McKinsey: Fossil Fuels Will Never Return to Their Pre-Pandemic Growth

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McKinsey: Fossil Fuels Will Never Return to Their Pre-Pandemic Growth Curve

Date: January 18^th 2021

Author: Peter Palčec

Category: En.vision

Topic: Electricity , Oil and oil derivates , Renewables , Coal , CO2 emissions , Gases

“Power consumption will more than double by 2050 as energy demand electrifies; green hydrogen will become cost competitive by 2030; low-cost renewables will dominate the power market by 2030 as they become cheaper than existing fossil plants; and almost half of global capacity will be in solar and wind by 2035.” These are the main findings of the Global Energy Perspective 2021 report published by the global consultancy group McKinsey & Company. Additionally, fossil fuel demand will never return to its growth curve prior to the COVID-19 pandemic.

According to the report, energy markets have reflected the uncertainty and shown exceptional movements. At the beginning of the crisis, plunging fuel demand in many key markets was reflected by prices: by the end of March 2020, the price of gas hit a 30-year low, whereas the price of oil, also affected by supply shocks, showed the largest single-day decline in the past 22 years.

“As economies have reopened, energy commodities have shown a partial rebound: for example, by the end of Q3 2020, oil demand in China was back at pre-COVID-19 levels, and 50% of the decline was recovered in Europe and North America,” stated the report.

The report mentions that fossil fuel demand is set to peak in 2027 – with oil peaking in 2029 and gas in 2037 – partially due to the impacts of COVID-19 and that coal demand has already peaked. The pandemic has resulted in a profound reduction in energy demand, from which McKinsey expects it will take between one to four years to recover – with electricity and gas demand expected to bounce back more quickly than demand for oil.

Over the long term, the impacts of behavioural shifts due to COVID-19 are minor compared to the “known” long-term shifts such as decreasing car ownership, growing fuel efficiencies and a trend towards electric vehicles. It is estimated that the impact of these shifts will be three-to-nine times higher than that of the pandemic by 2050, added the report.

According to the report, gas is expected to continue to increase its share of global energy demand in the next ten to 15 years – the only fossil fuel to do so – and is set to then peak in the late 2030s. Gas demand will, nevertheless, be 5% higher in 2050 versus today’s level. Oil demand growth is set to slow substantially, with a projected peak in the late 2020s followed by a 10% decline by 2050, mainly driven by slowing car growth, enhanced engine efficiency in road transport, and increased electrification. Coal demand is projected to decrease almost 40% from 2019 to 2050, driven mainly by the phase-out of coal plants in the power sector across regions, mentioned the report.

In the meantime, as green hydrogen is expected to become cost competitive in the 2030s, “indirect” power demand for electrolysis will account for approximately 40% of electricity demand growth from 2035 to 2050, primarily in industry and transport. To enable this shift to intermittent resources – both traditional and new capacities – flexible capacities will be needed to ensure system security. Batteries play an important role, but gas peakers also remain relevant to cover longer spells of low output for renewables, stated McKinsey in the report.

However, while energy systems around the world will shift to renewables, which today are already able to compete with the marginal cost of fossil power in most places, McKinsey’s Reference Case scenario shows that by 2050 more than half of all global energy demand will continue to be met by fossil fuels. “As a result, while the earlier peak in hydrocarbon demand means a substantial reduction in forecasted carbon emissions, the world remains significantly off of the 1.5ºC pathway and will run out of its carbon budget for 2100 in the early 2030s,” stated the authors of the report.

According to McKinsey, COVID-19 has triggered a drop in global CO₂ emissions of around 7%. In the Reference Case, energy-related CO₂ emissions peak by 2023, followed by a steady decline of approximately 25% until 2050.

Christer Tryggestad, senior partner at McKinsey, stated: “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% lower in 2030 and about 85% lower by 2050 than current trends predict. 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.”