Global demand shifts to China and SE Asia

In its latest assessment of the global energy landscape, World Energy Outlook 2018, the International Energy Agency reports that major transformations are underway for the global energy sector, from growing electrification to the expansion of renewables, upheavals in oil production and globalisation of natural gas markets. It believes that across all regions and fuels, policy choices made by governments will determine the shape of future energy systems.

At a time when geopolitical factors are exerting new and complex influences on energy markets, underscoring the critical importance of energy security, the IEA’s flagship publication details global energy trends and the potential impact they will have on supply and demand, carbon emissions, air pollution, and energy access.

Possible futures

The WEO’s scenario-based analysis outlines different possible futures for the energy system across all fuels and technologies. It offers a contrast with different pathways, based on current and planned policies, and those that can meet long-term climate goals under the Paris Agreement, reduce air pollution, and ensure universal energy access.

While the geography of energy consumption continues its historic shift to Asia, WEO-2018 finds mixed signals on the pace and direction of change. Oil markets, for instance, are entering a period of renewed uncertainty and volatility, including a possible supply gap in the early 2020s. Demand for natural gas is on the rise, erasing talk of a glut as China emerges as a giant consumer. Solar PV is charging ahead, but other low-carbon technologies and especially efficiency policies still require a big push.

In all cases, governments will have a critical influence on the direction of the future energy system. Under current and planned policies, modelled in the New Policies Scenario, energy demand is set to grow by more than 25% to 2040, requiring more than $2 trillion a year of investment in new energy supply.

“Our analysis shows that over 70% of global energy investments will be government-driven and as such the message is clear the world’s energy destiny lies with government decisions,” said Dr Fatih Birol, the IEA’s executive director. “Crafting the right policies and proper incentives will be critical to meeting our common goals of securing energy supplies, reducing carbon emissions, improving air quality in urban centres, and expanding basic access to energy in Africa and elsewhere.” 

Oil consumption growing

The analysis shows oil consumption growing in coming decades, due to rising petrochemicals, trucking and aviation demand. But meeting this growth in the near term means that approvals for conventional oil projects need to double from their current low levels. Without such a pick-up in investment, US shale production, which has already been expanding at record pace, would have to add more than 10 million barrels a day from today to 2025, the equivalent of adding another Russia to the global supply in seven years which would be an historically unprecedented feat.

Power markets

In power markets, renewables have become the technology of choice, making up almost two- thirds of global capacity additions to 2040, thanks to falling costs and supportive government policies. This is transforming the global power mix, with the share of renewables in generation rising to over 40% by 2040, from 25% today, even though coal remains the largest source and gas remains the second-largest.

This expansion brings major environmental benefits but also a new set of challenges that policy makers need to address quickly. 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.

Electricity markets are also undergoing a unique transformation with higher demand brought by the digital economy, electric vehicles and other technological change. As part of its deep dive into the electricity sector this year, WEO-2018 also examines the impact of higher electrification in transportation, buildings and industry. The analysis finds that higher electrification would lead to a peak in oil demand by 2030, and reduce harmful local air pollutant. But it would have a negligible impact on carbon emissions without stronger efforts to increase the share of renewables and low-carbon sources of power.

Sustainable development

The IEA’s Sustainable Development Scenario offers a pathway to meeting various climate, air quality and universal access goals in an integrated way. In this scenario, global energy- related CO2 emissions peak around 2020 and then enter a steep and sustained decline, fully in line with the trajectory required to achieve the objectives of the Paris Agreement on climate change.

But most emissions linked to energy infrastructure are already essentially locked-in. In particular, coal-fired power plants, which account for one-third of energy-related CO2 emissions today, represent more than a third of cumulative locked-in emissions to 2040. The vast majority of these are related to projects in Asia, where average coal plants are a mere 11 years-old on average with decades left to operate, compared with an operating age of 40 years in the United States and Europe.

Unprecedented effort

“We have reviewed all current and under- construction energy infrastructure around the world such as power plants, refineries, cars and trucks, industrial boilers, and home heaters and find they will account for some 95% of all emissions permitted under international climate targets in coming decades,” said Dr Birol.

“This means that 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. But we also need to be much smarter about the way that we use our existing energy system. We can create some room for manoeuvre by expanding the use of carbon capture utilisation and storage (CCUS), hydrogen, improving energy efficiency, and in some cases, retiring capital stock early. But to be successful, this will require an unprecedented political and economic effort on a worldwide scale.” 

Electrification of the world

There has been great progress in electrification. Over 120 million people worldwide gained access to electricity in 2017. For the first time ever, the total number of people without access fell below 1 billion, according to data from WEO-2018.

One of the greatest success stories was India’s completion of the electrification of all its villages. Many other Asian countries have also seen significant progress. In Indonesia, the electrification rate is almost at 95%, up from 50% in 2000. In Bangladesh, electricity now reaches 80% of the population, up from 20% in 2000.

Meanwhile in Africa, Kenya’s access rate has increased from 8% in 2000 to 73% today, and the Last Mile Connectivity Project aims to deliver universal access by 2022. In Ethiopia, electricity now reaches 45% of the population compared with just 5% in 2000. The National Electrification Programme has set out a plan to achieve universal access by 2025, aiming to reach 35% of the population with off-grid solutions. 

Key points of WEO 2018

• There are mixed signals about the pace and direction of change in global energy:

Oil markets are entering a period of renewed uncertainty amd volatility

Natural gas is on the rise: China’s rapid demand growth is erasing talk of a ‘gas glut’ Solar PV has the momentum while other key technologies and efficiency policies need more incentivisation

Energy-related CO2 emissions reached a new high in 2018 – IEA assessment

For the first time, the global population without access to electricity fell below 1 billion

• Electricity is carrying great expectations, but questions remain over the extent of its reach in meeting demand & how the power systems of the future will operate;
• Policy makers need clear insights about possible futures and how they come about. The WEO provides two key scenarios – ‘New Policies’ and ‘Sustainable Development’.

Conclusions

• A mismatch between robust oil demand in the near term and a shortfall in new projects risks a sharp tightening of oil markets in the 2020s;
• The rapid growth of electricity generation brings huge opportunities; but market designs need to deliver both electricity and flexibility to keep the lights on;
• There is no single solution to turn emissions around: renewables, efficiency & a host of innovative technologies, including storage, CCUS and hydrogen, are all required;
• The future pathway for energy is open: governments will determine where our energy destiny lies.