Heavily oil dependent and iron & steel

COVID-19 and its impact on the energy transition

Sverre Alvik - 8 October 2020

Energy use is strongly linked to economic activity, which has been, and will continue to be, significantly impacted by COVID-19. Our energy forecast is predicated on IMF’s longer outbreak scenario, where World GDP will shrink 6 per cent in 2020. Even with slower growth, however, by mid-century the world economy will still be twice its size today. In contrast, energy demand will not grow. In 2050, it will be about the same as it is today, in spite of a larger population and world economy.

About the author

Mr Sverre Alvik
Sverre Alvik is Director of the Energy Transition Programme and project director for DNV GL’s Energy Transition Outlook. He has a Master’s degree in Naval Architecture from NTNU in Norway and 20 years’ experience working in DNV GL.
This is largely due to significant improvements in energy intensity, but also due to the effects of COVID-19. Improvements in energy intensity will remain the most important factor in reducing energy demand in the coming decades. The contraction due to COVID-19 comes on top of this, as a result of the brakes applied to economic activity generally by the pandemic, as well as some specific sectoral impacts (decreased mobility, decreased demand for manufactured goods, decreased demand for iron & steel).

This appears to be good news for decarbonization. Transport remains heavily oil dependent and iron & steel is one of the key so-called ‘hard to abate’ sectors, heavily relying on hydrocarbons. Declining demand in these sectors is one of the main reasons for the price weakness in hydrocarbons, with widespread write-downs in oil and gas assets. It appears likely that oil has already reached a supply plateau that we forecast to occur in 2022, prior to factoring in the effects of the pandemic.

However, it is certainly not game over for hydrocarbons, especially for natural gas, which we forecast to take over from oil as the largest energy source in this decade. However, the reduced return on capital and the increased volatility in fossil fuel prices is making many investors look at these assets in the post-COVID world with a greater degree of caution.

Renewables have first place in the merit order of the power mix due to their very low operating costs, and short design and construction times. These assets are therefore more robust, and we predict a slightly faster recovery of the non-fossil capital expenditure in the next couple of years than will be the case for fossil energy.

With the earlier than anticipated plateauing of oil and the continued rapid decline of coal use, our forecast shows that CO2 emissions most likely have already peaked (in 2019). Again, this appears to be good news from a climate goals perspective – but the longer-term decline in emissions is not significantly accelerated by the pandemic. Even with peak emissions behind us, and flat energy demand through to 2050, the energy transition we forecast is still nowhere near fast enough to deliver the Paris ambition of keeping global warming well below 2°C above pre-industrial levels. To reach 1.5-degree target, we would need to repeat the decline we’re experiencing in 2020 every year from now on.

It should also be acknowledged that emissions have been declining in the first half of this year for the wrong reasons. The coronavirus pandemic is exacting a heavy and tragic toll on lives and livelihoods, increasing poverty and hunger and reducing growth prospects for those that need it most. There is a potential for a much more just and sound energy transition that does not cause the harm and disruption associated with the COVID crisis.

In our forthcoming Energy Transition Outlook (2020), which we will release in early September, we explore many of the technology solutions that can help to close the gap between our forecast global warming outcome and the Paris ambitions. However, the key to reaching the Paris goals remains policy: the political choices and policy delivered around the world that encourages the correct behavioral changes and enables the right technical solutions to scale.

About the authors:

Mark Irvine is Communications manager (Strategic Research & Innovation) at DNV GL.

Mark Irvine

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