Current events risk distracting governments “from recognising and tackling the longer-term signs of stress that are emerging in the energy system” says the International Energy Agency (IEA) in its latest World Energy Outlook (WEO) 2014 unveiled on 12 November in London. Just like a year ago, it warns that long-term oil supplies are far from secure, with the Middle East re-establishing itself as the main supplier in the long-term. Moreover, while low-carbon sources (renewables and nuclear) may provide a quarter of global energy supplies by 2040, the world is still set for a 3.6 degree temperature rise. Energy Post sets out five take-home messages, including from special sections on nuclear power and sub-Saharan Africa.
The International Energy Agency’s (IEA) World Energy Outlook 2014 will be presented in Brussels this Friday, 14 November, with a debate on what it means for Europe. Ahead of that, Energy Post has picked out five take-home messages as food for thought about what lies for the EU. There is little good news: high energy prices, climate change and oil insecurity dominate the picture. For the first time, the IEA looks as far ahead as 2040.
1) Long-term oil supplies are not secure.
The whole energy security debate in Europe today focuses, understandably, on gas. The European Commission has explicitly put oil on the back burner because of a liquid, international, well-functioning market. Yet the IEA’s headline message this year is the same as it was last year: the tight oil revolution in the US is set to dwindle from the 2020s onwards. Reliance will grow on a relatively small number of producers. Global supplies will hinge critically on investments in the Middle East – where “turmoil… has rarely been greater since the oil shocks in the 1970s”.
Some US$900bn of investment per year will be needed in upstream oil and gas development by the 2030s. This is to meet projected demand of 104 million barrels per day (mb/d) in 2040, up just 15% from today.
Even sustaining this level of consumption is beset by uncertainty, from developing Brazilian deepwater fields to the difficulty of replicating the US tight oil experience outside the US to a question mark over the output of Canadian oil sands to the sanctions that currently restrict Russian access to technologies and capital markets. Top of the list for a potential spanner in the works however, is the political and security situation in Iraq. The Middle East “remains the only large source of low-cost oil” and will re-emerge as the primary supplier of oil in future, especially for Asian countries.
“In the midst of geopolitical uncertainty, and with energy security concerns on the rise, the European Union needs – more than ever – a common energy diplomacy, innovative energy efficiency measures and a well-integrated internal energy market. In other words… an ambitious European Energy Union.” – EU Vice-President for Energy Union Maroš Šefčovič
“The lessons for the EU from the IEA’s 2014 World Energy Outlook are clear: in an increasingly unstable world, the best route to improved energy security is a low carbon and energy efficient one.” – EU Climate & Energy Commissioner Miguel Arias Cañete
2) The world is still on track to 3.6 degrees warming.
The global energy system is not being transformed quickly enough to avoid dangerous climate change. CO2 emissions will grow by one-fifth out to 2040, the IEA projects, putting the world on track to a 3.6-degree temperature rise. The entire carbon budget allowed under a two degrees scenario is set to be consumed by 2040. “Since emissions are not going to drop suddenly to zero once this point is reached, it is clear that the two degrees objectives requires urgent action,” the IEA concludes. It will issue a special report in mid-2015 in advance of “critical” UN climate talks in Paris.
The depressing climate diagnosis comes despite a positive outlook for renewables, which are set to account for one-third of global power generation by 2040, overtaking coal. In addition, renewables for heat are set to more than double and the use of biofuels triple, the IEA projects. Wind dominates renewables’ growth, followed by hydropower and solar. Subsidies of some US$120 billion globally today are assumed to come down from 2030.
Energy efficiency too – given special emphasis in the 2012 edition of the World Energy Outlook in particular – is re-identified as a “critical tool” to relieve pressure on supply and, this bit is new, “mitigate in part the competitive impacts of price disparities between regions”.
The IEA says the transport sector is in the front line for energy efficiency improvements. More than three-quarters of global car sales are now subject to efficiency standards. As a result, oil demand is due to grow by just a quarter despite a more than doubling of cars and trucks on the roads by 2040.
As for oil, demand for coal is expected to grow by just 15% from today and almost two-thirds of that increase is due over the next ten years. Asia will dominate the global coal market going forward, although even here the IEA talks about high-efficiency generation and carbon capture and storage as a way to “ensure a smooth transition to a low carbon power system”.
By 2040, global energy supply is expected to consist in four roughly equal parts of: low-carbon (nuclear and renewables), oil, natural gas and coal. Regional price disparities will persist with energy in Europe staying expensive and that in the US cheap – even cheaper than China in the long-run.
Prospects for a new global climate deal in Paris in December 2015 took a turn for the better this week, as both the US and China announced pledges for greenhouse gas emission reductions beyond 2020 on the fringes of an Asia-Pacific Economic Cooperation meeting in Beijing, China.
The US will reduce its emissions by 26-28% by 2025, relative to 2005 levels, to get to an 80% emission reduction by 2050. China said it would try to peak emissions by 2030 – and earlier if possible – including through more renewables and energy efficiency. This follows the EU’s pledge for a 40% emission cut, relative to 1990 levels, last month. Environmental campaigners such as think tank E3G in the UK called US and China’s announcements a “game-changer”.
“These two countries shape the global emissions trajectory. Their collaboration makes the prospects of a deal in Paris a safe bet.” – Liz Gallagher, Climate Diplomacy Programme Leader at E3G
But the US pledge only equates to a 14-16% cut relative to a 1990 baseline. And others pointed out that the pledges would still need to be backed up by concrete action. Since last week, the Republicans in the US have a majority in both houses of Congress and they will not want to support ambitious climate action.
3) Emerging economies are in the driving seat.
Global energy demand is set to grow by 37% to 2040, but the rate of growth is slowing down. Energy demand will grow by just 1% a year from 2025, down from over 2% a year today. This is due to price and policy effects, and a structural shift in the global economy to services and lighter industrial sectors, the IEA says. Asia counts for 60% of global growth in demand going forward, followed by Africa, the Middle East and Latin America. In the early 2030s, China will take over from the US as the world’s largest oil-consumer, though by then it will already be India, Southeast Asia, the Middle East and sub-Saharan Africa that are really driving demand.
China and the Middle East are also the main drivers of global gas demand going forward. Gas is the only fossil fuel still growing significantly by 2040. The US remains the largest global gas producer, although production levels off in the late 2030s as shale gas output starts to recede. OECD countries are set to embrace gas as the leading fuel in their energy mix by 2030. This is thanks in particular to a new US regulation limiting power sector emissions, the IEA says. Gas production is forecast to grow almost everywhere – Europe is the notable exception – with unconventional gas accounting for almost 60% of supply growth. There is a growing role for LNG as a way to protect against supply disruptions. But outside North America, the key uncertainty is whether gas can be made available at prices that are attractive to consumers while still offering incentives for the large investments needed in supply.
4) Nuclear power faces an uncertain future.
In a special report, the IEA highlights nuclear power’s role in energy security for certain countries. Global nuclear capacity increases by 60% to 2040 (that’s one big new plant being commissioned every six weeks!) , but its share in electricity generation grows by just one percentage point to 12% (six reactors are also being retired every year). This reflects both the challenges all new thermal generation capacity face, the IEA says, plus the difficulties of nuclear in particular, such as public acceptance. China accounts for nearly half (45%) of the anticipated growth, followed by India, Korea and Russia. Nuclear power generation also goes up in the US and rebounds in Japan, but falls by 10% in Europe. Yet nuclear is also “one of the few options available at scale to reduce CO2 emissions while providing or displacing other forms of baseload generation”, the IEA notes. It has avoided the release of almost two years’ worth of global emissions since 1971.
Almost 200 reactors are due to go offline between now and 2040, most of these in Europe. The IEA estimates the cost of all this decommissioning at some US$100 billion, although some observers are already saying this hugely underestimates the job at hand. “Considerable uncertainties remain”, the IEA admits, due to the “relatively limited experience to date in dismantling and decontaminating reactors and restoring sites”. It also notes that no country has opened a permanent disposal facility so far.
“Although the IEA’s World Energy Outlook foresees a fall in nuclear generation in the EU, nuclear power remains an essential element of the EU’s energy mix. The Outlook takes into account the phase-out in some member states, such as Germany. At the same time continued interest in developing nuclear power generation can be seen in other EU countries, including in Bulgaria, Czech Republic, Finland, France, Poland, Romania, Slovakia, Slovenia, Lithuania, Sweden and the UK.” – Yves Brachet, Westinghouse Electric Company President for Europe, Middle East and Africa
5) Fossil fuel consumption subsidies do not help the poor.
These subsidies amounted to US$550 billion in 2013, or more than four times the subsidies for renewables, the IEA calculates. They are often intended to help increase energy access, it says, but in reality “fail to help those that need it most and discourage investment in efficiency and renewables”. Interestingly, the IEA highlights the Middle East and Saudi Arabia as examples where subsidies are keeping renewables and more efficient products out of the market. In Saudi Arabia, a car that’s twice as cost-efficient as the current average would have a payback period of just three years (vs. 16 currently) if gasoline were not subsidised. G20 leaders will discuss fossil fuels subsidies at the G20 summit in Australia this weekend.
Two out of every three people in sub-Saharan Africa still do not have access to electricity. By 2040, nearly one billion people will gain access to electricity, but more than half a billion will remain without it. The IEA advises investments to upgrade the power sector (to reduce outages and deliver universal electricity access), deeper regional cooperation (to expand markets and unlock more of the continent’s hydropower potential) and more efficient and transparent financing of essential infrastructure improvements (i.e. less corruption and waste). What sub-Saharan Africa experiences today is “the most extreme form of energy insecurity”, the IEA says.
See our interview with IEA Executive Director Maria van der Hoeven ahead of the new World Energy Outlook, published Monday, 10 November, about the energy security challenge becoming global – and extending beyond oil.