As a result of major transformations in the global energy system that will take place over the next decades, renewables and natural gas are likely to be the big winners in the race to meet energy demand growth until 2040, according to the latest edition of the IEA’s World Energy Outlook.

A detailed analysis of the pledges made for the Paris Agreement on climate change finds that the era of fossil fuels is far from over. Still, government policies, as well as cost reductions across the energy sector, enable a doubling of renewables – subject of a special focus in the 2016 Outlook – and of improvements in energy efficiency over the next 25 years. Natural gas continues to expand its role while the shares of coal and oil fall back. “There is no single story about the future of global energy: in practice, government policies will determine where we go from here” commented Dr Fatih Birol, the IEA’s executive director.

This transformation of the global energy mix described in WEO- 2016 suggests that risks to energy security also evolve. Traditional concerns related to oil and gas supply remain – and are reinforced by record falls in investment levels. The report shows that another year of lower upstream oil investment in 2017 would create a significant risk of a shortfall in new conventional supply within a few years.

In the longer-term, investment in oil and gas remain essential to meet demand and replace declining production, but the growth in renewables and energy efficiency reduces oil and gas imports in many countries. Increased LNG shipments also change how gas security is perceived. Meanwhile the variable nature of renewables in power generation entails a new focus on electricity security.

Global oil demand continues to grow until 2040, mostly because of the lack of easy alternatives to oil in road freight, aviation and petrochemicals, according to WEO-2016. However, oil demand from passenger cars declines even as the number of vehicles doubles in the next quarter century, thanks mainly to improvements in efficiency, but also biofuels and rising ownership of electric cars.

Coal consumption barely grows in the next 25 years, as demand in China starts to fall back thanks to efforts to fight air pollution and diversify the fuel mix. The gas market is also changing, with the share of LNG overtaking pipelines and growing to more than half of the global long-distance gas trade, up from a quarter in 2000. In an already well-supplied market, new LNG from Australia, the United States and elsewhere triggers a shift to more competitive markets and changes in contractual terms and pricing.

Climate pledges and climate goals

The Paris Agreement, which entered into force on 4 November, was a major step forward in the battle against global warming. Countries are generally on track to achieve, and even exceed in some instances, many of the targets set in their Paris Agreement pledges; this is sufficient to slow the projected rise in global energy-related CO2 emissions, but not nearly enough to limit warming to less than 2°C.

China’s transition to an economic model oriented towards domestic consumption and services will play a critical role in shaping global trends. The build-up of its infrastructure in recent decades relied heavily on energy-intensive industrial sectors, notably steel and cement. Energy demand from these sectors is now past its high point, with the projected decline to 2040 bringing down China’s industrial coal use in its wake. Almost all the growth in China’s power generation comes from sources other than coal, whose share in the power mix falls from almost 75% today to less than 45% in 2040. China’s energy-related CO2 emissions plateau, only slightly above current levels.

In India, coal’s share in the power mix drops from 75% to 55% over the period to 2040, a major shift in a country that sees electricity demand more than triple (compared with a “mere” 85% rise in China). Among the main developed economies, the United States, the European Union and Japan look to be broadly on track to meet their climate pledges, although delivering on further improvements in energy efficiency will be vital.

With a continued focus on full and timely implementation, the Paris pledges are sufficient in aggregate to limit the increase in global CO2 emissions to an annual average of 160 million tonnes. This is a marked reduction compared with the average annual rise of 650 million tonnes seen since 2000. But continued growth in energy- related CO2 emissions, to 36 gigatonnes in 2040, self-evidently means that these pledges do not deliver the Paris Agreement’s goal to reach a peak in emissions as soon as possible.

CO2 emissions

Growth in energy-related CO2 emissions flatlined in 2015. This was mainly due to a 1.8% improvement in the energy intensity of the global economy, a trend bolstered by gains in energy efficiency, as well as the expanded use of cleaner energy sources worldwide, mostly renewables. An increasing slice of the roughly $1.8 trillion of investment each year in the energy sector has been attracted to clean energy, at a time when investment in upstream oil and gas has fallen sharply. The value of fossil-fuel consumption subsidies dropped in 2015 to $325 billion, from almost $500 billion the previous year, reflecting lower fossil-fuel prices and a subsidy reform process.

Market design and security

There are many trade-offs, co-benefits and competing priorities that need to be untangled across the energy sector. This is the task that the Outlook takes up in different scenarios and case studies, with the opportunity in 2016 to provide the first comprehensive examination of the new era opened up by the Paris Agreement. All the Paris climate pledges, covering some 190 countries, have been examined in detail and incorporated into WEO’s main scenario.

More stringent decarbonisation options examined in WEO-2016 include not only the 450 Scenario (consistent with a 50% chance of limiting global warming to 2°C) but also a first examination of pathways that could limit warming further.

Energy consumption

In WEO’s main scenario, a 30% rise in global energy demand to 2040 means an increase in consumption for all modern fuels, but the global aggregates mask a multitude of diverse trends and significant switching between fuels.

Globally, renewable energy sees by far the fastest growth. Natural gas fares best among the fossil fuels, with consumption rising by 50%. Growth in oil demand slows over the projection period, but still tops 103 million barrels per day by 2040. Coal use is hit hard by environmental concerns and, after the rapid expansion of recent years, growth essentially grinds to a halt. The increase in nuclear output is spurred mainly by deployment in China. With total demand in OECD countries on a declining path, the geography of global energy consumption continues to shift towards industrialising, urbanising India, Southeast Asia and China, as well as parts of Africa, Latin America and the Middle East.

China and India see the largest expansion of solar photovoltaics, while by the mid-2030s developing countries in Asia consume more oil than the entire OECD. Yet, despite intensified efforts, more than half a billion people, increasingly concentrated in rural sub-Saharan Africa, will still be without access to electricity in 2040.

Renewables break free

The electricity sector is the focus of many Paris pledges: nearly 60% of all new power generation capacity to 2040 in our main scenario comes from renewables and, by 2040, the majority of renewables- based generation is competitive without any subsidies.

Rapid deployment brings lower costs: solar PV is expected to see its average cost cut by a further 40-70% by 2040 and onshore wind by an additional 10-25%. Subsidies per unit of new solar PV in China drop by three-quarters by 2025 and solar projects in India are competitive without any support well before 2030. Subsidies to renewables are around $150 billion today, some 80% of which are directed to the power sector, 18% to transport and around 1% to heat.

With declining costs and an anticipated rise in end-user electricity prices, by the 2030s global subsidies to renewables are on a declining trend from a peak of $240 billion. Renewables also gain ground in providing heat, mainly in the form of bioenergy for industrial heat in emerging economies in Asia, and solar thermal applications for water heating, already an established choice in many countries, including China, South Africa, Israel and Turkey.

In the 450 Scenario, nearly 60% of the power generated in 2040 is projected to come from renewables, almost half of this from wind and solar PV. The power sector is largely decarbonised: the average emissions intensity of electricity generation drops to 80 grammes of CO2 per kWh in 2040, compared with 335 g CO2/kWh in the main scenario, and 515 g CO2/kWh today. In the four largest power markets (China, the United States, the European Union and India), variable renewables become the largest source of generation in around 2030 in Europe and around 2035 in the other three countries.

A truly global gas market

A 1.5% annual rate of growth in natural gas demand to 2040 is healthy compared with the other fossil fuels, but markets, business models and pricing arrangements are all in flux. A more flexible global market, with a doubling of trade in LNG, supports an expanded role for gas in the global mix. Gas consumption increases almost everywhere, the main exception being Japan where it falls back as nuclear power is reintroduced.

China (where consumption grows by >400 bcm) and the Middle East are the largest areas of growth. But how quickly can a market currently awash with gas rebalance, with 130 bcm of liquefaction capacity under construction, mainly in the US and Australia.

WEO assumes a marked change from the previous system of strong, fixed-term relationships between suppliers and a defined group of customers, in favour of more competitive and flexible arrangements, including greater reliance on prices set by gas-togas competition.Floating storage and regasification units help to unlock new and smaller markets for LNG, whose overall share in long- distance gas trade grows from 42% in 2014 to 53% in 2040. But there is uncertainty over the direction of this transition, posing the risk of a hard landing for markets once the oversupply is absorbed.

Export-oriented producers have to work hard to control costs in the face of strong competition from other fuels, especially in the power sector. In the mid-2020s, in gas-importing countries in Asia, new gas plants would be a cheaper option than new coal plants for baseload generation only if coal prices were $150/tonne (double the anticipated 2025 price). The space for gas-fired generation is also squeezed by the rising deployment and falling costs of renewables.

Coal prospects

With no global upturn in demand in sight for coal, the search for market equilibrium depends on cuts to supply capacity, mainly in China and the USA. There are stark regional contrasts in the coal demand outlook. Some higher income economies, often with flat or declining overall energy needs, will make large strides in displacing coal with lower carbon alternatives. Coal demand in the EU and the USA falls by over 60% and 40%, respectively, over the period to 2040. Meanwhile, lower income economies, notably India and countries in Southeast Asia, need to mobilise multiple sources of energy to meet fast growth in consumption; they cannot afford, for the moment, to neglect a low cost source of energy even as they pursue others.

China is in the process of moving to the former group, resulting in a decline of almost 15% in its coal demand over the Outlook period. China is also instrumental to the way that the coal market finds a new equilibrium, after the abrupt end to the coal boom of the 2000s. China is administering a number of measures to cut mining capacity, which has already pushed coal prices higher in 2016 after four years of decline. But if the social costs of this transition prove too high, China could ease the pace of cuts, perhaps becoming a coal exporter, which would prolong the slump in the international market.

The long-term future of coal is increasingly tied to the commercial availability of carbon capture and storage, as only abated coal use is compatible with deep decarbonisation.