The Energy Transition Needs a Reality Check
S&P Global executives warn that the energy transition will be more difficult, costly, and complicated than anticipated, according to their new article in Foreign Affairs. Daniel Yergin, Peter Orszag, and Atul Arya argue that the transition won't unfold linearly but will vary across regions at different rates with different fuel mixes.
The authors highlight that despite record renewable energy production in 2024, oil and coal also reached all-time highs. What's occurring is more "energy addition" than transition, with renewables supplementing rather than replacing conventional sources. The share of hydrocarbons in global energy has only decreased from 85% to 80% since 1990.
Key challenges include:
- The massive cost (estimated at 5% of global GDP annually through 2050)
- Energy security concerns heightened by Russia's Ukraine invasion
- A North-South divide on balancing climate with development priorities
- Mining and mineral constraints (new mines take 20+ years to develop)
- US-China rivalry complicating green supply chains
- Surging electricity demand from EVs, reshoring, and data centers
- S&P Global executives provide strategic analysis of energy transition realities
- Record levels of wind and solar energy production achieved in 2024
- Article offers pragmatic framework for energy policy reconsideration
- Energy transition costs estimated at 5% of global GDP annually through 2050
- Oil and coal reached all-time high production levels in 2024
- Hydrocarbons still represent 80% of global energy mix
- New mines for critical minerals take 20+ years to develop
- US-China tensions slowing clean energy technology deployment
- Power demand in US projected to double by 2050
Insights
The article authored by S&P Global Vice Chairman Daniel Yergin, Lazard CEO Peter Orszag, and S&P Global Chief Energy Strategist Atul Arya represents a significant reassessment of the global energy transition narrative with profound implications for investment strategies across multiple sectors.
This perspective shift from influential market thought leaders signals a potential revaluation of assets across the energy spectrum. Traditional energy companies, previously discounted under rapid-transition scenarios, may experience extended relevance and cash flow generation. The recognition that hydrocarbons will maintain their approximately 80% share of the global energy mix longer than anticipated could stabilize valuations in these sectors while tempering growth expectations for pure-play renewable companies.
The article's emphasis on the staggering costs of the transition—estimated at 5% of global GDP annually through 2050—highlights a substantial funding gap. This creates significant opportunities in green finance but also raises questions about return expectations and risk allocation. For context, this would require developed nations to commit approximately 10% of their annual GDP, equivalent to the U.S. spending on Medicare, Medicaid, and Social Security combined.
The critical minerals supply chain constraints described represent both a bottleneck and an investment opportunity. With new mines taking over 20 years to develop and projected demand for transition minerals quadrupling by 2040, existing producers with permitted assets hold significant strategic advantages. This supply-demand imbalance suggests sustained price support for these commodities.
Perhaps most overlooked is the article's warning about electricity infrastructure inadequacy in the face of surging demand from electrification, reshoring, and AI/data centers. This points to urgent needs for grid modernization, energy storage, and transmission capacity—areas requiring massive capital deployment that have not received sufficient investor attention.
The geopolitical dimension adds another layer of complexity. The U.S.-China rivalry is fragmenting green technology supply chains, potentially creating parallel systems with different standards, technologies, and financing mechanisms. This fragmentation could increase costs and create unexpected winners and losers across regions.
For portfolio construction, this reassessment suggests a more balanced approach that acknowledges the extended coexistence of conventional and alternative energy sources, with heightened attention to energy security assets, critical mineral exposure, and grid infrastructure. The "energy addition" rather than "energy transition" framework requires investors to recalibrate both time horizons and sector allocations in sustainable investing strategies.
Expectations of a rapid, linear transformation of the global energy system have proved misplaced. A major rethinking is in order
Writing in the March-April edition of Foreign Affairs, they say that it is time to rethink priorities, polices and investments in light of the complicated realities today.
"What is becoming clear is that the shift in the global energy system will not unfold in a linear or steady manner," Yergin, Orszag and Arya write. "Rather, it will be multidimensional—unfolding differently in different parts of the world, at different rates, with different mixes of fuels and technologies, subject to competing priorities and shaped by governments and companies establishing their own paths."
It has not been and will not be the energy transition that many envisioned, they say.
The substantial (though temporary) reductions in energy demand and carbon emissions during the COVID-19 pandemic gave many the false impression that a rapid and singular transformation of the global energy system would be feasible.
"This ambition, however, has collided with the magnitude and the practical constraints of completely overhauling the energy foundations of a
The disconnect is evident. The world is far from on track to achieve the often-stated target of reaching net-zero emissions by 2050, and there is no clear plan for delivering the massive investment that would be required to do so, the authors say.
"Part of the problem is the sheer cost: many trillions of dollars, with great uncertainty as to who is to pay for it. Part of the problem is the failure to appreciate that climate goals do not exist in a vacuum. They coexist with other objectives—from GDP growth and economic development to energy security and reducing local pollution—and are complicated by rising global tensions, both East-West and North-South," Yergin, Orszag and Arya write. "And part of the problem is how policymakers, business leaders, analysts and activists expected the transition to go, and how plans were shaped accordingly."
"A new North-South divide has emerged on how to balance climate priorities with the need for economic development. This is a key factor behind rethinking the pace and shape of the energy transition," they write.
The path forward will require significant tradeoffs and a more pragmatic approach—one that considers a multitude of factors such as the need for economic growth, energy security and energy access, they say.
"The first step in this rethinking is understanding why the key assumptions behind the [energy] transition have fallen short," Yergin, Orszag and Arya write. "That means grappling with the geopolitical, economic, political, and material tradeoffs and constraints rather than wishing them away."
The complete article is available at: https://www.foreignaffairs.com/guest-pass/redeem/YxSIFt7hbEA
Selected excerpts:
(Edited slightly for brevity only)
More Energy "Addition" than Transition
"What has been unfolding is not so much an 'energy transition' as an 'energy addition.' Rather than replacing conventional energy sources, the growth of renewables is coming on top of that of conventional sources…. This was not how the energy transition was expected to proceed."
"The fundamental objective of the energy transition is to replace most of today's energy system with a completely different system. Yet throughout history, no energy source, including traditional biomass of wood and waste, has declined globally in absolute terms over an extended period."
"In 2024 global production of wind and solar energy reached record levels—levels that would have seemed unthinkable not long before…. Yet 2024 was a record year in another regard as well: the amount of energy derived from oil and coal also hit all-time highs. Over a longer period, the share of hydrocarbons in the global primary energy mix has hardly budged: from 85 percent in 1990 to about 80 percent today."
How Much—and Who Pays?
"Past transitions, such as the shift from wood to coal, were motivated by improved functionality and lower costs, incentives that are not yet present across much of the entire energy system. The scale of the transition means that it will also be very costly."
"Based on such estimates [from the Independent High-Level Expert Group on Climate Finance], the magnitude of energy-transition costs would average about five percent a year of global GDP between now and 2050.
"If global South countries are largely exempted from these financial burdens, global North countries would have to spend roughly 10 percent of annual GDP—for
Energy Security
"
"Governments simply cannot tolerate disruptions to, shortages of, or sharp price increases in energy supplies. Energy security and affordability are thus essential if governments want to make the transition acceptable to their constituencies."
"Assuring that citizens have access to timely supplies of energy and electricity is essential for the well-being of populations. That means recognizing that oil and gas will play a larger role in the energy mix for a longer time than was anticipated a few years ago, which will require continuing new investment in both hydrocarbon supplies and infrastructure."
A New Divide
"In the global South, the transition competes with immediate priorities for economic growth, poverty reduction, and improved health. The trilemma of energy security, affordability, and sustainability looks very different in
"At the moment, almost half the population of the developing world—three billion people—annually uses less electricity per capita than the average American refrigerator does. As energy use grows, 'carbonizing' will precede 'decarbonizing.'"
"The clash of priorities between the North and the South is especially striking when it comes to carbon tariffs. Many global North governments have, as part of their efforts to reduce emissions, put up barriers preventing other countries from taking the same carbon-based economic development path that they took to achieve prosperity."
Big Shovels
"A global economy in transition depends on another transition—a shift from 'big oil' to 'big shovels.' That means much more mining and processing, driven by major new investments and resulting in much-expanded industrial activity. Yet the complexities surrounding mining and critical minerals represent another major constraint on the pace of the energy transition."
"The International Energy Agency has projected that global demand for the minerals needed for 'clean energy technologies' will quadruple by 2040….
"This is extremely unlikely, considering that, based on S&P data that tracked 127 mines that have come online globally since 2002, it takes more than 20 years to develop a major new mine; in
Great-power Rivalry
"The energy transition is increasingly intertwined with the great-power rivalry between
"The growing tensions will likely slow the deployment of clean energy technologies, add costs, and constrain the pace of the energy transition. Governments are now mobilizing to 'diversify' and 'de-risk' supply chains. But in practice this is proving very difficult because of costs, infrastructure constraints, time required, and the substantial roadblocks to getting projects permitted."
Electricity Surge
"A new challenge for the energy transition has emerged: assuring adequate electricity supplies in the face of dramatically increased worldwide demand. This is the result of a quadruple piling on: a coming surge in consumption arising from "energy transition demand" (for example, for electric vehicles); reshoring and advanced manufacturing (for example, of semiconductors); crypto mining and the insatiable energy appetite of data centers powering the AI revolution."
"Some estimates have suggested that data centers alone could consume almost ten percent of
"Electrification trends suggest that power demand in
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SOURCE S&P Global
FAQ
What are the main challenges to the energy transition according to S&P Global executives?
How has the share of hydrocarbons in global energy changed since 1990 according to S&P Global?
Why do S&P Global experts describe the current situation as 'energy addition' rather than 'energy transition'?
How long does it take to develop a major new mine for critical minerals according to S&P Global data?
What is the projected impact of data centers on US electricity consumption by 2030 according to the S&P Global report?
How much would the energy transition cost global North countries if global South is exempted, according to S&P Global analysis?
What is the projected change in US power demand by 2050 according to S&P Global's report?
