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IEA: Government Policy Critical Driver for Global Energy Future

By MarEx 2018-11-12 19:34:48

At a time when geopolitical factors are exerting new and complex influences on energy markets, the World Energy Outlook 2018 published by the International Energy Agency (IEA) states that government policy will be critical to the future shape of the energy sector.
 
While the geography of energy consumption continues its historic shift to Asia, the report 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. 
 
In all scenarios proposed, governments will have a critical influence in the direction of the future energy system. Under current and planned policies, modeled in the New Policies Scenario, energy demand is set to grow by more than 25 percent to 2040, requiring more than $2 trillion a year of investment in new energy supply.
 
“Our analysis shows that over 70 percent 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 centers and expanding basic access to energy in Africa and elsewhere.”
 
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 of conventional oil projects need to double from their current low levels. Without such a pick-up in investment, U.S. 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 global supply in seven years – which would be an historically unprecedented feat.
 
In power markets, renewables have become the technology of choice, making up almost two-thirds of global capacity additions to 2040, as a result of falling costs and supportive government policies. This is transforming the global power mix, with the share of renewables in generation rising to over 40 percent by 2040, from 25 percent today, even though coal remains the largest source and gas remains the second-largest.
 
The expansion of renewables brings 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. 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. The analysis finds that higher electrification would lead to a peak in oil demand by 2030 and would reduce a 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.

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 just 11-years-old on average with decades left to operate, compared with 40 years on average age in the U.S. and Europe.
 
“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 percent of all emissions permitted under international climate targets in coming decades,” said 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 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.”