Coal and oil persist – but the future is electric27 March 2018
Despite a resurgence in oil and gas demand the energy future, according to IEA analysis, belongs to electricity. This report concentrates on the electricity industry changes revealed by World Energy Outlook 2017.
The resurgence in oil and gas production from the United States, a steep decline in the cost of renewables and growing electrification are changing the face of the global energy system and upending traditional ways of meeting energy demand, according to the International Energy Agency’s World Energy Outlook 2017 report. A cleaner and more diversified energy mix in China is another major driver of this transformation.
Over the next 25 years, the world’s growing energy needs will be met first by renewables and natural gas, as fast-declining costs turn solarpowerintothecheapestsourceofnew electricity generation. Global energy demand is 30% higher by 2040 – but still half as much as it would have been without efficiency improvements. The boom years for coal are over–intheabsenceoflarge-scalecarbon capture, utilisation and storage – and rising oil demand slows down but is not reversed before 2040 even as electric-car sales rise steeply.
Four large-scale shifts in the global energy system are the main determinants of the energy future as described in WEO-2017:
The rapid deployment and falling costs of clean energy technologies. In 2016, growth in solar PV capacity was larger than for any other form of generation. Since 2010, costs of new solar PV have come down by 70%, wind by 25% and battery costs by 40%.
The growing electrification of energy. In 2016, spending by the world’s consumers on electricity approached parity with their spending on oil products.
The shift to a more services-oriented economy and a cleaner energy mix in China, the largest energy consumer.
The resilience of shale gas and tight oil in the USA, fixing its position as the biggest oil and gas producer even at lower prices. These shifts come at a time when traditional distinctions between energy producers and consumers are being blurred and a new group of major developing countries, led by India, moves towards centre stage. How these developments play out, and the implications for natural gas, are the main focus of WEO2017. Together, they are opening up new perspectives for affordable, sustainable access to modern energy, reshaping responses to the world’s pressing environmental challenges, and entailing a reappraisal of approaches to energy security.
WEO2017 describes multiple future pathways for global energy through to 2040. One, the New Policies Scenario, shows where existing policies and announced intentions might lead the energy system. The Sustainable Development Scenario, new for WEO-2017, outlines an integrated approach to achieving the energy-related aspects of UN Sustainable Development Goals: determined action on climate change, universal access to modern energy by 2030, and a dramatic reduction in air pollution. These are all areas in which progress in the New Policies Scenario falls short of what would be required.
In the New Policies Scenario, global energy needs rise more slowly than in the past but still expand by 30% to 2040. A global economy growing at an annual average rate of 3.4%, a population that expands from 7.4 billion today to more than 9 bn in 2040, and rapid urbanisation are key forces that underpin IEA’s projections. The largest contribution to demand growth – almost 30% – comes from India, whose share of global energy use rises to 11% by 2040 (for its 18% share in the then global population). Southeast Asia, a region covered in a separate special report in the WEO-2017 series, is a rising heavyweightinglobalenergy,withdemand growing at twice the rate of China’s. Overall, developing countries in Asia account for two-thirds of global energy growth, with the rest coming mainly from the Middle East, Africa and Latin America.
The way that the world meets its growing energy needs changes dramatically in the New Policies Scenario, with the lead now taken by natural gas, by the rapid rise of renewables, and by energy efficiency. Renewable sources of energy meet 40% of the increase in primary demand and their explosive growth in the power sector marks the end of the boom years for coal. Since 2000, coal-fired capacity has grown by nearly 900GW, but net additions from today to 2040 are only 400 GW and many of these are plants already under construction. In India, the share of coal in the power mix drops from three-quarters in 2016 to less than half in 2040. In the absence of large- scale carbon capture and storage, global coal consumption flatlines. Oil demand continues to grow to 2040, albeit at a steadily decreasing pace. Natural gas use rises by 45% to 2040; with limited room to expand in the power sector, industrial demand becomes the largest growth area. The outlook for nuclear power has dimmed since last year’s Outlook, but China continues to lead a gradual rise in output, overtaking the United States by 2030. Renewables capture two-thirds of global investment in power plants as they become, for many countries, the least-cost source of new generation. Rapid deployment of solar PV, led by China and India, helps solar become the largest source of low-carbon capacity by 2040, by which time the share of all renewables in total power generation reaches 40%. In the European Union, renewables account for 80% of new capacity and wind power becomes the leading source of electricity soon after 2030. Policies continue to support renewables worldwide.
Electricity is the rising force among worldwide end-uses of energy, making up 40% of the rise in final consumption to 2040. Industrial electric motor systems account for one-third of the increase in power demand in the New Policies Scenario. Many millions of households add electrical appliances (with an increasing share of “smart” connected devices) and install cooling systems. Electricity makes inroads in supplying heat and mobility, increasing its share of final consumption to nearly a quarter. A strengthening tide of industry initiatives and policy support – including recent decisions by the governments of France and the UK to phase out sales of conventional petrol and diesel vehicles by 2040 – pushes IEA’s projection for the global electric car fleet up to 280 million by 2040, from 2 million today.
The scale of future electricity needs and the challenge of decarbonising power supply help to explain why global investment in electricity overtook that of oil and gas for the first time in 2016 and why electricity security is moving firmly up the policy agenda. Increasing demand is dominated by India and China. To meet it India needs to add over 3000 TWh to its power generation by 2040, trebling today’s figure, while China needs to add over 4000 TWh to its 6000 now.
Cost reductions for renewables are not sufficient on their own to secure efficient decarbonisation or reliable supply. The policy challenge is to ensure sufficient investment in electricity networks and in a mix of generation technologies that are the best fit for power system needs, providing the flexibility that is needed as the contribution of wind and solar PV increases.
The increasing use of digital technologies improves efficiency and the more flexible operation of power systems, but also creates potential new vulnerabilities that need to be addressed.
China is entering a new phase in its development, with the emphasis in energy policy now firmly on electricity, natural gas and cleaner, high-efficiency and digital technologies. The previous orientation towards heavy industry, infrastructure development and the export of manufactured goods lifted hundreds of millions out of poverty and energy poverty – but left the country with an energy system dominated by coal and a legacy of serious air quality problems, giving rise to almost 2 million premature deaths a year.
The transition towards a more services-based economic model is moving the energy sector in a new direction. Demand growth slowed markedly from an average of 8% per year from 2000 to 2012 to less than 2% per year since 2012, and in the New Policies Scenario it slows further to an average of 1% per year to 2040. But the scale of China’s clean energy deployment, technology exports and outward investment makes it a key determinant of momentum behind the low-carbon transition: one-third of the world’s new wind power and solar PV is installed in China in the New Policies Scenario, and China also accounts for more than 40% of investment in electric vehicles.
The shale revolution
United States oil and gas output has moved to a level 50% higher than any other country has ever managed; already a net exporter of gas, the US becomes a net exporter of oil in the late 2020s. In IEA’s projections, the 8 mb/d rise in US ‘tight’ oil output from 2010 to 2025 would match the world record for growth, while a 630 bcm increase in US shale gas production over the 15 years from 2008 would comfortably exceed the previous record for gas. This expansion is fuelling major investments in petrochemicals and other energy-intensive industries. It is also re-ordering international trade flows. By the mid-2020s, the United States will become the world’s largest LNG exporter and a few years later a net exporter of oil.
But IEA sounds a cautionary note. In a lower oil price world, consumers have few economic incentives to make the switch away from oil or to use it more efficiently. Meanwhile, with projected demand growth appearing robust, at least for the near term, a third straight year in 2017 of low investment in new conventional projects remains a worrying indicator for the future market balance, creating a substantial risk of a shortfall of new supply in the 2020s.
LNG is the new order
Natural gas grows to account for a quarter of global energy demand in the New Policies Scenario by 2040, becoming the second- largest fuel in the global mix after oil.
80% of the projected growth in gas demand takes place in developing economies, led by China, India and other countries in Asia, where much of the gas needs to be imported. This reflects the fact that gas looks a good fit for policy priorities in this region, generating heat, power and mobility with fewer CO2 and pollutant emissions than other fossil fuels, helping to address widespread concerns over airquality.Butthecompetitionfromcoaland renewables is pushing gas-fired plants towards a balancing rather than a baseload role.
Access, air pollution and GHG
Universal access to electricity remains elusive, but there are some positive signs: over 100 million people per year have gained access to electricity since 2012 compared with around 60 million per year from 2000 to 2012. Progress in India and Indonesia has been particularly impressive, and in sub- Saharan Africa electrification efforts outpaced population growth for the first time in 2014.
Political attention to air quality is rising and global emissions of all the major pollutants fall in IEA projections, but their health impacts remain severe. Premature deaths worldwide from outdoor air pollution rise from 3 million today to more than 4 million in 2040 in the New Policies Scenario.
Global energy-related CO2 emissions increase slightly to 2040 in this Scenario. This outcome is far from enough to avoid severe impacts of climate change, but there are a few positive signs. Projected 2040 emissions are lower by 600 m tonnes from the from 36.3 Gt of the 2016 Outlook.
An integrated approach
The IEA’s Sustainable Development Scenario offers an integrated way to achieve a range of energy-related goals crucial for sustainable economic development: climate stabilisation, cleaner air and universal access to modern energy, while also reducing energy security risks. This scenario starts from a set of desired outcomes and considers what would be necessary to deliver them. Central to these is achieving an early peak in CO2 emissions and a subsequent rapid decline, in line with the Paris Agreement.
In this Scenario, low-carbon sources double their share in the energy mix to 40% in 2040, all avenues to improve efficiency are pursued, coal demand goes into an immediate decline and oil consumption peaks soon thereafter. Power generation is all but decarbonised, relying by 2040 on generation from renewables (over 60%), nuclear power (15%) as well as a contribution from carbon capture and storage (6%).
Investment can change the future
The large-scale shifts in global energy that characterise WEO-2017 projections also reshape the outlook for energy investment. Electricity accounts for nearly half of total energy supply investment in the New Policies Scenario and almost two-thirds in the Sustainable Development Scenario, up from an average of 40% in recent years. Clean energy technologies and energy efficiency take an increasing share of the $60 trillion in cumulative investment in supply and end- uses in the New Policies Scenario, and the bulk of the $69 trillion in the Sustainable Development Scenario. Getting pricing signals and policy frameworks right would include phasing out subsidies that promote wasteful consumption of fossil fuels. At an estimated $260 billion in 2016, these are almost double the subsidies currently going to renewables.