Energy transition avaru

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The scale of the global climate emergency has become ever more obvious in recent years, with record high temperatures and extreme weather events linked to climate change occurring around the globe.

The success achieved this decade in reducing greenhouse gas emissions will determine whether global temperature rise can be limited to 1.5°C of pre-industrial levels this century, in line with the objectives of the Paris Agreement. IRENA’s 1.5°C Scenario, set out in the World Energy Transitions Outlook, presents a pathway to achieve the 1.5°C target by 2050, positioning electrification and efficiency as key transition drivers, enabled by renewable energy, clean hydrogen and sustainable biomass.

The first volume of the 2023 Outlook provides an overview of progress by tracking implementation and gaps across all energy sectors, and identifies priority areas and actions based on available technologies that must be realised by 2030 to achieve net zero emissions by mid-century.

It also provides three key pillars that can form the foundations for action to realign the global energy transition with climate objectives: building the necessary infrastructure and investing at scale to accommodate new production locations, trade patterns and demand centres; advancing a policy and regulatory architecture that can facilitate targeted investments, and improve socio-economic and environmental outcomes; and a strategic realignment of institutional capacities to help ensure that skills and capabilities match an energy system that integrates a high share of renewables.

To date, policymakers have concentrated on the technological, institutional, regulatory and policy facets of the energy transition, with limited attention to its socio-economic implications. Volume 2 of the World Energy Transitions Outlook 2023 contends that current transition narratives may not resonate with all stakeholders, largely due to their omission of central socio-economic dimensions. Bridging gaps in climate policy ambition and fostering essential structural changes necessitates unparallel global collaboration.

The second volume is based on IRENA’s macro-econometric modelling work and provides policymakers with insights into how economic activity, employment and wellbeing may be affected under the 1.5°C pathway, compared to current policy settings. It adopts a comprehensive approach that includes a set of supportive policies within the 1.5°C pathway designed to facilitate structural changes and empower countries to fully leverage the socio-economic opportunities that arise during the energy transition.

Volume 2 also employs IRENA’s welfare index, comprising five dimensions (economic, social, environmental, distributional and access), to delve deeper into the socio-economic analysis of the energy transition. Human welfare improves in all countries and regions under the 1.5°C Scenario.

Photo by Jakub Pabis from Unsplash. 

While climate change remains a challenge, the expectation of an imminent, policy–driven peak in oil and gas demand will need to be reevaluated against wavering policy support and more challenging economic and geopolitical realities, writes Robert McNally.

he extraordinarily favorable economic, geopolitical, and policy conditions from 2015 to 2021, which fueled optimism about an imminent, policy-driven peak in oil and gas demand, have vanished and are unlikely to return soon. Expect a resurgence of "all of the above" energy policies and a collapse of the "peak demand" narrative.

Between the signing of the Paris Agreement in December 2015 and late 2021, conditions seemed perfect for governments, investors, and industries to believe in and bet on a rapid, policy–driven decarbonization of the global energy system by 2050—an ambitious timeline by historical standards.

There were no significant wars, and few outside the U.S. seemed troubled by China's increasing dominance of clean energy supply chains, from solar panels to electric vehicles. 

Aside from the U.S. under former president Trump, most governments embraced ambitious climate agendas, enacting bans, mandates, and subsidies to achieve net zero greenhouse gas emissions by 2050.

Some oil majors announced targeted exits from new fossil fuel projects and a shift to renewables, automakers committed to electric vehicles, and investment firms stopped financing fossil fuel projects.

ESG became the mantra, and capital flooded clean energy funds, with investors betting on green energy. Euphoria soared after Joe Biden''s 2020 victory, his re–entry into the Paris Agreement, and his administration''s "keep it in the ground" approach to fossil fuels.

Moved by the torrent of ambitious policies, pledges, and rhetoric, leading companies and forecasters, including the International Energy Agency, enthusiastically declared that the world should assume a policy–driven global peak in fossil fuel demand by the end of the decade and, therefore, reject proposed investment in new oil and gas production.

Favorable macroeconomic, geopolitical, and policy conditions have reversed, leaving the public and policymakers distracted, disconcerted, and decarbonization efforts adrift. Interest rates have surged as inflation returned. Oil prices, low and stagnant after Paris, began climbing in 2021, spiking after Russia invaded Ukraine. In response, President Biden urged shale producers and OPEC to ramp up production, drained the Strategic Petroleum Reserve, and approved a controversial oil project in Alaska, frustrating climate advocates.

Geopolitics have shifted from post–Paris calm to turmoil. Wars in Europe and the Middle East have roiled energy markets, bringing energy security back to the forefront. Concerns about China''s control over clean energy supply chains, simmering since the Obama era, have escalated and spread. The West now views China as a geopolitical threat, and the EU, U.S., and Canada have imposed tariffs on Chinese renewables and EVs, opting for a slower transition than one dominated by China.

Elected officials have also struggled to enforce their ambitious climate mandates. Rapidan Energy Group, which tracks climate policy, has observed a reluctance to impose costly regulations. France canceled a climate tax after protests, Germany delayed a boiler ban, and cut subsidies for EV sales, which have since cratered.  The UK postponed its 2035 internal combustion engine ban, and New York's governor scrapped a congestion fee just before implementation. When fuel prices soared after Russia''s invasion, ardently climate–focused  governments slashed fuel taxes to ease the burden and encouraged fossil fuel consumption.

Politics have shifted, too.  ESG is out of favor.  EU elections this year revealed a backlash against green parties and the green policies they support.  The centerpiece of the EU''s climate transportation policy, a ban on gasoline cars in 2035, is attracting increased public, industry, and political opposition.  After becoming her party''s presidential candidate in a tight election that hinged on pro–fossil fuel swing states like Pennsylvania, Vice President Kamala Harris walked back her past support of a fracking ban and EV mandates.  President Trump''s election and the Republican party''s sweep of Congress herald a decisive return to "all–of–the--above" energy policy.  Germany''s upcoming election should also result in more pragmatic energy.

Amidst the backlash and policy uncertainty, energy majors are coming together to align on the way forward. Industry events, such last month''s ADIPEC in Abu Dhabi, provide tailor–made platforms for these critical discussions, as CEOs and leading executives from the world''s most powerful energy companies outline new business targets and operational models in the wake of shifting political attitudes. The recent ADIPEC served as a particularly poignant example of this search for consensus and consistency, as the event helped drive greater capital into new innovations, including AI, which can accelerate emissions reduction while extending the life of oil and gas.

What does this mean for the pace of decarbonization? While climate change remains a challenge, the recently concluded COP29 demonstrated a continued trend toward a less hostile approach toward hydrocarbons and more pragmatic international action on climate policy.  The writing is on the wall:  Stakeholders will reevaluate expectations of an imminent, policy–driven peak in oil and gas demand due to wavering policy support and economic and geopolitical realities.   Moreover, while near term economic weakness may temporarily soften oil prices, investors and governments should position themselves for a medium–term boom as demand that is more robust than expected collides with underinvestment in supply. Buckle up.

About Energy transition avaru

About Energy transition avaru

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