerable are likely to suffer most. The strains did not begin with Russia’s invasion of Ukraine, but they have been sharply exacerbated by it. Extraordinarily high prices are sparking a reappraisal of energy policies and priorities. The Europe-Russia energy relationship lies in tatters, calling into question the viability of decades of fossil fuel infrastructure and investment decisions built on this foundation. A profound reorientation of international energy trade is underway, bringing new market risks even as it addresses longstanding vulnerabilities.
Many of the contours of this new world are not yet fully defined, but there is no going back to the way things were. And we know from past energy crises that the process of adjustment is unlikely to be a smooth one. That adjustment will also be taking place in the context of commitments made by governments to clean energy transitions. A central theme of this World Energy Outlook 2022 is how the levers of technological change and innovation, trade and investment and behavioural shifts might drive a secure transition towards a net zero emissions energy system, while minimising the potential risks and trade-offs between various policy objectives.
- The recovery in global energy consumption that followed the pandemic-induced drop in 2020 ended prematurely with Russia’s invasion of Ukraine in early 2022, plunging global energy markets into turmoil, stoking inflationary pressures and slowing economic growth. The strains on markets did not begin with Russia’s invasion of Ukraine, but they have been sharply exacerbated by it. This has led to volatility and steep spikes in energy prices, particularly for natural gas in European markets, and the menace of further disruption to supply looms large. Amid this turmoil, growth in renewables has held up well.
- The crisis has shattered energy relationships with Russia built on the assumption of trust and secure supplies, and led to a reappraisal of energy security needs in many countries. This is leading to a recasting of the energy trade and investment landscape in profound ways. It has already prompted a host of measures aimed at strengthening energy security, including support to build domestic production capability in key sectors.
- One key question is whether today’s crisis will lead to acceleration in energy transitions, or whether a combination of economic turmoil and short-term policy choices will slow momentum. On the one hand, high fossil fuel prices and record levels of emissions offer strong reasons to move away from reliance on these fuels or to use them more efficiently. On the other, energy security concerns may spur renewed investments in fossil fuel supply and infrastructure. This Outlook considers the implications of different policy choices.
- Today’s energy crisis shares some parallels with the 1970s oil price shocks, but there are also important differences. The crises in the 1970s were concentrated in oil markets and the global economy was much more dependent on oil than it is today. However, the intensity of use of other fossil fuels has not declined to the same extent; for natural gas it has risen in many cases. The global nature of the current crisis, its spread across all fossil fuels and the knock-on effects on electricity prices are all warning signs of broader economic impacts.
- Governments made a host of commitments to sustainability in the run-up to the COP26 meeting in Glasgow in 2021, and these remain the bedrock for many energy strategies. In some cases, these ambitions have now been reinforced by new measures seeking to reinforce long-term energy security and accelerate energy transitions, including the US Inflation Reduction Act and the REPowerEU Plan. The total amount of government spending committed to clean energy transitions since the start of the pandemic amounts to USD 1.1 trillion.
- Near-term borrowing costs are likely to rise as monetary policy tightens in many countries. This could disadvantage some clean energy projects for which financing costs play a major role in levelised costs. Nonetheless, clean technologies remain the most cost-efficient option for new power generation in many countries, even before taking account of the exceptionally high prices seen in 2022 for coal and gas.
- This Outlook explores three scenarios – fully updated – that provide a framework for thinking about the future of energy and exploring the implications of various policy choices, investment trends and technology dynamics. The scenarios, which should not be considered as IEA forecasts, are:
- Stated Policies Scenario, which looks not at what governments say they will achieve, but at what they are actually doing to achieve the targets and objectives they have set out, and assesses where this leads the energy sector.
- Announced Pledges Scenario, which examines where all current announced energy and climate commitments – including net zero emissions pledges as well as commitments in areas such as energy access – would take the energy sector if implemented in full and on time.
- Net Zero Emissions by 2050 Scenario, which maps out a way to achieve a 1.5 °C stabilisation in global average temperature and meet key energy-related UN Sustainable Development Goals.
- Rising demand for energy services to 2040 is underpinned by economic growth, which is lower to 2030 than in last year’s Outlook but which averages 2.8% per year through to 2050. The world’s population rises from 7.8 billion people in 2021 to 9.7 billion in 2050, an increase of almost one-quarter. These economic and demographic assumptions are kept constant across the various scenarios, while energy and climate policies, technology costs and prices vary.
- Cost pressures are being felt across the energy sector from persistent strains on supply chains and from higher prices for critical minerals and essential construction materials such as cement and steel. We expect recent rises in clean technology costs to be temporary, and to recede in the face of the forces of innovation and improvements in manufacturing and installation processes. Current trends are, however, prompting governments to pay closer attention to the resilience and diversity of clean energy supply chains, which cannot be taken for granted.
- Today’s exceptionally high fossil fuel prices are projected to ease as economies slow and markets rebalance, although natural gas markets remain tight for several years as Europe competes for available LNG cargoes to compensate for curtailed Russian supply. The speed of adjustment and the longer-term price trajectories differ by scenario, depending on the strength of policy action to curb demand.