Steam rises from the cooling towers of the Lippendorf power plant south of Leipzig.
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Energy prices around the world are at record highs as an electricity crisis hits Europe and Asia – and the International Energy Agency warned Wednesday that volatility will continue.
In its annual press release, the Paris agency said the world is currently underinvesting in future energy consumption, which will make the transition to net zero emissions unstable.
“There is a risk of further turbulence for global energy markets,” said Fatih Birol, Executive Director of the IEA, in a statement. “We are not investing enough to meet future energy needs and the uncertainties are setting the stage for a volatile phase ahead of us.”
The report pointed to, among other things, political and demand uncertainties as reasons for the current underinvestment.
As events in 2021 show, consumers are vulnerable to soaring prices.
World Energy Outlook 2021
International Energy Agency
The dangers of an energy complex mismatched on the supply and demand side are now playing out as the global economic recovery from Covid-19 continues. Energy demand has skyrocketed as businesses reopen and consumers return to pre-pandemic activity, but supply remained tight as manufacturers hesitated to bring new productions online.
Oil prices are up more than 60% for 2021 after falling to record lows in April 2020, while U.S. natural gas prices have more than doubled this year. In Europe, spot prices for natural gas hit an all-time high this fall, while coal prices are also rising in the course of preparations for the winter heating season.
Higher fuel costs are passed on to consumers and businesses, potentially damaging economic recovery.
“As events in 2021 show, consumers are vulnerable when prices rise sharply,” the report said. “Volatility and price shocks cannot be ruled out during the transition.”
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The World Energy Outlook report outlines three possible future scenarios to try to understand what the energy system will be like decades from now.
- Specified policy scenario: based on policies that have already been implemented;
- Announced commitment scenario: factors in goals that have been made but not yet achieved. In this scenario, fossil fuel demand will peak by 2025;
- Net zero emissions by 2050: Factors that need to be done to limit global warming to 1.5 degrees Celsius above pre-industrial levels.
The report found that for the first time in its projections, oil demand is declining in each scenario, but the pace varies widely. This in turn poses challenges for energy producers.
“If the supply side of oil or gas moves away before the world’s consumers do, the world could face periods of market squeeze and volatility,” the report said. “Alternatively, if companies misjudge the rate of change and over-invest, these assets could underperform or become stranded.”
Clear signals and instructions from policy makers are essential. If the road ahead is paved with only good intentions, it will be a bumpy ride indeed.
International Energy Agency
To achieve net zero emissions by 2050, clean energy spending must reach $ 4 trillion annually by the end of this decade, according to the IEA. While the number seems large, the report found that technologies that pay for themselves, like improving efficiency and limiting gas leaks, can reduce emissions by 40%.
Still, the majority – or 70% – of the money has to come from private developers, consumers, and Wall Street.
The report added that the level of investment required creates “great economic opportunities” for clean energy technologies such as wind turbines, solar panels, lithium-ion batteries, electrolysers and fuel cells. All in all, the IEA said the market for these green technologies will hit $ 1 trillion annually by 2050, which is the current size of the oil market.
“Clear signals and instructions from policy makers are essential. If the road ahead is paved with only good intentions, it will indeed be a bumpy ride, ”the report said.