Russia’s war of aggression is throwing the global energy sector into disarray. Although demand for fossil energy is still growing, it is noticeably spurring the expansion of renewable energies, such as hydrogen. Natural gas will remain a key energy source, but the times of sharp rises in its growth appear to be over.
As recently as the beginning of 2022, the central thesis of the last World Energy Outlook (WEO), published annually by the International Energy Agency (IEA), was that the global economy and thus also the energy sector are recovering from the consequences of the pandemic. This assumption was invalidated just a few weeks later, when Russia’s invasion of Ukraine plunged the world into a global energy crisis – with the war especially triggering massive turbulence in the natural gas sector. For private households, companies and entire national economies, this led to unprecedented price increases for energy – especially for natural gas.
States are driving the expansion of renewable energy
Owing to these circumstances, the WEO 2022 confirms that there has been a major shift in energy policy since the previous WEO because the global energy crisis is giving strong impetus to the expansion of renewable energies, among other things. According to the STEPS scenario (see info box), even if demand for oil and gas increases in the short term, it will peak in the years ahead. This is due to the changed political framework conditions and current policy decisions, such as the Inflation Reduction Act in the US or the more stringent climate targets in the EU. As a consequence, countries across the world – but especially the heavily impacted EU countries – are investing massively to accelerate the expansion of renewable energies. The goal is no longer mainly climate protection, as it was in the past. Instead, the focus is now also on security of supply of affordable energy in sufficient volumes from diversified sources.
If one compares the WEO 2022 with the WEO 2021, the following becomes clear: According to the current STEPS, the share of renewable energies in the global energy mix will grow significantly between now and 2030. This trend mainly comes at the expense of the growth originally forecast for natural gas. In concrete figures, this means that there will be around eight exajoules (EJ) more renewable energy worldwide in 2030 than predicted in the 2021 forecast – although the figure is seven EJ less natural gas when comparing directly. Overall, in the STEPS, the IEA expects the global energy supply to grow by 7.9% between 2021 and 2030, from 624.2 EJ to 673.3 EJ. By 2050, growth is projected to be as high as 18.6%, to 740 EJ.
The growth of fossil energy reaches its peak
Until now, no WEO scenario based on current political decisions has shown a decline in the use of fossil energy. But with the global energy crisis, this is changing for the first time. According to STEPS, the use of coal will decrease within a few years, the amount of natural gas used will reach a plateau by the end of the current decade, and demand for oil will consequently start to decline in the mid-2030s. As a result, the share of fossil fuels in the global energy mix is expected to fall from the current level of around 80% to 75% by 2030 and 60% by 2050. In the WEO 2021, this share was still significantly higher, at two-thirds. Annual growth in global energy demand – around 1% per year until 2030 – will be covered almost entirely by renewable energies.
Already today, investment in renewable energy amounts to more than half of that in fossil energy. According to STEPS, by 2030, global spending on renewable energy will have risen from the current level of around $1.3 trillion to around $2 trillion.
The market for natural gas is growing, but at a markedly slower pace
The IEA believes that the time of sharp rises in growth in the natural gas market are over. According to STEPS, global demand for natural gas will only grow by less than 5% until 2030 and will peak at the end of the current decade. This will mainly be due to high prices – especially in EU countries, where the IEA predicts that prices will remain much higher until the mid-2020s than in the original forecasts found in the WEO 2021. Moreover, natural gas will also remain noticeably more expensive in the EU than, for example, in Asian countries. This is because the LNG supply will grow only slowly in the next few years, while imports of Russian gas into the EU will continue to decline. It is only in the mid-2020s that prices could fall again due to a more relaxed market situation and a diversified supply.
Whether there will be larger rises in growth in the LNG sector is unclear, according to the IEA. This is because no consistent picture emerges across the three scenarios presented in the WEO 2022. According to STEPS, new projects would have to be launched to meet the growing demand. However, if one follows the APS (see info box), ongoing projects are already sufficient to meet demand. In the NZE scenario (see info box), many of the current projects won’t even be necessary in the near future. For investors, there is a challenge here because a sharp increase in demand in the short term could already be followed by a precipitous drop in the medium to long term.
The market for natural gas is changing
EU countries and the United States, in particular, are reacting to the current situation by rapidly transitioning to renewable energy. Thus, the lower growth forecast for natural gas can be mainly attributed to the accelerated shift towards renewable energies. As a result, demand for natural gas in these countries will also fall between now and 2030, causing gas prices to drop precipitously in the middle of the decade.
On the whole, the face of the global market for natural gas is also changing. Russia’s gas exports to Europe have fallen by around 90%. According to STEPS, Russia will no longer be able to reach its former level of fossil energy exports, and the country’s market share in natural gas will be halved by 2030, from 30% to 15%. The IEA does not expect China to make up for this decrease because the People’s Republic has concluded long-term contracts for LNG. The market leader in natural gas exports will be the United States. In the future, Europe and Asia will compete for LNG imports, causing Europe to lose its role as an LNG-balancing market.
Green gases are becoming more and more important
The IEA predicts that green gases will play a significantly larger role in the future gas market. According to the APS, capacities for hydrogen are expected to increase to around 30 million tonnes by 2030. Investments in hydrogen could already exceed those in natural gas starting in 2030. Although these are still significantly lower than the investments in natural gas in the current STEPS, investments in both energy carriers in the period between 2031 and 2050 is already almost comparable in the APS. In the NZE, this would already be the case by 2030. In the subsequent decades, investments in hydrogen could therefore be more than twice as high as those in natural gas. However, notwithstanding the inconsistent forecast picture, the key message of the WEO 2022 is clear: the global energy crisis is noticeably spurring the expansion of renewable energies, such as hydrogen.
The WEO 2022 shows the systemic consequences of the global energy crisis and its impact on the global energy system. Even if the crisis bolsters fossil energies in the short term, it will noticeably propel the transformation towards renewable energies in just a few years. Hence, the crisis is an accelerator for the transformation of the global energy system towards more renewable energies.
For natural gas, this implies that the importance of this energy carrier will continue to grow globally, but at a noticeably lower rate than was still being forecast in 2021. Natural gas will therefore remain a key energy carrier, including as a bridging technology. In the future, hydrogen will play an increasingly important role in the global energy system. According to the IEA, investments in this energy carrier could already surpass those in natural gas as of 2030.
This is the World Energy Outlook 2022
- The WEO is the flagship publication of the International Energy Agency (IEA) and provides a comprehensive overview of how the global energy system could develop in the coming decades.
- This year’s edition of the WEO is dominated by the Russian invasion of Ukraine and the global energy crisis it triggered.
- Since 1993, the IEA has been producing medium- to long-term energy forecasts using the World Energy Model (WEM), a large-scale simulation model designed to replicate how energy markets work.
- The current issue of the WEO and further information can be found online at: https://www.iea.org/reports/world-energy-outlook-2022
Three scenarios for the future energy sector
- The "Stated-Policies"-Scenario (STEPS) is based on the current policy framework and measures that have already been implemented or announced.
- The "Announced-Pledges"-Scenario (APS) assumes that all announced net-zero-emissions commitments are met in full and on time.
- The "Net-Zero-Emissions by 2050" (NZE) scenario shows a pathway for the global energy sector to achieve net zero CO2 emissions by 2050.