Five hard truths about energy transformation and resilience

Carlos Pascual is Senior Vice President at S&P Global Commodity Insights for Geopolitics and International Affairs. He was founder of the Energy Resources Bureau in the US State Department and served as US Ambassador in Mexico and Ukraine.

The world is attempting, by 2050, to reinvent its energy systems and redress climate change at a scale that has never been attempted in history. To succeed, governments, industries and civil society must face hard truths about energy demand and how to supply it. Companies will need to lead on technology and resilience. And governments must work closely with industry to set policies and regulations that stimulate innovation and investment.

Here are five hard truths that frame the challenges for ADIPEC 2023.

First, the relationship between energy consumption and fossil fuels will need to be transformed. From 1990-2022, the world depended on fossil fuels to supply about 80% of global primary energy demand. Trillions of dollars in renewable energy investments in the past decade have helped meet the world’s growing appetite for energy. But the share of hydrocarbons in the global energy mix barely budged.

If the world is to achieve net-zero greenhouse gas emissions by 2050, it will mean shrinking fossil fuels in the next 27 years from a stagnant 80% to about 20-30% of the energy we consume.[1] Achieving such change in so few years will entail unprecedented transformations in the global economy, energy technology, consumer behavior, national politics and geopolitical competition.

Second, the pathways to net zero are not clear, and they will differ by country and region depending on economic means, natural resources and political capacity to act. The International Energy Agency and many companies have published net-zero roadmaps. But the striking commonality in all of them is that to get to net zero, they start at zero in 2050 and mathematically backcast to find a solution. The IEA states in its roadmap that commercially competitive technologies are not available for 50% of the emissions that need to be reduced.

In other words, the world has an end goal, but there is no shared pathway to get there. The war in Ukraine and resulting commodity shocks forced Europe to increase its use of coal. Shocks can also be commercial and technological. Some technologies may simply take longer or not prove viable. Hence the need for Plan Bs to adapt and reinvent as new realities emerge.

Third, we know that our future energy systems will rely more on electric power, particularly in the transportation sector. In a "business as usual" assessment (i.e. no massive technology change), S&P Global Commodity Insights estimated that electricity demand will double by 2050. More aggressive technology scenarios increase further electricity’s importance. In this BAU scenario, electric vehicles rise to almost half of new car sales by 2050. But cars with internal combustions engines (ICE) would still make up the majority of light duty vehicles on the road.

That underscores two related issues. The world will have to increase radically the supply of critical minerals like copper and lithium needed for electrification and batteries.[2] Today, supply chains for key metals and minerals are geographically concentrated, while the global average for bringing new mines into operation is more than 15 years. And for vehicles with internal combustion engines, other solutions will be needed need to decarbonize transit, like second-generation biofuels that can also use existing distribution networks.

Fourth, the world is making major bets on decarbonization technologies. To remove CO2 from existing energy systems, the biggest is on carbon capture, utilization and storage (CCUS). The United States, under the Inflation Reduction Act (IRA), will subsidize companies from $60-$180/mt to capture, store and/or use CO2. Currently, only about 0.1% of CO2 emissions are captured. For CCUS to drive us towards net-zero goals, yearly capacity additions by 2050 should increase 130-200 times.

The United States is making a parallel bet on hydrogen as the future fuel that will allow industries like steel, petrochemicals and refineries to meet their energy needs without GHG emissions. IRA subsidies should make the cost of hydrogen produced with renewable energy cheaper than hydrogen using natural gas or other fuels. But the catch is on enabling infrastructure – renewable energy to produce the hydrogen, getting permits, and new grids and transmission and distribution lines.

What is clear is that technology gains need to be shared widely, especially with developing and emerging economies, to tackle a global threat. For both CCUS or hydrogen, companies around the world have an opportunity: to build partnerships with companies tapping IRA subsidies, and to bring the lessons back home. These are practical partnerships that ADIPEC can forge.

Finally, the global energy and climate communities need to confront the hard truth that we face two energy transitions. One is to meet demand in today’s energy economy. If we do not, shortages occur, prices rise and the political will for the transition unravels. For the second transition, we need to build an energy economy for a net-zero world. Many technologies like wind, solar and geothermal will cross over, but massive investment, innovation and cost reductions (and infrastructure to deliver them) are needed to get there.

The hard part is that both these transitions must move in parallel. And here is where the world stumbles – on resources and on sharing technology – particularly with developing countries. For companies and countries, the opportunity is to use ADIPEC’s platform to stimulate action on these hard truths – and make real our aspirations for energy security, sustainability and affordability.