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Energy 2050: Insights from the ground up

Blog Post created by sksingh on Nov 10, 2016

How will the world satisfy its need for energy? McKinsey research offers a perspective.

When we talk about energy, there does a common ground for everyone to agree upon. For the foreseeable future, at least, the world will need more of it; and it’s production and usage will play a critical role in deciding the future of the global economy, geopolitics and the environment. Taking this under consideration, McKinsey took a hard look at the data, modeling energy demand from the bottom up, by country, sector, and fuel mix, with any analysis of current conditions, historical data, and country-level assessments. On this basis, McKinsey’s Global Energy Insights Team has put together a description of the global energy landscape to 2050.

It is important to remember that this is a business-as-usual scenario. That is, it does not anticipate big disruptions in either the production or use of energy. And, of course, predicting the future of anything is perilous. With those caveats in mind, here are four of the most interesting insights from this research.

Global energy demand will continue to grow. But the growth will be relatively slow – an average of about 0.7 percent a year through 2050 (as compared to an average of more than 2 percent from 2000 to 2015). The reasons behind this decline would be digitization, slower population and economic growth, greater efficiency, to name a few. For instance, in India, the percentage of GDP derived from services is expected to increase from 54 to 64 percent by 2035. By 2035, McKinsey research expects that the fuel required to propel a fossil-fueled car through a mile would be less by almost 40 percent than it is now. By 2050, global “energy intensity” will be half of what it was in the year 2013. From 1990 to 2015, global energy intensity improved by almost a third, and it is reasonable to expect the rate of progress to accelerate.

 

Demand for electricity will grow twice as fast as that for transport. China and India will account for 71 percent of new capacity. By 2050, electricity will account for a quarter for all energy demand, as compared to the current 18 percent. Now the question arises, how will that additional power be generated? Well, according to McKinsey research, more than three quarters of new capacity (around 77 percent) will be derived from wind and solar, 13 percent from natural gas, and the rest from everything else. The share of nuclear and hydro is also expected to grow, albeit modestly.

What this means is that by 2050, non-hydro renewables will account for more than a third of global power generation—a huge increase from the 2014 level of 6 percent. To put it another way, between now and 2050, wind and solar are expected to grow four to five times faster than every other source of power.

 

Fossil fuels will dominate energy use through 2050. This would occur, owing to massive investments that have already been made and because of the superior energy intensity and reliability of fossil fuels. The mix, however, will change. Gas shall continue to grow quickly, but the global demand for coal is likely to reach it’s peak by the year 2025. Growth in the use of oil, which is primarily used in transport, will slow down as vehicles become more efficient and more inclined towards being electric. In this case, the peak in demand is likely to be occur as soon as 2030.  By 2050, the research estimates that coal will be down to just 16 percent of global power generation (from 41 percent now) and fossil fuels to 38 percent (from 66 percent now). Overall, though, coal, oil, and, gas will continue to be 74 percent of primary energy demand, down from 82 percent now. After that, the rate of decline is likely to accelerate.

 

Energy-related greenhouse-gas emissions will rise 14 percent in the next 20 years. That is not what needs to happen to keep the planet from warming another two degrees, the goal of the 2015 Paris climate conference. Around 2035, though, emissions will flatten and then fall, for two main reasons. First, cars and trucks will be cleaner, due to more efficient engines and the deployment of electric vehicles. Second, there will be a significant shift in the power industry toward gas and renewables discussed above. The countervailing trends are that there are likely to be some 1.5 billion more people by 2035, and global GDP will rise by about half over that period. All those people will need to eat and work, and that means more energy.

 

Given that global energy demand is set to grow, it is likely that prices will continue to be volatile. Better energy efficiency will be helpful in reducing related risks. Technology development is critical to ensuring that the world gets the energy it needs while mitigating environmental harm. This, however, will require substantial new investments. Finally, to encourage the creation of the clean and reliable energy infrastructure that the world needs, it is imperative that the energy producers work with local, regional, national, and international regulators. Getting things right the first time is essential; there is extensive evidence to show that dramatic changes in policy act as a powerful deterrent to energy investments by producers. Given the scale of the new investments needed, this will be a factor of growing importance.

 

Source: McKinsey & Company

 

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