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As part of its World Energy Outlook released in November, the International Energy Agency posed key questions over the current and future global energy landscape.

Q: Has the world broken the link between rising economic activity, energy demand and energy-related CO2 emissions?

IEA data suggests that what has been a fairly inexorable rise in global energy-related CO2 emissions slowed sharply in 2015, for the second year in a row.

Before 2015, there were only four periods in the past 40 years in which emissions stood still or fell compared with the previous year. Three of those – the early 1980s, 1992 and 2009 – were associated with global economic weakness.

In contrast, the most recent stall in emissions growth comes during a period of economic expansion. This represents a clear hint that the previously close relationship between global economic growth, energy demand and related CO2 emissions is weakening. But is it too soon to conclude that the link is broken?

Energy intensity is a measure of the link between global economic activity and energy demand; preliminary estimates suggest that global energy intensity decreased by 1.8 per cent in 2015, almost twice the average level of improvement over the last decade.

Part of the reduction in energy intensity was due to changes in the global economy: for example, production of steel and cement fell by 2-3 per cent in 2015, mainly because of developments in China. The increasing rigour of global energy efficiency policies also played a role.

In turn, the link between energy demand and energy-related CO2 emissions is determined by the mix of fuels and technologies used to meet the world’s energy needs. Moving away from the most carbon-intensive fuels (for the first time, the US generated as much power from natural gas as from coal in 2015) or introducing more renewables into the system (additional power generated from renewables was equal to more than 90 per cent of the growth in global electricity generation in 2015) are the main ways to drive a wedge between energy and emissions trends.

Overall, the IEA estimates that around two-thirds of the contribution to the flattening in emissions in 2014 and 2015 came from reductions in energy intensity; the rest from an expansion of cleaner energy sources in global energy use.

The IEA says that some of the factors that have caused the slowdown in global emissions growth in 2014 and 2015 are cyclical and might not be prolonged – the most pronounced slowdown in economic activity over this period occurred in some of the most energy and carbon-intensive parts of the global system, e.g., Russia, the Middle East and other hydrocarbon-exporting countries and regions.

A further implication is that, if indeed the trends seen in 2014 and 2015 are to be a turning point, then stronger policies than those in place or envisaged today would be needed to boost improvements in efficiency and the deployment of low-carbon energy.

In the IEA’s projections, the annual average increase in GDP is assumed to pick up, from 3 per cent in 2015 to an average of 3.7 per cent over the ten years to 2025, meaning that improvements in energy intensity and deployment of lower carbon technologies have to clear a higher bar in order to deliver a net reduction in emissions.

The IEA forecasts that global energy intensity will continue to fall at a rate of 1.8 per cent per year to 2040, which it calls “a significant achievement given that GDP growth is concentrated in emerging economies, where economic activity is still relatively energy intensive. But the net result is still a stubborn upward trend in global demand for energy”.

Primary energy demand in most advanced economies is set to fall over the coming decades: despite pockets of growth such as Mexico, the net trend for OECD countries as a whole is that they consume less energy in 2040 than they do today.

But this is more than offset by increases elsewhere, with rising incomes, industrialization and urbanization – and rising levels of energy access – proving to be powerful spurs for consumption. China has had a huge influence on global energy trends since 2000 and continues to be the largest single source of global demand growth until the mid-2020s in the IEA’s projections, when it is overtaken by India.

But even as energy demand growth slows in China, other countries in South and Southeast Asia, along with parts of Africa, the Middle East and South America where energy demand per capita is low today, take on a more prominent role in pushing global energy demand higher.

Q: Which fuels and technologies are poised to do well in the post-Paris Agreement new energy order?

The IEA stresses that “the global energy mix does not change easily. Although government policies, relative prices, changing costs and consumer needs all create incentives to switch fuels or to introduce a new technology in order to obtain a better energy service, in practice the energy system has a great deal of inertia”.

Which fuels and technologies will dominate?

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Light bulbs and office equipment might be replaced every few years, but the lifetimes of vehicles, factories, power plants and buildings are much longer, and each bit of infrastructure locks in certain patterns of energy use. So, in the absence of a concerted policy push or a dramatic change in relative prices, the positions of the different fuels and technologies in worldwide energy use tends to be fairly stable.

According to the IEA’s projections in what it calls its New Policies Scenario, coal is not yet in terminal decline but growth is anaemic at only 0.2 per cent per year to 2040, providing scant relief for the 80 per cent of Chinese coal companies that were reportedly losing money in 2015 or the firms accounting for half of US coal production that were under bankruptcy protection in mid-2016.

The reason that coal demand continues to rise at all is due to robust demand growth in India and southeast Asia – where readily available coal is difficult to ignore as an affordable solution to fast-growing energy needs. This offsets rapid declines in coal use in North America and the European Union.

More so than for any other fuel, it is China – still by far the largest coal producer and consumer – that holds the keys to the global coal balance. The structural economic shift towards non-energy-intensive industry and services sectors hits coal use hard and means that, barring an unexpected dry year for hydro, China’s coal use is likely to have peaked in 2013.

On the production side, China intends to close more than 1 billion tonnes of mining capacity in order to rebalance the market. Even if this restructuring proceeds according to plan, China’s import needs are set to plummet by around 85 per cent to 2040. If it is delayed, it is conceivable that China could even become a net exporter of coal again, a development that would prolong the current slump in international coal markets.

Natural gas demand grows by nearly 50 per cent in the New Policies Scenario over the period to 2040. The 1.5 per cent annual rate of growth to 2040 is healthy compared with the other fossil fuels, although considerably less than the 2.3 per cent seen over the last 25 years. Natural gas consumption increases almost everywhere, with the main exception of Japan, where it falls back from today’s levels as nuclear power is reintroduced: China and the Middle East are the largest sources of growth.

Are there limits to growth for renewables?

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But, in the face of strong competition and saturation effects in some mature markets, the IEA stresses that the “natural gas industry has to work hard to secure new outlets for its product. Gas prices rise steadily in all regions as the current supply overhang is absorbed.”

According to the IEA, by 2025, in gas-importing countries in Asia (in the absence of carbon pricing) new gas plants would be a cheaper option than new coal plants for baseload generation only if coal prices were $150/tonne. The space for gas-fired generation is also squeezed in many markets by the rising share and falling costs of renewables. Gas demand for industry increases more quickly (at 2.1 per cent per year) than for power (1.3 per cent); the fastest growth (3.4 per cent), albeit from a low base, comes from natural gas use in transport, including liquefied natural gas for heavy goods vehicles and for shipping.

Gas production growth is dominated over the period to 2020 by Australia and the US, but thereafter the increase in supply comes from a larger range of countries. East Africa emerges as a new gas province thanks to large offshore developments in Mozambique and Tanzania. Egypt makes a comeback with the start of production from the major Zohr field, as does Argentina with the development of its promising shale gas resource in the Vaca Muerta region.

After remaining relatively flat into the early 2020s, Russia’s output rises again as a new pipeline route opens up to bring gas to China, but a larger share of the increase in international trade is taken by LNG. New projects in North America, Australia, Africa, the Middle East and Russia help to boost the share of LNG in inter-regional gas trade from 42 per cent today to 53 per cent in 2040.

Readily available coal is difficult to ignore

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The gradual removal of contractual restrictions, such as destination clauses, also eases the emergence of a globalized gas market in which prices are increasingly determined by the interplay of gas supply and demand.

In the case of nuclear, even though one-sixth of the global nuclear fleet is retired in the next decade (80 per cent of this in OECD countries), overall prospects are buoyed by large new build programmes in a select group of countries led by China, Russia and India.

The largest expansion in the primary energy mix comes, unsurprisingly, from renewables. But…

Q: Are there limits to growth for renewable energy?

Renewable energy is the major growth story in the IEA’s World Energy Outlook 2016.

The attention to renewables is typically focused on their place in the power sector, but renewable resources are also used in end-use sectors to meet heat demand and as a transport fuel. Use for heat can either be direct (from bioenergy or solar thermal, for example) or indirect (via renewables-based electricity or heat from combined heat and power plants). Use in the transport sector is as biofuels, mainly for road transport.

To the extent that renewables in the power sector test the limits of growth, they do so for two reasons. First, particularly in countries with low rates of growth in electricity demand and very strong decarbonization goals, the desired pace of change may exceed the natural rate at which existing capacity is retired.

Large new projects improve nuclear’s prospects

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There is no technical barrier to early retirement of existing assets, but the political challenges can be a different matter and early retirement comes with a cost: an increase in the amount of overall investment or, in some instances, a claim for compensation for lost income.

Second is the impact of variable renewables on the operation and reliability of the power system as a whole. At low shares of penetration in the power mix, wind and solar PV are unlikely to pose significant challenges.

Yet, the deployment of such technologies requires a significant upgrade in technical, institutional, policy and market design, collectively known as system integration measures.

In the absence of these measures to increase the flexibility of the system, there is a risk that wind or solar capacity would face significant curtailment during times of abundant generation, which could undermine the economics of projects, deter investment and make these technologies less effective as emissions abatement options.

Any power system in which wind and solar PV installations face a regular risk of having their production curtailed is taking an expensive and inefficient route towards decarbonization.

Flexibility, in power system terms, is traditionally associated with generators that can change their output very quickly (typically reservoir hydropower or gas-fired plants). But there are multiple potential sources of flexibility that can be exploited to shift the timing of the demand or of the delivery of supply in order to accommodate large shares of renewables.

Markets can be designed in a way that incentivize investment in locations and technologies that offer the best value to the system as a whole, i.e., are capable of delivering power at times of day and in places when it is particularly needed. Strengthening the network or integrating with neighbouring systems make it possible to aggregate output over a larger area, helping to smooth fluctuations that might occur in individual locations.

Although its use has been limited so far (with the partial exception of pumped storage hydro), utility scale storage offers promise – especially once costs come down – to accommodate supply and demand mismatches.

Another approach is to induce flexibility on the demand side, either by moving consumption in time without affecting the total electricity demand (e.g., shifting the use of a washing machine or the charge of an electric vehicle to a different time period), or by interrupting demand at short notice (e.g., stopping industrial production for a given amount of time) or adjusting the intensity of demand for a certain amount of time (e.g., reducing the thermostat temperature of space heaters or air conditioners to lower electricity demand at that time).

A judicious mix of these solutions can allow for very high shares of variable renewables in power systems, while reducing curtailment to negligible levels below 2.5 per cent of their annual output in 2040. System integration measures provide the essential enabling mechanism for high growth of renewables.

In the end-use sectors, there is a mixture of barriers that impede rapid growth in renewables. Technological progress has been much less rapid than in the case of wind or solar PV power, not least because policies that can help renewable heat technologies achieve full commerciality are much less widespread than those supporting renewables-based electricity.

Not all sources of renewables for heat offer the range of heating temperatures demanded, especially in industry. But there is still scope for further penetration of solar thermal heating for use in the residential or services sectors or in low-temperature applications, such as textiles and food processing.

Bioenergy offers a wider range of heating temperatures, although logistics and supply chain problems could emerge as a constraint on large-volume consumption. Research and development is still essential to bring down costs and to open up new areas for growth, for example solar thermal heating for medium-temperature industrial applications, or renewables-based cooling systems for buildings and industry.