The Global Energy Transition Explained

“A new energy economy is emerging around the world as solar, wind, electric vehicles and other low-carbon technologies flourish.” – the International Energy Agency (IEA)

What is an energy transition?

In the simplest sense, the displacement of one energy source by another. The term also includes the evolution of the energy system that produces and consumes the old and new types of energy. For example, cheap petroleum and the internal combustion engine (tractors, cars, trucks) replaced horses and steam engines on North American farms during the first half of the 20th century. Infrastructure was built to fuel the gasoline-powered vehicles, roads were constructed, businesses sprang up to sell and repair them, workers acquired necessary skills, banks provided credit to buy the more capital-intensive equipment, and farmers changed their operations to accommodate “power-farming,” as it was often called back then. Not only the fuel changed, but the system that enabled and supported it changed, too.

During the 20th century, as the global economy expanded, new energy sources were added (natural gas, nuclear power) while demand for existing energy (coal, oil) grew. The additive process continued into the 21st century because of rapid economic growth in Asia. The growth of existing energy sources while adding new ones, which is still the trend as of 2021, would likely continue unabated but the current energy transition is different, for three reasons.

The first is the climate change imperative to transition off fossil fuels (coal, oil, natural gas) and achieve net-zero greenhouse gas emissions by 2050. Government policy will play a much bigger role in this transition. The second is that the lower costs (a few cents per kilowatt-hour) of renewable electricity from wind and solar coupled with the higher efficiency of electric motors and heat pumps, for example, create greater value for consumers. Third, the scope and complexity of the global energy system is so much greater than in the past. (listen to Energi Talks podcast Tony Seba: Electric revolution by 2030?)

Timeline of the modern energy transition

Will this energy transition be fast or slow?

The evidence suggests that it will more or less follow the typical diffusion path for many new technologies: slow growth during the initial period (1990s to 2020); followed by a decade (the 2020s) or more of rapid, disruptive growth; then moderate to slow growth (2030s onward) as the new energy technologies come to dominate their markets. Technologies, industries, and national economies will transition at different speeds depending upon their unique circumstances. (watch 26:30 video interview, Is the energy transition arriving quickly or slowly? Hint: technology change is speeding up)

Many of the key commercial energy technologies (wind turbines, lithium-ion batteries, General Motors’ EV-1) of this transition seriously entered the marketplace during the 1990s. The 2020s appear to be a very disruptive decade as the new energy technologies begin to push old technologies and fuels out of the market. Even so, the International Energy Agency’s (IEA) net-zero by 2050 scenario shows that fossil fuels will still comprise a significant portion of primary energy consumption by mid-century.

This suggests that another two or three decades, if not more, will be needed to completely or mostly displace fossil fuels. If true, then this energy transition may take 75 to 100 years from start to finish.

10 Key Issues for The Energy Transition

1. Government Policy

Government intervention is necessary because markets fail and consumers and companies do not always act in the broader public interest. Well-designed, effective government policy is essential for countries to meet their climate targets (lower greenhouse gas emissions levels) and to assist the transition from fossil fuels to low-carbon energy. Governments have a number of available policy instruments, including regulations, subsidies, and their own spending.

Is technology or policy driving the energy transition?

Dr. James Henderson of the Oxford Institute for Energy Studies thinks policy is the main driver because of the urgency to achieve net-zero global emissions by 2050 and keep global warming to 1.5C by 2100. 

Financial analyst Kingsmill Bond of Carbon Tracker believes that policy supported the development of clean energy technologies over the past 20 to 30 years, that most of those technologies are now competitive with fossil fuels, and that consumers and markets, capital, and the private sector are now driving the energy transition. From this perspective, policy’s main role is to speed up the transition in order to meet climate objectives. (listen to the 7 “feedback loops” speeding up the energy transition Energi Talks podcast)

2. New Energy Technologies

Clean energy technologies are transforming four primary sectors of the economy: electricity systems, transportation, buildings, and industry.

Economist Jason Dion groups these technologies into two categories. “Safe bets” are technologies that are already competitive like solar and wind power generation, electric vehicles, and lithium-ion batteries. “Wild cards” are developing technologies that are not yet competitive but may be competitive within the next 10 to 20 years, like small modular nuclear reactors and green hydrogen. (listen to interview with Dion in the Managing the energy transition: Pathways to Canada’s net-zero future episode of Energi Talks)

Often less visible but just as important are “enabling” technologies like artificial intelligence and machine learning, robotics and automation, cloud computing, and 3D printing that enable advances in the other clean energy technologies.

Two curves help us understand how technologies are adopted. 

The S-curve (orange line) plots a technology’s development over time. When it is first introduced to consumers, the new technology is more expensive and less useful. As it improves and the price falls, it rises up the S-curve, eventually hitting the “inflection point” when sales take off, eventually pushing competing technologies out of the market. 

The adopter curve (blue line) begins with Innovators, who are willing to pay the highest cost and assume the most risk that a new technology will not work satisfactorily. As the technology gets better (rising up the S-curve), Early Adopters who are willing to pay less and assume less risk begin to buy.

Eventually, after passing the S-curve inflection point, the technology becomes mainstream as Early Majority and Late Majority adopters, then finally Laggards, buy it. 

Danny Cullenward, David G. Victor, “Making Climate Policy Work,” Wiley, 2020.

The graph above shows where new clean energy technologies are on the S-curve. Power, cars, and building technologies are at their inflection points or beyond, while steel, cement, and plastics are lagging because they are difficult and costly to decarbonize.

3. Finance

“The extent to which banks and other financial institutions will be prepared to take the dual risk of financing new technologies, while also responding to investor and societal pressure to withdraw from the funding of hydrocarbons will be a key determinant of progress of the energy transition,” said Dr. Henderson. The IEA estimates that $100 trillion must be invested by 2050 to finance renewable energy deployment, improve energy efficiency, and help manage the decline of fossil fuels.

The biggest challenge will be to finance clean energy development in emerging (Africa, Latin America) or rapidly developing “middle income” economies (Asia, Middle East). These countries account for two-thirds of the global population but only one-fifth of clean energy investments, according to the IEA, which estimates that 1.1 billion people still are without electricity. Energy consumption per capita is low, sometimes low enough to be considered “energy poverty.” Implementing clean energy development models that avoid high-carbon options will be a significant challenge. (listen to this Energi Talks podcast, Time for the United States to compete with China in global clean energy finance)

4. Business Models

Energy related business models are being transformed by policy, technology change, investor pressure, changing consumer preferences, and other influences. Three trends are of particular note.

Oil and gas companies

European supermajors like Shell and BP are adopting energy transition strategies that include divesting from oil production, shifting to natural gas (lower emissions), and diversifying into electricity generation and related business activities like electric vehicle charging infrastructure. North American and national oil companies have mostly resisted this trend, though some are being pressured by shareholders to emulate the Europeans. (listen to the How is Big Oil navigating the Energy Transition? Energi Talks podcast)

Electrical utilities

Power grids are being transformed by new technologies. In some countries, like the United States, “distributed energy” (wind, rooftop solar, batteries) is breaking up the old monopoly utility and distribution model in favour of independently operated systems that allow many generators and distributors to compete in regulated markets. Policymakers, regulators, and utilities are struggling to make rules and design markets that enable more cheap renewables but also provide consumers with low prices and reliable electricity.  (listen to Coming soon: The electric utility of the future Energi Talks podcast)

Circular economy

“The circular economy concept is fundamentally based on keeping materials and products within a supply and demand loop for as long as possible, with leakages minimized or ideally eliminated through measures such as resource life extension, material re-use and recovery, and recycling,” according to Dr. James Henderson of the Oxford Energy Institute. (watch 9-minute video interview about EV battery recycling)

5. Decline of Fossil Fuels

Interview request: Adonis Yatchew, UofT

The International Energy Agency predicts that consumption of coal, oil, and natural gas will decline over time, but how quickly is still uncertain. Policy will play a key role determining the pace of the decline. The IEA’s World Energy Outlook 2021 modelled three potential futures for fossil fuels. 1) Stated Policies Scenario (STEPS) based on existing policies; 2) Announced Pledges Scenario (APS); 3) Net-zero by 2050. Fossil fuels consumption will decline fastest in the net-zero scenario and slowest in the stated policies scenario. (watch this 12-minute video interview, Cash rich oil/gas firms not investing in more production due to energy transition uncertainty)

World Energy Outlook, International Energy Agency, P. 185.

A fossil fuels “wild card” is carbon capture and storage (CCS). Greenhouse gas emissions are captured during combustion, transported by pipeline to areas with the appropriate geology (often depleted oil and gas reservoirs), then pumped underground where they are stored indefinitely. CCS is relatively new, unproven in many applications, and expensive, but is considered to be critical for rapid decarbonization. (watch this video interview, Carbon capture and storage “no silver bullet” for oil and gas sector)

Coal

Coal emits between 214 and 228 pounds of CO2 per million British thermal units (Btu) depending upon type and quality. Consumption will decline quickly in rich economies, displaced by natural gas and renewables. Developing economies, particularly in Asia where rapid economic growth is expected until mid-century, rely heavily on coal-fired power plants and transitioning to other fuels will be more difficult.

World Energy Outlook 2021, International Energy Agency, P. 185.

Oil

Gasoline and diesel refined from oil emit between 157 and 161 pounds of CO2 per million Btus. Consumption by ground transportation (autos, freight) will decline fastest because of electrification. Consumption in other sectors, such as aviation and marine shipping where low-carbon fuels are less available, will take longer. Peak Oil Demand is expected to arrive during the late 2020s or early 2030s. (watch this 10-minute video interview, Peak oil demand is coming soon, says IEA)

World Energy Outlook 2021, International Energy Agency, P. 185.

Natural Gas

Natural gas is the cleanest burning of the fossil fuels, emitting 117 pounds of CO2 per million Btus. It is considered by some to be a “bridge fuel” that will be important to power generation, heating buildings, and generating industrial heat until electrical solutions or low-carbon fuel replacements are developed. 

World Energy Outlook 2021, International Energy Agency, P. 185.

6. Electricity Systems

As the global energy system gradually shifts away from fossil fuels, much more electricity will be needed. Economic modeller Dr. Chris Bataille says the rule of thumb is two to three times more for rich countries and three to five times more for developing countries. Electricity systems – power generation, power grids, distribution – will change significantly to accommodate this growth.

IEA renewable energy analyst Heymi Bahar estimates that 90% of new global electricity generation through 2025 will come from renewables (primarily hydro, wind, solar), at which time it will overtake coal-fired generation and account for 50% of all power. As the graph below shows, renewables’ percentage of total energy supply by 2050 is higher in scenarios with stronger government policies. (listen to Wind, solar adoption will soar during 2020s – IEA Energi Talks podcast)

At the same time electricity systems are expanding, they are changing because of new technologies. Wind turbines and solar photovoltaic panels are now the cheapest form of power generation. But they are intermittent (the wind doesn’t alway blow and the sun doesn’t always shine). Batteries and other forms of storage (e.g. pumped hydro) are being used to store electricity so it is available to the grid when needed, but costs must fall further to make them economic. (watch 13 minute video interview, Is compressed air storage the answer to adding more wind and solar to the electricity grid?)

International Energy Agency, World Energy Outlook 2021, P. 199.

7. Hydrogen and Biofuels

Hydrogen is the lightest chemical element, does not contain a carbon molecule, and is highly combustible. These properties make hydrogen ideal as a low-carbon fuel for applications such as long-haul freight trucking or steel manufacturing where electricity is not efficient or cost-effective. Green hydrogen, made using renewable electricity and hydrolyzers, is expensive, though it is expected to be competitive by 2030. Blue hydrogen is made from natural gas and lower-cost, but does create some emissions. Many countries, including the European Union and Canada, now have hydrogen development strategies. (watch 8-minute video interview, The hydrogen economy is coming but how do we get it to market?)

Biofuels can be made from plants such as corn or from agricultural and industrial waste. They are mostly used in transportation because they can be substituted for gasoline and diesel with minor modifications to vehicles. Biofuels produced from food crops are controversial because they divert food to energy and sometimes cause land degradation.  (watch 8-minute video interview, Suncor, Shell invest in sustainable jet fuel producer)

8. Energy Efficiency

Energy efficiency is using less energy to perform the same task. The IEA estimates that 40% of GHG reductions to 2040 must come from improvements to energy efficiency. Fortunately, existing cost-effective technologies, such as heat pumps, already could double energy efficiency over the next 20 years. The challenge is to adopt them at a global scale.  (watch 6-minute video interview, It ain’t sexy, but energy efficiency can pay big dividends for Canadian industry – new CERI study)

9. Consumers, Workers, and Just Transition

“Raising the level of climate ambition, however, requires more from consumers than a systematic preference to buy clean technologies. They also need to change behaviour to reduce their energy consumption and emissions footprint.” (IEA, World Energy Outlook 2021, P. 158)

The IEA incorporated consumer behavioural changes into its announced pledges, but government policy interventions were not strong enough to significantly change behaviour. The more aggressive policies of the net-zero scenario modify behaviour and lower emissions, especially before 2030. Measures such as buying an EV, ride-sharing, teleconferencing instead of flying to meetings, and setting building air conditioners above 24 degrees Celsius lowered emissions significantly. 

Government policies must ensure that workers and disadvantaged communities, including those currently dependent on the fossil fuel industry, are supported as they cope with the disruption caused by the energy transition. The IEA describes this as “putting people at the heart of the clean energy transition.” Other describe it as “just transition.” Just transition strategies include worker retraining and investments in community-based renewable energy projects (e.g. wind and solar farms). (watch 8:35-minute video interview, Transformation of global energy system requires a Canadian “just transition” strategy, says UNIFOR)

10. Geopolitics and Asymmetrical Regional Transition

“For more than fifty years, oil and gas have been at the heart of the geopolitics of energy, with questions of trade flows, energy security and economic power at the fore,” says Dr. James Henderson. This will change slowly as the fossil fuel industry wanes over the next three to five decades. Competition and conflict may, instead, focus on emerging industries and supply chains like critical minerals for Lithium-ion battery and electric vehicle manufacturing.

The global energy transition will be asymmetrical, with developed countries dominating the emerging clean energy sectors and developing countries playing catch up.

Conclusion

“A new energy economy is emerging around the world as solar, wind, electric vehicles and other low-carbon technologies flourish,” the IEA says.

As the energy transition enters the 2020s, the disruptive decade, the general trends of the switch from fossil fuels to clean energy are discernible, but not the finish. Will the transition away from fossil fuels happen soon enough to halt global warming at 1.5C degrees? Which countries will dominate the emerging clean energy economy? Which energy technologies will dominate? Will the energy transition create new types of human society or just a cleaner version of the present ones?

“The world’s hugely encouraging clean energy momentum is running up against the stubborn incumbency of fossil fuels in our energy systems,” said IEA Executive Director Fatih Birol. “The social and economic benefits of accelerating clean energy transitions are huge, and the costs of inaction are immense.”

Related links:

  1. The Energy Transition: Key Challenges for Incumbent and New Players in the Global Energy System, James Henderson, Anupama Sen, Oxford Energy Institute, 2021
  2. How the 1920s help us understand the energy transition of the 2020s, Markham Hislop

  3. Managing the energy transition: Pathways to Canada’s net-zero future

  4. Germany’s Energiewende shows energy transitions are damned difficult

  5. Energy transitions: A simple model to help us think about fossil fuels vs. renewables, by Markham Hislop

  6. Glasgow an opportunity to change climate, energy transition narrative from “pain” to “gain” – video interview with Kingsmill Bond, Carbon Tracker

  7. Canadians overwhelmingly favour climate action, energy transition support says pollster – video interview with Bruce Anderson, Abacus Data
  8. European oil majors accelerating the pivot to low-carbon economy – video interview with Valentina Kretzschmar, Wood Mackenzie

  9. Energy Transition, Energi Student Resources portal

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