The IEA on Thursday released some eye-watering projections for energy demand declines in 2020 in the light of the Covid19 crisis. In their scenario they expect oil demand to fall by a massive 9%, coal by 8% and gas by 5%. Meanwhile, they expect solar to continue to grow by 16% and wind by 12%. They expect CO2 emissions from the fossil fuel sector to fall by 8% in 2020.
If these decline rates are right, this means that peak fossil fuel demand was almost certainly in 2019. And that also means we have seen peak emissions from the energy sector, so there is new hope that we can hit the targets of the Paris Agreement. Peak fossil fuel demand is exactly what happened to the European electricity sector in 2008, when the financial crisis forced it upon a reluctant and disbelieving sector. This time, the peak is global, and it is for the entire system.
Fossil fuel demand growth was already low before the crisis, at less than 1% a year. Renewables were growing at 15-20% a year, and from our calculations the peak of fossil fuel demand was coming in any event in the mid 2020s.
Reduce fossil fuel demand by 8% and it will be very hard to get back to former levels of demand before renewables get big enough to supply all the growth. Demand will bounce back in 2021, but the bounce is highly unlikely to be by as much as the fall given the economic hardship that is coming. And after that it is hard to envisage fossil fuel demand maintaining its old growth rates of even 1% because there will be ongoing impacts on the way we travel and trade. If demand for fossil fuels bounces back in 2021 by half the amount it fell in 2020, and grows at 0.5% a year, it would take 8 years to get back to where the industry started.
And in the meantime, the renewable energy revolution has not stopped. The fundamental drivers of growth remain. Lower costs, falling on technology learning curves, and governments anxious to protect their people from pollution and reduce the threat of global warming. Meanwhile, governments are likely to implement rebuild packages which will favour renewable energy because for most countries it is cheaper, cleaner, faster and local. BNEF’s latest data calculates that solar and wind are the cheapest source of bulk electricity generation in 85% of the world. And investors will as usual allocate money to growth industries and take it away from those in decline. So renewables will keep growing even as fossil demand stagnates.
We should not be surprised to see this peak even as we are surrounded by fossil fuels in our daily lives. Horse demand peaked when cars made up just 3% of their number, gas lighting demand peaked when electricity was in its infancy, and we had Nokia phones before the iPhone came along. This is just another technology transition, albeit in the world’s largest sector of energy.
Why then is this so important? Declining demand for fossil fuels will mean perennial overcapacity and low prices punctuated with periods of undersupply and high prices. The high cost part of the industry will have to close down. Rents will fall across the system. Capital expenditure will fall. The ability of the industry to dictate to governments will weaken and the capacity of incumbents to frustrate the growth of renewables will reduce.
This change will not happen in every country nor in every sector. Fossil fuel advocates are rolling out their longstanding plans to reduce emissions controls, reverse plastic bans, and build coal generators. But four out of five people live in fossil fuel importers, and they have cheaper and superior energy choices from domestic renewables than imported fossil fuels. So the writing is on the wall for the fossil fuel sector, and these futile actions will only add to its fragility.
And there is a key consequence of this peak for policymakers. It would be deeply irresponsible to try to build back the fossil fuel system. You may be certain that if you try to do so, the companies at the top end of the cost curve will dump their assets on the taxpayer, and you will have to pay to clean them up and close them down. As you stimulate to drive economic growth, then invest in industries like solar or wind or electric vehicles, with lower costs than the fossil alternative. Invest in efficiency and clean up our cities. Now is precisely the moment to forge the industries of the future, to invest in the new areas which will create jobs, opportunity and growth. Business as usual is well and truly over.