What is the place of fossil fuels in the energy transition?

ENERGY industry panellists at this year’s Singapore International Energy Week are probably correct in saying that fossil fuel usage will keep growing over the next decade, but probably wrong that this outcome is both inevitable and more equitable for developing countries.

Many panellists – including senior representatives from Singapore’s DBS Bank and Sembcorp Industries, Saudi Arabia’s Aramco and the US Department of Energy – at the event held the view that fossil fuel usage will constitute a larger slice of the global energy mix by 2035.

That view appears to be an accurate reading of the current trend. The World Energy Outlook 2024 report by the International Energy Agency (IEA) has said that even though the world added a record amount of clean energy in 2023, two-thirds of the global growth in energy demand was still being met by fossil fuels.

However, what is concerning is the prevalence of two ideas in discussions.

The first is that the increasing share of fossil fuels is inevitable, because the growth in the use of renewables cannot keep up with demand.

This would be true if the expansion of renewables capacity was limited by physical constraints, such as scarcity of materials or a lack of suitable real estate. But there is good reason to think otherwise. For instance, solar panel prices are near historical lows amid an oversupply. Indonesia has been so aggressive in extracting nickel – a core input for batteries – that nickel prices have also caved.

Instead, the tepid pace of growth in clean energy is more probably related to insufficient funding or politics. The IEA’s scenario for net-zero emissions by 2050 requires trebling installed renewables capacity by 2030. For that to happen, current investment levels in renewable power, grids and battery storage will need to double to US$2.5 trillion by 2030, and to US$2.7 trillion by 2035.

Capital is not allocated in a vacuum, and the large financing gap for clean energy is ultimately a failure of policy.

Meaningfully higher carbon pricing, incentives and risk-mitigation support for renewables investments, cost-of-living support for transitioning communities, developmental aid and phase-out deadlines for fossil fuel infrastructure are just a few examples of measures that governments can undertake to shift the calculations for investors, and to nudge business and investment decisions towards more sustainable activities.

This is not to suggest that it is easy for policymakers to direct capital towards sustainable energy. If it were easy, it probably would have been done by now by many countries. But just because something is hard does not mean it is all right to not try. Governments can do more, so the predicted increase in fossil fuel dependence is by no means inescapable.

The second flawed idea that has emerged is the notion that trying to transition too quickly is inequitable for developing countries.

The basis for the inequity claim is that transitioning too quickly is too costly, and would impose too much of a burden on developing countries.

That burden should not be trivialised, but in a similar vein to the first flawed idea, issues of cost can be significantly mitigated by policy. Substantially more financial support flowing from the Global North to the Global South can help reduce the pain for developing countries, for instance. Countries with fossil fuel subsidies can reallocate resources towards renewables.

Perhaps more importantly, claims that the energy transition is inequitable for poorer parts of the world ignore the point that the developing world would bear a disproportionately high level of pain from climate change. So, yes, the energy transition is unfair to these countries, but then, global warming is unfair to them, too.

Inequity is a poor excuse for inaction and prolonging a destructive status quo.

The trappings of modern society have largely been built on the back of fossil fuels, so if there is one aspect of the energy transition that is inevitable, it is that it will be extremely challenging. The nascency of some potential alternatives like hydrogen and carbon capture and sequestration, as well as the usual lead time required for new infrastructure, mean that the energy transition cannot happen overnight.

Some reliance on fossil fuels in the short-term is therefore necessary. But such an accommodation should not become indefinite inaction. There must be sufficiently ambitious commitments to phase out that usage, in line with credible decarbonisation pathways.

Those pathways exist. The IEA’s scenarios, based on stated policies and announced pledges, both envision fossil fuels’ share of electricity generation in South-east Asia peaking before 2030. There is a way, if there is the will.

This commentary first appeared in BT’s ESG Insights newsletter. Sign up for it and read past issues here.