In late January, I highlighted how McKinsey sees the near future of the global energy system. On February 3, the US Energy Information Administration (EIA) did the same, with a specifically American perspective, in its Annual Energy Outlook. Like any forecasts, those of the professionals at the EIA are subject to error; the pace of change could accelerate, or slow down, depending on many factors. In short, these are guesses, or as the authors put it, “modeled projections of what may happen given certain assumptions and methodologies.” But they are well-informed guesses.
It’s also important to remember that the job of the EIA is not to make policy but to gather and analyze data. But that data does inform the government, and given that the Biden administration’s energy policy is certain to be different than that of its predecessor, I thought it would be interesting to examine what America’s official seers are thinking.
Here are five insights from the AEO I found interesting. (Note: what follows refers to the “Reference case”—what the AEO considers the most likely scenario, based on existing trends).
The United States will continue to be a major producer of oil and gas and is about to become a major exporter.
Since 1953, the United States has been a net importer of energy. Beginning in 2020 (the final figures are not in yet), it is likely to be a net exporter for decades to come. Part of this is because of continued strong production of oil and gas, and part is also because of slow growth in domestic consumption. US consumption of oil and other liquids peaked in 2004—and even given population and economic growth, might not reach that level as late as 2050. The AEO thinks the country will export oil through 2050, and that oil production will stay steady at around 14 million barrels a day (b/d) through 2045, mainly due to the development of tight-oil plays in the eastern and southwestern regions.
The AEO sees a price of $105 per barrel of oil by 2050, compared to about $56 now. But I suspect their hearts may not be in this one. Trying to forecast the price of oil is like playing the slots at the casino: it’s possible to land on the right spot, but the odds are against you.
Source: Energy Information Administration
As for gas, production of dry natural gas continues to grow steadily (1.9 percent a year to 2025), but not as fast as in recently (5.1 percent a year from 2015-20). Most of this growth will come from shale. Domestic consumption, however, is flat for the next decade, due to slower industrial growth and less demand from the power sector, because of greater efficiency and population shifts to warmer regions—thus, the increase in exports. Prices remain stable, at less than $4 per million British thermal units.
Electricity demand slows, even as the shape of electricity generation changes.
For many years, demand for power correlated to economic growth. That link has been decisively broken, as the economy has shifted toward services, which are less energy intensive, and as more efficient new housing, appliances, and heating and cooling units replace older ones. Result: demand for power rises only about 1 percent a year to 2050, even though economic growth will likely be much faster than that. Electricity sales are even lower, as more homes and businesses choose to make their own power, in the form of rooftop solar—projected to account for 4 percent of demand in 2050—and site-specific combined heat-and-power systems.
A more striking result is how the shape of the power sector is likely to change. By 2045 or so, the combination of hydro, wind, and solar will be the largest single source of power generation, almost doubling their current share by 2050 (to 38 percent). Regulatory support, such as renewable portfolio standards and tax credits, will help. The more important factor, though, is that costs for wind (down about 35 percent to 2050) and solar (down by half) will continue to decline. Indeed, solar PV and combined-cycle natural gas have the best economics to 2050, and onshore wind gets close; not so, however, for offshore wind.
The use of coal and nuclear declines steadily to 2040, from 24 to 13 percent and 19 to 12 percent respectively, but then stabilize, with the best plants staying in business. Natural gas stays about the same (37 percent now). Overall, electricity prices remain stable or fall, with lower generation costs offset by higher transmission and distribution costs.
Source: Energy Information Administration
Transportation energy consumption declines through the 2030s, even though Americans will keep driving.
Even by 2050, motor-vehicle gas consumption is projected to be 19 percent less than its peak in 2019; energy intensity per passenger mile falls 35 percent by 2050. The reason: better fuel efficiency.
Source: Energy Information Administration
But what about EVs? Won’t they cut into gas consumption (and add to electricity demand)? Not so fast, says the AEO, noting that there is a “lack of market evidence to date that would indicate a significant increase in U.S. consumer preference for EVs.” Unless sales increase markedly, the effect of EVs on the use of energy for transport will not be more than a “fraction of a percentage per year.” Although the AEO sees electricity as the fastest-growing energy source in the transportation sector (7.4 percent a year by 2050), that is from a low base. By 2050, it estimates that electricity will still account for less than 2 percent of transportation fuel consumption, with sales of longer-range battery electric vehicles rising from 280,000 in 2019 to 1.9 million in 2050.
This is clearly an area where change could come fast, and from different directions. It is plausible, even likely, that the Biden administration will look at increasing fuel-efficiency regulations, and it has already signaled its intention to replace the government fleet with US-made EVs. That could change the market. And then, of course, there is everyone’s favorite blue-sky solution: hydrogen. While I do think there is great hope for hydrogen, the AEO is measured, seeing only a sliver of market share for it even in 2050.
Homes get bigger, but more efficient, and energy consumption from buildings grows slightly.
There will be more homes built; more of them for single-person households; and slightly larger (from an average of 1,786 square feet to 1,987 square feet in 2050). Another interest shift: the lion’s share of new homes will be in warmer regions, and cooling tends to be less energy-intensive than heating—one of the reasons overall growth in energy demand in the building sector is slow (0.2 percent a year). Other reasons are greater efficiency, more on-site generation (particularly solar PV). The same dynamics hold true for the commercial building sector, where higher efficiency keeps energy demand growth relatively low.
Greenhouse-gas emissions will fall for the next decade or so, but then begin to grow again.
This may be the most uncertain of the projections. The trajectory of GHG emissions is profoundly influenced by government policies and could be entirely disrupted by the evolution of existing technologies—think hydrogen and cheap EVs—or the invention of entirely new ones. But that is speculative. So far, history has show a relationship between economic growth and emissions growth, and while that relationship is weaker than in the past, it still exists—and economic growth is necessary. As the AEO sees it, for the next decade or so, efficiency will outrun economic growth and thus lead to lower emissions. But after that, the course reverses, forcing emissions up. By 2050, emissions are still 4 percent less than in 2019—but that is a far cry from the Biden administration’s goal of net-zero emissions by that year.
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Like McKinsey’s Global Energy Perspective, the AEO continues to see a big role for fossil fuels and an increasingly important one for renewables. The GEP sees global emissions steadily declining, while the AEO believes that in the US, they will fall and then rise. Both see the use of coal declining, and neither sees the energy system anywhere near achieving the goal of limiting global temperatures from rising no more than 1.5 degrees Celsius above pre-industrial levels. This 1.5 degree pathway, McKinsey has argued, would “require dramatic emissions reductions over the next ten years—starting now.”
Of course, McKinsey and the AEO could be wrong—but in any case, it’s food for thought.
All views are mine and not those of McKinsey & Company.