Counting The Cost Of A Faster Energy Transition

Slowly but surely the energy mix is changing. Renewables, increasing efficiency, electrification of end-use demand including electric vehicles (EVs) are all driving the energy transition. Even so, we’ll depend on coal, oil and gas for quite some time. Demand for fossil fuels continues to rise for the next two decades at least in Wood Mackenzie’s base case forecasts and the share of global energy demand stays above 70% through until 2040.

What if it happens a lot faster?  Our Carbon Constrained Scenario envisages a world in which existing and viable technology trends accelerate, steer policy, and become bound together to shape far faster cuts to carbon emissions than we see today under current pledges. I talked through the implications for the energy mix with David Brown, Senior Cross Commodities analyst.

David, rapid decarbonisation must be great news for renewables?  Yes - the uptake would be explosive. The electrification of demand across all regions drives power demand at nearly 2% p.aer annum through 2040. Wind and solar capacity grows nine-fold from over 900 gigawatts today to just under 8,000 gigawatts by 2040; renewables share of global power output jumps from 7% to 40%. It’s transformational. Large-scale energy storage isn’t commercial today, but we’d need 780 gigawatts  of storage capacity by 2040.

And the big loser? Coal is the first casualty of decarbonization. Coal demand halves by 2040 even with no international carbon dioxide pricing regime as the power sector switches to gas and renewables. That’s wildly different to Wood Mackenzie’s base case where coal demand stays broadly flat. India is the only major consumer in the scenario where we see demand for coal increase through 2040. We don’t see carbon capture and storage playing a big role.

What about oil? A faster energy transition takes a chunk out of oil demand by 2040. We forecast demand peaks at 110 million barrels per day (b/d) in 2036 in our base case. But demand from petrochemicals continues to grow leaving total demand still at that level in 2040. The Carbon Constrained Scenario has two main effects. First, higher EV sales penetration would wipe another 5.5 million b/d off demand. Second, mounting environmental concerns prompt higher biofuel mandates and a challenge to the widespread use of plastics. More biofuels, less single-use plastics, and more plastics recycling takes out another 5 million b/d. So oil demand falls to 100 million b/d by 2040, back to today’s level, and on the slide.

Is gas the bridging fuel we think it is? Demand grows through 2040, but at a slower rate. Power is the big market, gas benefiting from the switch out of coal because of its lower carbon intensity; and provides the flexibility to balance intermittent solar and wind power. Gas has a lot of running room in markets with high power demand growth like China, India and south-east Asia – 60% of incremental demand 2018-40 is from Asia-Pacific economies. But in slower-growing power markets like the EU and the U.S. with high penetration of renewables, gas demand growth will be more limited.

Does nuclear fit in? Nuclear just about holds its own, despite being a zero carbon source of power. Growth in capacity in developing economies like China and India is countered by the EU and North America which have fallen out of love with nuclear. Nuclear’s high cost is a factor.

And what does this all do to carbon dioxide emissions? Emissions fall much faster than under our base case and go beyond the Paris Agreement NDCs at the global level. OECD emissions continue to decline given modest energy demand growth and fuel switching. Developing economies’ emissions peak in the late 2020s then decline as substitution away from coal gathers momentum. Reduction of coal-fired power is the single biggest contributor to the emissions decline. But the Carbon Constrained Scenario still falls well short of the 2oC world, the IEA SDS trajectory. To get there will need much more to happen beyond the power sector, including: deep decarboniz

ation of industry, transport and other sectors; accelerated reduction in battery costs; and high-cost, as yet commercially unproven technology such as carbon capture and storage.