Slowly but surely the global energy oil tanker is changing course. The long journey to a low-carbon energy future has finally gotten underway – and there is no turning back anymore. That’s the central message that can be deduced from the 2015 edition of the World Energy Outlook (WEO), released today by the International Energy Agency (IEA). Fatih Birol, the new Executive Director of the IEA, tells Energy Post he is “more optimistic” for the future than he has been for a long time. He also notes that the IEA is “prepared to take upon ourselves the role of monitoring how countries live up to their pledges after the climate summit in Paris”.
“The direction of travel is changing”, is how the IEA itself puts it in the Executive Summary of its flagship annual report, the world’s most authoritative survey of the state of the global energy sector. “There are unmistakable signs that the much-needed global energy transition is underway”, says the IEA, although it adds: “but not yet at a pace that leads to a lasting reversal of the trend of rising CO2-emissions.”
The “signs” that the WEO lists are not altogether new, but the trends they show have become clearer and more cemented over the past year. This is evident from the INDCs – the climate pledges have made to the UN in advance of the Paris climate summit – which, says the IEA “give new impetus to the move towards a lower-carbon and more efficient energy system”. The pledges are included in the WEO’s “central scenario”.
Taking a hit
Positive signs come first of all from China, which has firmly embarked on a “transition to a less energy-intensive model for growth”. The importance of China to the global energy market is of course well-known, yet it bears repeating. The WEO notes for example that China’s total energy demand in 2040 will be almost double that of the US! China will also remain by far the largest producer and consumer of coal and will become a bigger gas consumer than the EU. It also deploys more renewable power generation than any other country.
IEA Chief “optimistic”
Fatih Birol, the IEA’s former Chief Economist who succeeded Maria van der Hoeven as Executive Director of the IEA as of 1 September, tells Energy Post in a reaction that he is “optimistic” about the chances of the world dealing adequately with climate change. He gives two reasons for this. One, the “unprecedented political momentum”, evidenced by the fact more than 150 countries have made pledges to the UNFCCC. “At the time of the Kyoto treaty, only the advanced economies made commitments. Now it’s the whole world.” Secondly, the fact that many of the pledges “are based on policies which promote renewable energy and energy efficiency”.
The IEA is organising a Ministerial Conference on 17-18 November at which Energy Ministers from across the world, including India and China, will be present. The IEA is an OECD-organisation, but Birol wants to “enlarge its constituency by improving ties with the emerging economies”.
Birol sees a role for the IEA post-COP21. “We are prepared to take upon ourselves the role of monitoring how countries live up to their pledges after the climate summit in Paris”.
According to the WEO, “policy choices” are “changing the face of China’s energy system”. As a result of energy efficiency measures and other changes in the economy, China will use 85% less energy use per unit of GDP over the next 25 years than over the past 25 years. The IEA is expecting China’s CO2 emissions to peak around 2030.
Another sign: gas will be the fastest growing fossil fuel, coal is taking a hit.
Gas consumption will grow almost 50% up to 2040, in the IEA’s central scenario, especially thanks to China and the Middle East. Both these regions will become larger gas consumers than the EU, which will see gas demand not return to its peak in 2010.
By contrast, coal, after a long period of steady growth, faces a “reversal of fortune”. Notes the IEA: “The fuel that met 45% of the increase in global energy demand over the last decade meets only around 10% of further growth to 2040. In the EU, coal consumption is expected to drop to one-third of current levels in 2040.” In India and South East Asia, however, coal use is expected to triple.
Leading the charge
The brightest sign of all is perhaps the power sector, which is “leading the charge to decarbonise”. Sixty cents of every dollar invested in new power plants to 2040 will be spent on renewable energy technologies, notes the WEO. More than half of the increase in total generation (8300 TWh) will come from renewables – “equivalent to the output of all of today’s fossil-fuel generation plants in China, the United States and the European Union combined. The net result is that the share of coal in the global electricity mix drops from 41% to 30%, with non-hydro renewables gaining a similar amount, while gas, nuclear and hydro broadly maintain their existing shares.”
Energy efficiency is also “gathering strength”. While the global economy grows by 150%, energy demand will only grow by a third, thanks to energy efficiency gains. “Mandatory targets in China and India (following on from first-mover Japan) have increased the global coverage of efficiency regulation in industry from 3% in 2005 to more than a third today, and such energy policies continue to expand their reach and effectiveness through to 2040.”
Even so, the IEA notes there is still room for improvement. “We estimate that the energy efficiency of new equipment bought worldwide in 2030 can be increased by a further 11%, with the average cost of the energy saved being $300 per tonne of oil equivalent (toe), far below the weighted average energy price of $1300/toe.”
Balance is shifting
All in all, “the balance is shifting towards low-carbon technologies”, notes the WEO. This is partly because renewables are getting cheaper and oil and gas more expensive: “Oil and gas production costs increase for most resource types as operators are forced to move to smaller, more remote or more challenging reservoirs, although the effect is dampened by technology and efficiency improvements. By contrast, cost reductions are the norm for more efficient equipment and appliances, as well as for wind power and solar PV, where technology gains are proceeding apace and there are plentiful suitable sites for their deployment.”
IEA: oil price will recover
“The process of adjustment in the oil market is rarely a smooth one, but, in our central scenario, the market rebalances at $80/barrel in 2020”, writes the IEA, “with further increases in price thereafter.”
The WEO sees demand “pick up to 2020”, but a subsequent rise “is moderated by higher prices, efforts to phase out subsidies, efficiency policies and switching to alternative fuels.”
Yet the IEA hedges its bets, stating that “a more prolonged period of lower oil prices cannot be ruled out”. If prices stayed around $50 per barrel, this would not necessarily be only good news to consuming countries, notes the WEO. The economic benefits of a lower oil price would be “counterbalanced by increasing reliance on the Middle East for imported crude oil and the risk of a sharp rebound in price if investment dries up. Concerns about gas supply security would also be heightened if prices stay too low to generate the necessary investment in supply.”
In addition, a “low oil price scenario” would “mean that the world misses out on almost 15% of the energy savings seen in our central scenario, foregoing around $800 billion-worth of efficiency improvements in cars, trucks, aircraft and other end-use equipment, holding back the much-needed energy transition.”
Even when it comes to subsidies for fossil fuels, the trend is slightly positive, says the WEO: “Fossil-fuel consumption continues to benefit from large subsidies: we estimate this global subsidy bill at around $490 billion in 2014, although it would have been around $610 billion without reforms enacted since 2009. Subsidies to aid the deployment of renewable energy technologies in the power sector were $112 billion in 2014 (plus $23 billion for biofuels).” The report notes that a 50% rise in subsidies (to $170 billion in 2040) would secure “a five-fold increase in generation from non-hydro renewables”.
Nevertheless, although the energy ship has changed course, there is still a long way to go, notes the IEA. And it is not certain whether the destination will be reached on time.
For one thing, “the cumulative $7.4 trillion invested in renewable energy to 2040 represents only around 15% of total investment in global energy supply”, the report points out. In addition, while the power sector is doing well, it “is much more difficult and expensive to displace coal and gas as fuels for industry, or oil as a transport fuel. The net result is that energy policies, as formulated today, lead to a slower increase in energy-related CO2 emissions, but not the full de-coupling from economic growth and the absolute decline in emissions necessary to meet the 2 °C target.”
Of special concern is India, which is “entering a sustained period of rapid growth of energy consumption”, which will see demand for coal in that country surge to “almost half of the energy mix”.
In general, it is worth noting that according to the WEO “energy use worldwide is set to grow by one-third to 2040”. That’s a very different picture from for instance Europe, which will see its energy use decline 15% to 2040, if the IEA’s central scenario turns out to be right.