Renewables are not to blame for the ongoing energy crunch, and the crisis may in fact kick-start faster deployment of clean power as gas sees its role diminish, the International Energy Agency said in its Oct. 27 flagship "World Energy Outlook" report.

"There is a mistaken idea that this is somehow a clean energy crisis. That is simply not true. The world is struggling with too little clean energy, not too much," IEA Executive Director Fatih Birol said in the report. The real cause is Russia's invasion of Ukraine, which has tipped what was a strong recovery from COVID-19 into turmoil and damaged the global economy, according to the IEA.

Energy systems were vulnerable to the shock caused by the weaponization of gas because of underinvestment, with spending on energy transition technology flat at about $1 trillion per year globally for the five years following the Paris Agreement on climate change, the IEA said.

Only in the past two years did investments increase. The falling cost of green power enabled growth in deployment, but spending was not enough to become transformative, the organization said.

On the other hand, investments in fossil fuels also declined in the years after oil prices fell in 2014/2015, putting market balance in the 2020s at risk. The unprecedented natural gas and electricity prices Europe is now experiencing can be traced back to these systemic vulnerabilities, according to the IEA.

Natural gas fades in outlook

Compared with 2021, natural gas took a backseat in the latest update of the IEA's stated policies scenario, which is based on existing policy plans.

Gas volumes in the global energy mix were revised down all the way through 2030. Renewables, coal and nuclear are set to pick up the shortfall starting in 2023, though coal's gains are set to be short-lived. By the end of this decade, renewables will rise by 90% globally, meaning more electricity will be produced from renewables than from fossil fuels.

"We are approaching the end of the golden age of gas," Birol said during an Oct. 27 press conference. Liquefied natural gas is set to play a more important role given the destruction of Russian pipelines into Europe, and the scale of growth for LNG will depend on whether infrastructure can be made compatible with climate goals, Birol said.

The high-price environment has more than doubled the value of global gas trading this year compared with 2021, according to the IEA, with Europe and Asia-Pacific the biggest buyers.

The IEA took note of $550 billion in government interventions since September 2021, mostly in Europe, aimed at protecting consumers from the worst effects of the price spikes. Several countries are considering additional support. Such plans are funded in part by taxing windfall profits of oil and gas producers or capping revenues of non-gas power generators, but often they also involve government borrowing.

It is unclear how the energy crisis will evolve, the IEA said, with the outcome of the war one of the major unknowns. Other variables are the temperatures of the upcoming winter, the extent to which Russia can redirect energy shipments from Europe to other markets and the way consumers adjust their demand and their views on clean power transitions.

The IEA expects 2021 to be a high-water mark for Russian energy exports after the country all but lost its largest customer in Europe. Russia's ability to divert trade to Asia is limited by pipeline infrastructure. The assumption that Europe's loss is China's gain is flawed, according to Tim Gould, chief energy economist at the IEA.

"China is changing, too," with rising renewables deployment and slowing demand growth for gas, Gould said. Beyond the existing Siberian pipeline, there is no expectation for another large-scale line being needed, Gould said during the press conference.

After representing 30% of traded gas in 2021, the IEA's stated policies scenario expects Russia's share to drop to 15% by 2030.

Crisis as turning point for cleaner system

Energy markets have changed as a result of Russia's invasion of Ukraine, "not just for the time being, but for decades to come," Birol said in the report, adding that part of this change could be an accelerated decarbonization of energy systems.

"Government responses around the world promise to make this a historic and definitive turning point towards a cleaner, more affordable and more secure energy system," Birol said.

The IEA's stated policies scenario shows a peak or plateau for fossil fuel demand across all fuels. In the scenario, coal use will fall back within the next few years, natural gas demand will reach a plateau by the end of the decade, and rising sales of electric vehicles mean that oil demand will level off in the mid-2030s

This means total demand for fossil fuels will fall by an annual average roughly equivalent to the lifetime output of a large oil field from the mid-2020s to 2050, the agency said. In more climate-focused scenarios, these declines are faster and more pronounced.

"I believe we will see that 2022 was a year where clean energy will be turbocharged," Birol said during the press conference.

Planned increases in global manufacturing capacity for renewables technology support the view that a rapid rise in deployment could be ahead, the IEA said. Announced production capability for electrolyzers and solar panels mean it is possible that installations could exceed currently announced pledges globally by 2030.

While not all projects will secure financing and go ahead, "we are seeing an incredible line-up of new plants," according to Laura Cozzi, chief energy modeler in the IEA's energy demand outlook division.

S&P Global Commodity Insights produces content for distribution on S&P Capital IQ Pro.