Four Shifts In World Energy Markets - Ravi Raghavan

Four large-scale shifts are taking place in global energy markets: the rapid deployment and falling costs of renewable energy, particularly solar; the growing electrification of energy; the shift to a cleaner energy mix in China, as it rebalances economic growth; and the resilience of shale oil & gas, which has made the US the world’s leading oil and gas producer even at the low prices that have ruled for the past few years.

These findings are at the heart of ‘The World Energy Outlook’, a report published recently by the International Energy Outlook, a Paris-based think-tank, and are of significance to India, which is forecast to be a key driver of global energy markets.

In one likely scenario, termed the New Policies Scenario, global energy demand is seen rising 30% between 2016 and 2030 – the equivalent of adding another India and China to today’s global demand. This rise is driven by GDP growth, rising population and increasing urbanisation. Almost 30% of the incremental growth is expected to come from India alone, taking its share of world energy use to 11% by 2040 – a marked improvement from now, but still below the country’s 18% share of world population.

The rise of renewables and the beginning of the end for coal

Over the next 25 years natural gas will become the leading supplier of primary energy, with a 45% share. Significant gains will also be made by renewables and through substantial improvements in the efficiency of energy use. Without the last, global energy supply would far more stressed than expected to be, as consumption would be twice as much.

The rise of renewables will also mark the end of the boom years for coal, not withstanding sops thrown in some markets. Even in India the share of coal in the power mix is expected to drop from a whopping 75% in 2016 to less than half in 2040. Global demand for oil is, however, expected to continue to rise, though at a muted pace, and the outlook for nuclear seems dimmer than expected just a year ago. Significantly, by 2030, China will overtake the US to emerge as the largest producer of nuclear electricity.

Renewables will account for two-third of global investments in power plants between 2016 and 2040, as they will be the least cost source. By 2040, renewables will have a 40% share of global power generation capacity, and much of the build-up over the 25-year period will be in India and China. In the EU, renewables will account for an impressive 80% of the new capacity created, with wind forecast to become the leading electricity source. The rise of renewables will also not be restricted to electricity alone; it will also provide twice as much of heat and mobility, albeit from small bases.

Electrifying future

Electricity will account for a 40% share of the rise in energy consumption to 2040 – the same share oil enjoyed in the last 25 years. Industrial electric motor systems will account for one-third of the increase in power demand, even as demand for cooling will increase, driven by greater affluence and rapid urbanisation, particularly in China. While 45-mn people will get connected to the grid each year, the world will still fall short of its target of universal electrification by 2030.

The commitments given by several countries to phase out new sales of gasoline- and diesel-vehicles and usher in a rapid transition to electric vehicles (EVs) will also boost the share of electric power. According to the IEA, by 2040 the global fleet of EVs will rise to 280-mn, from just 2-mn today.

To meet its anticipated power demand by 2040, India will need to add generation capacity equivalent to the present consumption of the EU, while China will need to augment its own by the equivalent of the present consumption in the US.

Changing China and consequences

As China transitions its economy from an infrastructure- and investment-led growth path to a more sustainable one built on high efficiency and digital technologies, growth in energy demand will slow to about 1% per year, compared to a whopping 8% per year average between 2000 and 2012, and 2% per year since then. The share of coal, which has fuelled much of the past growth, will decline by 40% by 2040, from its peak in 2013. China will also account for a quarter of the projected rise in global gas demand, a significant portion of which will be imported. But for the first time, its incremental oil demand to 2040 will fall behind that of India’s.

A big chunk of the reductions will come from improving energy efficiencies – otherwise energy demand in 2040 will be 40% higher. The country will also account for 40% of investments in EVs and one-third of the new investments in wind and solar energy.

Shale-driven exports from the US

Improvements in the productivity of shale oil & gas will see the US become a net oil exporter by the late 2020s. The country will account for 80% of the increase in global oil supply to 2025, while shale gas production will also rise at a pace not been seen before. This will benefit several energy-intensive industries, including petrochemicals that will get access to low cost feedstock.

By the mid-2020s the US will become the world’s largest LNG exporter, and a bit later the largest exporter of light crudes – the ones that command a premium in markets. This will be on top of significant energy efficiency gains, including in fuel consumption for cars.

A significant quantity of oil and gas exports from the US will land up in Asia – a scenario just beginning to unfold.

Too early to write off oil

The IEA expects oil demand to stay robust at least till the mid-2020s, despite the rapid penetration of EVs. But oil demand is seen weakening beyond that period due a combination of large-scale switching (to EVs) and efficiency gains in conventional vehicles.

Two important factors will however take oil demand to 105-mbpd (million barrels per day) by 2040 – demand for making petrochemicals and for other mobility purposes (trucks, aviation and shipping).

Supply & prices

From the supply side, a tapering of US shale oil production in the late 2020s and a fall back in non-OPEC production could shift the onus to balance oil markets on Middle East producers. Sizeable investments will be needed to develop the additional resource base to compensate for the decline in existing fields. These projects will be costly – in terms of capital and operating expenditures – due their complexity and geographical challenges.

But the IEA does not rule out a low oil price scenario, wherein US shale oil plays an even larger role, consumers make an even faster switch to EVs and widespread use of digital technologies keep a lid on upstream costs. Under such a scenario, oil prices are seen hovering in the $50-70 per barrel range to 2040 – a comforting scenario from an Indian perspective.

Meeting Paris goals unlikely

The grim news from an environmental perspective is that under the New Policies Scenario global energy-related carbon dioxide (CO2) emissions increases, albeit slightly to 2040. While the power sector will see significant reductions in CO2 output due the shift to gas and renewables, this will be more than compensated by an increase in emissions from oil use in the transport sector and from industry. It is only under a Sustainable Development Scenario, wherein low-carbon sources double their share in the energy mix to 40% in 2040, all avenues to improve efficiency are pursed, coal demand goes on an immediate decline, and oil consumption peaks soon after, do the commitments made in Paris come to be met.

Which of these scenarios pan out will be determined not just by technological advances, but by visionary leadership, backed by clear commitments and support from governments.