A new report by Carbon Tracker titled “2020 Vision: Why You Should See Peak Fossil Fuels Coming,” shows that rapid global growth of clean technologies – particularly solar and wind – will lead to fossil fuel demand peaking in the 2020s. Renewable energy sources will replace fossil fuels.
With global energy demand expected to grow at 1-1.5% and solar and wind at 15-20% a year, fossil fuel demand is due to peak between 2020 and 2027. The impending energy transition will put trillions of oblivious investors’ dollars at risk.
The report was released at the Global Climate Action Summit (GCAS), in San Francisco, in early September. GCAS convened leaders and people from around the world to celebrate the achievements of: states, cities, companies, investors, and citizens—with respect to climate action. They also gathered to ensure deeper worldwide commitments and accelerate action to realize the historic 2015 Paris Agreement which had united nations to undertake ambitious efforts to combat climate change.
“Fossil fuel demand has been growing for 200 years but is about to enter structural decline. Entire sectors will struggle to make this transition. They can expect: price declines, greater competition, restructuring, stranded assets, and market derating,” said Kingsmill Bond, Carbon Tracker New Energy strategist, and the Carbon Tracker report’s author.
The energy transition and stagnation in demand for coal, gas, and oil is being driven by three factors, the report finds. Firstly, the cost of solar photovoltaic, wind, and battery storage is falling fast and they are now able to compete with fossil fuels without subsidies. According to data from the InternationalRenewable Energy Agency (Irena), the average global cost of electricity, wind-generated, has fallen from nearly $150 per MWh at the start of the century to under $60 today. The average global cost of solar PV electricity has fallen from $350 per MWh in 2010 to $80 in 2018, with auction results indicating it will fall to $50 by 2020.
In India, for instance, over the last 12 months, the cost of solar PV electricity has fallen to a level ($36 per MWh) well below that of new coal-fired power stations. By 2020, renewables will be cheaper than fossil fuels in every major region of the world, according to Irena.
Secondly, emerging economies are driving growth in energy demand and choosing renewables over fossil fuels. They: have less fossil fuel legacy infrastructure, a rising energy dependency, more pollution, and are keen to seize the opportunities renewables have to offer. China and India are already choosing solar and wind over fossil fuels. China overtook the United States and boasted the largest capacity for solar and wind power in 2012, then electric cars in 2016. The IEA predicts that 27% of energy-demand growth in the next 25 years will come from India, and 19% from China.
Finally, government policy supports these trends to curb climate change and reduce air pollution.
“The need to limit carbon emissions, the desire to breathe clean air, and the drive for energy independence all mean that global regulatory pressure on the fossil fuel industry will only increase,” the report’s author Bond said.
The report identifies four phases in the energy transition from fossil fuels to renewables: innovation, peaking, rapid change, and endgame. It shows that each energy demand sector in every country is moving through these stages, led by the electricity sector.
The peak in fossil fuel demand, and the energy transition from a system based mainly on fossil fuels to one based primarily on renewable energy sources, will greatly impact financial markets. The fossil fuel sector has invested an estimated $25 trillion in infrastructure, and the fossil fuel and related sectors comprise a quarter of equity and debt markets. There will be systemic risks to financial markets as they seek to digest vast amounts of stranded assets. The transition will directly affect companies that comprise a quarter of equity indexes and debt markets— hitting the: banking, capital goods, transport, and automotive sectors. Peaking demand for fossil fuels will mean: falling prices, rising competition, sector disruption, and stranded assets.
“We have seen a similar pattern in many energy transitions, from electricity, coal, and cars in recent years to horses and gaslights in the past. Demand for incumbents peaks early, and investors in incumbents lose money early on,” Bond said.
The report finds that the tipping point for fossil fuel demand will come when the challenging renewable technologies make up around 6% of the total energy supply, and 14% of the global electricity supply.
Bond said investors will typically react even before companies see peak demand.
“We believe that investors will start to react faster as the energy transition works its way through the world’s capital markets. As each sector is impacted, it becomes easier for the market to anticipate something similar happening to the next sector,” he said.
The Carbon Tracker Initiative is a not-for-profit financial think tank that carries out in-depth analysis on the impact of the energy transition on capital markets and the potential investment in high-cost, carbon-intensive fossil fuels, making climate risk real in today’s capital markets.
This story was supported by the 2018 Climate Change Media Partnership, a collaboration between Internews’ Earth Journalism Network and the Stanley Foundation.
