Notable Observations from the International Energy Agency’s November 2017 Outlook #Energy
The International Energy Agency (IEA), which has 29 OECD member countries under its roof, publishes its World Energy Outlook reports every November, based on multiple scenarios, assessing possible future developments in the world of energy.
This year’s report was made public on November 14, 2017 at a press conference in London. In addition to 3 basic scenarios, the report evaluated possible future developments based on 6 supplementary scenarios.
It is given that different organizations have different scenarios and different implications than the IEA reports. Still, we will focus on some of the elementary estimates of the New Policy Scenario (NPS -the assumption that countries undertake the commitments they signed in the Paris Treaty), which is defined as the main scenario of the IEA.
When estimates are made, certain models, based on assumptions with a set of parameters, are constructed. While a model is being developed, the policies of the major actors (producer / consumer, cartels such as OPEC, etc.) that affect energy markets are considered as the most essential inputs. A summary of policies based on countries is as follows:
The United States, along with Trump, is heading for radically different approach than that of Obama’s. An executive order issued in March 2017 aims to make amendments to the regulations governing nature conservation with an emphasis on national resources and employment, arguing that the US is implementing policies that are detrimental to production of fossil fuels. Although some states and cities are leaning towards keeping the old statutes, this presidential order was taken into account in the UEA scenario. Trump’s decision to withdraw from the Paris Treaty similarly made its way into this scenario.
China announced its “2016-2030 Energy Production and Consumption Revolution Strategy” which was drawn upon the directions from the President in 2014. This strategy aimed at implementing the 13th Five Year Plan (in the energy field). It includes plans covering all energy resources (coal, oil, gas, etc.) and innovations for energy technology. Each plan identified medium-range and binding targets. The State Council has prepared a roadmap for market reforms regarding the oil and natural gas sectors. China’s most pressing concern, its air pollution, was at the center of new regulations.
The Indian government has drafted a strategy plan that will coordinate its national and sectoral policy objectives. The goals are: to provide access to electricity every day / hour for every citizen by 2022, to increase the share of domestic energy production in GDP, to reduce petroleum imports, to raise the electricity production from renewable sources to 175 Gigawatts by 2022, and to decrease the economy’s emission intensity by 33-35%. Another goal is to increase the share of electricity produced from sources not linked to fossil fuels up to 40%.
South Korea has announced a program aimed at reducing the share of nuclear and coal power in electricity generation. This reduction is slated to be met by increasing the share of renewables and natural gas.
Japan, following its policy of liberalizing its retail electricity market last year, launched an initiative for a similar policy for natural gas in April 2017. On the same date, a new bidding system was introduced along with new incentives for solar PV.
The European Commission came up with a “Clean Energy for All Europeans” package, in which new legislation was proposed for energy efficiency, renewables, a new electricity market design, electricity supply security and Energy Union governance.
France, Britain and Finland and other European countries, have declared their decision to completely disable their coal-based power plants. France designated 2023 for the action, while the UK’s target is 2025 and Finland’s is 2030. Britain and France have proposed a total ban on the sale of diesel and gas vehicles starting in 2040.
Saudi Arabia has announced its intention to lift most of its fuel subsidies that it is currently implementing, in 2020. It has further announced that it wil provide assistance services for the low-income families that will be affected by this negatively.
Qatar lifted its one-sided moratorium and decided to open the North Zone that it shares with Iran for development.
The UEA 2017 “Future Outlook” report was prepared by taking into account these and similar major country policy changes.
Some Basic Predictions of the New Policy Scenario
The following 4 developments were first expressed during the presentation of the report to the media:
- Rapid expansion and cost reductions in clean energy technologies in 2016: The increase in solar PV capacity capped the increases in all other electricity generation sources. Solar PV costs have declined by 70% since 2010, while the drop in wind energy was 25%, and, in batteries, 40%.
- With the share of electricity in energy consumption growing rapidly in 2016, consumer electricity spending inched close to their spending on petroleum products (electric cars, refrigeration and digitalization).
- In China, the world’s largest energy consumer, the switch to a service sector-led economy and a cleaner energy mix weighed heavily on a global scale. («Make the skies blue again»)
- Oil and gas production from “shale” and low permeability formations in the US maintained their “durability” against lower oil and gas prices, and the country maintained its position as the largest producer of oil and gas.
In the light of these four fundamental insights, some of the predictions for the future are as follows:
For the period between 2016-2040, Asian countries will be leading the increase in energy demand; whereas China’s growth rate is falling behind India’s. China’s energy demand growth is expected to be 790 million tons of petroleum equivalent (mtpe), against India’s 1050 mtpe. For the EU, the USA and Japan, energy demand is expected to face a decrease due to parameters such as the saturation of the sector and effective demand side management. The old ways, along with the changes in the role of the countries and regions will lose their cogency. The Middle East is set to become a big energy consumer while the US is set to become an energy exporter.
Solar photovoltaic (PV) plants, which have already increased their share in energy consumption rapidly during the 2010-2016 period, are expected to further their rally in the 2017-2040 period. China, India and USA will be leading in solar PV, while the EU will play a pivoting role in terrestrial and marine wind investments. The growing share of solar and wind energy in the energy mix creates a need for greater flexibility in the supply-demand balance.
Between 2016 and 2040, INDIA’s electricity generation is expected to reach current EU levels, and China’s to current US levels. Among the driving sectors of the big jump in electricity demand are industrial motors and cooling appliances.
The number of electric vehicles, which are currently around 2 million, will reach 50 million by 2025 and 280 million by 2040. This swift increase in the number of electric vehicles will slow down the rate of increase in demand for petroleum with regards to passenger vehicles, the demand from trucks, air transportation, shipping and petrochemical sub-sectors tend to keep the total demand in balance.
The United States will become the undisputed leader in oil and gas production. Although the US has been exporting gas since 2016, it is not yet a net gas exporter when we consider its imports. However, it is expected that the US will become a net exporter of gas very shortly, and it will further become a net oil exporter from year 2020 onwards. The main driving forces behind this swap are the increase in domestic production, demand side efficiency and fuel transformation policies. In both these source-based productions, the contributions from reservoirs with low permeability, mainly “shale” gas and oil, is set to play a large role.
In the new global gas trade order, LNG (liquefied natural gas) stands out. Asia’s growing gas import need is largely met by LNG. Exports by the US is set to create a more flexible and liquid gas global market. Trade volume in natural gas trade volume in 2016 was 706 billion cubic meters in total, with 61% going through pipelines, and the remaining 39% in LNG form. The total volume in 2040 is expected to rise to 1,230 billion cubic meters. It is foreseen that 41% of it will flow through pipelines and 59% will be LNG.
These are some key findings from the New Policies Scenario. However, the Scenario for Sustainable Development which requires only 15% more investment and in return, will bring greenhouse gas emissions to a much lower and will require significantly lower levels of fossil fuels promises a much more hopeful. To demonstrate:
If this scenario can be realized on a global basis, electric vehicle sales will be three times (850 million) the 280 million proposed by the New Policy Scenario, resulting in less emissions. Energy will be used twice as efficiently as today; which effectively means tht we will be able to achieve the same level of economic growth with half the energy consumption. Our resources will not go to waste.
When I look at the reckless leaders in today’s world, I admit that it is hard to look forward to a bright future. But as Friedrich Hölderlin put it gracefully: “But where the danger is, also grows the saving power.”