As we highlighted in a recent focus (see Deciphering the daunting challenges of COP25), the main underlying goal of the ongoing COP25 summit in Madrid is to have the world’s main economies individually commit to more ambitious energy-related greenhouse gas (GHG) emissions cuts. For the time being, both the current policies and future policy commitments NDCs (NDCs, the Nationally-Determined Contributions) are not ambitious enough to be compatible with the objectives fixed by the Paris Agreement, which aims to limit global warming to “well below 2°C” (relative to pre-industrial levels) and to make additional efforts to aim for 1.5°C and entails “carbon neutrality” to be achieved by 2050. Increased efforts towards carbon neutrality are therefore urgently needed, with the energy sector having a substantial part to play for the world economy to reverse its GHG emissions trends in the next decades. Taking the specific perspective of the energy sector, IEA’s freshly-released 810-page 2019 World Energy Outlook (WEO) offers valuable insights into these topics.
As a preliminary remark, let us recall that WEO does not aim to provide forecasts of how the world energy mix will look like in the future. Instead, it offers three main scenarios which explore the economic, environmental and social consequences of policy action or inaction, in particular for what concerns energy sector-induced world GHG emissions (see table below).
The first, “current policies scenario” (CPS) explores the consequences of policy inaction. It shows what would happen if no new policies were adopted and the world would simply continue its current path, hereby serving as a benchmark case against which all the other projections can be evaluated. Under current trends, energy-related GHG emissions continue to rise relentlessly and almost every aspect of energy security becomes increasingly strained. The share of fossil fuels remains almost unchanged, falling only marginally from 81% in 2018 to 79% in 2030 and 78% in 2040. Primary energy demand grows at an 1.3% average annual growth rate to 2040. Due to the overall growth of primary energy demand, global energy-related CO2 emissions rise from 33.2 Gt in 2018 to 37.4 Gt in 2030 and keep rising further to reach 41.3 Gt in 2040. Such trajectory is not compatible with climate goals as it would result in global temperature rise far above the 2 degrees limit aimed for by the Paris Agreement.
The second, “stated policies scenario” (SPS - previously known as “new policies scenario”, the underlying assumptions and modelling methodology remain unchanged) shows how the world would look like if current policy intentions and announced targets were implemented. In such state of the world, the growth in oil demand flattens out in the 2030s, coal use falls and electrification causes rapid transformation of a part of the energy system. Renewables and natural gas grow fast, the demand for nuclear also increases, but only marginally. As such, nuclear remains far behind both fossil fuels and renewables. The share of fossil fuels falls from 81% in 2018 to 77% in 2030 further down to 74% in 2040 and the primary energy demand growth slows down to 1% annual average growth to 2040. Consequently, the growth of energy-related GHG emissions slows down and eventually reverses into a decline, which results only in a marginal emission increase: from 33.2 Gt in 2018 to 37.4 Gt in 2030, followed by a decrease to 35.6 Gt in 2040. However, this trajectory is still far from being compatible with the abovementioned Paris Agreement.
The third, “sustainable development scenario” (SDS) works backwards by choosing a set of objectives and describing the rapid structural changes in the energy system required for their achievement. This scenario describes how would the world energy system have to look like if it were on a pathway aligned with the Paris Agreement while also achieving energy access to all and reduced air pollution, which results from the combustion of fossil fuels. Coal experiences the most severe fall of all fossil fuels in this scenario: from 3 821 Mtoe in 2018 to 2 430 Mtoe in 2030 and further down to 1 470 Mtoe by 2040. This falling demand reflects both the high carbon intensity of coal and the air pollution resulting from the burning of coal. Oil also takes a heavy hit in this scenario since the primary energy demand for oil falls from 4 501 Mtoe currently to 3 995 Mtoe in 2030 and further down to 3 041 Mtoe by 2040. Under this scenario, oil loses the dominant position it still enjoys nowadays to both renewables and natural gas by 2040. Natural gas is the only fossil fuel not suffering from a heavy fall in demand in this scenario. The demand for natural gas even increases from 3 273 Mtoe in 2018 to 3 513 Mtoe in 2030. However, the trend reverses and the demand fall down to 3 162 Mtoe by 2040. Renewables experience the strongest growth of all, jumping up from current primary energy demand of 1 391 Mtoe to 2 776 Mtoe by 2030 and further up to reach 4 381 Mtoe by 2040, which makes renewables the largest source of primary energy demand by that time for ahead of both natural gas and oil, which take the second and the third place, respectively.
Primary energy demand does not rise in the “sustainable development scenario” thanks to improving energy efficiency and thanks to a shift of power generation away from combustion, which reduces losses from waste heat. This scenario sees the sharpest drop of the share of fossil fuels in the world primary energy demand, mainly at the expense of coal and oil. The fossil fuel share drops from 81% in 2018 to 72% in 2030 and further down to 58% by 2040. Accordingly, energy-related CO2 emissions fall sharply from 33.2 Gt in 2018 to 25.2 Gt in 2030, reaching 15.8 Gt in 2040. Such emission pathway gives 50% change of achieving the Paris Agreement by limiting global average temperature rise to 2 degrees by the end of the century.
While the modelling undertaken by IEA provides insights into the incremental changes in the world energy system along the possible pathways it may take, such approach does not account for disruptions and the rapid structural changes which follow afterwards. The following section outlines some of the possible sources of large-scale disruption in the world energy system.
“Green Hydrogen”, namely hydrogen produced via electrolysis of water powered by renewable energy such as solar PV or wind, offers the promise of sparing gas infrastructures from massive stranding, while unlocking potential synergies with onshore/offshore wind and solar PV energy, hereby further boosting its prospects. As we highlighted in a recent ad hoc piece of research (see Complementarity between gas and power assets amid transitioning energy systems), once electrolysis has reached commercial viability, one could imagine a system where, in theory, electricity generated by wind or solar power plants could, depending on market conditions, be injected into high or medium voltage grids, or supplied to power electrolysers for the decarbonised production of hydrogen for which there would be multiple end-uses in both the industrial sector (production of plastics, ammonia, glass, etc.) and energy sector, alternatively after being injected into infrastructures (networks, underground storage facilities), serve a variety of purposes (mobility, used by vehicles powered by fuel cells, electricity generation, domestic heating, etc.). Better still, as it could potentially be injected into gas infrastructures, green hydrogen could in fact offer a large-scale storage solution for electricity generated from intermittent sources, which otherwise risk destabilising the electricity system. Substituting to oil and complementing electricity for mobility purposes, offering an alternative to coal/natural gas for industrial processes, hereby establishing itself as a “systemic” answer for the decarbonisation of the whole economy, the development of green hydrogen comes with potentially significant implications for the different assets making up contemporary energy systems. Nevertheless, prospects of green-power electrolysis remain remote. Even under its SDS, IEA anticipates only modest green hydrogen volumes being injected into gas grids by 2040 (25 Mtoe, to compare with over 200 Mtoe of biomethane injections). IEA’s greater interest in green hydrogen however evidences the gradual emergence of this technology as a potential source of disruption in the energy sector, something less tangible in WEO’s previous releases.
When it comes to assessing the prospects of electric cars, renewables and power markets, another key unknown in the energy sector lies in the pace of cost decline of energy storage. Since the decline of energy storage cost would improve the economic prospects of renewables, such development would further dampen the prospects for coal, oil and gas. Cost reductions of energy storage in WEO projections are achieved thanks to economies of scale in manufacturing and learning from experience as well as improved chemistry. The SPS projects that the costs of battery system for a four-hour storage (including battery pack and balance-of-system costs) will fall to $200/kWh by 2040. It nonetheless remains to be seen whether such price level would enable the technology to reach commercial viability, even assuming its use for critical balancing purposes.
Moreover, the future of coal will be largely decided in Asia. Coal has a strong position in Asia, a region which over the past 20 years accounted for 90% of newly built coal-fired capacity. Coal power plants in Asia are in average 12 years old, which means their future emissions are already “locked in” due to their operational lifetime spanning several decades. While coal has a strong position in Asian energy markets, it is under an increasing pressure from oil & gas but also from renewables. However, the speed at which coal will be displaced depends both at future prices of LNG and on the decline of costs of energy storage. The latter point is especially pertinent for India, where coal currently provides three-quarters of electricity. The country plans to meet the rapidly increasing electricity demand (especially during peak times) with ambitious plans for renewables in general and solar PV in particular. The need for additional flexibility during peak demand times is currently met thanks to a combination of coal, hydro and gas-fired power plans. Cheaper energy storage would improve the prospects of renewables, mainly solar PV since combined facilities (solar PV + battery storage) are projected to become cost-competitive with coal-fired power plants by 2030 in India.
IEA’s WEO offers various illustrations of what the world’s energy sector could look like under various scenarios. IEA’s modelling work should not distract us from the simple observation that for the time being, energy markets continue to follow a business-as-usual trend, somehow like IEA’s CPS. For instance, overall demand for oil continues to be driven by global economic trends rather than by shifts in consumption patterns; accordingly, oil price forecasts continue to reflect short term anticipations of worldwide supply-demand balance, the latter being itself influenced by the role of swing producers such as Saudi Arabia or the US.
 NDCs refer to the individual targets accompanying the signature of the Paris Agreement in December 2015.
 In its recently-released 2019 Emission Gap Report, the United Nations Environment Programme (UNEP) stressed that “if current unconditional NDCs are implemented there is a 66% chance that warming will be limited to (only) 3.2°C by the end of the century”.