Major transformations are under way for the global energy business and with more than 70% of energy investments projected to be driven by government, the world’s energy destiny lies with government decisions, according to the International Energy Agency’s World Energy Outlook 2018.
Geopolitical factors are exerting new and complex influences on energy markets, IEA said.
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 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, IEA said.
Under current and planned policies, modeled in the New Policies Scenario, energy demand is set to increase by more than 25% to 2040, requiring more than $2 trillion/year of investment in new energy supply.
“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 centers, and expanding basic access to energy in Africa and elsewhere,” said IEA Executive Director Fatih Birol.
The analysis shows oil consumption rising in the coming decades, due to rising petrochemicals, trucking, and aviation demand, but meeting the growth means that approvals of conventional oil projects need to double from current levels. Without the investment, US shale production would have to add more than 10 million b/d from today to 2025, the equivalent of adding another Russia to global supply in 7 years, IEA said.
With falling costs and supportive government policies, renewables have become the technology of choice in the power markets, comprising almost two thirds of global capacity additions to 2040. The share of renewables in generation is rising to more than 40% by 2040 from 25% today even though coal remains the largest source and gas remains the second-largest.
This expansion brings environmental benefits but also new challenges for policymakers. The issue is of growing urgency as countries are 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.
As part of research into the electricity sector, WEO 2018 examined the impact of higher electrification in transportation, buildings, and industry, finding 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.
In the IEA’s Sustainable Development Scenario, global energy-related carbon dioxide 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 essentially locked in. Coal-fired power plants, which account for a third of energy-related CO2 emissions today, represent more than a third of cumulative locked-in emissions to 2040. The majority of these are related to projects in Asia, where average coal plants are 11 years old, on average, compared with those in the US and Europe, which are 40 years old, on average.
“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,” Birol said.
If the world is serious about meeting its climate targets, Birol said, there needs to be a systematic preference for investment in sustainable energy technologies starting today. We also need to be “much smarter about the way that we use our existing energy system,” he said. “We can create some room for maneuver by expanding the use of carbon capture utilization and storage, hydrogen, improving energy efficiency, and in some cases, retiring capital stock early. To be successful, this will need an unprecedented global political and economic effort.”