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IEA’s World Energy Outlook: Same Old?

December 26th, 2014 by Fereidoon Sioshansi, EEnergy Informer

The International Energy Agency released its annual World Energy Outlook 2014 in mid-November with the usual fanfare. As always, it is worth a read, for its breadth and depth even if parts read repetitive of prior projections. The overwhelming message, now repeated enough number of times by enough forecasts of the future, is the clear bifurcation of global energy demand growth among the haves and have nots, the north and the south, with China rapidly joining the former.

As illustrated, China, now the biggest consumer of energy and the world’s biggest polluter, is expected to reach a plateau by early 2030s, beyond which, its energy consumption – and hopefully carbon emissions – should flatten out or possibly drop. This, many suspect, explains why China recently agreed to cap its carbon emissions by 2030 in a joint statement along with the US at the recent APEC summit in Beijing in 2014. Capture d’écran 2014-12-26 à 19.29.26

Many critics of the APEC agreement, at which President Obama promised to reduce US emissions 26-28% below 2005 levels by 2025, say the promise eked out of China was not worth much since the country is on a trajectory to reach its peak by the deadline any way. Much more, they insist, should have been gotten from China. The same, however, can be said about the US, who by some estimates can and should do more without too much pain.

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Setting that dispute aside, IEA’s latest demand projections reaffirm another significant trend, namely the fact that the energy demand for the mature economies of the world, the members of the rich OECD club, has already peaked and will be on a slowly declining trajectory moving forward. The rest of the world, however, will need more energy for some time, certainly through 2040.

The implications are clear: The OECD countries will be able to sustain economic growth but will not need more energy to do so. This miracle will be achieved through continued improvements in energy efficiency and productivity – cars, appliances, and all manner of energy using devices are getting more efficient while buildings become better insulated which means less energy will be required to keep them running. The other explanation is low – or in some cases dropping – population growth plus gradual deindustrialization.
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Other major conclusions of the latest WEO is to confirm that peak coal may be closer to reality than coal mining companies would like to acknowledge. IEA’s projections show a gradual decline in coal consumption in the US and EU to 2040 – no surprise here – but also a pronounced inflection point in China’s use of coal as early as 2020, if not sooner, with India and rest of the world (ROW) following thereafter. Coal’s era of supremacy in power generation, in other words, is coming to an end.

This has obvious if long term implications for a few remaining coal-loving countries and their supportive politicians notably Tony Abbott of Australia, Steve Harper of Canada and, of course, Mitch McConnell, US Senate’s new Majority Leader. They can continue to fight against the inevitable, or they can move on to something worth fighting for.

IEA, like everyone else, predicts that the future of the global power sector will increasingly be defined by the growth of renewables followed by natural gas-fired generation as illustrated in graph.

IEA projects robust growth in renewables through 2040 while assuming that subsidies will peak by 2030 and begin to decline thereafter. Many renewable technologies are rapidly maturing to the point where they will compete against fossil fuels on their own, even better if one includes the costs of environmental externalities, especially if a carbon penalty is included in generation costs. As illustrated on graph below, IEA sees continued investment in both hydro and non-hydro renewables even as subsidies are reduced over time.

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The eventual decline in renewable subsidies is consistent with rapidly maturing technologies and the fact that many, including wind, are already mature and cost-competitive in certain regions of the world. Cost-competitiveness, of course, depends on a number of variables, including the prevailing costs of alternative resources in the region, the prevalence and quality of renewable resources and the existence of subsidies for fossil fuels – a persistent reality in many countries where fuel consumption is heavily subsidized.

As is customary, this year’s WEO covers all fuels and technologies. Nuclear’s future, again no surprise, appears rather glum in the West, particularly in the European Union and Japan where a net decline in capacity is projected through 2040.

For the US, 4 new reactors under construction is Georgia and North Carolina plus a reactor that has been under perpetual construction by the Tennessee Valley Authority (TVA) are counted as a net gain in capacity. This, however, may prove optimistic as many existing reactors are reaching retirement age and/or are having a hard time operating profitably.

Nuclear’s future prospects appear brightest in countries with central planning and opaque or no wholesale markets at all, namely China, India, Russia, South Korea and a handful of other places.
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The aging nuclear fleet in EU is expected to decline in the coming decades as illustrated in graph. Globally, IEA says that nuclear capacity may grow by 60% by 2040, mostly outside the West, but concedes that there is “no nuclear renaissance in sight.”

Persistent efforts by successive governments in the US and the UK, for example have resulted in only a handful of prospects but no avalanche of new reactor orders. Even in France, long the strongest bastion of nuclear power, only one reactor is currently under construction, and it is over budget and beyond schedule as is the single new reactor under construction in Finland, a source of embarrassment to nuclear proponents.

Germany, as everyone knows, is phasing out its remaining reactors by 2022, while a number of European countries including Switzerland and Sweden, have said they will not build any more reactors after the existing units retire. Italy, which once was talking about nukes, has lost its appetite entirely and possibly for good. Countries like Australia, South Africa and Brazil, who occasionally toy with the idea of building nukes have not done so, or are scaling back.

Japan, still recovering from the devastating Fukushima accident in 2011, has been in a nuclear limbo, sending mixed signals from time to time on what it intends to do. Many Japanese citizens are saying why risk another accident when the country has managed to keep the lights on without any reactors. Under Prime Minister Shinzo Abe, several of the reactors shut down after the Fukushima accident have been cleared to enter service, but even that seems uncertain. The problem of what to do with the spent fuel has not been satisfactorily resolved – and not just in Japan – which means the waste will continue to accumulate for future generations to deal with.
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Energy, as everyone acknowledges, is a critical input to the global economy. Cheap, abundant and secure energy helps; the reverse hinders economic growth and prosperity. The current low price of oil, if it persists, will have a major impact on future choice of energy resources.

Countries that are well-endowed with resources, use energy efficiently and/or use it to produce high value added output gain at the expense of those with little or no endogenous resources, inefficient and low-value added consumption – self-evident statements.

Energy prices, aggregated and presented as $/ton of oil equivalent ($/toe) vary from region to region depending on many factors, including costs of environmental controls and protection, as illustrated in graph. Clearly, EU and Japan are currently disadvantaged relative to the US, China and India. Which explains why industrialized countries are increasingly delegating the heavy lifting to places where energy, labor and land are cheaper.

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But as time goes on, two developments are expected to gradually move energy prices towards global parity as is already the case for oil, a truly global commodity:

• First is the impact of globalization of commerce;
• Second is that as developing economies mature, they too migrate into higher value added manufacturing and services.

As illustrated above, by 2040, energy prices in China, for example, are projected to exceed the prevailing prices in the US, while still below Japanese and European prices

F.P. Shioshansi

This post is extracted from EEnergy Informer, January 2015 issue.

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