“The IEA is no longer the conservative bastion of oil it once was” writes Fereidoon Sioshansi. Distilling all 650 pages of their latest Outlook, he summarises how the pressing need to address climate change means the dwindling supremacy of oil is giving way to a growing role for electricity that will, amongst other things, cater for 1 billion EVs by 2040. Courtesy EEnergy Informer

If the world is serious about climate change, fossil fuels must go

The International Energy Agency (IEA) released its annual World Energy Outlook (WEO) in mid-November. As always, it is a good read. This year’s edition represents a historical departure from the past on a number of important dimensions. Much of the credit for the new direction must go to Fatih Birol, the IEA’s Executive Director who has expanded the agency’s focus beyond oil and fossil fuels with stunning speed, and in the right direction. The most surprising – refreshing – change in WOE2018 is that the report is primarily focused on the growing role of electricity in supplying the world’s growing need for energy – not fossil fuels. For an oil-centric organization this is noteworthy.

Another topic taking center stage – rather than coming as an afterthought at the end of the report – is the extensive discussion of the pressing need to address climate change. It is the main driver of the projected change to 2040 and beyond; another major departure from IEA’s historical focus on supply security issues such as who has and who needs oil.

In a surprising development, even with Iran’s oil exports squeezed out of the global markets due to the US-imposed sanctions, there are no apparent supply shortages and prices have actually declined in recent weeks – a rather counterintuitive outcome. Perhaps IEA’s original mission – oil supply security – is not as relevant as it was in the 1970s.

Third, IEA’s new focus on electricity as the future fuel of choice has shifted attention to related issues such as how to balance supply and demand in a future dominated by increasing amounts of renewable energy resources – such as the need for supply diversity and flexibility. Such topics were rarely mentioned in prior WEO editions.

Finally, WEO2018 devotes considerable space to the electrification of the transport sector – the ultimate nemesis of oil. The IEA, in other words, now appears focused on the energy issues that actually matter – such as how to meet future global energy needs without further ruining the climate – rather than supply and demand of oil and predicting prices. That, you might say, is old stuff.

Despite continuing criticism from some circles that the IEA has not gone far or fast enough, it is refreshing to see an old, once conservative bastion of oil reflect such dramatic change over a fairly short period of time.

As usual, the basic message of this year’s WEO – given the complexities of global energy markets, the rising importance of climate change, and the all-too-important political nature of energy – is nuanced. You have to read – the report is some 650 pages – digest and reflect. But a few major items stand out.

The central, and most stunning take away may be the recognition that the supremacy of oil – and, for that matter, all fossil fuels – is gradually dwindling and the future will increasingly be electric – increasingly generated from renewable resources. Fossil fuels emit greenhouse gases to various degrees, hence if the ultimate aim is to avoid climate catastrophe, we must move away from them and towards low carbon, and eventually zero carbon, resources. The main question is how fast.

Coal is going away, but not fast enough

Since oil – more broadly liquid petroleum products – are primarily used to fuel the transport sector, the obvious starting point is to convert as many passenger and light duty cars, vans, delivery trucks and eventually long-distance lorries to electricity generated from low carbon resources. The same goes for trains and mass transit systems, which are already mostly electrified. Shipping and planes are more challenging to convert to electric.

Not surprisingly, the IEA says the number of electric vehicles (EVs) may top 1 billion by 2040 (you can read Fereidoon’s excellent article on this in the December 2018 edition of EEnergy Informer), roughly half of all vehicles on the road at the time, up from a negligible 0.3% now. Whether the figure is too high or too low does not matter as much as the fact that nearly all automakers – and many oil majors – already agree that the days of the internal combustion engines (ICEs) are numbered, as further described in the following article.

The upshot is that two of the biggest and most profitable global industries, oil and automobiles – are essentially in agreement that a major shift is taking place and whether the tipping point comes in 2025 or sooner, they need to shift gears, and rather quickly.

For the automakers, the shift is painful but not fatal – instead of making gasoline and diesel engines with a petrol tank, they will install electric motor drives with batteries. More changes are likely to follow if the trend towards ride hailing and sharing is followed by autonomous EVs and the transition towards transport-as-a-service (TaaS), rather than car ownership.

By 2050, roughly 70% of the global population is expected to live in urban centers. If you think today’s cities are congested and polluted today, think again.

As the share of renewables rises, new thinking is needed to integrate them

For oil companies and oil exporting countries, the transition is likely to be far more painful, even if more gradual. If/as more of the global transportation fleet becomes electrified, the demand for their main and most profitable product, gasoline and diesel, will gradually diminish. Oil companies can, of course, convert their existing petrol stations to EV charging stations – but the demand for their main product is likely to dwindle.

The IEA points out that “The massive global uptake is driven by a switch to electrification, not just in transport but a range of different sectors, including heat and manufacturing, that is in turn driven by the plunging cost of wind and solar which can deliver cheap electricity.”

The other unambiguous message of WEO2018 is that the time has finally arrived to effectively abandon coal. The IEA says coal generation would have to be drastically scaled down if the world has any hope of getting anywhere near the targets needed to address climate change.

The IEA says wind and solar must produce more than 7 times the amount of coal power by 2040 if the “well below 2°C” limit to average global warming agreed to in Paris Accord in 2015 is to be met. Under its “Sustainable Development” scenario – the one that keeps the world on track for its climate goals, and removes global energy poverty – 2/3rd of the world’s electricity generation will need to come from renewables by 2040, roughly 40% from wind and solar alone.

With so much variable renewable generation, governments around the world must invest significant amounts to strengthen their electrical transmission grids while developing new ways of introducing flexibility into how renewables are utilized and integrated.

The IEA says by 2040 wind and solar must deliver more than 14,100 TWhs – more than from coal, oil, natural gas and nuclear combined. The corresponding figure for 2017 was 1,500TWh.

Coal generation, the most carbon-heavy fuel, is expected to plunge from nearly 10,000 TWh today to less than 2,000 TWh with oil almost eliminated in power generation while reducing natural gas generation by nearly 20%. Nuclear’s share is expected to grow somewhat but atom is expected to produce only 1/3rd of the output of wind and solar. Hydro is expected to jump 50% while “other renewables” increase five-fold.

Even under the “New Policies” scenario, which assumes that governments commit to the current Paris pledges and do no more, the share of coal and renewables switch. Coal, currently supplying 40% of the world’s electricity generation, falls to 25%, while the reverse happens to renewables.

More solar and wind, and a lot less coal

While the IEA may not be as bullish on renewables as some would have liked, the WEO2018 is nevertheless a bold departure from the fossil-centric past.

Last year, for example, it pretty much said that the global coal boom was over. This year’s verdict on coal is even more unequivocal. The IEA has joined virtually everyone else in stating that solar PVs and wind are among the least expensive options to produce electricity nearly everywhere. Pairing variable renewables with storage, while raising the levelized costs, increases their value. It says:

“These developments have undercut the case for new investment in thermal generation in some countries, especially in coal” noting that, “the fall in (coal consumption in) China has been particularly abrupt.”

The IEA predicts that China will be the biggest source of coal retirements of any country over the next 20 years (graph on page 3). And as everyone knows China accounts for roughly half of the global coal consumption. Hence if China abandons coal, game is over.

As already noted, IEA has historically under-estimated the rise of renewables – despite trying. Others who study trends, such as Lazard, claim that IEA’s midpoint of solar costs for the US, for example, at around $140/MWh is too high. A more realistic number may be in the $36/MWh range. A few recent competitive auctions have been in the low $20s/MWh. These, of course, are levelized cost of electricity or LOCE, which do not account for the fact that variable renewable generation needs flexible ramping generation to be workable as well as considerable investment in transmission. Yet it is fair to say that the IEA’s underlying message is clear and slowly but surely moving in the right direction.

In another blow to the fossil fuel lobby – who have been saying that for the world’s poorest without access to electricity, dirty coal is better than no power at all – the IEA says fossil fuels are not the best way to ensure universal access to electricity.

“The least expensive way to achieve universal electricity access in many areas is with renewable energy sources, thanks to the declining costs of small-scale solar photovoltaic (PV) for off-grid and mini-grid electricity and the increasing use of renewables for grid-connected electricity.”

Clearly, as renewable penetration rises, grid operators need more sophisticated means of managing the inherent variability of these resources as illustrated in visual on page 4. Stating the obvious, Fatih Birol said, “With higher variability in supplies, power systems will need to make flexibility the cornerstone of future electricity markets in order to keep the lights on.”

“The issue is of growing urgency as countries around the world are quickly ramping up their share of solar PV and wind, and will require market reforms, grid investments, as well as improving demand-response technologies, such as smart meters and battery storage technologies.”

The inescapable conclusion is that the global energy order is changing and those who are not preparing will be left behind. According to Birol,

“If the world is serious about meeting its climate targets then, as of today, there needs to be a systematic preference for investment in sustainable energy technologies,” adding, “But we also need to be much smarter about the way that we use our existing energy system.”

Editor’s Note

Fereidoon Sioshansi is president of Menlo Energy Economics, a consultancy based in San Francisco, CA and editor/publisher of EEnergy Informer, a monthly newsletter with international circulation. This article was first published in the December 2018 edition of EEnergy Informer and is republished here with permission.