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Long exposure sunset over German highway along power plant , Germany Credit: Zoonar GmbH / Alamy Stock Photo
Long exposure sunset over German highway along power plant , Germany Credit: Zoonar GmbH / Alamy Stock Photo
13 November 2019 8:20

‘Profound shifts’ underway in energy system, says IEA World Energy Outlook

Simon Evans


Simon Evans

13.11.2019 | 8:20am
Energy‘Profound shifts’ underway in energy system, says IEA World Energy Outlook

The world’s CO2 emissions are set to continue rising for decades unless there is greater ambition on climate change, despite the “profound shifts” already underway in the global energy system.

That is one of the key messages from the International Energy Agency’s (IEA) World Energy Outlook 2019, published today. This year’s 810-page edition is notable for its renamed central “Stated Policies Scenario” (STEPS), formerly known as the “New Policies Scenario”.

In this scenario, which aims to mirror the outcome of policies already set out by governments, a surge in wind and solar power would see renewable sources of energy meeting the majority of increases in global energy demand. But a plateau for coal, along with rising demand for oil and gas, would mean global emissions continue to rise throughout the outlook period to 2040.

In contrast, the report’s “Sustainable Development Scenario” (SDS) sets out what would be required to give a 50% chance of limiting warming to 1.65C, which the IEA describes as “fully in line with the Paris Agreement”.

It says the SDS would require a “significant reallocation” of investment away from fossil fuels towards efficiency and renewables, as well as the retirement of around half the world’s fleet of coal-fired power stations and other changes across the global economy.

The IEA has this year also explored, but not modelled in detail, what it would take to limit warming to no more than 1.5C above pre-industrial temperatures, the aspirational goal of the Paris Agreement.

Future scenarios

The World Energy Outlook (WEO) is one of the most heavily scrutinised documents in the annual calendar of publications on the topic. Its hundreds of pages of analysis are based on thousands of datapoints, drawn from governments around the world, as well as the IEA’s World Energy Model.

The IEA says that it does not make forecasts in its outlook. Instead, it presents the consequences of societal energy “choices” in terms of CO2 emissions and other outcomes. The report explains:

“The World Energy Outlook does not aim to provide a view on where the energy world will be in 2030 or 2040. This will depend on hugely important choices that lie ahead. What the WEO-2019 does aim to do is to inform decision-makers as they design new policies or consider new investments or shape our energy future in other ways. It does so by exploring various possible futures, the ways that they come about, the consequences of different choices and some of the key uncertainties.”

The outlook spans three alternative “futures”, set out in the introduction and described in a blog, published ahead of the report’s release, on “understanding the WEO scenarios”.

The outlook’s central scenario is STEPS, which has “the intention to ‘hold up a mirror’ to the plans and ambitions announced by policymakers without trying to anticipate how these plans might change in future”. This includes the Paris climate pledges made by governments. The IEA does not assume that all policy goals will be met, however:

“[A]mbitions are not automatically incorporated into the scenario: full implementation cannot be taken for granted, so the prospects and timing for their realisation are based upon our assessment of the relevant regulatory, market, infrastructure and financial constraints.”

Stated policies include some net-zero emissions goals, such as the UK’s. Similar goals agreed or under discussion, including in the EU, cover 12% of global emissions, the IEA says. This makes the targets significant, but not decisive, in terms of tackling the global emissions. But the IEA says there could be larger knock-on effects due to the technologies and approaches developed to meet net-zero targets, which could help others to also cut emissions.

The second WEO future is the “Sustainable Development Scenario” or SDS. This is a different type of scenario that starts from sustainable development goals on energy access, air pollution and CO2 emissions before working backwards to show what would be needed to reach them.

Finally, the “Current Policies Scenario” (CPS) would see governments renege on their stated goals and intentions, with the energy system guided only by policies and laws that are already in place.

This year’s outlook continues to feature the CPS in its text, charts and data. But it is afforded lower priority, with the phrase “current policies scenario” used 102 times over 810 pages – far less often than the 793 mentions of the STEPS or the 535 for the SDS. The outlook says the CPS highlights the consequences of inaction and the level of effort required to meet even the STEPS pathway.

(For comparison, the CPS is mentioned 340 times in the WEO 2010, against 981 uses of the then-central NPS and 745 mentions of the “450 scenario”.)

Rising demand

On the basis of stated plans and policies around the world, the IEA says that global energy needs will continue to rise by 1% per year until 2040, adding demand equivalent to China’s current total.

This growth is driven by a rising population – based on the UN’s “medium” projections to reach 9 billion people by 2040 – and an expanding economy, with global GDP increasing by 3.4% a year, per International Monetary Fund projections.

The rate of energy demand growth is around half the average rate of 2% seen since 2000, the IEA says, due to shifts towards less energy-intensive industries, energy efficiency gains and “saturation effects” – for example, where demand for cars reaches a peak.

Some 49% of demand growth would be met by renewables in the STEPS, as shown with the red line in the chart, below. Gas use is also expected to rise rapidly (blue), overtaking coal to become the second-largest source of energy after oil and meeting a third of the rise in overall demand.

Global primary energy demand by fuel, millions of tonnes of oil equivalent, between 1990 and 2040. Future demand is based on the STEPS. Other renewables includes solar, wind, geothermal and marine. Source: IEA World Energy Outlook 2019. Chart by Carbon Brief using Highcharts.

In contrast to the rapid gains for gas and renewables, the IEA STEPS sees coal use plateau and then decline slightly from today’s levels (black line above). This confirms last year’s analysis that global coal demand peaked in 2014.

The IEA now also suggests that oil demand will start to level off by the 2030s (orange line) as a result of vehicle fuel-efficiency gains and the rise of electric vehicles (EVs), which see passenger car oil demand peak in the “late 2020s”. There are “profound questions” over the future of conventional cars, it says, given falling costs for EVs.

Oil demand for freight, shipping, aviation and chemicals “continues to grow”, the IEA says, with the growing popularity of SUVs another potential factor propping up demand. (Notably, documentation for the Saudi Aramco share sale also has global oil demand levelling off from around 2035.)

Some two-thirds of the increase in global energy demand to 2040 comes from the Asia Pacific region, under the IEA STEPS. India becomes the world’s most populous country and its energy demand doubles, making it the single largest contributor to global growth and accounting for more than a quarter of the total increase.

Within this total, the STEPS sees rising coal demand from Asian countries offset large declines in the US and Europe. The IEA says:

“Coal is the incumbent in most developing Asian countries: new investment decisions in coal-using infrastructure have slowed sharply, but the large stock of existing coal-using power plants and factories…provides coal with considerable staying power in the STEPS.”

Shifting shares

The rise of renewables anticipated under the STEPS to 2040 is demonstrative of the “profound shifts” described by the IEA, yet it also points to the “slow moving” nature of the global energy system, as exemplified by the long, high plateau in demand for coal.

These shifting shares of demand growth are shown in the chart, below, with coal, oil and gas (shades of blue) having met most of the historical increases in energy use (leftmost columns).

While the STEPS maps a future where renewables meet half of the increase in demand to 2040, and the pace of growth slows due to shifting economic factors and energy efficiency (central columns), it remains well short of putting a cap on global CO2 emissions (see discussion below).

If increases in global temperatures are to be stopped, then even more decisive changes will be required, as shown in the example of the IEA SDS (rightmost columns).

Average annual change in global energy demand, by fuel, million tonnes of oil equivalent. Left: historical changes. Centre: IEA STEPS. Right: IEA SDS. Source: IEA World Energy Outlook 2019. Chart by Carbon Brief using Highcharts.

The rising portion of demand growth met by renewables sees the fossil fuel share of global energy use decline from 81% in 2018 to 74% in 2040 under the STEPS, or 58% under the SDS.

Moving from the STEPS to the SDS will require a wide range of changes, most of which have long been on the agenda for policymakers. As the report explains:

“The global value of fossil fuel consumption subsidies in 2018 was almost double the combined value of subsidies to renewable energy and electric vehicles and the revenue from carbon pricing schemes around the world. This imbalance greatly complicates the task of achieving an early peak in emissions.”

By the 2030s, investment in fossil fuels without carbon capture would halve in the SDS, relative to the average during 2014-2018. At the same time, investment in renewables, electricity networks and nuclear would roughly double and spending on energy efficiency would nearly quadruple.

This reflects the fact that energy efficiency is the single most important factor in tackling emissions, the IEA says, meaning that overall demand in 2040 under the SDS is slightly below today’s levels.

It says “the potential for efficiency improvements to help the world meet its sustainable energy goals is massive” and it has convened a Global Commission for Urgent Action on Energy Efficiency to boost progress.

In part, this is a response to data showing that efficiency improvements are drying up and 2018 saw the slowest rate since 2010, with this “faltering momentum” a cause for “deep concern”. It cites “a relative lack of new energy efficiency policies and of efforts to tighten existing measures”.

Lower demand has knock-on consequences, particularly when combined with more rapid growth from renewables. Notably, demand for coal, oil and gas progressively declines under the SDS, with coal facing particularly large reductions (grey chunks in the rightmost columns, above).

Within this total, the IEA suggests that coal use in the power sector would be hardest hit. It says that more than half of current coal-fired power stations would retire by 2040 in the SDS, representing a fleet larger than China’s current capacity.

With half of retirements coming before the end of their useful lives, some of the $1tn of capital invested in the world’s existing coal fleet would be put at risk, if warming is kept below 2C. Some 98% of the 222 gigawatts (GW) of coal in Europe and 88% of the 276GW in the US would close.

Under the SDS, the remaining coal plants would mostly need to be “repurposed or retrofitted”, the IEA says. This means they would either operate limited hours, during peaks in demand and troughs in renewable output, or would face substantial investments to fit carbon capture and storage (CCS) technology to prevent their CO2 emissions.

This year’s outlook contains new analysis on the methane released during coal mining, which it suggests has a greater warming impact than aviation and shipping combined.

CO2 emissions

In the STEPS, global CO2 emissions from energy would continue to rise from the record level they reached in 2018, putting the world on track for upwards of 2.7C of warming this century. This emissions trajectory is shown with the dashed black line in the chart, below.

In contrast, CO2 declines quickly in the SDS (thick red line) to 17% below 2010 levels by 2030, 48% by 2040 and 68% by 2050. According to the IEA, this is “on course for net-zero emissions by 2070” and corresponds to a 50% likelihood of limiting warming to 1.65C, or a 66% chance of 1.8C.

This trajectory is less ambitious than most pathways to 1.5C with no or limited overshoot (yellow lines, below). In its special report on 1.5C, the Intergovernmental Panel on Climate Change (IPCC) said this would need CO2 to fall 45% below 2010 levels by 2030 and to net-zero by 2050.

Global CO2 emissions from energy and industrial processes in the past (solid black line) and under a range of different scenarios for the future: IEA STEPS (dashed black); IEA SDS (thick red line); IPCC pathways limiting warming to 1.5C this century with no or limited temperature overshoot (thin yellow lines); pathways to 1.5C with high overshoot (blue); and IPCC 2C pathways (grey). Values below zero indicate negative emissions, where residual CO2 from energy and industry is more than offset by removals, here primarily bioenergy with carbon capture and storage (BECCS). Source: IEA World Energy Outlook 2019 and Carbon Brief analysis of the database for the IPCC special report on 1.5C of warming. Chart by Carbon Brief using Highcharts.

According to the IEA, the SDS charts “a path fully aligned with the Paris Agreement by holding the rise in global temperatures to ‘well below 2C…and pursuing efforts to limit [it] to 1.5C’”. It also offers two options for going beyond the SDS to keep warming below 1.5C.

This form of words implies either that “pursue” means to head towards a goal, without necessarily reaching it, or that the SDS is aligned with 1.5C – so long as it is accompanied by additional action.

Along with the WEO’s central focus on the STEPS pathway, the statement on Paris “alignment” is at the heart of criticism from a group of NGOs, scientists, business groups and others. In an April letter, they called for the IEA to develop a scenario with a 66% chance of limiting warming to 1.5C.

One of the letter’s authors, Dr Joeri Rogelj, a lecturer in climate change and the environment at the Grantham Institute at Imperial College London, says the SDS is “inconsistent with 1.5C and several aspects of the Paris Agreement”.

Rogelj was a coordinating lead author on chapter two of the IPCC special report on 1.5C and is a lead author for working group one on the IPCC’s forthcoming sixth assessment report.

He tells Carbon Brief that there are at least two potential interpretations of the Paris ambition to “pursue efforts towards 1.5C”. One is that of limiting peak warming to 1.5C and the other is overshooting this level before returning below 1.5C, Rogelj says: “Planning to simply miss it is not a reasonable interpretation for a scenario that wants to be fully aligned with the Paris Agreement.”

He also points to Article 4 of the deal, which commits to reaching a “balance” between human sources and sinks of all greenhouse gases. This goal is likely to require net-negative CO2, for which the SDS provides no detailed pathway.

Negative CO2 emissions could be provided via technological solutions, such as bioenergy with carbon capture and storage (BECCS), or using “natural climate solutions”, such as afforestation.

The IEA says that negative emissions do indeed offer one way that the SDS could become aligned to a 1.5C limit. A cumulative total of around 300bn tonnes of CO2 (GtCO2) would need to be removed to bridge this gap, it adds. There are concerns over the sustainability and deliverability of such extensive deployment, however, and these are acknowledged by the IEA.

The WEO says:

“[I]t would be possible in the light of concern about [negative emissions technologies] to construct a scenario that goes further than the Sustainable Development Scenario and delivers a 50% chance of limiting warming to 1.5C without any reliance on net-negative emissions on the basis of a zero carbon world by 2050.”

[Other groups have developed a limited number of scenarios that already do this, which are included in the IPCC’s 1.5C report and the figure above.]

To go beyond its SDS, the IEA says the world would need to tackle “hard to abate” sectors, such as aviation, heavy industry and heat for buildings. This would include near-universal building retrofits and the development and retrofitting of new technologies for industrial processes.

The IEA says this “would not amount to a simple extension” of the changes in the SDS, instead “pos[ing] challenges that would be very difficult and very expensive to surmount.” It adds that tackling some of these areas would require social acceptance and behavioural change:

“This is not something that is within the power of the energy sector alone to deliver. It would be a task for society as a whole…Change on a massive scale would be necessary across a very broad front, and would impinge directly on the lives of almost everyone.”

If the IEA were to develop a 1.5C scenario, despite the challenges it would present, then the agency’s modelling could be used by policymakers to inform their energy and climate choices. Such guidance would be pertinent as governments reconsider their climate pledges under the Paris Agreement, with a fresh round of “Nationally Determined Contributions” due in 2020.

Coal changes

The outlook includes various changes since last year’s edition, reflecting shifts in the base year – there was unusually strong growth in demand in 2018 – and new or amended policy.

As a result, the IEA has once again revised down its outlook for coal demand in the central STEPS pathway, as the chart below shows (red line). However, it has also raised its near-term outlook for coal, in part due to China’s renewed reliance on smokestack industries to prop up flagging growth.

Historical global coal demand (black line, millions of tonnes of oil equivalent) and the IEA’s previous central scenarios for future growth (shades of blue). This year’s STEPS is shown in red and the SDS is in yellow. Source: IEA World Energy Outlook 2019 and previous editions of the outlook. Chart by Carbon Brief using Highcharts.

Despite the near-term increase in expected demand, this year’s outlook affirms that coal use would remain below the global peak reached in 2014, if stated plans and policies are met as per the STEPS. Nevertheless, this would leave coal demand significantly above the level in its SDS, where warming is limited to well-below 2C (yellow line, above).

According to the STEPS, rising demand in India is one of the key factors holding global coal use steady, despite rapid falls in developed economies, such as the US and EU.

Part of the reason for this increase in India is a large expected buildout of new coal-fired power stations, with 232GW of capacity built by 2040 in the STEPS, roughly doubling its installed capacity and accounting for a third of global additions.

The IEA says India’s coal capacity growth could be cut “sharply”, if declines in the cost of battery storage are faster than expected. Solar and cheap storage could “reshape the evolution of India’s power mix”, the IEA says, offering a “very compelling economic and environmental proposition”.

It is also worth comparing the 232GW of new coal capacity expected by the IEA, with India’s current pipeline of just 85GW, of which a quarter has been frozen in construction for years.

Another 510GW of new coal has been cancelled since 2010 due to competition from cheaper renewables, financial distress at utility firms and public opposition.

In addition, the Indian government has repeatedly overestimated electricity demand growth, meaning existing coal capacity is running less than two-thirds of the time. Moreover, data for 2019 to date suggests India’s electricity generation from coal could be declining.

The Indian government recently announced a highly ambitious target for solar, wind and biomass capacity to reach 450GW, potentially as soon as 2030, when the IEA STEPS outlook sees just 344GW having been added. If this target is met, then wind, solar and other low-carbon sources could largely meet rising demand without new coal, according to recent Carbon Brief analysis.

Supersized solar?

Elsewhere in the electricity sector, the IEA’s central STEPS sees renewables surging and overtaking coal as the largest source of power by the mid-2020s. By 2040, low-carbon sources would be supplying more than half of the world’s electricity needs – rising to 85% in the SDS.

(It is worth reiterating, however, that electricity accounts for only a fifth of final energy consumption today, a figure that rises to 24% by 2040 in the STEPS or 31% in the SDS. This is one of the many reasons why renewables alone cannot solve the climate challenge.)

Notably, this year’s STEPS has significantly increased the prospects for renewables, raising the solar total for 2040 by 23% and that for wind by 11%. This revision, adding 8% to the total for non-hydro renewables (red lines in the chart, below), sees them overtaking coal in the late 2030s.

The increase in expected renewable output is mostly absorbed by higher demand, meaning that generation from other sources is relatively unaffected. Carbon Brief analysis suggests the increase in 2040 demand relative to last year’s outlook is mainly due to higher demand in the base year 2018, which gets compounded by 2% annual growth.

Global electricity generation, by fuel, terawatt hours. Historical data and the STEPS from WEO 2019 are shown with solid lines while the WEO 2018 is shown with dashed lines. Source: IEA World Energy Outlook 2019 and last year’s edition. Chart by Carbon Brief using Highcharts.

The WEO explains:

“As a result of continued cost reductions, solar PV becomes the most competitive source of electricity in 2020 in China and India, and largely closes the gap with other sources by 2030 in the European Union and United States. In the Stated Policies Scenario, the global average [levelised cost] of solar PV declines by about 50% from 2018 to 2030.”

It adds that cost declines for wind and solar are “bolstering the economic case for switching directly from coal to renewables”, rather than using gas as a “bridge” to low-carbon sources.

It also points to newly announced US auctions for offshore wind, lower-than-expected prices in auctions around the EU and a softening of China’s shift towards subsidy-free renewables.

The IEA recently published an in-depth review of the prospects for offshore wind, which it says “has the technical potential to meet today’s electricity demand many times over” at costs set to be competitive with fossil fuels within a decade.

The IEA says there will be an increasing need to address challenges posed by variable wind and solar as they take hold of the electricity sector: “Policy makers and regulators will have to move fast to keep up with the pace of technological change and the rising need for flexible operation of power systems.”

Solar saga

Despite the large upwards revision in solar output in 2040 under this year’s STEPS, noted above, the IEA’s outlook for the technology remains relatively conservative compared with some others.

The IEA’s outlooks for solar have become something of a lightning rod for critics of the agency’s work. It has made upwards revisions for solar capacity growth in each successive edition of the outlook, shown in shades of blue in the chart, below.

(Note that the chart shows additions net of retirements. These are initially negligible as the vast majority of solar capacity growth has been recent. The IEA assumes 298GW of solar retirements to 2040, suggesting it expects capacity to switch off after around 25 years. This means that actual additions rise in the 2030s and beyond, rather than apparently remaining relatively flat as in the net additions chart below.)

Annual net additions of solar capacity around the world, gigawatts. Historical data and an estimate for 2019 are shown in red while central outlooks from successive editions of the WEO are shown in shades of blue. The WEO 2019 STEPS is shown in black. Source: IEA World Energy Outlook 2019 and previous editions of the outlook. Chart by Carbon Brief using Highcharts.

The IEA attributes these successive upwards revisions largely to shifts in government policy over time, in particular pointing to changes in China, which is the world’s largest market for solar.

The IEA argues that following slightly weaker solar growth in 2018, “a renewed acceleration in annual solar PV deployment, alongside enhanced efforts to ensure smooth integration of the resulting solar generation into power systems, is essential to reach climate targets and other sustainable development goals”.

The IEA’s relatively conservative outlook for solar appears to rest partly on its use of a standard weighted average cost of capital for all electricity generation technologies, set at 7-8% depending on each country’s stage of development.

This can have a very large impact on the levelised cost of electricity (LCOE) for a given project, as the IEA illustrates with reference to offshore wind. (Actual costs of capital for offshore wind in Europe have been closer to 4%, enough to cut its LCOE from around $140 per megawatt hour to $100/MWh.)

Another factor could be the IEA focus on system “value” rather than upfront costs, illustrated by the “VALCOE” metric it developed for the WEO 2018.

The agency says that cost reductions do not guarantee continued competitiveness “because the system value of solar PV tends to decline relative to the system average as its share of generation rises”.

This is because solar output is concentrated in the middle of the day, with additional capacity adding to supply and so partially eroding the price commanded by already-built solar panels.

Despite also considering these sorts of issues, some other outlooks are much more bullish on solar capacity growth. Whereas the IEA’s STEPS has solar additions of less than 140GW each year by 2040, the BloombergNEF new energy outlook sees solar additions topping 300GW by then. This higher figure is in line with deployment in the IEA’s target-focused SDS.

BloombergNEF is also more bullish on wind capacity growth, with the result that its outlook has electricity output from coal falling by half in 2050, rather than holding steady as in the IEA’s STEPS.

Simon Evans was one of more than 250 external peer reviewers that read sections of the World Energy Outlook in draft form.

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