ENERGY SPECIAL ....Global shifts in energy systems

Global shifts in energy systems

The International Energy Agency (IEA) has outlined four large-scale shifts in global energy systems in its recently released World Energy Outlook 2017. These are the rapid deployment and falling costs of clean energy, in particular, but not restricted to solar; the growing shift to electric vehicles (EVs) – a trend only now gaining momentum; a shift to a more service-oriented and a sharing economy; and transitions in China leading to cleaner energy mix, and a growing role for shale oil & gas from the US. Global energy demand is expected to continue to rise, as population rises, economies expand and prosperity pulls more people out of poverty. Between 2016 and 2040, primary energy demand is expected to rise 30%, with India expected to account for 30% of this increase (about 1,005-mtoe). This will take India’s share of global energy use to 11% – higher than now, but still below its 18% share of expected global population in 2040. End of the boom in coal…. The fuels used to generate energy are changing. While in the 25-year period between 1990 and 2016, coal served as the primary fuel – with China burning close to 90% of the increase – the world is now transitioning to lighter, cleaner-burning natural gas and renewables. While global coal-fired power generation capacity expanded 900-GW between 2000 and 2016, net additions between 2016 and 2040 are forecast to be only 400-GW, with much of the increase coming from plants now under construction. In China, coal use peaked in 2013 and is forecast to decline by almost 15% by 2040 from current levels. In the developed world the decline is well underway. As a consequence of these changes, global coal consumption will only rise slightly between now and 2040. … but oil will continue to reign Unlike coal, however, oil demand will to continue to grow, albeit at a steadily decreasing pace, reaching 105-mbpd by 2040. Till the mid-2020s oil demand is expected to stay robust; thereafter fuel switching and greater efficiencies will slow the pace of growth. The use of oil to produce petrochemicals will emerge as the largest source of growth, followed closely by fuels for trucks, aviation and shipping. But poor investments in conventional oil exploration, in the aftermath of several years of low oil prices, have raised the spectre of shortfall in new supply in the 2020s. New order in natural gas Natural gas is the fastest growing fossil fuel, with a 45% increase in use to 2040, driven by increase in industrial use and not power. By 2040, natural gas will become the second most important fuel, accounting for a quarter of global energy demand. Much of the demand growth for gas will take place in developing economies, led by China, India and other countries in Asia. Barring pipeline transport between Russia and China, consumers in Asia and elsewhere will prefer the flexibility offered by LNG, especially as supply options for this form of gas are expected to diversify and greatly expand. The prospects for nuclear energy seem to have dimmed since the last outlook was published, but output is expected to increase slightly – again driven by China, which will, by 2030, overtake the US to become the largest producer of nuclear-powered electricity. Improvements in energy efficiency will have a very significant role to play and will take some strain off the supply side. Without the expected increases in energy efficiency, brought about by innovation, effective policies and incentives, consumption of primary energy would have more than doubled in the forecast period to meet demand. The rise of renewables Renewable energy will account for two-third of global investment in power plants to 2040. What is even more significant is that for several countries, these greener options for power will become the least-cost source, able to stand on its own economic footing, devoid of subsidy. Solar energy will be the key driver and China and India will lead its deployment. By 2040, renewable power will account for 40% of total global power generation capacity. In the European Union, renewables will account for 80% of new capacity and wind power becomes the leading source of electricity soon after 2030, with investments both in offshore and onshore wind farms. Solar energy’s impact will be come from both distributed power generation and centralised power facilities, and focussed programmes such as India’s National Solar Mission, which aims to generate 100-GW of solar power by 2022, will keep up the momentum. Competitive auctions will intensify competition – as is already evident in India – and are likely to stay the preferred policy option, in contrast to the feed-in tariffs earlier followed. Along with falling costs of photovoltaic cells, they have contributed in significant measure in lowering overall system costs and brought grid parity for solar energy in several parts of the world. The spread of solar thermal energy systems – distributed and concentrated – is also expected to accelerate. Electrifying world The role of electricity is expected to expand significantly, including for supplying heat and mobility, besides its traditional uses. EVs account for a miniscule share of the global fleet population today, but that is about to change very significantly over the next two to three decades. According to the IEA, the global fleet of EVs is set to expand from a piffling 2-mn in 2016 to over 280-mn by 2040. Nearly every industrialised country – the US, UK, China and India, to cite just four – have announced ambitious plans to phase out vehicles running on conventional internal combustion engines and replace them with all-electric fleets. India, for instance, has announced that by 2030, no fossil fuel driven cars would be sold – a target that seems over-ambitious at this point. China, which already has the largest fleet of EVs in the world, has even more ambitious targets, including an aggressive programme to build indigenous capabilities covering all aspects of the shift – car design, battery technology, charging infrastructure etc. By 2040, the country is targeting that one in four cars will be an EV. Digital technologies – including smart grids and metering systems – will also contribute in no small measure to enhancing efficiencies of electricity generation and distribution. Superior load management technologies as well as market-responsive power pricing policies will allow for better planning of power generation infrastructure and improve their operational flexibility. Changes in China The transition in China will reshape energy markets as no country ever has. With economic growth settling to a new normal deemed sustainable, less resource depleting and greener, several manufacturing industries are being prodded to curb pollution or shut down. The transition to a more service-driven society will also impact energy demand. The trends are already evident: while energy demand grew 8% per year from 2000 to 2012, the growth since then has been under 2% annually and is expected to further moderate to about 1% to 2040. A significant portion of this can be attributed to energy savings, in the absence of which the end-use consumption would be 40% higher in 2040. Nearly one-third of the world’s new wind power and solar photovoltaic capacity will be installed in China and the country will account for more than 40% of global investments in EVs. Despite these trends, China will overtake the US as the largest oil consumer by 2030, with net oil imports of 13-mbpd (million barrels per day) and gas imports of 280-bcm (billion cubic metres) in 2040 – second only to the European Union. US – transitioning to exports of oil & gas The US will enhance its position as a leading energy provider – not just for itself, but also for the world – by expanding its status as a net gas exporter to also emerge as a net oil exporter by the late 2020s. The quality of crude oil available will also shift from the heavy ones currently produced and processed at its refineries, to lighter grades that will find markets beyond North America. Tight oil output is expected to expand by 8-mbpd between 2010 and 2025, even as shale gas production rises by 630-bcm in a 15-year period from 2008. Significantly, the US will also emerge as the largest LNG exporter by the mid-2020s. The hydrocarbon finds are already fuelling a considerable build-up in petrochemical capacity, at a cost position reckoned amongst the best in the world for some value chains. Mammoth projects utilising these hydrocarbons will need to find markets around the globe, and will alter trading patterns for several commodity chemicals. India – dependence on imports set to rise In India, where power production is being ramped up considerably as part of initiatives to boost manufacturing, the share of coal in electricity generation is expected to drop from 75% in 2016 to less than 50% by 2040, due the increasing availability of gas (imported as LNG), and the emphasis on renewables. Natural gas and oil demand will continue to rise, but the worry will be the growing dependence on imports. The government is targeting a 10% reduction in oil & gas imports by ramping up domestic production, but that seems easier said than done. The silver lining here is the soft price outlook for most hydrocarbons in a decarbonising world!

Ravi Raghavan

CHWKLY 21NOV17