Global energy outlook – renewables switch but upside for Australian coal and gas  

WHO SHOULD READ THIS

• Current and prospective producers and consumers of, and investors in, renewables, coal, gas and uranium (including associated infrastructure) in Australia and offshore, together with those seeking to shape policies affecting these sectors.

THINGS YOU NEED TO KNOW

The International Energy Agency (IEA) has released its 2018 World Energy Outlook which assesses global energy supply and demand out to 2040 under three scenarios.

In its core (New Policies) scenario, under which it is assumed that Paris Climate Agreement emission targets are implemented, global energy needs rise more slowly than in the past but still expand by 25% between today and 2040. The largest contribution to demand growth comes from India where energy demand is expected to double, and be half that of China’s compared to 30% today. In Southeast Asia energy demand grows by two-thirds.

This year’s Outlook includes a special focus on electricity. According to the IEA “the future is electrifying”, with low-carbon technologies on the rise and electricity demand set to grow at twice the pace of energy demand as a whole.

The IEA projects a 60% rise in electricity demand to 2040, with nearly 90% of global growth occurring in developing economies.

Contrary to the expectations of many, coal’s contribution to meeting overall energy demand continues to grow slowly out to 2040, but coal’s share shrinks from 27% today to 22% by 2040.

The IEA view is that once the current wave of coal power generation plant projects under construction is over, the flow of new coal power projects starting operation slows sharply post-2020. However, the IEA points out that the average age of a coal-fired plant in Asia is less than 15 years, compared with around 40 years in advanced economies.

Global trade in thermal coal is expected to flatten out but the trade in coking coal is expected to continue to grow steadily. Indeed, the IEA states that “Australia continues to be well positioned to serve the Asian markets with low-cost coking coal in a growing international coking coal market”.

By 2040 India will be the world’s largest importer of coal, with a 66% increase over 2017 import levels.

Adjusting for the higher calorific value of our coal, Australia’s coal exports out to 2040 are projected to grow by 22 percent. While coking coal is the sweet spot for Australia’s dominant position in global coal trade, the IEA concedes that its projections are consistent with development of new thermal coal mines in the Galilee Basin in Queensland.

While we in Australia continue to tie ourselves up in knots in a debate about renewables’ appropriate share of power generation, the IEA is saying that the world will produce 40% of its electricity from renewables by 2040. Of the 870 GW in new power plant capacity worldwide that is currently under construction or expected to come online by the end of 2020, almost 60% will use renewables-based technologies.

Under the New Policies Scenario, by 2040 China will be producing 42% of its electricity from renewable sources (exceeding coal’s share), and India 38% renewables (including 17% from solar).

The IEA finds that new solar PV is well placed to outcompete new coal almost everywhere, although it struggles to undercut existing thermal plants “without a helping hand from policy”. In the New Policies Scenario, renewables and coal switch places in the power mix: the share of generation from renewables rises from 25% today to around 40% in 2040; coal moves from 40% to 25%. As we pointed out recently, this is of course a far cry from the IPCC scenario of close to zero power generation from coal by 2050 (see That Climate Change Report: What did it say, what does it mean?).

The IEA has revised up its global gas demand estimates. Gas is forecast to grow to account for a quarter of global energy demand by 2040 (surpassing coal), and become the second-largest fuel in the global mix after oil. The IEA expects gas demand in China to grow rapidly reflecting strong policy efforts to improve air quality. Developing economies in Asia account for half of the total demand growth through to 2040.  The overall gas share of global power generation is expected to remain steady at over 20%.

Finally, nuclear’s share of power generation is expected to remain stable at 10%, but with China overtaking the USA and the EU in its use of nuclear. The IEA notes that two-thirds of today’s nuclear fleet in advanced economies is more than 30 years old. The IEA observes that “decisions to extend, or shut down, this [nuclear] capacity will have significant implications for energy security, investment and emissions”.

WHERE TO FROM HERE

The IEA’s latest Outlook confirms that the global switch to renewable power generation is set to continue unabated. However, it also paints a pretty positive next couple of decades for the export of Australia’s high quality fossil fuels, reflecting:

• China’s switch from coal to gas to meet air quality imperatives;
• the investment in new coal power generation in South East Asia which will support growth in Australian thermal coal exports; and
• Australia’s dominant position in the global trade in coking coal for steel-making.

In a future Insight article, we will take a more detailed look at the implications of the latest Outlook for Australia’s export coal sector.

This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.