Key insights from McKinsey’s Global Energy Perspective 2021

All economies around the world have experienced unprecedented disruptions triggered by the Covid-19 pandemic. Like every aspect of the economy, energy markets also mirrored the uncertainty and demonstrated extraordinary movements in 2020.

In the initial period of the crisis, fuel demands started dropping and by the end of March, the prices of gas and oil hit historic lows. The second quarter of the year witnessed some of the harshest lockdowns with marginal economic activity, but once the economy reopened, energy demands started peaking. Towards the end of the third quarter of 2020, oil demand in North America and Europe returned to 50% of pre-Covid levels, while China made a full recovery.

McKinsey’s Global Energy Perspective 2021 report elaborates on multiple energy scenarios that might take shape in the coming years. Presented below are 5 key trends that are expected to unfold if the existing trends continue to persist.

Long-term demand impact of Covid-19 is modest

In the last decade, energy sectors witnessed swift technological and policy shifts, while 2020 was extremely disruptive. McKinsey study suggests that the oil, gas and power sectors will rebound anywhere between 1-4 years, while the demand for coal will not return to 2019 levels.

Due to Covid-19, national governments have a better chance to drive transitioning to green energy with adequate policy and reform initiatives. In the following years, energy system will continue to see major shifts with increase in electrification and accelerated focus and growth of renewable energy in order to fuel the global agenda of decarbonization.

Power wins and hydrogen changes the landscape

World’s power consumption will be doubled and by 2050, the share of electricity in total energy consumption, will increase from 19-30%. In the power market, existing fossil assets will be taken over by low-cost renewables by 2030, while by 2036, intermittent renewable sources will account for half of the world’s power supply.

Green hydrogen costs will break even in the 2030s and the demand for indirect power for electrolysis will account for about 40% of electricity demand growth between 2035 to 2050, majorly in transport and industry. In order to shift over to intermittent sources securely, batteries and gas peakers will play an important role, especially to cover larger periods of low output for renewables.

Peaks in fossil-fuel demand continue to occur earlier

Growth in oil demand will slow down and might peak towards the end of the current decade, due declining road transport because of the pandemic. Demand growth will be driven by emerging economies, aviation and chemicals. Despite the overall decline, new oil supply will be required in the future.

Till the late 2030s gas demand will grow and post its peak, decline in demand will be propelled by the power sector, when its role will shift to flexibility provider. Coal will continue to decline, and gas and renewables will increasingly become cost-effective alternatives.

Additional decarbonization policies will be required globally to effectively lower the demand for fossil fuels up to desirable levels.

Change is too slow to reach the 1.5°C Pathway

Sticking to the current decarbonization policies will fail to adequately curb the carbon emissions, to meet the 1.5°C Pathway. With the present-day actions only 25% decline in carbon emission can be reached by 2050, while reaching zero carbon emissions by 2050 is a must to move to the 1.5°C Pathway.

It is extremely necessary for the sustainability of the planet that 50% reduction in carbon emissions is reached by 2030 and for that economies from across the globe must accelerate their decarbonization initiatives.

The targets are ambitious but will really bear fruit only if translated to policies and measures that are properly implemented. Current measures are not enough and a lot more needs to be done.

Investment flows remain stable over the next 15 years

After recovering from the pandemic shock, energy system investments are expected to see steady growth toward 2035. Although the shift towards renewables rise and so does the demand for oil, the energy investment mix stays remarkably stable, although oil and gas become more expensive and renewables see steady decline in cost.

By 2035, oil and gas will still account for 50% of energy investments, growing at an average of 3% annually through 2030 in comparison to 2020 lows. Due to the increasing focus of governments, investors as well as consumers towards the intended energy transition, profitability in all segments of energy will vary significantly. Business leaders and investors must carefully navigate the transition by tracking the speed and direction of change which will vary significantly.