The World’s Projected Energy Mix, from 2018-2040

Since 1977, the International Energy Agency (IEA) has put together the World Energy Outlook, a highly anticipated annual report that looks towards the future of energy production and consumption on a global basis.

In the latest edition, the report dives into two very different policy scenarios that help illustrate the choices and consequences we have ahead of us.

In this post, we’ll look at each policy scenario and then dive into the associated numbers for each, showing how they affect the projected global energy mix from 2018 to 2040.

The Policy Scenarios

The IEA bases its projections based on two policy scenarios:

1. The Stated Policies Scenario
   This scenario is intended to reflect the impact of existing public policy frameworks, including announced policy intentions.
2. The Sustainable Development Scenario
   This scenario outlines a major transformation of the global energy system, aligned with achieving the energy-related components of the United Nations’ Sustainable Development Goals (SDGs), such as reducing carbon emissions.

Neither scenario is technically a forecast; the IEA sees both scenarios as being possible.

However, this data can still provide a useful starting point for decision makers and investors looking to read the tea leaves. Will countries stick to their guns on their current plans, or will those plans be scrapped in the name of bolder, sustainable initiatives?

Scenario 1: Stated Policies

Today’s chart shows data corresponding to this policies scenario, as adjusted by CAPP.

See the energy use data below, shown in terms of Millions of Tonnes of Oil Equivalent (Mtoe):

Note: Data is based on CAPP conversion estimates, and is rounded to nearest 50 Mtoe.

In the Stated Policies Scenario, oil will be the largest energy source in 2040, making up about 28% of the global energy mix — and natural gas will be right behind it, for 25% of supply.

Coal consumption, which is decreasing in Western markets, will stay consistent with 2018 levels thanks to growing demand in Asia.

Meanwhile, renewable energy (excl. hydro) will see an impressive renaissance, with this category (which includes wind, solar, geothermal, etc.) increasing its portion in the mix by over 300% over 22 years.

Scenario 2: Sustainable Development

The IEA’s Sustainable Development scenario is very different from the status quo, as shown here:

Source: IEA

The contrast between the energy needed in the Stated Policies (STEPS) and Sustainable Development (SDS) projections is stark, going from a 2,500 Mtoe increase to a 800 Mtoe decrease in total consumption, driven by residential and transportation sectors.

Under this scenario, renewable energy use for electricity consumption (incl. hydro) would need to increase by 8,000 TWh more, with ultimately more than half of it in Asia.

Under this transformational and ambitious scenario, fossil fuel use would plummet. Coal consumption would drop by roughly 60%, oil consumption by 30%, and the role of natural gas in the energy mix would remain stagnant.

Two Scenarios, One Path

Both scenarios are a possibility, but in reality we will likely find ourselves somewhere in between the two extremes.

This makes these two baselines a helpful place to start for both investors and decision makers. Depending on how you think governments, corporations, and organizations will act, you can then adjust the projections accordingly.

Top Risks in 2020: Dominated by Environmental Factors

Environmental concerns are a frequent talking point drawn upon by politicians and scientists alike, and for good reason. Irrespective of economic or social status, climate change has the potential to affect us all.

While public urgency surrounding climate action has been growing, it can be difficult to comprehend the potential extent of economic disruption that environmental risks pose.

Front and Center

Today’s chart uses data from the World Economic Forum’s annual Global Risks Report, which surveyed 800 leaders from business, government, and non-profits to showcase the most prominent economic risks the world faces.

According to the data in the report, here are the top five risks to the global economy, in terms of their likelihood and potential impact:

With more emphasis being placed on environmental risks, how much do we need to worry?

According to the World Economic Forum, more than we can imagine. The report asserts that, among many other things, natural disasters are becoming more intense and more frequent.

While it can be difficult to extrapolate precisely how environmental risks could cascade into trouble for the global economy and financial system, here are some interesting examples of how they are already affecting institutional investors and the insurance industry.

The Stranded Assets Dilemma

If the world is to stick to its 2°C global warming threshold, as outlined in the Paris Agreement, a significant amount of oil, gas, and coal reserves would need to be left untouched. These assets would become “stranded”, forfeiting roughly $1-4 trillion from the world economy.

Growing awareness of this risk has led to a change in sentiment. Many institutional investors have become wary of their portfolio exposures, and in some cases, have begun divesting from the sector entirely.

The financial case for fossil fuel divestment is strong. Fossil fuel companies once led the economy and world stock markets. They now lag.

– Institute for Energy Economics and Financial Analysis

The last couple of years have been a game-changer for the industry’s future prospects. For example, 2018 was a milestone year in fossil fuel divestment:

• Nearly 1,000 institutional investors representing $6.24 trillion in assets have pledged to divest from fossil fuels, up from just $52 billion four years ago;
• Ireland became the first country to commit to fossil fuel divestment. At the time of announcement, its sovereign development fund had $10.4 billion in assets;
• New York City became the largest (but not the first) city to commit to fossil fuel divestment. Its pension funds, totaling $189 billion at the time of announcement, aim to divest over a 5-year period.

A Tough Road Ahead

In a recent survey, actuaries ranked climate change as their top risk for 2019, ahead of damages from cyberattacks, financial instability, and terrorism—drawing strong parallels with the results of this year’s Global Risk Report.

These growing concerns are well-founded. 2017 was the costliest year on record for natural disasters, with $344 billion in global economic losses. This daunting figure translated to a record year for insured losses, totalling $140 billion.

Although insured losses over 2019 have fallen back in line with the average over the past 10 years, Munich RE believes that long-term environmental effects are already being felt:

• Recent studies have shown that over the long term, the environmental conditions for bushfires in Australia have become more favorable;
• Despite a decrease in U.S. wildfire losses compared to previous years, there is a rising long-term trend for forest area burned in the U.S.;
• An increase in hailstorms, as a result of climate change, has been shown to contribute to growing losses across the globe.

The Ball Is In Our Court

It’s clear that the environmental issues we face are beginning to have a larger real impact. Despite growing awareness and preliminary actions such as fossil fuel divestment, the Global Risk Report stresses that there is much more work to be done to mitigate risks.

How companies and governments choose to respond over the next decade will be a focal point of many discussions to come.