For over 25 years, companies have valued our ability to serve as their early warning system—to interpret emerging issues and trends in the sustainable development agenda and help them anticipate, understand and respond to shifts in the business landscape. In 2013, SustainAbility re-launched a dedicated function to regularly track and interpret “what’s next”—our Ten Trends of 2013 series is the distillation and public output of our thinking over the year.
Every year, a number of organizations publish long-term energy forecasts. The two most recent ones were the World Energy Outlook 2013 from the International Energy Agency (IEA) and The Outlook for Energy: A View to 2040 from ExxonMobil. These reports paint a future that is more or less the same when it comes to how fossil fuels contribute to our energy future – the IEA predicts that 75% of global energy demand will come from fossil fuels by 2035 (vs. 82% today) while ExxonMobil forecasts a similar figure for 2040.
While these robust research pieces are must reads for anyone working in the energy space, a variety of technical, environmental and societal factors make their predictions about the future of energy more uncertain than ever.
On the technical side, consider that as recent as 2005, coal represented roughly 50% of the US electricity mix – it is now under 40%, a substantial decline in such a short period. The main driver has been hydraulic fracturing (aka fracking), a process developed decades ago but that accelerated in the mid 2000s through advancements in technology. As such, the portion of electricity from natural gas has jumped from 19% in 2000 to 30% today resulting in significant shifts in the industry. For example, Consol, a major coal producer, is selling a third of its coal reserves to focus on natural gas, while the Tennessee Valley Authority is retiring eight coal plants.
We are also seeing major technical advancements and cost reductions in renewable energy technologies such as solar and wind. The cost of solar photovoltaics has dropped precipitously—Citigroup analysts cite a 75% drop in the last four years. Larger and more efficient turbines make wind cost competitive with coal in many regions—to such an extent that Warren Buffett’s MidAmerican Energy recently ordered $1 billion worth of turbines from Siemens. We also see a dizzying array of innovation in the energy space – residential solar (e.g. SolarCity), electric vehicles (e.g. Tesla), home energy management (e.g. Nest), wearable technology – that make the future incredibly exciting and hard to predict.
From an environmental perspective, the imperative to limit GHG emissions in order to stay within a 2 degrees Celsius temperature increase has struck an economic chord with the carbon bubble / stranded asset framing. The fossil fuel divestment movement took off in 2013 (with 350.org as a key driver), and organizations including Ceres and Carbon Tracker are getting the attention of analysts and investors by highlighting the significant risks faced by fossil fuel companies if they are not allowed to extract their reserves. Investors are not the only capital providers paying attention – a number of national governments and multilateral banks (e.g. US, UK, European Investment Bank, World Bank) have announced that they will no longer finance coal-fired power plants.
A common response to the above drivers is to highlight the forecast for prolific demand in coal and other fossil fuels in emerging markets, particularly China. The IEA has forecast China alone will construct about 600 GW of coal-fired power plants by 2030, and automobile ownership will boom with rising incomes. Yet, this future is not a foregone conclusion as Chinese citizens are beginning to express their concerns about environmental and human health impacts. The Atlantic opined that 2013 will be “remembered as the year that the country’s air pollution problem went mainstream,” while Citibank analysts authored# a report on peak coal in China, citing the tolerance of the Chinese population for pollution as a main limit to the trajectory of coal consumption.
Companies are fond of saying that they need certainty – regulatory and otherwise – to operate. Yet, if we continue to see these sort of developments, energy companies, their investors and other stakeholders should prepare for a bumpy ride.