There is a looming risk of more turbulence ahead for energy markets, the International Energy Agency (IEA) warns in its latest World Energy Outlook publication.

“The world is not investing enough to meet its future energy needs, and uncertainties over policies and demand trajectories create a strong risk of a volatile period ahead for energy markets,” the 2021 edition of the flagship report warns.

Released against the backdrop of fuel shortages and surging energy prices across the world, but particularly in the UK and parts of Europe and Asia, the report states that transition‐related spending is currently inadequate to meet rising demand for energy services in a sustainable way.

Investments are also falling well short of what is required for limiting global warming to 1.5 °C above pre-industrial levels, as contained in the report’s net zero emissions (NZE) scenario.

Global average temperatures are already 1.1 °C higher than those of the pre‐industrial age, with visible impacts on weather and climate extremes.

$4-TRILLION-A-YEAR BY 2030

To achieve the NZE pathway, yearly investments in clean energy would have to rise to $4-trillion by 2030, more than triple today’s levels.

Much of this investment, the report says, would have to be directed towards four key measures to “keep a 1.5 °C path within reach”, including: a massive additional push for clean electrification; a relentless focus on energy efficiency, a broad drive to cut methane emissions from fossil fuel operations; and a big boost to clean energy innovation.

“There is a looming risk of more turbulence for global energy markets,” executive director Dr Fatih Birol warns, pointing to deficits across all sectors and regions, underpinned by inadequate clean energy investment and falling oil and gas investment.

He dismisses any suggestion that the current crisis has been precipitated by the clean energy sector, describing such arguments as a "gross mischaracterisation".

"I think the issue is not that we have too much clean energy . . . but that we have too little clean energy."

The crisis, he asserts, is the result of a strong growth recovery, fuelled by fossil fuels and higher emissions, extreme weather events that curtailed hydropower production in some regions and a surge in planned and unplanned gas plant outages.

Birol expresses particular disappointment with the way the gas industry has been managed in the run-up to the crisis.

"Natural gas has been presented as a reliable, affordable energy source, which could complement the clean energy.

"But the current volatility in the natural gas markets, I believe, is not a good news for the natural gas industry and the natural gas industry didn't get good marks from millions of consumers around the world and I think they should take note of this."

While investments in wind, solar and electric vehicles are gaining momentum, the pace, Birol argues, remains too slow to reach net zero emissions by mid-century and to compensate for lower fossil fuel spending that is currently geared towards a world of stagnant or even falling demand.

The amount being spent on oil and natural gas has also been dragged down by two price collapses in 2014/15 and in 2020.

Boosting deployments of clean energy technologies and infrastructure provides a way out of the impasse, but the IEA stresses that it needs to happen quickly, or global energy markets will face a turbulent and volatile period ahead.

“Clear signals and direction from policy makers are essential. If the road ahead is paved only with good intentions, then it will be a bumpy ride indeed.”

STUBBORN INCUMBENCY

Birol warns, too, that the world’s encouraging clean energy momentum is running up against the “stubborn incumbency” of fossil fuels in energy systems.

The world’s consumption of coal, for instance, is set to grow strongly this year, pushing carbon dioxide emissions towards their second largest annual increase in history.

However, under all scenarios presented in the report, coal use is estimated to decline – a fall that could be accelerated further by China’s recent announcement of an end to its support for building coal plants abroad.

“Governments need to resolve this at COP26 by giving a clear and unmistakeable signal that they are committed to rapidly scaling up the clean and resilient technologies of the future.

“The social and economic benefits of accelerating clean energy transitions are huge, and the costs of inaction are immense,” Birol adds.

Beside the NZE scenario, the report also includes a newly modelled Announced Pledges Scenario, or APS, based on country decarbonisation commitments made ahead of the upcoming COP26 climate talks, as well as the usual Stated Policies Scenario (STEPS), which reflects specific policy initiatives either in place or under development.

For the first time, oil demand is shown to go into eventual decline in all the scenarios, although the timing and speed of the drop vary widely.

In fact, the IEA describes the differences in the outcomes of the APS and NZE as “stark”, with current climate pledges resulting in only 20% of the emissions reduction by 2030 that is necessary to put the world on a path towards net zero by 2050.

Under the STEPS, meanwhile, yearly emissions would remain around current levels by 2050, which would result in global average temperatures still rising when they hit 2.6 °C above pre‐industrial levels in 2100.

“If all today’s announced climate pledges are met, the world would still be consuming 75-million oil barrels per day by 2050 – down from around 100-million today – but that plummets to 25-million in the NZE by 2050 scenario.”

Natural gas demand increases in all scenarios over the next five years, but there are sharp divergences thereafter.

MISSING LINK

Finance is the “missing link” to accelerate clean energy deployment in developing economies, with some 70% of the additional spending required to close the gap between the APS and NZE needed in emerging market and developing economies.

The report also states that fulfilling the commitment by advanced economies to mobilise $100-billion a year in climate finance to support developing countries “is necessary, but not sufficient”.

“An international catalyst is essential to accelerate flows of capital in support of energy transitions and allow developing economies to chart a new lower-emissions path for development,” the IEA states.

It adds that most transition‐related energy investment will need to be carried out by private developers, consumers and financiers responding to market signals and policies set by governments.

“Alongside the necessary policy and regulatory reforms, public financial institutions – led by international development banks and larger climate finance commitments from advanced economies – play crucial roles to bring forward investment in areas where private players do not yet see the right balance of risk and reward.”