Tatsuya Terazawa Chairman and CEO The Institute of Energy Economics, Japan
Message for November 2023
IEEJ recently published its official annual global energy outlook for 2050. This is a forecast based outlook, not a back-cast based outlook such as the NZE scenario by IEA. What is most likely to happen based on a set of reasonable and well-grounded assumptions as portrayed by forecast outlooks may be quite different from what needs to happen to realize a pre-determined objective, such as carbon neutrality by 2050, as portrayed by back-cast outlooks.
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1. Forecast based outlooks by IEEJ differs from back-cast based outlooks
IEEJ has been conducting its long-term global energy outlook analyses annually since 2004. It is one of the few independent thinktanks in the world to conduct such analyses annually. In line with this long history, IEEJ has just released its most recent outlook. IEEJ outlook scenarios are forecast based, portraying two most likely pictures of the energy supply and demand in 2050. This approach is very different from a back-cast outlook which starts from net zero emissions in 2050 and works backwards to portray what technologies would be needed to achieve the goal. The NZE scenario issued by IEA is a typical example of a back-cast outlook. It is quite natural for these two approaches to produce different outcomes. While back-cast based outlooks are very important to highlight a set of necessary technologies, forecast based outlooks show the emissions’ gap relative to an emission’s objective. By comparing them, we get an idea of which policies, actions and investments are required to reach the goal. There are two scenarios presented by IEEJ. The first is the Reference Scenario (REF) which assumes that current trends including policy and technology advancements will continue to take place towards 2050. The second is the Advanced Technologies Scenario (ATS) which incorporates a much higher degree of technology/policy advancement and deployment considered realistically possible.
2. Reduction of energy related CO2 emissions: Significant but short of the goal
Under the REF, the energy related CO2 emissions will stay roughly at the same level in 2050 as in 2020 but, under the ATS, they will drop to roughly 40% of their current level in 2050. Although a 60% drop will be a significant achievement, it will most likely disappoint those stressing the need to realize carbon neutrality by 2050. To make it clear, IEEJ is not arguing against aiming for carbon neutrality by 2050. The outlook (ATS) simply demonstrates what might happen when we assume maximum development and deployment of technologies considered realistically possible. A closer look at the data reveals that the vast majority of the remaining CO2 emissions under the ATS will be coming from the emerging/developing economies as well as the non-power sectors. In other words, to get closer to carbon neutrality by 2050, much more progress must be made to address specifically those two sources. Energy-related CO2 emissions CO2 emissions by region
3. Outlook for fossil fuels: Reduced but remains important during a long transition
In both the REF and ATS, coal will be peaking out in the mid-2020’s. In the ATS, coal consumption will be dropping significantly to 39% of the current level by 2050. In the REF, demand for oil and for gas will continue to grow. On the other hand, under ATS, oil demand will be peaking out by the mid-2020’s and will drop thereafter to be roughly at 60% of today’s level. From this perspective, oil will have a relatively smaller but still significant role to play in 2050. The outlook for natural gas deserves much greater attention. Even under the ATS, the demand for gas will be rather plateauing until the late 2030’s before gradually declining. By 2050, demand for gas will be about 87% of the current level. This pathway demonstrates the continued importance of gas in the transition. Putting these together, under the ATS, 53% of the global primary energy will still be supplied by fossil fuels. This is certainly a substantial drop from the current global share of roughly 80% for fossil fuels. But fossil fuels will likely continue to play an important, albeit reduced role, in 2050. This may not be in line with what needs to happen to realize carbon neutrality by 2050 but this is what is projected to happen even when a higher level of development/deployment of technologies and policies is assumed. Primary Supply（Fossil Fuel） The transition will be long! In addition, if the technology/ policy development and deployment assumed in the ATS do not fully materialize, the demand for fossil fuels could be larger, somewhere between the REF and the ATS. This would certainly lead to uncertainties! The challenge is to ensure that the world’s energy demand will be met by sufficient supplies. What makes it even more challenging, is that the future supplies of energy require long lead time and can only be achieved through investment made in a timely manner. We will have to steadily invest in fossil fuels to support the long and uncertain transition. Otherwise, underinvestment will lead to a shortage of supply which in turn could lead to occasional energy crises.
4. Outlook for LNG: Steady demand requires steady investment
In line with the outlook for natural gas, the outlook for LNG demand will be growing under the REF. Under the ATS, however, the demand for LNG will be growing gradually until shortly before 2040 and then start to decline. The level for LNG demand in 2050 under ATS will be roughly the same as the current level. depletion over time of the existing LNG supply capacity and the addition of projects already sanctioned, the world’s LNG capacity in 2030 will most probably be sufficient to meet demand. But even under the ATS, the LNG supply will face potential shortage in 2040 and 2050. In addition to the existing capacity (net of natural depletion), investment for an annual average addition of 8 million tonnes per year will be needed. While substantial Final Investment Decisions (FIDs) have been made, especially following the invasion of Ukraine, some of those projects for which FIDs have been made might be delayed and the existing capacity may be disrupted due to various factors including geopolitical tensions. Increased investment to mitigate the natural depletion of supply capacity will definitely be needed together with investment to support new projects, in addition to those for which FIDs have been made, to fill-in the potential insufficiency. LNG Supply: Capacity Requiring Investment
5. Aiming ambitiously for the goal but preparing realistically for a likely future
As we all strive to realize the goal of carbon neutrality by 2050, it is important to identify what is required in order to achieve it. We need to introduce new policies and take action that would be consistent with the goal. But at the same time, we should also look at what is likely to happen and prepare for it. Energy is essential. We must make sure that there will always be a sufficient energy supply and must also make sure that we never create energy crises. To avoid the possibility of crises, sufficient investment must be planned and implemented in advance to address the long lead time required by the energy sector projects. The energy transition to carbon neutrality will most probably be long and filled with uncertainties. As we must plan for an ‘as smooth as’ possible transition and must avoid making energy crises, a steady and sufficient flow of investment is needed to prepare us for the reality of the transition.
I would like to conclude this message by introducing the 12th and the 13th IEEJ Webinars for the World planned for November 7th and 15th, respectively. In both webinars, IEEJ will present a quick overview of “IEEJ Outlook 2024”, its newest global energy outlook for 2050 officially released on October 20th. The “IEEJ Outlook 2024”, which is a “forecast based outlook”, presents very different energy perspectives for the future than those presented by “back-cast based outlooks”. Either of the events will feature the same content, but the latter will be hosted especially for viewers in the time zones of the United States and Canada. Please feel free to click the hyperlink below to register.
The 12th IEEJ Webinar for the World 1.Date/Time: Nov. 7th 21:00-21:45PM JST/12:00-12:45PM GMT/07:00-07:45AM EST 2. Webinar App.：Zoom 3. Agenda：IEEJ outlook 2024 4. Registration: https://us02web.zoom.us/webinar/register/WN_IAIPCvadRcq3GIEnTEha2w
The 13th IEEJ Webinar for the World 1.Date/Time: Nov. 15th 19:00-19:45PM ET/18:00-18:45PM CT/16:00-16:45PM PT 2. Webinar App.：Zoom 3. Agenda：IEEJ outlook 2024 4. Registration: https://us02web.zoom.us/webinar/register/WN_X0HqKLsNS_iid1K6INvARw
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