Global energy markets are likely to see natural gas and renewables consolidate and further expand their predominance in the energy mix to 2040, rising respectively by 49% and 78% from 2014 levels, against a progressive decline in the role of coal and oil, the International Energy Agency said.
In its latest edition of the World Energy Outlook, IEA said that “renewables and natural gas are the big winners in the race to meet energy demand growth until 2040.”
"While the era of fossil fuels appears far from over” at the same time “government policies, as well as cost reductions across the energy sector, enable a doubling of both renewables and of improvements in energy efficiency over the next 25 years" it added.
"We see clear winners for the next 25 years - natural gas but especially wind and solar - replacing the champion of the previous 25 years, coal," said Dr Fatih Birol, the IEA's executive director.
"But there is no single story about the future of global energy” he added. “In practice, government policies will determine where we go from here."
Natural gas fares best among the fossil fuels, with consumption rising by roughly 50% and going from 2,893 Mtoe in 2014 to 4,313 Mtoe in 2040 under IEA's “New policies scenario.”
Under the same scenario, renewables are set to rise some 78% of the energy mix, going from 1,937 Mtoe to 3,455 Mtoe in the same period.
This transformation of the global energy mix “means that risks to energy security also evolve” said IEA, noting that “traditional concerns related to oil and gas supply remain and are reinforced by record falls in investment levels.”
“Another year of lower upstream oil investment in 2017 would create a significant risk of a shortfall in new conventional supply within a few years” it said, adding that “in the longer-term, investment in oil and gas remain essential to meet demand and replace declining production, but the growth in renewables and energy efficiency lessens the call on oil and gas imports in many countries.”
Overall, IEA's main scenario forecasts a cumulative $44 trillion in investment is needed in global energy supply, 60% of which going to oil, gas and coal extraction and supply, including power plants using these fuels, and nearly 20% to renewable energies. An extra $23 trillion is required for improvements in energy efficiency. Compared with the period 2000- 2015, when close to 70% of total supply investment went to fossil fuels, “this represents a significant reallocation of capital, especially given the expectation of continued cost declines for key renewable energy technologies” IEA noted.
“At the same time, the variable nature of renewables in power generation, especially wind and solar, entails a new focus on electricity security” IEA stressed.
Oil demand mixed, investments subdued on volatile prices
In oil markets, "we are entering a period of greater oil price volatility," said Birol, which means on one hand "if oil prices rise in the short term, then shale producers can react quite quickly to put more oil on the market, producing a see-saw movement” while on the other hand, “if we continue to see subdued investments in new conventional oil projects, this could have profound consequences in the longer term."
Global oil demand will continue to grow until 2040, topping 103 million barrels per day (mb/d) by 2040 “mostly because of the lack of easy alternatives to oil in road freight, aviation and petrochemicals,” according to IEA.
However, oil demand from passenger cars is expected to decline “even as the number of vehicles doubles in the next quarter century, thanks mainly to improvements in efficiency, but also biofuels and rising ownership of electric cars.”
Meanwhile, coal consumption is set to see marginal growth in the next 25 years, partly on the back of an ease in China demand amid policies aimed at reducing pollution and diversifying the energy mix.
LNG market share to rise
In gas markets, IEA expects LNG to overtake pipeline natural gas in the coming years, “growing to more than half of the global long-distance gas trade” and going from 42% in 2014 to 53% in 2040 against global gas trades totalling 1 100 billion cubic meters in 2040.
“In an already well-supplied market, new LNG from Australia, the United States and elsewhere triggers a shift to more competitive markets and changes in contractual terms and pricing.”
However, “uncertainty over the direction of this commercial transition could delay decisions on new upstream and transportation projects, posing the risk of a hard landing for markets once the current oversupply is absorbed.”
“Export-oriented producers have to work hard to control costs in the face of strong competition from other fuels, especially in the power sector” IEA said, noting that “in the mid-2020s, in gas-importing countries in Asia, new gas plants would be a cheaper option than new coal plants for baseload generation only if coal prices were $150/tonne (double the anticipated 2025 price).”
“The space for gasfired generation is also squeezed by the rising deployment and falling costs of renewables” it added.
Industrial, building sectors next challenge for renewables
Furthermore, despite the coming into force of the Paris Agreement on November 4, with countries “generally on track to achieve, and even exceed in some instances, many of the targets set in the agreement, this is likely to lead to a bare slowdown in carbon emissions growth.
“Implementing current international pledges will only slow down the projected rise in energy-related carbon emissions from an average of 650 million tonnes per year since 2000 to around 150 million tonnes per year in 2040” IEA said.
“While this is a significant achievement, it is far from enough to avoid the worst impact of climate change” as it would only limit the rise in average global temperatures to 2.7°C by 2100, the agency said.
“Continued growth in energy-related CO2 emissions, to 36 gigatonnes in 2040, self-evidently means that these pledges do not deliver the Paris Agreement’s goal to reach a peak in emissions as soon as possible' IEA added.
“The path to 2°C is tough, but it can be achieved if policies to accelerate further low carbon technologies and energy efficiency are put in place across all sectors” it stressed.
That also means expanding the role of renewables in other sectors than power generation.
"Renewables make very large strides in coming decades but their gains remain largely confined to electricity generation," said Birol.
"The next frontier for the renewable story is to expand their use in the industrial, building and transportation sectors where enormous potential for growth exists."