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‘There is a new energy landscape’

Wind and hydro
Wind and hydro dominate new renewables installations outside the OECD
Credit: Siemens

The balance of power in the global energy markets is changing. In five years’ time the world will have new leaders in both oil and gas production, and electricity demand will expand by over 70 per cent by 2035. Kelvin Ross studies the findings of the International Energy Agency’s annual global forecast to find out what this means for the power sector.

The foundations of the global energy system are shifting substantially, with implications for everybody. This stark claim was made by Fatih Birol, chief economist at the International Energy Agency (IEA). He was speaking at the launch of the World Energy Outlook (WEO), the IEA’s annual publication that makes projections for the energy sector up to 2035. He said “there is a new landscape” forming, and added that it has “significant consequences for everybody”.

One of the factors driving this shifting landscape is “resurgent” oil and gas production in the US, Canada and – less obviously – Iraq, “a country with huge potential”. He adds that by 2017, the United States will be the world’s largest oil producer, surpassing Saudi Arabia, and by 2015 it will be the “clear leader in global gas production, overtaking Russia”.

In North America, this gas boom is being fuelled by the surge in shale gas production, which has resulted in a wide gap in gas prices in the US compared to Europe and Asia and means the US “is moving to a different rhythm to the rest of world” when it comes to gas.

Birol also stresses that the centre of gravity of world energy use is moving east. The share of the OECD (Organisation for Economic Co-operation and Development) countries in global energy use is declining sharply. In 1995, two-thirds of global energy was consumed by OECD countries. By 2030, the IEA estimates that that figure will have dropped to one-third. The rise in consumption of non-OECD countries will be led, unsurprisingly, by China, India and the Middle East, driven by economic growth and a rise in the middle classes in those countries. Yet Birol stresses that 1.3 billion people still have no access to electricity.

North America is moving to a ‘different rhythm to the rest of world’ thanks to shale gas

Electricity demand

The IEA forecasts that electricity demand will expand by over 70 per cent between 2010 and 2035, or 2.2 per cent a year on average.

More than 80 per cent of growth comes in non-OECD countries, with over half in China (38 per cent) and India (13 per cent) alone.

Up to 2035, average electricity prices increase by 15 per cent, driven by higher fuel prices, a shift to more capital-intensive generating capacity, carbon pricing in some countries and growing subsidies for renewables. There are significant regional price variations, with the highest prices persisting in the European Union (EU) and Japan, well above those in the US and China.

In net terms, global generating capacity expands by almost three-quarters, from 5429 GW in 2011 to 9340 GW by 2035. Gas and wind together account for almost half of this increase, followed by coal and hydro at about 15 per cent each. Solar photovoltaic (PV) capacity also expands rapidly, at a rate more than two-and-a-half times that of nuclear, though generation from solar PV increases by half that of nuclear, reflecting the much lower average availability of these plants.

As mentioned before, the bulk of growth in electricity use to 2035 will come in non-OECD countries, which have a projected share of incremental global demand of over four-fifths.

Solar PV
Solar PV capacity grows fast under the IEA’s forecast, outstripping new nuclear capacity
Credit: Siemens

At an average of 5.2 per cent per year, electricity demand in India grows faster than in any other region, due mainly to strong population and economic growth. Average annual demand per capita increases by three-quarters in non-OECD countries, from almost 1600 kWh in 2010 to 2800 kWh in 2035. Yet per capita demand in the OECD remains far higher, though it increases much more slowly, from 7800 kWh in 2010 to 8700 kWh in 2035. In sub-Saharan Africa, consumption remains extremely low, at only 500 kWh per capita in 2035. Although the number of people with access to electricity worldwide increases significantly, 12 per cent of the population still lacks access to electricity in 2030, compared with 19 per cent in 2010.

Natural gas

The IEA predicts a steady expansion of natural gas through to 2035, growing at an annual average rate of 1.6 per cent. Although it rises worldwide, its growth is far more pronounced in non-OECD countries. In China, demand rises from 130 billion m3 (bcm) in 2011 to 545 bcm in 2035, while the Middle East and India see growth to 640 bcm and 180 bcm respectively. In all, non-OECD countries account for 80 per cent of the overall increase in global natural gas demand.

The IEA states that the world’s resources of natural gas can easily keep pace with this increasing demand for the fuel. In 2035, Russia will continue to hold massive resources of natural gas, while output in Brazil, Iraq and East Africa will rise dramatically.

Regardless of how government policies evolve, the power sector will remain the main driver of gas demand in most regions. However, the IEA stresses that the extent of gas use will depend heavily on its price, both in absolute terms and relative to the cost of coal.

Natural gas used mainly in combined-cycle gas turbines (CCGTs) is expected to remain the preferred option for new power stations, due to a combination of economic, operational and environmental reasons: CCGTs have relatively high thermal efficiency, are quick and cheap to build, flexible to operate and emit less carbon dioxide and local air pollutants than other fossil fuel-based technologies.

Unconventional gas

While everyone is aware that unconventional gas will play a key role in meeting rising natural gas demand, the IEA estimates it will account for close to half of the increase in global gas production between 2011 and 2035.

Most of this rise is accounted for by shale gas and coalbed methane, with the former making up about 14 per cent of total gas production in 2035 and the latter 7 per cent. The bulk of this increase comes from just three countries – China (30 per cent), the US (20 per cent) and Australia (12 per cent).

Shale gas
Shale gas influences the outlook for all fuels

While the effects of the shale gas boom in the US are well documented and often held up as a model to copy, the IEA cautions that the prospects for unconventional gas production worldwide remain uncertain.

This is for several reasons, but in particular because of growing public concerns about the environmental and social impact of hydraulic fracturing, or ‘fracking’, the method by which shale gas is extracted. A failure to address and resolve these concerns could hinder the development of unconventional gas in many parts of the world, says the IEA.

Other challenges, including an adverse fiscal and regulatory framework, limited access to pipelines and markets, and shortages of expertise, technology and water, which is vital for fracking, could hold back production.

Coal

In the past decade, coal has met 45 per cent of the growth in global energy demand.

The IEA forecasts global coal demand growing by 0.8 per cent a year to 2035, with growth slowing sharply after 2020 as recently introduced and planned policies to curb its use take effect.

While coal’s share of global primary energy demand falls to less than 25 per cent in 2035, it still remains “the second most important fuel behind oil and the backbone of electricity generation”. Its use grows in all major non-OECD countries, with China and India alone accounting for nearly 75 per cent of this growth, with India passing the US by 2025 as the world’s second largest coal user. Meanwhile, coal use in all major OECD countries will drop dramatically. Coal demand in the US fell 4.5 per cent in 2011 and continues to drop as the shale gas boom displaces the need for coal.

The IEA also notes that as around one-third of the 340 GW of coal-fired capacity is more than 30 years old and relatively inefficient – and coal-fired generation faces more stringent pollution standards – many older plants may become subject to accelerated retirement.

It also highlights that there has been hardly any net increase in coal-fired capacity since 2000, while the last decade saw a near doubling in gas-fired capacity to 425 GW.

Renewables

The IEA forecasts that electricity generation from renewables will nearly triple from 2010 to 2035, reaching 31 per cent of total generation. In 2035, hydropower provides half of renewables-based generation, wind almost one quarter and solar PV 7.5 per cent.

Biofuels use more than triples from 1.3 million barrels of oil equivalent per day (mboe/d) in 2010 to 4.5 mboe/d in 2035.

The IEA calculates that investment in renewables of $6.4 trillion is required between now and 2035. The power sector accounts for 94 per cent of this sum – wind ($2.1 trillion), hydro ($1.5 trillion) and solar PV ($1.3 trillion) – with the remainder in biofuels.

Investment in OECD countries accounts for 48 per cent of the total, focusing mainly on wind and solar PV, while in non-OECD countries most investment is in hydro and wind. Renewable energy subsidies jumped to $88 billion in 2011, up 24 per cent on 2010, and they need to hit almost $240 billion in 2035 to achieve the trends projected by the IEA.

An investment in renewables of $6.4 trillion is required over 2012-2035

Cumulative support to renewables for power generation amounts to $3.5 trillion, of which over one quarter is already locked in by commitments to existing capacity, and about 70 per cent is set to be locked in by 2020.

While vital to the growth of the industry, subsidies for new renewables capacity need to be reduced as costs fall to avoid them becoming an excessive burden on governments and end-users.

Nuclear

The shadow of Fukushima continues to hang over nuclear power in many countries in the IEA’s forecast, notably – and unsurprisingly – Japan, where following the disaster in March 2011 all reactors were shutdown for stress tests to review their safety.

To date, only two units have restarted while in September, Japan released the Innovative Strategy for Energy and the Environment, which includes a goal of reducing reliance on nuclear power.

The IEA assumes that all existing reactors except those at Fukushima Daini and Daiichi are re-commissioned over the next few years. Their lifetimes are limited to 40 years in the case of reactors built before 1990 and 50 years for those built more recently. It also assumes that no new plants – apart from two already under construction – are built by 2035. As such, the IEA forecasts total nuclear capacity in Japan will fall from 46 GW in 2011 to 24 GW in 2035, and the share of nuclear in electricity generation drops from 26 per cent in 2010 to 20 per cent in 2020 and 15 per cent in 2035.

Meanwhile, nuclear power output grows at roughly the same pace as projected in the 2011 WEO, with the exception of the US, where some plants are due for retirement and the effect of unconventional gas means that fewer new plants are likely to be built.

As a result, US nuclear capacity reaches 120 GW in 2035, which is 5 GW lower than the projection in the 2011 WEO. Installed capacity in 2035 in the EU is also revised down, from 129 GW to 120 GW, as a result of the reduced competitiveness of nuclear power and slightly higher retirements.

In China, it is expected that a moratorium on new approvals will be lifted and the nuclear programme will proceed as planned.

At present, there are 64 reactors under construction in the world, totalling 66 GW of capacity.

Transmission & distribution (T&D)

Finally, the IEA predicts that the total length of the T&D system worldwide will increase by 25 million km to around 93 million km in 2035. Distribution networks, delivering power over short distances from substations to households, businesses and small industrial facilities, account for about 88 per cent of this increase, while transmission grids, moving power over long distances from generators to local substations near the final customers, account for the remainder.

The IEA stresses that “robust T&D grids are critical to system flexibility and are particularly important for accommodating the increasing contribution of variable renewables”.

Cumulative investment in T&D from 2012 to 2035 is estimated to be $7.2 trillion, with finance from non-OECD countries making up more than three-fifths of this, and China alone accounting for 40 per cent. Meanwhile in the OECD, the majority of T&D investment will be spent on replacing and refurbishing assets rather than building new ones, as power markets in these countries are relatively mature.

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