A number of reports have been released so far this year on global energy transition. Among these, Norwegian DNV GL, an international accredited classification society, took an independent and balanced view of the entire global energy system from source to end-use.
This is what makes this an important outlook to analyse and draw from its findings and conclusions.
DNV states that on a global scale, the energy transition will be dramatic.
The key findings are:
- Renewable energy sources will continue to rise, making up nearly half of global energy supply by 2050, cutting energy-related CO2 emissions in half by that time.
- Gas supply will peak in 2035, but will still be the biggest single source of energy by mid-century.
- Oil supply will flatten out in the period 2020 to 2028 and then fall significantly to be surpassed by gas in 2034.
- Despite greater efficiency and reduced reliance on fossil fuels, the energy transition outlook indicates that the planet is set to warm by 2.5˚C, failing to achieve the 2015 Paris Agreement target.
A rapid decarbonisation of the energy supply is underway with renewables set to make up almost half of global energy mix by 2050, although gas will become the biggest single source of energy, but prices will stay low.
Global energy demand
The world is experiencing a rapid energy transition, driven by electrification, boosted by a strong growth of wind and solar power generation, and further decarbonisation of the energy system, including the decline in coal, oil, and gas, in that order.
DNV GL forecasts that global primary energy supply will peak by the 2030s and stay largely unchanged to 2050, even in the context of continued population and economic growth. However, this is at variance with most other energy outlooks which forecast continued increase in primary energy demand, for example BP, the International Energy Agency (IEA) and Shell, even if at a slower pace.
From the perspective of where the energy is sourced, according to DNV GL the demand picture is more dramatic. Although total energy demand is almost flat, there are big changes in its composition. In 2015, electricity represented 18 per cent of the world’s final energy demand – by 2050, its share will become 40 per cent. Electricity replaces both coal and oil in the final energy demand mix, and the trend of electrification is strong in all regions.
Renewable energy – wind and solar PV – holds the most potential for cost-competitiveness. Solar and wind will rapidly become cheaper than fossil fuels, despite the low cost of the latter. As a result, renewables will expand to make up 44 per cent of primary energy supply and 85 per cent of electricity supply by 2050. At the same time the share of electricity in total energy supply will rise dramatically from 18 per cent today to 40 per cent in 2050.
Renewables will increasingly dominate world electricity generation, with solar PV and wind each having a 36 per cent share, with fossil fuels providing only about 15 per cent.
This is a more bullish view in comparison to most other forecasts. Even Bloomberg-NEF does not expect renewables to dominate electricity production. It expects that solar and wind will jointly provide about 34 per cent of global electricity production by 2040, with fossil fuels still providing about 40 per cent.
The world’s energy intensity, ie amount of energy per unit of GDP, has been declining on average by 1.4 per cent per year for the last twenty years. According to DNV GL electrification of the global energy system would cause this to almost double to an average annual 2.5 per cent decline per year.
Electricity use, especially derived from solar and wind energy, is much more efficient with less heat losses than is the case for fossil fuels. About half of global emission reductions can be achieved through energy efficiency measures.
But this will be challenging. Even the EU, which is at the forefront of combating climate change, is finding it difficult to increase its ambition. What would then be the challenges for less committed countries?
Oil and gas
DNV GL forecasts that oil consumption is set to flatten from 2020 through to 2028 and fall significantly from that point as the penetration of electric vehicles gains momentum. This is not very different from what Shell and Statoil have said they expect to happen, but it is considerably earlier than BP or the IEA have estimated. The possibility of peak oil demand is one of the factors driving the oil companies to increase investments in gas.
Given the long lives of many projects, even the possibility that world demand could be peaking in the 2020s and will start falling after that, is something that could affect future investment decisions.
According to DNV GL the fossil fuel share of the world’s primary energy mix will decline from 81 per cent currently to 52 per cent in 2050, out of which the share of oil and gas will be 44 per cent.
Gas will continue to play a key role alongside renewables in helping to meet future energy requirements. Its contribution to total global primary energy will decline from 27 per cent at its peak in 2034 to 25 per cent by 2050, but it will still be the dominant fuel source.
Major oil companies are already increasing the share of gas in their reserves to meet this future demand, especially liquefied natural gas. The industry is betting on gas overtaking coal due to its clean characteristics compared to both oil and gas.
But natural gas needs to remain affordable and possibly at prices even lower than now. An abundance of resources and a near flat demand are likely to lead more intensive competition, reduced oil demand and keep prices low. The oil and gas industry will intensify its focus on cost efficiency to remain competitive.
Assumptions and challenges
The big assumption in DNV GL’s work is that coal will decline dramatically from providing about 26 per cent of global primary energy now down to only 8 per cent by 2050. This is in contrast with BP’s energy outlook 2017 forecast. A more recently released study by Shell appears to agree with BP and so does EIA.
The contribution from coal to total primary energy has remained roughly constant for over the last 40 years. All indications are that in absolute terms coal consumption may stay at the same level as now. That would impact oil and gas consumption.
Demand for gas has been held back by two main factors. One is rapid growth in renewable power. In Europe, this has led to the mothballing of some gas-fired power stations as rising wind and solar generation pushes down wholesale electricity prices. The other is that coal remains cheaper than natural gas in many parts of the world.
Another challenge is that natural gas producers portray their product as a ‘bridging fuel’ between the eras of hydrocarbons and renewables. The risk for the industry is that advances in battery technology, which allow surplus wind and solar power to be stored for future use, could allow the world to leapfrog gas direct to renewables.
An important implication of peak energy demand is that with abundant supplies competition between producers is increasing. The energy market is becoming much more competitive and cost-driven.
As a result, the oil and gas industry is intensifying its focus on cost efficiency to remain competitive against renewables. That also means that low prices are here to stay.
However, the positive take for natural gas from DNV GL’s outlook, supported by other outlooks including BP and Shell, is that it will continue being an important contributor to global primary energy to 2050, but at low prices.
Dr Charles Ellinas is a nonresident senior fellow at the Global Energy Center of the Atlantic Council