The 49th celebration of Earth Day occurs 22 April. In recognition of the occasion, we want to highlight some important and encouraging trends in global energy. Energy remains the lifeblood of the global economy, fostering economic growth, driving improvements in science and technology, and enhancing human lifestyles and well-being. Broad trends of population growth and urbanization across the developing world, and even an aging global population all but ensure that global energy demand will continue to grow for the next few decades. But the desire to reduce carbon emissions has caused us to rethink our energy priorities.
Fig. 1: Projected growth in energy supply by resource
While 85% of primary energy consumed globally is fossil fuel, positive trends are evident. By 2040, the International Energy Agency (IEA) projects that some 40% of power generation will be renewable, versus 25% today. With increasing efforts to reduce carbon emissions and improve energy efficiency, we see significant associated economic potential and health benefits from cleaner, more efficient and cost effective energy resources. With this will come investment opportunities, which we describe in detail in our report, Longer Term Investments: Renewables. But will renewable energy supplies be sufficient to satisfy increasing global demand for energy? We believe that no single energy source alone will be enough.
Despite the popular shift in priorities to a cleaner energy future, only a relative few of us are familiar with the complexities and challenges associated with reforming global energy supply. What's so difficult? Two major hurdles come to mind: scale and cost. The world uses an enormous amount of energy; and with growth in demand, particularly in the developing world, comes needed investment in costly infrastructure. Further, the developed world has grown extremely reliant on predictable, reliable and cost effective energy, much of which comes from fossil fuels. Despite advances in renewable energy technology, certain sectors including industry, freight and air transport remain reliant on fossil fuels due to a lack of alternatives. Many of us simply assume we have as much reasonably-priced energy and electricity as needed to support global economic growth and provide the day-to-day conveniences that we take for granted. But as history tells us, a sudden drop in supply can be quite disruptive. And as global demand growth has now shifted to the developing world, the challenge to create reliable energy resources on a large scale at a reasonable cost is likely to intensify.
The transition to cleaner energy resources will take time and will be driven by different variables (relative costs, available supplies, government mandates, etc.) in various regions of the world. Below are a few things to consider as we chart a path towards a cleaner and more sustainable global energy resource mix.
- The world's energy appetite continues to rise. Global energy demand could rise by 30% by 2040, according to the IEA. Most of this growth will come as an increasing number of citizens of the vastly-populated developing world join the ranks of the middle class. Much of this energy demand will be satisfied with renewable resources like solar and wind deployed on a large scale in rapidly growing urban centers. Still, while demand for renewable resources will outpace all other fuels, it will likely be necessary that additional supplies of oil, natural gas, and even coal be developed to keep pace with the world's future needs. This Earth Day let us reflect on how we can use our energy resources more efficiently.
- A large portion of the global population remains energy poor. Some 12% of the world's citizens lack access to electricity. Nearly three times that many – about half the population in developing countries - lack access to clean cooking fuels, relying instead on biomass, coal, and kerosene. With support from the UN and other efforts to promote global sustainable development, even remote rural areas are gaining access to energy with mini-grid and off-grid electricity. However, even taking this progress into account, IEA projects that by 2040, nearly a half a billion people (mostly in Sub-Saharan Africa) will remain without access to electricity, in part due to the rapid population growth in the most energy-poor regions. On Earth Day, we may ask ourselves what more we can do to better share access to sustainable energy resources with all citizens of the world?
- Costs of renewable energy resources continue to decline globally. Solar and wind powered facilities have declined in price dramatically over the last 10 years, and are now competitive with new natural gas-fired power plants in the US, for example. However, given our reliance on energy, it is important to recognize that wind and solar resources are coincident supplies, only available when the wind blows or the sun shines. Battery technology continues to develop and could hold the answer to making renewable energy more reliable as prices decline over the next 3-7 years. In the interim, the world is awash in natural gas, which emits about half the carbon emissions of coal when combusted. On this Earth Day, we might ask ourselves how we could cost effectively accelerate the transition towards more solar, wind and natural gas resources for energy.
Keeping pace with the world's needs for a secure and sustainable supply of energy is a challenge. As shown in Fig. 1, renewables and natural gas are likely to be the most rapidly growing sources of energy over the next two decades. And importantly, coal's share in power generation will decline. Still, fossil fuels currently account for some 81% of the world's energy consumption; and despite the rapid increase in the use of renewable resources, IEA projects that fossil fuels will still account for 74% of global energy consumption in 2040.
There is much work to do, but much to celebrate. While total transformation of our energy resource base may take time, we are emboldened by our proven ability to innovate and to find the solutions. May our Earth Day reflections inspire us, and renew our energy to continue working to make our energy resources cleaner, more efficient and cost effective.
For more information, please see the Our energy future series of reports, as well as the renewables long-term investment theme:
James Dobson, CFA, MLP and Utilities Analyst Americas, UBS Financial Services Inc. (UBS FS)
Nicole Decker, Energy Analyst Americas, UBS Financial Services Inc. (UBS FS)
Laura Kane, CFA, CPA, Head Thematic Research Americas, UBS Financial Services Inc. (UBS FS)
Michelle Laliberte, CFA, Thematic Investment Associate, UBS Financial Services Inc. (UBS FS)