Cyprus Mail

Cyprus should heed the trends in renewable energy

By Charles Ellinas

GLOBAL natural gas demand will not carry on rising but will peak. Is this considered unthinkable? Then think again!

Most recently published oil company Energy Outlooks talk about the possibility of peak oil but foresee gas demand continuing to grow in the period to 2050. A few, though, such as DNV-GL and IRENA, forecast that natural gas demand will peak earlier. The continuously falling costs of renewables and advances in electricity storage technology, including batteries, pose increasing challenges. Renewables are on the way to become cheaper than building new coal and gas-fired power plants, even without subsidies.

Cyprus should heed this and open up the sector, and specifically solar power, to the benefit of substantially lower electricity prices and reduced emissions in line with EU requirements.

Energy transition

In its Energy Transition Outlook, released in September, DNV-GL forecasts that global primary gas demand will peak by 2034, as direct use of gas loses out to electricity. It forecasts that renewables will be taking an ever-increasing share of the electricity market, with gas demand falling back down to today’s levels by 2050.

DNV-GL, though, warns that this requires the gas industry to remain cost-efficient if it is to stay competitive for the longer term. That will then ensure that gas decline, after it peaks by 2034, is slow and that it can still have a strong role alongside renewables in decarbonizing the world energy system. Expensive gas will hasten renewables penetration and could lead to faster decline. Increasingly, all fuels in the global energy mix will be competing on cost.

DNV-GL also forecasts that “Driven by pervasive electrification, especially of transport, and by ongoing efficiency gains in other sectors, linked in many instances to digitalization,” advances in energy efficiency will lead to “peaking of energy demand worldwide in the 2030s.” It concludes that a rapid energy transition will lead to “a very strong growth of solar and wind, initial growth in gas, and a decline in coal, oil and, eventually, gas, in that order,” but even then the world “would still exceed the 2degC carbon budget.”

Based on the deployment of low-carbon technologies to achieve the Paris 2degC goal, IRENA forecasts that fossil fuel use for energy would fall to one-third of today’s levels by 2050. Oil and coal would decline most, 70% and 85% respectively. Natural gas use would peak around 2027 and then decline by 30% from present levels.

Even BP, in its Energy Outlook 2018, foresees a scenario under which gas demand peaks in the 2020s and declines below current levels. This could happen if the world were to enter an ‘even faster transition’, needed to reduce carbon emissions from energy-use broadly consistent with the Paris climate goals. According to BP, this could be brought about by a sharp increase in carbon prices and implementation of climate polices to encourage greater energy efficiency and fuel switching.

Shell also recognizes the unstoppable rise of renewables. Its CEO, Ben van Beurden, said that the energy transition is “fundamentally a force that cannot be stopped…It is both policy and public sentiment, but also technology that is driving it.” In its Sky-scenario, Shell expects natural gas demand to peak by 2030 and start declining in the 2040s to low levels beyond 2070.

It would appear that even though the oil majors in their ‘base case’ scenarios expect natural gas demand to carry on increasing at least to 2050, they are hedging their bets. They are also considering scenaria that show possible conditions under which future natural gas demand may peak well before 2050.

Clearly the concept of ‘peak natural gas demand’ is not unthinkable and as such it should be taken seriously.

As most major international oil companies are in the process of shifting future production to natural gas, often seen as a bridge between a fossil fuel past and a carbon-free future, this is an important issue.

With the inexorable advance of renewables, the world has entered an era of abundant energy. This is leading to low energy prices, a more competitive and cleaner energy market environment and increasing pressure on fossil fuels if they are to hold-on to their dominance.

Increasingly cheaper renewables, combined with coal resilience because of low prices, are putting the future outlook for gas in doubt. BNEF’s CEO, Seb Henbest, warned that “Wind and solar are just getting too cheap, too fast” for gas to play a transitional role. High oil and gas prices, climate policies and increasing use of carbon pricing are other factors that may accelerate fuel mix switch, threatening the view that gas can be a bridge fuel.

Impact of climate policies

BP, in its Energy Outlook 2018, says the prospects for gas demand could be adversely affected, with both weaker or stronger environmental policies posing potential threats. Weaker policies could dampen the shift away from coal towards natural gas, while stronger policies could encourage greater gains in renewables and energy efficiency.

Such policy risks might cause the gas share of primary energy consumption to plateau by mid-2020s to 2030s and then fall, “squeezed out by non-fossil fuels.”

In introducing the Energy Transition 2018 report, Remi Eriksen, group president and CEO DNV-GL, said “There are many signs that the energy industry is on the brink of profound change. Globally, policy developments, despite some notable exceptions, continue to favour renewables technology. Last year, new renewable power capacity additions were more than double the new power capacity additions from fossil fuels. In capital markets, a reallocation of funds towards cleaner technology is underway.”

With 2020 approaching, most of the world appears to be moving forward reviewing and often strengthening commitments. There is an expectation that climate pledges will be largely fulfilled and extended. This is increasing pressure on fossil fuels, as is the policy goal by an increasing number of countries of achieving near-zero emissions by 2050.

Seven countries have already adopted legally binding commitments to largely eliminate carbon emissions by 2050 – UK, Mexico, Denmark, Finland, France, Norway and Sweden – mostly in line with Paris climate targets, with the Netherlands and California about to join them. This is gradually creating a momentum, with other countries being prompted to join them.

Inevitably this could lead to major reductions in the consumption of fossil fuels, likely to lead to peaking demand well before 2050. Fossil fuels can retain a foothold through adoption of technologies to reduce emissions, otherwise their future use could face extensive scaling-down.

The combination of more ambitious climate policies, technology advances, efficiency improvements and changing social preferences are leading to increasing penetration of cleaner fuels and slow-down in fossil fuel demand. It is social preferences combined with environmental activism that may hasten this transition.

Gas prices in Europe and southeast Asia are already high and may increase further as winter approaches, impacting electricity prices. These are factors that contribute to implementation of greater energy efficiency measures and hastening renewables penetration at the expense of fossil fuels, and may eventually lead to faster peaking of gas consumption if they persist.

Not all doom-and-gloom

The energy sector is changing fast, making long-term forecasts challenging. It is likely that in the longer-term natural gas demand will peak before 2050 and then decline over time. But it is not something that will happen suddenly. In fact, most of these forecasts predict growth in global gas demand over the next twenty or so years, followed by gradual decline.

In addition, renewables have great success penetrating the global power sector, but very limited success in other sectors, such as transport and industry, where displacing fossil fuels is proving to be much harder.

It is important not to miscalculate. Not to let the uncertainty of ‘peak demand’ stifle investment in oil and gas projects prematurely, before renewables and efficiency improvements demonstrate they are able to fill the gap in global energy demand. This could result in energy supply shortfalls and price rises, creating a problem for the global economy.

Dr Charles Ellinas is a nonresident senior fellow at the Global Energy Centre of the Atlantic Council


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