New trends in energy economics will reshape the global energy landscape

2025-07-16

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Editor's Note

Over the past decade, the rapid development of renewable energy has continuously reshaped the global energy landscape. Recently, the Oxford Institute for Energy Studies (OIES) released a report stating that unlike fossil fuels with limited reserves, renewable energy, powered by inexhaustible solar and wind energy, and utilizing key components such as solar panels, wind turbines, batteries, and electrolyzers, exhibits entirely different energy economic characteristics than in the past, and is rewriting energy history. Specifically, the competitiveness of renewable energy is no longer determined by natural resource endowments, but rather by the synergistic effects of industrial policies, supply chain efficiency, and economies of scale. With an industrial base and capital investment, strong production capacity can be established. A deep understanding of this trend is particularly important for energy professionals.

Text provided by Lu Xuemei, China Petrochemical Corporation Petroleum Exploration and Development Research Institute

Fundamental Transformation of the Energy Economy

The global energy landscape is undergoing a major transformation, potentially overturning the energy economic paradigms established over the past few decades based on resource scarcity. Unlike fossil fuels characterized by scarcity and geographical contingencies, renewable energy is centered on production technology and uses inexhaustible wind or solar energy as raw materials. Once initial construction is complete, it can provide low-cost energy.

This means that the energy economic framework will shift from the Hotelling rule (scarcity-driven cost increases) to a learning curve model (costs decrease with cumulative output), forming a new model inconsistent with traditional energy economics.

Wave of Industrial Policy Imitation

In recent years, countries have successively realized the economic and strategic benefits of controlling the supply chain for new energy technologies, and China has long been at the forefront of this field. As of 2021, China's electric vehicle battery production accounted for 79% of the global total; as of 2023, China's photovoltaic component production accounted for 85% of the global total. China's successful experience has also stimulated policy follow-up by competitors. The US Inflation Reduction Act and the EU's Net-Zero Industry Act both aim to boost domestic clean technology manufacturing through subsidies, tax breaks, and other incentives. Japan's "Green Growth Strategy" (2024) and South Korea's "Green New Deal" (2021) set specific targets and provide support policies for hydrogen energy and battery technology manufacturing, respectively.

These emerging industrial strategies are prompting the battery manufacturing industry to break through existing geographical limitations and spread to countries and regions such as the United States, the European Union, India, and Southeast Asia. Some countries (such as Vietnam and Malaysia) are actively expanding photovoltaic production capacity by leveraging advantages such as low-cost labor, policy support, and existing manufacturing bases.

These trends indicate that manufacturing is more mobile; key resources such as lithium, nickel, and cobalt can be globally sourced and transported, and battery assembly can be carried out in regions with more advantageous policies and market conditions. In contrast, fossil fuel extraction is often limited to specific geological structures. In addition, the supply chain for low-carbon manufacturing can be established globally with fewer geographical limitations. Based on this understanding, countries are actively competing for market share, reflecting a profound shift in global competition from "resource control" to "industrial strategy".

Redefining Energy Security

The above-mentioned changes in the industrial landscape are redefining energy security. Governments are no longer limited to ensuring the security of oil and gas supplies, but are gradually building national energy security systems from the perspective of stable access to clean energy technologies. For example, the US Department of Energy emphasizes the vulnerability of over-reliance on imported solar panels in its supply chain review documents and points out the need to develop domestic production capacity as soon as possible. Other countries are also seeking to obtain intellectual property rights and manufacturing technologies for emerging technologies such as solid-state batteries or hydrogen electrolyzers.

In addition, policymakers are attempting to use export controls on advanced technologies to protect domestic industries. This also shows that technology controls as energy security tools are undergoing a transformation. As the integration of renewable energy systems and digital grids increases, cybersecurity becomes crucial for ensuring energy security, and technological leadership becomes a core pillar of energy security strategies.

Shift in Innovation Focus

The nature of innovation in the energy sector is also changing. The focus of manufacturing innovation is shifting from improving resource exploration and extraction efficiency in the fossil fuel era to optimizing manufacturing processes, reducing costs, and improving technological efficiency in the renewable energy sector. Therefore, countries are gradually shifting the focus of R&D investment and talent reserves towards renewable energy manufacturing technology R&D. Data from the International Energy Agency (IEA) in 2024 shows that the growth rate of renewable energy-related patents has consistently exceeded that of fossil fuels over the past 20 years. Although fossil fuels still dominate in terms of total patent numbers, this gap has significantly narrowed or even reversed in many specific technology categories.

The rapid growth of renewable energy patents is significant. The substantial decrease in solar power generation costs over the past decade is mainly due to manufacturing innovations, such as larger wafers, thinner silicon wafers, and optimized battery designs. R&D has also focused on improving battery performance, such as energy density, charging speed, and lifespan, and further reducing costs through innovations in materials science and manufacturing processes. The development of more efficient wind turbines is also driven by innovations in advanced materials, aerodynamics, and manufacturing technologies. This shows that expertise in materials science, manufacturing engineering, and system integration is becoming increasingly important to the energy industry.

Impact on Decarbonization Strategies

The above-mentioned changes have profoundly impacted national decarbonization strategies. More and more countries realize that simply subsidizing grid-connected electricity prices cannot automatically reduce supply chain vulnerabilities and external dependencies. Therefore, many countries have shifted their decarbonization focus to supporting the renewable energy industry, combining incentives with local production requirements, manufacturing tax credits, or R&D support policies. For example, some countries have begun to impose tariffs on imported clean energy products to protect domestic manufacturers from the impact of low-priced imports.

This shows that energy economics will undergo a fundamental transformation, shifting from the scarcity, geographical limitations, and resource control of the fossil fuel era to a new paradigm driven by technological innovation, manufacturing scalability, and policy coordination in the renewable energy era. To master this paradigm, it is necessary to understand the new framework of energy economics; traditional models rooted in fossil fuels can no longer capture the unique operating laws of low-carbon energy.

Economic Characteristics of the Traditional Energy Industry

1. Scarcity and Depletion Anxiety

The most fundamental economic characteristic of the traditional energy industry is scarcity, that is, fossil fuels are finite and non-renewable resources. The Hotelling rule, the core of the basic theoretical framework of the traditional energy market economy, was proposed based on this. For decades, based on concerns about the depletion of fossil fuels and the Hotelling model, many peak theories have emerged, such as "peak oil" and "peak coal," which have affected national or corporate investment strategies to varying degrees and have prompted countries to establish strategic reserves or seek energy diversification. Anxiety about the depletion of fossil fuels has also driven energy independence policies, reserve strategies, and the development of alternative energy sources. However, in reality, technological advances and new resource discoveries have repeatedly delayed the arrival of these "anticipated" energy depletion scenarios.

2. Economies of Scale and Industry Consolidation

The production, transportation, and refining of fossil fuels exhibit significant economies of scale, with larger operations typically having lower unit costs. Companies that invest heavily in capacity can therefore outcompete smaller, less efficient rivals. This dynamic accelerates industry consolidation, shifting the industry structure towards large, well-capitalized firms. Scale-driven consolidation also shapes the geographic pattern of production: large refineries or large coal mines become central hubs in the supply chain. Governments often support these large companies through direct subsidies, ultimately resulting in a global fossil fuel market dominated by a few large companies that leverage their scale to influence fuel pricing, production schedules, and technological direction.

3. Vertical and Horizontal Integration

To enhance efficiency and control, fossil fuel companies widely adopt vertical integration strategies, controlling the entire value chain from exploration and extraction to refining and retail distribution. Controlling multiple links in the supply chain helps reduce uncertainty and transaction costs: companies can ensure stable supply, optimize downstream refining capacity based on upstream production, and distribute finished products according to a unified strategy. This model was particularly typical in the 20th-century oil industry, with large international oil companies being largely vertically integrated giants. However, the benefits of vertical integration are not infinitely increasing; exceeding the optimal boundary point may lead to reduced efficiency.

Horizontal integration involves acquiring or merging with competitors at the same stage of the value chain. This can increase market share, reduce direct competition, and achieve cost advantages. The combination of economies of scale with vertical and horizontal integration ultimately creates an oligopolistic market structure, which is particularly evident in the oil industry, where a few integrated multinational companies and national oil companies control a large share of global production, refining, and distribution. Oligopolies typically occur in industries requiring large-scale, capital-intensive investments and specialized technologies, which limit the number of competitors and allow existing companies considerable control over market decisions, from pricing to supply.

4. Price Volatility and Risk

Price volatility, especially changes in oil prices, is a significant characteristic of the traditional energy industry. Geopolitical conflicts leading to supply disruptions, demand changes driven by global economic cycles, and speculative behavior in commodity markets are major contributing factors. For example, wars or political instability in major oil-producing regions (such as the Middle East) can restrict supply and cause oil prices to soar; conversely, a global economic recession will suppress demand, leading to price crashes.

Price volatility poses significant risks to investors, governments, and consumers, and has profound structural impacts. Oil companies often experience boom-and-bust cycles, directly affecting their exploration investment decisions; they increase exploration and development investment during price surges and postpone or cancel projects during price crashes. Similarly, the economies of countries that rely on fossil fuel exports are vulnerable to price fluctuations, while import-dependent countries face energy security threats and inflationary pressures when fuel costs rise. To address price volatility, various mechanisms have been developed to stabilize prices or secure supply, such as national strategic petroleum reserves, long-term contracts, and hedging tools.

5. Geopolitical Significance

Uneven geographic distribution gives fossil fuels a strong geopolitical attribute. The vast oil reserves concentrated in the Middle East, Russia, and North America give these regions enormous political and economic influence. Securing the safe supply of fossil fuels therefore becomes a strategic priority for most industrialized countries. This geopolitical consideration often leads governments to introduce policies to protect their domestic fossil fuel industries, including direct subsidies, trade barriers, or control of overseas resources through national oil companies.

6. High Capital Intensity

Fossil fuel projects (such as coal mining, oil and gas drilling, refinery construction, and pipeline construction) are extremely capital-intensive, requiring huge upfront investments that create high barriers to entry, excluding smaller or undercapitalized companies. High capital intensity interacts with price volatility, increasing the investment risk of traditional energy—new projects may take years to become profitable, and unfavorable price environments can render them uneconomical.

7. Long Project Cycles

Fossil fuel projects, from exploration and evaluation, feasibility studies, construction to final production, typically require long lead times. This lag makes it difficult for companies to respond flexibly to sudden changes in demand or supply shocks. The interaction of long project cycles and high capital intensity makes larger companies better equipped to withstand economic downturns and manage long investment payback periods.

8. The Dual Role of Technological Innovation

Technological innovation has long driven improvements in the efficiency of the fossil fuel supply chain. Advances in exploration technology have improved the accuracy of reserve assessments and reduced unproductive drilling, while advances in extraction technology have improved the recovery rate of old oil fields. These technological advances have reduced the unit cost of energy and extended the economic life of traditional resources. More importantly, technological breakthroughs such as hydraulic fracturing have successfully unlocked the potential of unconventional resources such as shale oil and shale gas. This development has significantly increased the global supply of oil and gas, profoundly changing the energy landscape and effectively alleviating previous concerns about resource scarcity.

9. Diverse Regulatory Environments

The regulatory framework for the fossil fuel industry is highly diverse. Some major oil-producing countries (such as the United States and some countries in the Middle East) have relatively lax regulations, with fewer constraints on environmental impact or safety standards; while other regions (such as Europe) are stricter in terms of environmental regulations, labor protection, and price controls. Even among countries that have set carbon neutrality targets, there are significant differences in environmental regulations. Currently, only a few G20 countries have legislation requiring the phasing out of specific fossil fuels, such as Germany's coal phase-out target, France's ban on new oil and gas exploration, and Spain's commitment to ending coal mining and power generation. As public concerns about environmental pollution, safety incidents (such as oil spills), and the side effects of extraction intensify, future regulations will become more complex and comprehensive. Relevant research indicates that to limit the temperature increase to 1.5 degrees Celsius by 2050, 58% of global oil reserves, 59% of natural gas reserves, and 89% of coal reserves must remain undeveloped.

10. High Subsidies and Their Impact

The fossil fuel industry has long benefited from various subsidies, including direct and indirect subsidies. These subsidies have reduced the production costs of fossil fuel companies, increased profitability, and solidified their dominant position in the national energy structure. In 2023, government support for fossil fuels reached $1.5 trillion, with subsidies accounting for the largest share. These subsidies mask the true market costs, making the economy more reliant on fossil fuels and hindering the transition to clean energy.

Economic Characteristics of the Renewable Energy Industry

Energy transition is not a new phenomenon in human history. From the transition from biomass energy (such as wood and straw) to coal during the Industrial Revolution, to the shift to oil in the early 20th century, and the later introduction of nuclear energy, all represent energy transitions. However, the renewable energy transition humanity faces today is fundamentally different from the past. Previously, new energy sources were mainly used as supplements, not to completely replace existing energy forms; coal did not completely replace biomass energy, and oil did not lead to the retirement of coal. Instead, these new energy forms expanded the energy structure, ultimately allowing each energy source to find its place and coexist.

The current renewable energy transition marks a historic breakthrough in this model. Driving this energy transition is not the discovery of more concentrated energy or more efficient extraction methods, but the emergence of energy technologies with different economic characteristics. These new energy sources are not only supplements to the existing energy structure, but also replace fossil fuels in multiple areas. This shift stems not only from the urgency of environmental problems or policy requirements, but also from the potential economic characteristics of renewable energy systems, namely, marginal costs approaching zero, continuously improving efficiency and cost reduction through manufacturing-based learning curves, and positive network externalities.

These economic characteristics create a fundamentally different and more competitive new economic paradigm. This development has fostered the emergence of a new energy economy, whose characteristics differ significantly from the traditional system based on commodities such as coal, oil, and natural gas. In the new energy economics, abundance replaces scarcity as the defining characteristic, and technological innovation and manufacturing capabilities, rather than resource control, constitute the core competitiveness of this new paradigm.

Electrification is at the heart of the new energy model. It is not only a decarbonization pathway, but also the fundamental vehicle for realizing the dynamics of the new energy economy. Electrification drives the transformation of energy systems with high marginal costs and extraction dependence to structures that provide energy services through manufacturing technologies, with marginal costs approaching zero. This not only improves thermodynamic efficiency but also enhances system integration. In addition, although some hard-to-abate sectors face challenges in direct electrification due to process or energy density requirements, their long-term decarbonization will also rely on low-cost, abundant renewable electricity. Many indirect decarbonization pathways, such as green hydrogen, synthetic fuels, and electrochemical processes, are essentially based on renewable electricity as a raw material. Therefore, even for industries facing transition barriers, the viable decarbonization solution remains abundant, low-cost renewable electricity.

The most fundamental characteristic of renewable energy systems is that the marginal cost of electricity generation approaches zero. Once the infrastructure (such as solar panels or wind turbines) is in place, sunlight and wind, as "fuels," are freely available. This fundamentally alters the pricing dynamics of the electricity market, allowing renewable energy to replace fossil fuels, depressing wholesale prices during periods of high output, and disrupting the traditional supply-demand relationship. The marginal cost approaching zero is intrinsically linked to another defining characteristic of the new economic paradigm (dominated by upfront capital costs), namely, the main cost of renewable energy is the initial capital expenditure for manufacturing and installing equipment, with relatively low operating costs (mainly maintenance costs). This high capital expenditure and low operating cost structure requires significant upfront financing, making the levelized cost of electricity (LCOE) highly sensitive to capital costs and equipment lifespan. However, once operational, this structure also translates into relatively low-risk long-term returns, making it attractive to institutional investors seeking stable cash flows, in stark contrast to the volatile returns of fossil fuel investments.

Furthermore, the geographical limitations of fossil fuel production are largely absent in the renewable energy sector. Renewable energy can be produced wherever the climate conditions are suitable, significantly reducing geopolitical risks and transportation costs. However, the distribution of solar and wind energy is uneven across regions; some areas are rich in solar resources (such as the Sahara Desert, the Arabian Peninsula, and inland Australia), some areas are abundant in wind resources (such as coastal areas, the North Sea, and certain mountain passes), and some areas have both. These differences in natural endowments may lead to variations in renewable energy generation potential and affect capacity, project economics, and competitiveness. However, even in regions with poor renewable energy endowments, there are usually sufficient resources to meet energy needs, and the geographical variations in the quality of these resources do not lead to geopolitical conflicts in the same way as fossil fuels.

The distributed nature of renewable energy can create a complementary relationship through interconnected systems. Grid interconnection can mitigate the inherent intermittency challenges of wind and solar energy, driving increased investment in transmission infrastructure and smart grids to build a more resilient and integrated energy system.

More importantly, the economic advantages of the new paradigm have shifted. The economies of scale for fossil fuels are mainly reflected in extraction, transportation, and refining, while renewable energy is reflected in equipment manufacturing. Large-scale factories producing solar panels or wind turbines have lower unit costs, driving manufacturing integration, and costs will further decrease as output increases, promoting international technology transfer and competition.

This manufacturing-driven cost reduction and efficiency improvement will be further amplified. Over time, the cost of renewable energy technologies has fallen dramatically, with costs decreasing proportionally with each doubling of output. This is a fundamental departure from the traditional Hotelling model, which suggests that resource depletion increases costs.

Overall, the new energy economy is characterized by a cost-reduction trajectory, spatial democratization, and manufacturing-driven scalability. While challenges such as intermittency, ensuring the supply of critical minerals, and adapting market designs remain, the structural advantages of renewable energy indicate that the trend of energy transition is irreversible. The new model encourages innovation, manufacturing, and technological leadership, rather than resource control, ushering in a new era of energy abundance and fundamentally reshaping the global energy landscape.

Source: China Petrochemical News

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