Chairman’s Message

There are as many long-term energy and emissions outlooks for the future as there are organizations that prepare them. The results could differ dramatically. When governments and companies rely on outlooks to support their policy and investment decisions, such wide variations in results raise concerns. Why are they so different? Energy demand, determined by economic growth and energy intensity improvements, makes the difference. Higher aspiration for economic growth and rising living standards in Asia will lead to greater energy demand. The larger energy demand will require a greater role for conventional energies.

<Main Points>

1. Comparing IEA pathways with ERIA/IEEJ pathways

Among the six reports submitted by IEA to the G7 Hiroshima process this year, my Institute (IEEJ) fully supported the preparation of two of these reports. The first of those reports titled “Decarbonization Pathways for Southeast Asia” compared the pathways presented by IEA in its Announced Pledges Scenario (APS) with the ERIA (Economic Research Institute for ASEAN and East Asia)/IEEJ analysis of what would be required to achieve the carbon neutrality pledges of member countries of ASEAN. ERIA and IEEJ have been supporting ASEAN countries develop their carbon neutrality roadmaps.
IEA expects that fossil fuel energies would be substantially reduced by 2050 while ERIA/IEEJ expect fossil fuels would still play a significant role even in 2050/2060. IEA suggests a peak in oil consumption will be reached around 2030, while the ERIA/IEEJ scenario shows strong continuous growth, with consumption in 2050 being twice that of IEA. Additionally, natural gas growth is significantly lower in IEA up to 2030, with a subsequent decline, whereas ERIA/IEEJ shows strong growth up to 2040 and slower decline thereafter, with consumption in 2050 being also twice that of IEA. The other report was the “Outlooks for gas markets and investment” which investigated various analysis and reports for natural gas/LNG markets as prepared by several organizations. Outlooks by IEA and IEEJ were compared with other outlooks and the expected demand for natural gas/LNG varies from 3300 Bcm to 4500 Bcm in 2030. A very big difference！

2. Anatomy of ASEAN pathways: Demand makes the difference.

It was surprising to find that the expected level of deployment of renewable energies in absolute terms was not very different between the IEA-APS pathway and the ERIA/IEEJ pathway. In fact, the latter had a slightly higher level of renewable energies in its pathway.
The largest difference between pathways was in the final energy demand of ASEAN in 2050. The final energy demand in 2050 estimated by ERIA/IEEJ was 2.4 times larger than the demand in 2020. The respective final energy demand by IEA was only 1.4 times larger, thus, the ERIA/IEEJ energy demand was 1.7 times larger than the IEA case.

3. Larger economic growth expectation contributes to half of the demand difference.

The ERIA/IEEJ pathway assumes an annual real GDP growth of 4.6% between 2020 and 2050, in line with the growth aspiration of ASEAN countries. This assumption leads to a 3.9 times growth in real GDP over the same period.
On the other hand, the IEA pathway assumes an annual GDP growth of 3.8% over the same period. The size of the economy will be 3 times larger in 2050 compared to 2020.
The economy of ASEAN in 2050 is expected to be 1.3 times larger in the ERIA/IEEJ pathway than in the IEA pathway. After 30 years of compounding a difference of just 0.8% in the annual growth assumption, the difference in the size of the economy will be substantial at 30% larger. The difference in the size of the ASEAN economy contributes to about half of the 70% difference in the final energy demand in 2050.
No one has a crystal ball about the future of the ASEAN economy. IEEJ believes that it would be appropriate to have assumptions consistent with the growth aspiration of the ASEAN countries. On the other hand, IEA seems to assume that economic growth will slow down over the long term as the economies mature. While this could eventually happen, the lowering of the growth aspirations of the ASEAN countries should be clearly explained in the pathways.

4. Lower energy intensity improvement contributes to the remaining half of the demand difference.

Both the ERIA/IEEJ and the IEA pathways assume significant energy intensity improvement over the period. The ERIA/IEEJ pathway assumes that the trend of past energy intensity improvements would continue during the next 30 years. On the other hand, according to the IEEJ’s estimate, the IEA pathway assumes a doubling of the ratio of the energy intensity improvement versus per capita GDP growth compared with the past trend. This difference roughly contributes to the other half of the difference in the final energy demand in 2050.
Energy intensity improvement is positively influenced by energy efficiency while often offset by a rise in living standards with, for example, the use of more air conditioners in houses or bigger cars. Considering the historical observation that energy efficiency improvement face diminishing returns as low hanging fruits are taken away, a doubling of the improvements in energy intensity seems to be a challenging assumption. Expectations of a slowing down of the rise in living standards would probably have to be in place to ensure continuous acceleration in energy intensity improvement.
This slowdown in the rise of living standards would be against the aspiration of the people in ASEAN. If a significant acceleration in energy intensity improvement is assumed in the IEA pathway, the difficulty of both achieving such acceleration and keeping the speed in the rise of living standards should be explained explicitly in presenting the pathways.

5. A larger demand must be met with a larger supply of conventional energy

How can a 1.7 times larger final energy demand in ASEAN in 2050 be met? As noted above, the ERIA/IEEJ pathway expects a larger development of renewable energies in absolute levels compared with the IEA pathway and it would be hard to expect more to come from renewable energies. A realistic option to fill in this demand gap is to increase the supply of conventional energies such as natural gas, as in the ERIA/IEEJ pathway. To offset the resulting increase in CO2 emissions, the ERIA/IEEJ pathway attaches great roles for CCUS and other carbon removal technologies instead of substantially reducing the role of conventional energies as in the IEA pathway.
This may not be welcomed by many people especially those in the advanced economies, but there must be a sufficient supply of conventional energies to meet a larger energy demand, and this will require sufficient investment in conventional energies. Otherwise, under-investment would lead to a shortage of future supplies resulting in occasional price hikes in the energy markets. An increase in energy prices would hurt more the people in ASEAN and other parts of the Global South because they are more vulnerable to rising costs and face a much longer energy transition period compared to advanced economies.

6. Various outlooks for the gas markets and the need for investment

IEA, with the support of IEEJ, submitted a report to the G7 process titled “Outlooks for gas markets and investment”. The report assembled a number of outlooks of gas markets towards 2050 including back casting outlooks such as the IEA-NZE (Net Zero Scenario) and forecast based outlooks such as the projections prepared by IEEJ. By displaying the wide range of energy outlooks, the report acknowledged that “large variations in the supply and demand outlook in different scenarios and different modelling frameworks highlight the uncertainties affecting natural gas and LNG markets.”
The report further recognized that “even with flat or declining natural gas demand in the STEPS (Stated Policies Scenario) and APS (Announced Pledges Scenario), new investments in upstream gas supply remain necessary in these scenarios to offset production declines from existing fields.” The IEA-NZE report, released in May 2021, sent shock waves to the energy industries as it was reported as if no new investment in the upstream for oil or gas would be necessary. To be truthful, it was based on the explicit assumption that net zero emission will be realized by 2050.
The new IEA report made it clear that in cases where net zero emission will not be realized by 2050, as in the STEPS and APS, new investment in the upstream of gas will be necessary. This was a very significant recognition which provided the basis for the following language in the G7 Hiroshima Leaders’ Communiqué.
“we stress the important role that increased deliveries of LNG can play, and acknowledge that investment in the sector can be appropriate in response to the current crisis and to address potential gas market shortfalls provoked by the crisis.”
This was a very significant recognition made by the G7 which could help ensure sufficient investment and financing in the gas sector.

7. The remaining question: What are the impacts of the Russian invasion of Ukraine on the need for investment in gas?

The remaining question relates to the NZE. After the IEA’s report in May 2021, Russia which had been supplying 25% of the global gas export market, invaded Ukraine in February 2022. If a substantial portion of the Russian gas supply is taken out from the global gas market, the outlook for the supply and demand for gas should be changed significantly. However, the IEA report submitted to the G7 continues to argue that if net zero is realized in 2050, there is still no need for new upstream investment in gas. It is hoped that a clear explanation and analysis could be provided taking into account of the dramatic changes that have occurred after the Russian invasion of Ukraine.