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World likely to hit peak fossil fuel in 2023, new Carbon Tracker report says

Q2: U.S. Solar and Wind Power by the Numbers

Essential Energy Insights - September 17, 2020

Essential Energy Insights September 2020

Rate case activity slips, COVID-19 proceedings remain at the forefront in August


World likely to hit peak fossil fuel in 2023, new Carbon Tracker report says

Fossil fuels are expected to hit peak demand in the 2020s as renewables move closer to making up all of the world's growth in energy demand, according to a new report from The Carbon Tracker Initiative.

The global transition in the energy sector is expected to put trillions of dollars at risk as demand for coal, gas and oil stalls due to the rapidly falling cost of renewables and battery storage, according to "2020 Vision: Why You Should See Peak Fossil Fuels Coming." The report from the not-for-profit financial think tank warns investors that with global energy demand expected to grow at 1% to 1.5% and solar and wind energy growing 15% to 20% per year, fossil fuel demand will peak between 2020 and 2027, likely in 2023.

"The 2020s will be the decade of fossil fuel demand peaks, as one bastion after another is stormed and overwhelmed by the rising renewable tide," Kingsmill Bond, a new energy strategist and author of the report, said in a statement. "This will inevitably lead to trillions of dollars of stranded assets across the corporate sector and hit petro-states that fail to reinvent themselves."

Carbon Tracker, which promotes aligning capital markets with climate change goals, acknowledges its report forecasts an earlier peak in fossil fuel demand than other leading energy forecasts including BP PLC, OPEC and the International Energy Agency. However, it warns that unsavvy investors could get hit by the "colossal" impacts of a transition that could put an estimated $25 trillion in fossil fuel infrastructure at risk of becoming stranded assets.

"I think what's striking to me from this report is that change happens on the margin," Carbon Tracker energy analyst Sebastian Ljungwaldh told S&P Global Market Intelligence. "If you look at annual growth in energy demand and you look at how that growth is eaten up increasingly by renewables, the change happens at the margins, which allow for this story or narrative of the peak to happen."

The report suggests the tipping point for fossil fuel demand will come when solar and wind make up about 6% of total energy supply and 14% of global electricity supply. The report bases its findings on the rapidly falling price of solar, wind and battery storage; emerging markets making ambitious plans for renewable energy deployment; and government policies that are supporting the move away from fossil fuels.

Carbon Tracker pointed to parts of the U.S. and Europe closing down uneconomic coal plants as well as the bankruptcy reorganization of Peabody Energy Corp. as evidence the world is in the early stages of hitting peak fossil fuel energy use. Developing economies without legacy infrastructure for fossil fuels may be able to "leapfrog" some of the issues more-developed economies will see when fossil fuel peaks, Ljungwaldh said.

"The global direction of policy is clear, notwithstanding recent retrenchment in the U.S.," the report says. "Policymakers, especially in the large majority of countries that import fossil fuels, have every incentive to keep raising the regulatory pressure on fossil fuels, and will continue to do so."

Bond said investors will often anticipate that change is coming, and this could happen even before companies see peak demand.

"We believe that investors will start to react faster as the energy transition works its way through the world's capital markets," Bond said. "As each sector is impacted, it becomes easier for the market to anticipate something similar happening to the next sector."