The Energy Transition in 2022
A year of accelerating change amid the global energy crisis.
After two centuries of growth, 2022 was the turning point for the fossil fuel system as we forecast in our analysis in March and reiterated at the end of the year. Putin’s War led to spiking fossil fuel prices and major new policy moves as the result of the security crisis. This led to a surge in supply of renewable energy, a major increase in efficiency, and a new focus on building renewable supply chains. Fossil fuel demand has therefore peaked, squeezed between efficiency and the growth of renewables. Here we look back at how the energy system changed over the past year.
Surging fossil fuel prices brought forward the point of renewable price parity in one sector and one country after another. According to BloombergNEF (BNEF), new solar or wind are now the cheapest source of electricity in 96 percent of the world; and cheaper than existing fossil fuels in 60 percent of the world. The global average levelized cost of electricity for natural gas and coal electricity in the second half of this year is twice as expensive as solar. Although green ammonia made from solar and wind power was expected to compete with fossil-fueled ammonia only at the end of this decade, the supply shocks in Europe mean that it is cheaper today. A similar story of superior economic competitiveness can be seen across the clean technology spectrum, from heat pumps to electric vehicles.
A Wave of New Legislation
Superior economics and energy security have been a powerful driver for legislative change. We have possibly seen more energy transition policy in 2022 than the past decade combined, as the major economies pushed through ambitious changes. Most notable among them are REPower EU, the Inflation Reduction Act in the United States, China’s 14th 5-year plan, and Japan’s GX Strategy. Interesting too was the emphasis on economic competitiveness throughout this flurry of legislation. It was the year a narrative of gain not pain turned mainstream among policymakers.
More Renewables, Greater Efficiency
All these developments have spurred higher growth in renewables and greater energy efficiency, squeezing fossil fuels from both sides (reducing demand and replacing supply). At the end of the year, the IEA increased its five-year renewable deployment forecasts by 30 percent. In 2022, clean technology growth hit heights that surprised even the most optimistic among us. Solar panel deployment is set to rise 50 percent relative to 2021, with BNEF forecasting 270 GW of new capacity. Electric vehicle (EV) annual sales growth is expected to be 60 percent, with China’s EV sales up 90 percent. EVs have gone from 4 percent of global monthly car sales to 19 percent in two years. They are now indisputably racing up the deployment S-curve, threatening the 85 EJ/y of oil demand for road transport (or one-fifth of final energy) at breathtaking speed.
Similarly, higher prices have driven more efficiency, as people find new ways to economize on energy use. The IEA expects efficiency gains to reach 2 percent this year, up from 0.5 percent the year before, and large enough to restrict energy demand growth to around 1 percent.
Expanding Renewable Supply Chains
This has been the year where for the first time the West has shown serious intent to challenge China’s dominance over the renewable supply chain. The United States, India, and Europe have all announced plans for a massive expansion of domestic renewable production capacity. This competition for leadership between the great economic powers is likely to achieve faster change than the old story of cooperative burden sharing.
Meanwhile, renewable supply chains scaled at speed in 2022, with battery and solar capacity plans exceeding the required levels set out in many net-zero pathways. By the end of the decade, the Chinese solar industry is scaling to produce 1,000 GW of solar PV a year and BNEF expects new wind capacity to increase to 160 GW a year. In 2021 BNEF tracked 50 GW of planned electrolyzer capacity; a year later that is up over 7X, at 360 GW. Battery storage deployment continues to outpace market expectations; according to BNEF, growth in 2022 is 40 percent higher than was expected only one year prior. Battery deployment plans have proliferated, with expected new storage capacity likely to be over 10 times larger in the decade to 2030.
Peaking Fossil Fuel Demand
This spectacular growth of the new inevitably leads to the peaking demand for the old. And 2022 was the year it became increasingly clear that global fossil fuel demand has reached a plateau, as those calling this historic milestone widen to include the IEA and BNEF.
The math behind peaking fossil fuel demand is simple. Global energy demand growth has been curtailed by efficiency down to around 6 EJ. Solar and wind supply growth in 2022 will be about 6 EJ (using the BP counting methodology) and rising fast, with additional support from other renewables technologies and rising efficiency. If we look in more detail at the electricity system, the story is similar. Total demand growth in 2022 of around 700 TWh is met by supply growth of 600–700 TWh from solar and wind and a further 100–200 TWh from other clean energy sources. The calculations are finely balanced in 2022; but renewable technologies continue to advance rapidly up S-curves, making the peaking more obvious each year.
It’s Now Up to the Policymakers
And 2022 was the year that the energy trilemma was solved. Security, cost, and environment while once at odds are now aligned to drive continued rapid deployment of renewables. The technology and economic barriers have solutions but we need to break through the barriers of incumbency and inertia. The focus now must be on policymakers playing their part. They need to speed up permitting of renewable deployment, to build grids, to retool regulatory systems for the renewables age, and to deploy development bank capital into the Global South.
The Two Phases of the Revolution
So, what does this mean for 2023? To draw inspiration from the historian Alexei Yurchak, there are two phases to a revolution: (1) when people realize the system has reached the end of its course, and (2) when everyone realizes everyone else has realized. The year 2022 was when a critical mass saw the fossil system for all its risks and vulnerabilities. Sooner or later (and likely sooner), the second phase will occur, when, as the fossil high induced by Putin’s War fades, everyone realizes that everyone else has figured out the inevitable decline of the fossil system.