Global energy demand will plateau from 2030, oil demand will flatten from 2020 to 2028 and go to a significant decline thereafter, the shift to renewable energy will be quicker and more massive than most people realize, yet the energy transition will not be difficult to finance. These are some of the momentous conclusions of a set of major new reports from independent energy consultancy DNV GL, under the name Energy Transition Outlook (ETO). They are based on an independent model and output from hundreds of the company’s experts who work in all sectors of the energy industry. Energy Post spoke with project leader Sverre Alvik and lead author of the renewable energy section of the report, Paul Gardner. They agree: “changes are coming so fast they will surprise many people.”
When a company like DNV GL makes projections of our energy future, this carries some weight. The company employs some 3400 energy experts, who are active across the entire energy value chain, from generation, transmission and distribution to sustainable use, covering sectors including renewables, storage and grids, as well as oil and gas. DNV GL prides itself on its “technology neutrality”. It has no special interests, and no axes to grind. Moreover, its experts work all over the world. In fact, the company’s first Energy Transition Outlook report includes different projections for 10 major regions in the world, so it has a truly global perspective.
“Changes are coming so fast, they will surprise many people”
It is precisely the unique position DNV GL has that motivated the company to develop its own Energy Transition Outlook, says Sverre Alvik, who works in the Strategic Research section of DNV GL in Oslo, and is head of Energy Transition research within the company. “We have a history of over 150 years of building trust and providing forecasts. We believe it is important for all energy industries to understand the current reality.”
That reality, according to DNV GL, is about to undergo an unprecedented transformation. “Changes are coming so fast that it will surprise many people, even inside the industry”, says Alvik.
The first major change that will have huge implications for the energy sector is that, perhaps for the first time in human history, global energy demand is about to plateau. And this will happen in the 2030s, according to the Energy Transition Outlook.
This conclusion seems to fly in the face of most other energy scenarios. The oil companies in particular count on continued demand growth many decades into the future. “It is a rather unique finding, yes” says Alvik. “That is to say, you do find this in 2-degree scenarios, such as the IEA’s 450 scenario, but not in any reference scenarios or even scenarios that take into account existing climate policies.”
“Many people I talk to are saying their next car will be electric”
There are three main reasons why DNV GL expects energy demand to peak, explains Alvik. “First, we assume a somewhat lower population growth than the UN median forecast. We use the IIASA/Wittgenstein Centre for Demography and Global Human Capital model, because it seems to better take into account the influence of rising urbanization and education levels on fertility growth. Second, we assume lower GDP growth than the IEA and the oil companies do, although our projections are in line with other sources such as McKinsey, PWC, MIT and Statoil. Economists like to see growth rates of 3 or 3.5%, but we think that’s unrealistic.”
“And thirdly, we have a more optimistic view on the continued cost reduction potential of solar and wind power and on improvements in energy intensity than many of the reference scenarios used in the industry.”
Alvik notes that “the growing electrification in combination with the growth of renewables will make the energy system more energy efficient, leading to important energy savings.”
Oil demand peak
The second major transformation that the Energy Transition Outlook foresees is a renewable energy revolution. Although the model takes into account that cost reductions will take place in the oil and gas sector, and assumes only a modest carbon price (at most $60 per ton in 2050), it finds that solar and wind will rapidly become cheaper than fossil fuels. As a result, renewables will expand to make up 44% of primary energy supply by 2050 and 85% of electricity supply, at the same time that the share of electricity in total energy supply will rise dramatically from 18% today to 40% in 2050.
The amount of renewable energy in the system by 2040 will be way beyond any existing experience
Natural gas is the only fossil fuel that will see growth (14% from now until its peak in 2035), while oil demand will decline by 38% and coal 73% until 2050. Biomass andnuclear are projected to remain fairly stable.
DNV GL has oil demand flattening from 2020 to 2028. “Not so very different from what Shell and Statoil have said they expect to happen”, notes Alvik “but considerably earlier than BP or the IEA have said. We know this conclusion will be challenged and I should say that continued investment in oil production will be necessary to make up for depletion.”
Rapid shift to EVs
The oil demand peak is mainly caused by a third major transformation forecast by DNV GL, which is a very rapid shift to electric vehicles (EVs). “This is a change that looks sensible”, says Paul Gardner, segment leader storage at DNV GL and the lead author of the renewable energy supplement of the report. “Many people I talk to are saying their next car will be electric.”
According to Gardner, EVs will win out because of their superior performance and – in time – lower costs. “EVs have so many advantages.”
“There is a significant risk that regulation will hold up some of the changes that we are foreseeing”
The additional electricity demand as a result of the EV revolution will not be an insurmountable problem for grid balancing, says Gardner. “We are not talking about a doubling of demand. The charging can be handled. However, the amount of renewable energy in the system by 2040 will be way beyond any existing experience. There will be costs and changes need to be made to the system.”
New regulation is particularly important, notes Gardner. “We have seen many times that electricity regulation is a hindrance to the expansion of renewable energy, because it can’t keep up with the speed of change. There is a significant risk that regulation will hold up some of the changes that we are foreseeing.”
“We have a lot of wind, a lot of solar and a lot of gas plant that spends a lot of time doing nothing”
One example Gardner mentions is in his own specialty, storage. “In many countries network operators are not allowed to go into the storage business, because that’s the preserve of generators. But storage is useful for network operators. This kind of regulation has already got in the way of energy storage projects.”
Is a 100% renewable energy future realistic, according to DNV GL? There has been quite a lot of debate about this in the U.S. recently.
“It is possible to build a secure system with a very high level of renewable energy”, says Gardner. “But in our projections we don’t quite get to 100%. We see quite a bit of ‘peaking’ gas generation to go with renewables by 2050. We have a lot of wind, a lot of solar and a lot of gas plant that spends a lot of time doing nothing. Even when we include the backup costs for the gas-fired power, this still looks attractive.”
“That’s a pleasant surprise: we can afford the transition”
Gardner does add there is one thing that the model does not yet take into account, namely the effect that temporary surpluses of wind and solar power will have on the economics of renewables. “We have not yet shown what the impact is of that.” However, he says, “we will also need to decarbonize heat, so it makes sense to store the surplus renewable energy, for example to heat water with it or to convert it into gas, to be used for heating. It is not yet clear what the most economic route will be.”
Good and bad news
The implications of the energy transition for the energy sector are obviously huge. “One important implication of peak energy demand”, says Alvik, “is that competition will increase. The energy market will become much more competitive and cost-driven.”
Another, perhaps surprising, finding is that, thanks to restrained demand, overall investment in energy won’t have to increase, despite the transition. “Major investments need to be made”, explains Gardner, “but the amount of money the world spends on energy does not change much. The total number will be lower relative to GDP. That’s a pleasant surprise: we can afford the transition.”
That’s the good news. The bad news, says Alvik, is that in spite of all these huge and rapid changes, they still won’t be enough to meet the goals of the Paris climate agreement. “Still more extraordinary efforts will be demanded from the energy sector to tackle the climate change challenge.”
DNV GL’s Energy Transition Outlook: no additional investment needed
Unlike for example the IEA’s World Energy Outlook, DNV GL’s Energy Transition Outlook does not present various scenarios. It presents just one “most likely” energy future, and this is based mainly on costs comparisons: it assumes that over time prices will follow the same trend as costs. It also factors in long-term climate policies. For example, it assumes that fossil fuel subsidies will be gradually phased out over the next few decades and renewable energy subsidies will continue, but slowly decrease over the coming decades.
Further, it assumes that cost learning curves for solar and wind power will be maintained until 2050. That may seem optimistic, but according to Sverre Alvik the learning rate applies to every doubling of capacity. Since it will take longer to double capacity in the future, it will also take longer to achieve the same cost reduction as before.
Just looking at capacity additions in the electricity sector, the Energy Transition Outlook makes the following forecast:
Globally, investments in fossil fuels will more than halve from around $3.4 trillion/yr today to $1.5 trillion/yr in 2050, according to DNV GL, while non-fossil energy expenditures show the reverse trend, increasing fivefold from around $500 billion/yr today to $2.7 trillion/yr in 2050.
Shifting investments to renewables, where the investment is upfront capex, implies a shift from an energy system with a 60/40 split between opex and capex to one with the inverse split of 40/60. In dollar terms, global opex declines from about $2 trillion/yr in 2015 to $1.5 trillion/yr in 2050. Conversely, capital expenditure almost doubles from $1.8 trillion/yr in 2015 to $2.6 trillion/yr in 2050. These figures do not include the cost of grids and energy efficiency investments.
According to the Energy Transition Outlook, the energy transition can be undertaken without any increase in overall energy investments. Global energy expenditures will stay approximately constant over time. With the forecasted increase in global GDP of 130% the next 33 years, this implies that energy expenditures will fall to less than half of current levels of global economic output – from 5% to a little over 2% of gross world product.
This means that the energy transition is not likely to be jeopardized by a lack of funds, and, while adjustment will be needed to cater for the heavier capex load from renewables, the transition is unlikely to prove financially disruptive. On the contrary, there may be scope to accelerate the pace of change.