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Energy Markets: Today and Tomorrow
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Economy & Finance
Dr Fatih Birol presents to the Club Espanol de la Energia in Madrid on 23 May 2017
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Energy Markets: Today and Tomorrow
- Energy markets: Today and Tomorrow Dr. Fatih Birol Executive Director, International Energy Agency 23 May 2017 – Enerclub, Madrid
- © IEA 2017 The global energy context today • Global energy markets are changing rapidly Renewables supplied half of global electricity demand growth in 2016, and increase in nuclear capacity reached highest level since 1993 Global energy intensity fell by 2.1% in 2016 Electric car sales were up 40% in 2016, a new record year • Universal access to modern energy remains a distant goal 1.2B people lack access to electricity; 2.7B people lack access to clean cooking • Energy & geopolitics remain intrinsically linked, but the changing energy landscape is altering the nature of this relationship
- © IEA 2017 US shale oil production US shale oil has shaken up global oil markets… US shale oil has surged in recent years and can continue to deliver impressive growth, 1 2 3 4 5 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 mb/d
- © IEA 2017 US shale oil average cost … and is now resilient at much lower prices than before US shale oil has surged in recent years and can continue to deliver impressive growth, reflecting the enormous cost savings & technological improvements made by the industry 20 30 40 50 60 70 80 2008 2009 2010 2011 2012 2013 2014 2015 2016 $/b
- © IEA 2017 No peak yet in sight, but a slowdown in growth for oil demand The global car fleet doubles, but efficiency gains, biofuels & electric cars reduce oil demand for passenger cars; growth elsewhere pushes total demand higher Change in oil demand by sector, 2015-2040 -3 0 3 6mb/d Power generation Buildings Passenger cars Maritime Freight Aviation Petrochemicals
- © IEA 2017 Share of LNG in global gas trade 2015 695 bcm 2040 1 150 bcm 2000 525 bcm LNG 53% Pipeline Pipeline LNG 40% Pipeline LNG 26% A 2nd natural gas revolution is changing the gas security equation A wave of new LNG supply, led by Australia and the US will improve the ability of the system to react to potential demand or supply shocks, but security of gas supply cannot be taken for granted
- © IEA 2017 Spain was the early champion of renewable integration, managing integration with little interconnection. The new line with France provides additional flexibility Renewables are growing throughout the world, but new challenges are emerging % of wind and solar in 2016 Share of wind and solar in total electricity generation 0% 10% 20% 30% 40% 50% 60% China Japan United States United Kingdom Italy Germany Spain Ireland Denmark % of wind and solar in electricity generation % of wind and solar in 2010
- © IEA 2017 Efficiency measures since 2000 saved IEA member countries 15% of their energy demand in 2015, a saving equivalent to the energy use of Japan and Korea combined Efficiency measures are saving energy, but more could be done 0 1000 2000 3000 4000 2000 2015 Efficiency Savings Mtoe Energy demand in IEA Countries
- © IEA 2017 Global energy-related CO2 emissions 5 10 15 20 25 30 35 1970 1975 1980 1985 1990 1995 2000 2005 2010 2014 2015 2016 Gt IEA analysis shows that global CO2 emissions remained flat in 2016 for the third year in a row, even though the global economy grew, led by emission declines in the US & China Global CO2 emissions flat for 3 years – an emerging trend?
- © IEA 2017 Progress on energy technologies compared with rate needed to meet ambitious climate targets Recent progress in some clean energy areas is promising, but many technologies still need a strong push to achieve their full potential Electric vehicles Solar PV and onshore wind Overall renewable power Buildings Nuclear Transport – Fuel Economy of LDVs Lighting, appliances and building equipment Energy storage Industry Transport Biofuels Carbon capture and storage More efficient coal-fired power ●Not on track ●Accelerated improvement needed ●On track
- © IEA 2017 Closing remarks • While a continued focus on oil security is essential, a broader approach to energy security is needed to reflect changing nature of natural gas & electricity markets • The next chapter in the rise of renewables requires more work on systems integration & expanding their use beyond the power sector • Growing linkages between the digital & energy worlds raises important opportunities & challenges for policy makers • Energy investment choices will impact security, sustainability & jobs for decades • The IEA is supporting the energy transition through in-depth analysis, pragmatic policy advice and technology collaboration
Editor's Notes
- Examples of energy digitalization: End-use devices from LED bulbs, electric vehicles, industrial compressors, refrigerator, freezers and thermostats are increasingly being controlled remotely over the internet enabling energy savings and making life more convenient. Smart grids are the heart of the digital energy future. Advanced metering infrastructure (AMI) can act as control hub, and enable two-way communication between energy suppliers, consumers and intermediaries. Digitalization has the potential to serve as a key enabler to help G7 countries and others meet key policy objectives, including to increase productivity and enhance sustainability. But there are also serious challenges that need to be overcome, including data ownership and data privacy, ensuring digital resilience, and effectively dealing with economic and job disruptions. Especially given digitalization’s potential for disruption, the IEA is making a big push to enhance our capabilities, including the release of a first-ever digitalization and energy report that in October. The Energy sector can be a substantial job creator. There is no clear one directional employment impact from the energy transition: clean energy investment is a meaningful job creator, but conventional energy also has a large employment, the balance depends on the regional context. The IEA stands ready to continue supporting G7 activities through our data, analysis , and solutions – both in areas of traditional G7 focus such as energy security and markets, as well as underpinning new energy drivers such as research and innovation, energy-related employment, and global issues such as energy access and investments.
- US tight oil (LTO) production has been growing rapidly since 2010 and in 2015 it was at 4.2 mb/d – a rise that has had major implications for oil markets and prices. You can see a slight dip in 2016 as lower prices and revenues held back production, but we are expecting that to be reversed in 2017 and continued growth over the next five years – even if prices remain in the USD 55-60/bbl range. Also important to note that - as seen over the past two years - US LTO responds more rapidly to price signals than other sources of supply. The production response of shale at different price levels is therefore critical, as it will play a key role in balancing the market over the medium term. What is behind the expectation of continued strong growth?
- It’s all about cost savings, efficiency and technology improvements. Average costs were creeping higher until around 2012: when US tight oil producers, on average, needed prices at more than $70 per barrel to break even. But since then, costs have come down significantly, a fall that accelerated after the oil price came down in 2014. We estimate that the average price required in 2016 to break even had fallen to $40/bbl – a remarkable drop. Some of these cost reductions are cyclical and will be given back as activity picks up and the cost of supplies and services starts to rise. But there has also been substantial gains in well performance and operational efficiency that continue to underpin a positive production outlook.
- Natural gas performs best of all the fossil fuels in our Outlook, with a 50% rise in consumption in 2040. But achieving this kind of rise will not be plain sailing for gas, which faces strong competition from coal in some markets and is being squeezed by the rise of renewables in others. How gas fares will be determined in the coming years by a major set of changes in the way that gas markets operate internationally. We are all familiar with the shale gas revolution in North America. Now we are on the verge of another gas revolution – this time driven by LNG – that will reshape gas markets for decades to come and also change the gas security equation. Over the next five years another 130 bcm of liquefaction capacity will come online – mostly in the United States and Australia, creating new options and greater flexibility for buyers of gas. Looking further ahead, we also see the prospect of other countries, notably Canada, Mozambique, Tanzania, joining the LNG export business later in our projections also makes an important contribution to the emergence of a truly global gas market. By 2040, more gas is traded over long distances as LNG than via the traditional pipelines. But, there comes a point in every revolution when it’s clear that the old rules have gone but no-one is yet sure what the new rules of the game are. This is where we are today. And that presents a risk – the current overcapacity in LNG is absorbed by the mid-2020s but new investment decisions are needed well before this point. The outlines of a new gas market order need to become clear soon if we are to avoid a new round of market tightening in the 2020s.
- Pushed by support policies and massive technology cost reductions in recent years, wind and solar PV have been the two fastest growing sources of electricity worldwide since 2010. [click] But wind and solar PV are variable renewable resources (VRE) and their input cannot be fully forecast and programmed; system integration of variable renewables has emerged as a major challenge in several countries. While this is not a technical issue, more flexible power systems will be needed to integrate large shares of wind and solar in cost effective way while ensuring security of electricity supply at all times. IEA analysis demonstrates that there are a number of different solutions to handle renewables integration and that we will need all forms of flexibility in the future: Stronger grids and interconnections Power plants operating in more flexible way – e.g. hydro and gas Affordable electricity storage (today hydro; in the future maybe batteries as well) And last, but certainly not least demand side response, which can be very cost effective. For example, combining ice storage with larger air conditioners, these can be 'charged' when the sun shines, while providing cooling also after sunset via the thermal storage The IEA is continuing to develop its expertise on this crucial topic, building upon a decade of experience. Under the German and Japanese presidencies, the IEA has provided no-regret options to protect energy security as wind & solar PV increase. We are constantly stepping up our efforts and our next focus will be on enhanced flexibility of power plants – both thermal and renewable ones. Spain championed renewables integration early on. It pioneered technical requirements that have become standards around the world. The Spanish system operator has systematically increased its capability to manage wind and solar generation. The dedicated renewable energy control center, which is integrated in the national control centre is just one well known example. The real achievement in Spain is particularly visible when we look beyond the annual shares of wind and solar PV alone. What you see here is a figure that compares two things: 1) the annual share of wind and solar and 2) how much wind and solar capacity is installed for each unit of usable interconnection capacity. For example in France, the Netherlands, Portogal and Denmark, this is almost one to1:1 – they can export all of their VRE generation, if they want. But not Spain. Before the commissioning of the new interconnector with France in 2015, Spain had the lowest amount of interconnection capacity compared to how much wind and solar was installed. This meant that Spain needed to find its own, domestic flexibility and it did so succesfully. Late 2015, the new HVDC interconnection between France and Spain was commissioned, which significantly increase the interconnection capacity in Spain. At the same time, the capacity of VRE remained at a similar level compared to the previous year (at around 28 GW). The additional interconnection capacity provides additional flexibility that will facilitate more wind and solar generation capacity in Spain – should the country chose to step up its ambition in this area again.. [The new link enabled the interconnection capacity between Spain/France to double. The new DC interconnection between Spain and France is the first onshore HVDC interconnection that is fully integrated in the AC grid, i.e. the power flow across the DC link perfectly follows the exchange over the pre-existing AC interconnector.]
- Adding to the picture is the central role of energy efficiency in reducing energy demand. Efficiency measures since 2000 saved IEA member countries 15% of their energy demand in 2015, a saving equivalent to the energy use of Japan and Korea combined Policies have been a key driver of improved energy efficiency. While standards have been important, another key policy development has been the increased use of market-based instruments for energy efficiency, such as utility obligation programmes and auction mechanisms. Over the last decade, the number of these policies around the world has quadrupled, and the investment they have stimulated has increased six-fold, to 26 billion dollars in 2015 – 12% of global investment in energy efficiency.
- Before I talk about the long-term Outlook for the energy sector, let me spend a few more moments on the facts and figures. As we all know, one main reason why we discuss the need for an energy sector transition towards low-carbon is the fact that energy-related CO2 emissions have been rising stubbornly for more than a century, in line with rising energy demand and economic growth. On the rare occasions that this has not been the case, it has been driven by some form of major economic shock, such as after the oil price shock and US recession in the early 1980s; in 1992 after the collapse of the former Soviet Union; and in 2009 during the global financial crisis. [CLICK] 2014 was a major change in this regards. It was the first year where emissions stayed flat even though the global economy grew. There were several energy sector trends backing up this observations, but, at the same time, there were also reasons to wonder if this really a structural energy sector change, or rather a cyclical phenomenon. [CLICK] In 2015, then, the IEA could announce the second consecutive year of no additional growth in energy-related CO2 emissions. Evidence for this being related to an energy transition was mounting: for example, renewables accounted for nearly all of the growth of global electricity demand. [CLICK] And now, today, I can inform you that 2016 was yet another such year of a stall in global CO2 emissions, although the global economy grew by 3.1%. This clearly shows that some positive trend is emerging. In the UK emissions fell by 6% due to a record drop in coal use in power generation, enabled by a switching towards gas. In the US emissions fell by 3.1% the main driver was switch from to coal to gas, renewables and nuclear in the power sector. In Japan emissions fell by 1.9%, but GDP fell by 0.9%, dragging oil use down across all sectors. Emissions rose in other G7 countries.
- Overall Progress Each year, TCEP assesses the latest progress in technology and market developments, tracks overall progress, and recommends further actions. TCEP this year shows that only 3 of 26 identified clean energy technologies are on track to meet a sustainable energy transition (one more than last year). 15 technologies showed only some progress, and 8 are significantly off-track and in need of renewed action. RED CCS A global portfolio of large-scale CCS projects continues to prove its viability across sectors, but the pipeline of projects has effectively stalled due to lack of new investment decisions. Targeted policy incentives to drive large-scale CCS projects forward into deployment are needed to meet the 2DS target of over 400 million tonnes of CO2 (MtCO2) being stored per year in 2025. Coal 30% of new coal power capacity additions in 2015 used low-efficiency subcritical technology. To stay on 2DS track, coal-based CO2 emissions must decline by around 3% annually to 2025, led by a retirement in the least efficient technologies and a decline in coal generation not equipped with carbon capture and storage (CCS) after 2020. Biofuels Advanced biofuels need a 25-fold scale-up in production volumes by 2025 to be on track with 2DS. Numerous first-of-a-kind commercial-scale advanced biofuel plants are increasing their production, but mandates for advanced biofuels or reducing the carbon intensity of transport fuels are needed to accelerate uptake. Buildings Progress on building energy codes in developing regions last year is a positive step toward 2DS ambitions, but two-thirds of countries still do not have mandatory building energy codes in place. ORANGE Nuclear Nuclear power saw 10 GW of capacity additions in 2016, the highest rate since 1990. Doubling of the 2016 annual capacity addition rate to 20 GW annually is required to meet the 2DS to offset planned retirements and phase-out policies in some countries. Moreover, 2016 brought only 3 GW of new construction starts, posing risks to the future growth rates of nuclear power generation. Renewable power Renewable power capacity additions broke another record in 2016, with over 160 GW of capacity additions and a 6% overall generation growth in 2016. Renewable power overall is still falling short of longer-term 2DS levels, despite this record breaking growth. It is forecasted to grow by another 30% between 2015 and 2020 and it needs to accelerate by an additional 40% over 2020-25 to reach the 2DS target. Industry Industrial sector action must accelerate to meet the 2DS trajectory and keep annual growth in final energy consumption below 1.2% from 2014 to 2025, less than a half of the average 2.9% annual growth since 2000. While the sector has continued to progress in energy efficiency and low-carbon technology deployment, industrial production growth must be further decoupled from energy use and carbon dioxide (CO2) emissions. Appliances and lighting The growing shift to light-emitting diodes (LEDs) in the last two years is encouraging, with LEDs representing 15% of total residential lamp sales in 2015 and expected to have grown to nearly 30% in 2016. However, electricity consumption by lighting, appliances and building equipment needs to halve from the current 3% average increase per year over the last decade to a 1.5% annual increase in the 2DS. Fuel economy of light-duty vehicles Progress in improving the average tested fuel economy of light-duty vehicles (LDVs) has slowed in recent years, from an annual rate of 1.8% in 2005-08, to 1.2% in 2012-15 and only 1.1% in 2014-15. This trend must be reversed, and an annual fuel economy improvement rate of 3.7% through 2030 must be achieved. GREEN Electric Vehicles A new historic record has been reached in the electrification of passenger transportation, with over 750 000 electric vehicles (EVs) sold in 2016, raising the global stock to two million. A slowdown in market growth of 40% in 2016 from 70% in 2015 still maintains EVs on track to reach 2°C Scenario (2DS) levels in 2025, but puts the technology at significant risk of missing the 2020 interim milestone and in turn raises risks toward the 2025 goal. Energy Storage Storage technologies continued rapid scale-up in deployment, reaching almost 1 gigawatt (GW) in 2016. These advances were driven by favourable policy environments and reductions in battery prices. Storage technologies need reaching cumulative capacity of 21 GW by 2025 under the 2DS level, requiring further policy action. d onshore wind Strong annual capacity growth continued for both solar PV and onshore wind in 2016, with record low long-term contract prices in Asia, Latin America and the Middle East.
- Examples of energy digitalization: End-use devices from LED bulbs, electric vehicles, industrial compressors, refrigerator, freezers and thermostats are increasingly being controlled remotely over the internet enabling energy savings and making life more convenient. Smart grids are the heart of the digital energy future. Advanced metering infrastructure (AMI) can act as control hub, and enable two-way communication between energy suppliers, consumers and intermediaries. Digitalization has the potential to serve as a key enabler to help G7 countries and others meet key policy objectives, including to increase productivity and enhance sustainability. But there are also serious challenges that need to be overcome, including data ownership and data privacy, ensuring digital resilience, and effectively dealing with economic and job disruptions. Especially given digitalization’s potential for disruption, the IEA is making a big push to enhance our capabilities, including the release of a first-ever digitalization and energy report that in October. The Energy sector can be a substantial job creator. There is no clear one directional employment impact from the energy transition: clean energy investment is a meaningful job creator, but conventional energy also has a large employment, the balance depends on the regional context. The IEA stands ready to continue supporting G7 activities through our data, analysis , and solutions – both in areas of traditional G7 focus such as energy security and markets, as well as underpinning new energy drivers such as research and innovation, energy-related employment, and global issues such as energy access and investments.
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