Technology to bring forward peak energy and renewables tipping point

12 June 2017 7 min. read

The world economy stands to hit peak energy by 2025, according to a new study. Exploring the effects of advancing technology on the energy sector, a white paper from McKinsey & Company’s found the acceleration of global technology could mean peak coal is already upon us, while peak oil may arrive as soon as 2020, while the renewable energy tipping point may be reached by 2025.

Peak energy, often confused with energy depletion, is actually a term used to describe the point at which global demand for energy production reaches its zenith. With rapidly advancing techniques in sustainability improving society’s energy efficiency, the demand for energy production could be set to reach its summit as soon as 2025. While this stands to benefit the environment in the long run, helping to scale down fossil fuel consumption as global society bids to roll back climate change, McKinsey’s document notes that since the development of industrialised capitalism, the so-called “supercycle” of economic growth has been built entirely on the back of non-renewable energy.

The global management consultancy subsequently warned of a need to prepare for mass-disruption across various market sectors which traditionally profited from a continuous growth in the demand for energy production, forecasting potential disruption as new technologies come online in the multi-trillion dollar natural resources industry. In total, the natural resource sector could see savings of $1.5 trillion from advancing technologies, however the firm’s investigation also concluded the resulting boost in resource efficiency would supplement resource types, which is likely to have a knock-on effect on demand.

The advance of a range of technology is expected to create risks for business worldwide, while different economic segments face varied types of risks, from insurance agencies facing increasing automation, to financial services institutions being disrupted by the potential of Financial Technologies.

Technology will create opportunities for increased productivity

The collection of analysis, entitled 'Beyond the Supercylce: How Technology is Reshaping Resources', suggests the effect of technological advance on demand and productivity improvements could be drastic. To better understand the huge potential impact, the firm created two scenarios, the ‘moderate case’ and the ‘technological acceleration’ case of the development and implementation of energy-saving tech.

The incentive to taking up these new technologies is the potential for huge savings in expenditure. In the moderate case of tech adoption, the total rate of saving may hit $890 billion by 2035 while the technology accelerated case stands to reach a colossal $1.570 trillion. In the transportation segment, adoption of electric autonomous vehicles could save around $150 billion in fuel consumption in the moderate case, with potential for an additional $130 billion in the accelerated scenario taking the forecast total to $280 billion. Meanwhile in the economy more widely efficiencies could save $310 billion in the moderate case and an additional $230 billion in the accelerated case. On 2015 levels of demand, this would likely see energy demand reduced considerably in the economy more widely.

Aside from demand reduction, considerable substitutions may also affect the natural resources segment as renewable energy generation displaces dependency on fossil fuels. The resultant increase in energy conversion efficiency is set to drive considerable savings as high as $210 billion in additional savings.

Primary energy demand could peak in 2025

The result of changes in energy market dynamics from demand changes and substitution could see peak demand for primary energy from fossil fuels within the next 10 to 20 years. In the moderate projection, the plateau for energy derived from fossil fuels will not be reached until 2035, at 529 million terajoules, a vast increase from 462 million in 2013 – while total output for the global economy would stand at 680 million terajoules. Growth would be +1.1% annually to 2025, after which growth would most likely plateau at +0.6% around 2035.

In the technological acceleration case, the combination of reduced demand and substitution would see global fossil fuel demand peak in 2025 at 493 million terajoules, before witnessing a steep decline in the ten years following to 427 million. The scenario would also see considerably lower energy use as such, falling to 577 million terajoules by 2035.

Coal demand could peak in 2020

Coal and oil peaking
According to the study, coal will be the hardest hit by the oncoming changes. The effect of coal-fired power plants on air quality, as well as further environmental concerns is seeing plants switched off and replaced by renewables and gas-fired plants. One example quoted was of the Chinese government, who scrapped the construction of 85 planned plants to invest $350 billion in renewables instead.

Before reaching its peak in 2020 therefore, any increase in coal demand before peaking will be slight compared to other sectors, with researchers predicting 135 million terajoules in the moderate case, before, reducing to 2013 levels just 5 years later.

In the forecast of technological acceleration, the peak is also hit in 2020, although the decline thereafter is considerably steeper – falling by 24% on 2013 levels by 2035, at 95 million terajoules derived from the fossil fuel. Organization for Economic Co-operation and Development (OECD) countries meanwhile have already hit peak coal, with demand falling from 31 million terajoules in 2013 to 11 million in 2035.

Oil demand could peak by 2025

Oil too faces peak demand in the not too distant future, depending on the scenario. In the moderate scenario demand for oil continues to rise over the coming 20 years, up 11% on 2013 levels – largely driven by demand increases in the developing world, with OECD countries already at peak oil.

In the technological acceleration case, the global economy will plateau in 2020, with its peak in 2025, before falling slowing in the years to 2035 to levels 2% below 2013 energy generation. Again, OECD countries see faster falls in their oil demand than in the moderate scenario, falling to 68 million terajoules.

Cost of renewable could reach tipping point by 2025

According to McKinsey’s study, the cost of power generation from renewables is likely to hit a tipping point in 2025, globally, thereafter rapidly accelerating to see total global generation from renewable surpass that of coal and gas by 2035. According to the firm the shift is increasingly a market driven one, with unsubsidised costs per KWh having fallen to about a tenth of what they were six years ago. The use of fossil fuels also tend to receive large state subsidies, which if rolled back by governments, could create an even swifter move away from fossil fuels as a source of future energy generation.

Concluding the document, the researchers state that policy makers and resource companies face a challenging transition in the post-supercycle era of technological change. While new opportunities for growth beckon, capturing them will remain a challenge. The changes will likely be complex and numerous, so companies would benefit from emphasising speed and agility over size, to help society reap the rewards of a less resource-intense economy.