By Lucy Adautin
JPMorgan has cautioned that the world requires a “reality check” regarding its transition from fossil fuels to renewable energy, suggesting that achieving net-zero targets may take “generations.”
In a recent global energy strategy report distributed to clients, the US investment bank highlighted setbacks in efforts to diminish the reliance on coal, oil, and gas. Factors such as higher interest rates, inflation, and conflicts in Ukraine and the Middle East have impeded progress in this transition.
“While the target to net zero is still some time away, we have to face up to the reality that the variables have changed,” Christyan Malek, JPMorgan’s head of global energy strategy and lead author of the report, told the Financial Times. “Interest rates are much higher. Government debt is significantly greater and the geopolitical landscape is structurally different. The $3tn to $4tn it will cost each year come in a different macro environment.”
Malek anticipated that the substantial investment requirements would compel governments to retreat from more aggressive energy policies. This sentiment was echoed when the Scottish government announced the abandonment of its ambitious plan to reduce carbon emissions by 75 percent by 2030, acknowledging the unattainability of the target.
In its assessment, JPMorgan emphasized that transitioning the world’s energy system “is a process that should be measured in decades, or generations, not years.” The report also highlighted that investment in renewable energy currently yields subpar returns, and warned of potential social unrest if energy prices surged.
This report followed adjustments to climate targets by oil companies like Shell and BP, and the failure of numerous companies, including Microsoft, Unilever, and JBS, to set sufficiently ambitious goals approved by the Science Based Targets initiative.
Malek highlighted the uncertainty surrounding the projected peak in oil and gas demand by 2030, as predicted by the International Energy Agency, particularly as developing countries’ populations increase car ownership and air travel.
JPMorgan projects a global demand of 108 million barrels of oil per day by 2030, with additional daily barrels expected from the expansion of wind, solar, and electric vehicle infrastructure.
“We are at a tipping point in terms of demand,” Malek said. “More and more of the world is getting access to energy and a greater proportion want to use that energy to upgrade their living standards. If that growth continues it puts huge pressure on energy systems and on governments.”
JPMorgan is a leading financier of fossil fuel projects and low-carbon energy projects. The bank underwrote $101bn of fossil fuel deals in 2021 and 2022, and $71bn of low-carbon deals, according to data from BloombergNEF.
Chief executive Jamie Dimon told a congressional hearing In 2022 that the bank would continue to invest in big oil and gas projects, saying that pulling out of such deals “would be the road to hell for America”, and that the world was not getting the energy transition right.
Kingsmill Bond, an energy strategist at the Rocky Mountain Institute, disputed JPMorgan’s assertion that the cost of building renewables capacity was becoming unaffordable, saying the annual growth of energy infrastructure spending will only be 2 per cent, as money is increasingly diverted from oil and gas projects into renewables.
“Renewable energy is much cheaper and more efficient than fossil fuel energy, which is why almost all electricity generation capacity now being built is solar or wind,” he said.
Additionally, energy consultancy Wood Mackenzie stated on Thursday that elevated interest rates would further complicate and escalate the cost of transitioning to a net-zero global economy.
Peter Martin, Chief Economist at Wood Mackenzie, emphasized that “the heightened cost of capital has significant implications for the energy and natural resource sectors.” He noted that renewables and nuclear power would be disproportionately affected due to their high capital intensity and relatively lower returns.
Wood Mackenzie further observed that numerous companies in the oil and gas industry have minimal borrowing and would thus be comparatively resilient to the impact of higher interest rates.
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