The world energy outlook: The good, the bad, and the ugly

The International Energy Agency has released its annual “World Energy Outlook 2023”, a report that tracks the global transition to net zero emissions. The report contains the latest trends from renewable energy manufacturing to fossil fuel demand. It also forecasts whether the current trajectory of the clean energy transition is on target for the 1.5 degrees Celsius increase in average global temperature – a goal that requires net zero emissions by 2050.

A key finding of the report is that a net zero scenario is still possible. All that’s required is further implementation of “mature, tried and tested, and in most cases very cost effective” policies. However, the window is closing fast.

The report finds that investment into and deployment of renewable energy technologies is rapidly overtaking fossil fuel projects, and demand for fossil fuels is likely to peak before 2030. Even so, the world is not on track to hit net zero. The current trajectory sees average global temperatures rise by 2.4 degrees Celsius.

The report also raises concerns that this forecast could deteriorate if trade tensions between the United States and China continue on a downward spiral.

So, let’s dig into the good, the bad, and the ugly.

The good

The report shows renewable energy costs decreased by almost 80 per cent between 2010 and 2022, with demand for fossil fuels expected to decline soon. In fact, a rapid projected decline in the demand for coal starting this decade leads to a peak in global emissions by the mid to late 2020s.

Solar panel manufacturing looks to have doubled every year for the last ten years despite subsidies for fossil fuels dwarfing those for renewables. A staggering 40 per cent of total solar panels around the world were installed in 2021 and 2022, and more than 50 per cent of global electric vehicle sales were in that same period. These are exponential increases demonstrating both industries are seeing dramatic expansions.

The report identifies planned expansions of solar panel manufacturing capacity will be more than sufficient to reach a net zero scenario – if only 70 per cent of forecast manufacturing is used by 2030, this would be enough for a net zero outcome. In other words, on the current trajectory there will be plenty of solar panels being made to limit global warming to 1.5 degrees by 2030.

The bad

The world is currently heading for a 2.4 degrees Celsius warmer planet (instead of the somewhat safer 1.5 degrees Celsius). Such an increase will lead to catastrophic consequences around the globe, from extreme weather events to the disappearance of inhabited islands. And while oil and gas demand is projected to peak this decade, demand will remain at unacceptably high levels due to the need for aviation and shipping fuels, as well as growing demand in emerging market and developing economies.

While solar panel manufacturing capacity is looking on track, forecasts show the installation of solar is too slow. Right now, only 40 per cent of solar panels being manufactured are being installed. This oversupply is pushing prices down but if this rate of utilisation does not increase to 70 per cent by 2030, there will not be enough energy being produced by solar panels to reach net zero.

The report states the growth in electric vehicle (EV) sales is increasing enough to achieve net zero, forecasting two-thirds of vehicles sold by 2030 to be EVs. But China is the largest manufacturer, and the United States has already imposed import tariffs on Chinese-made EVs in an attempt to protect its domestic car industry. Uptake of EVs might slow enough to derail net zero if the European Union follows suit.

Renewable energy technologies require rare earth minerals. Projections suggest these are not being extracted fast enough to keep up with renewable technology production despite increases in critical mineral capital investment and exploration surveys. Without a significant expansion of critical mineral production capabilities and mined deposits, renewable energy technology inputs will not keep up with the demand to reach net zero.

The ugly

A pressing concern in the report is that renewable energy technology supply chains are more concentrated than other typical supply chains. China has driven much of this concentration with massive state-led investments, capturing large parts of the critical minerals, solar panel and EV industries, including EV batteries. Illustrating this, four countries – Vietnam, India, Malaysia and Thailand – have a 13 per cent share in global solar panel manufacturing. China has about 80 per cent.

Concentrated supply chains are more vulnerable to shocks. The report notes interruption of these supply chains either by geopolitical tensions, disasters or conflict could jeopardise progress towards net zero. Unfortunately, the willingness of China to restrict trade of critical minerals, and US import tariffs on electric vehicles and solar panels that are made in China demonstrate how an increasingly fragmented world is already endangering limiting warming to 1.5 degrees Celsius.

The International Energy Agency’s World Energy Outlook this year has provided a crucial present-day stocktake of progress towards the clean energy transition. Reaching net zero is possible but many challenges are ahead. Given geoeconomic competition has infiltrated renewable energy technologies, the report reads as a stern warning for global leaders: coordinated global investment and trade in renewable energy technologies is how the global community moves towards limiting global warming to only 1.5 degrees Celsius. Don’t jeopardise it.

This article was published in the Lowy Institute’ blogsite The Interpreter. Robert Walker is a Research Associate at the Lowy Institute and works as an economist in the Institute’s Indo-Pacific Development Centre. Dr Melanie Pill is a Research Fellow at the Lowy Institute.