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Unless there are significant shifts in current government policies and breakthroughs in clean energy technologies, we believe:
Fossil fuels currently dominate energy market share, reflecting 84.3% of primary energy consumption as of 2019, while renewables (such as wind and solar) and other non-fossil fuels (such as nuclear) reflected 5.0% and 10.7% respectively.1 Today, fossil fuels are ubiquitous in modern life and are used for a variety of purposes including electricity, transportation, and as a feedstock for a variety of petrochemical products including plastics. However, fossil fuels are a significant source of GHGs.
Despite urgent efforts to reduce GHG emissions from energy use, population growth and increasing wealth in developing economies may drive an increase in energy demand, including for both alternative energy technologies and fossil fuels. In particular, a convergence in per capita consumption across developed and developing economies may be a source for energy demand growth in the future.
Alternative energy and cleantech sectors are likely to have significant growth opportunities as factors including a global focus on reducing GHGs and declining costs may make them well-positioned to take market share while also benefiting from an overall growth in energy demand. For example, solar and wind sectors are estimated to have seen a decline in new build levelized cost of -90% and -71%, respectively, from 2009 to 2020.2 These factors are likely to drive growth across a wide spectrum of alternative energy and cleantech sectors. For example, some projections expect over a 300% increase in global installed wind and solar capacity by 2035 relative to 2020 levels.3
However, technological constraints, greater resource intensity (of land, materials, and natural resources such as minerals, metals, and rare earths), and relative cost considerations that many alternative energy solutions currently face may present issues for the rapid growth of these sectors, at least in the short term. We expect many of these potential constraints may be addressed by future technological advancements, infrastructure spending, and government incentives.
Source: Bloomberg New Energy Finance (BNEF). Reflects views and estimates as of May 2021.
Despite demand destruction for conventional fossil fuels arising from the growth of alternative energy and cleantech sectors, overall demand may still increase for years to come in some cases due to factors like population growth and increasing wealth in developing economies. For example, some estimates suggest that even considering demand loss arising from increasing electric vehicle adoption, global crude oil demand in 2030 may be over 6% higher than 2019 levels.4
Investor flows, a rising focus on ESG, and government policies may play a key role in management decisions on capital expenditures, with conventional energy companies potentially playing a key role in the energy transition going forward due to decades of experience in research and development and in many cases benefiting from rising levels of free cash flow available to invest and existing infrastructure footprints. Rather than a strictly bifurcated market, many alternative energy and cleantech solutions will likely be used in conjunction with fossil fuels and may utilize conventional energy infrastructure. Potential examples include biofuels blended with petroleum refined products, hydrogen and renewable natural gas utilizing conventional natural gas infrastructure, pipelines used to transport and sequester CO2, and carbon capture, utilization and storage (CCUS) used to mitigate the climate impacts of fossil fuel use in some cases.
Source: Goldman Sachs Global Investment Research (GIR). Reflects views and estimates presented in the Global: Future of Energy Demand report published in April 2021.
1. BP, Statistical Review of World Energy 2020 69th Edition, 4. Note that while hydroelectric power is often considered a renewable source of energy, in this breakdown it is included in the other non-fossil fuels category and reflected 6.4% of primary energy consumption as of 2019.
2. “Levelized Cost of Energy and Levelized Cost of Storage-2020,” Lazard, accessed June 15, 2021, https://www.lazard.com/perspective/levelized-cost-of-energy-and-levelized-cost-of-storage-2020/. Reflects utility-scale solar and onshore wind.
3. “Global Installed Capacity,” Bloomberg New Energy Finance, accessed May 31, 2021, https://www.bnef.com/.
4. Goldman Sachs Global Investment Research, Global: Future of Energy Demand, 9-10. Reflects views and estimates presented in the Global: Future of Energy Demand report published in April 2021 and reflects base case.