Changes in relative costs are creating strong competition for incumbent fuels

Index (2010 = 100)

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100

80

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Upstream oil and gas

Onshore wind

A wide range of technologies and policies are required in clean energy transitions to bring down emissions.

In the SDS, improved energy efficiency is a key lever for change. Exploiting the full economic potential for efficiency improvement leads to the energy intensity of the global economy (the amount of energy used per unit of gross domestic product [GDP]) falling by over 3% per year to 2040. For comparison, this indicator showed only a 1.2% improvement in 2018.

There is also a step change in the pace at which increasingly costcompetitive renewable technologies are deployed. This is most visible in the power sector, where renewables provide two-thirds of electricity supply worldwide by 2040 (up from one-quarter today). Of this, solar PV and wind power together provide 40%, with a further 25% from dispatchable renewables including hydro and bioenergy.

The growth in low-carbon electricity is accompanied by the rising importance of electricity as an energy carrier. The share of electricity in global final consumption rises from 19% today to more than 30% by

2040. The increase in electricity demand in the SDS comes from a variety of sources; the largest is EVs.

However, even with rapid growth in low-carbon electricity, more than two-thirds of final consumption in 2040 in the SDS comes from other sources, mainly from liquids and gases (the role of coal, examined in the next slide, declines rapidly).

And even if electricity use were to grow even faster and the complete technical potential for electrification were deployed, there would still be sectors requiring other energy sources (given today’s technologies), with most of the world’s shipping, aviation and certain industrial processes not yet “electric-ready”.

This opens up a set of questions for energy transitions that are no less important to the prospects for emissions reduction than improvements in efficiency or the rise of low-carbon electricity. These concern the fuels that are used in the rest of the energy system, including the emissions intensities of the oil and natural gas that is consumed; the deployment of low-carbon fuels such as biofuels, synthetic fuels and renewable gases; alternative energy carriers such as hydrogen; and the possibilities to capture, utilise or store CO2.

mtce

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Coal, oil and natural gas demand by scenario

Historical STEPS SDS

Coal is the most carbon-intensive fuel and the majority of global coal consumption is in the electricity sector, where competition from renewables is strongest. As such, it is no surprise that unabated coal use comes under intense pressure in all decarbonisation scenarios.

In the SDS, global coal use is 60% lower by 2040 than in the STEPS. Coal demand for power generation is hit hardest, while coal use in the industrial sector is slightly more resilient because substitution possibilities are more limited. Overall, coal’s share in the global primary energy mix falls towards 10%, from 27% today.

Such a dramatic change in coal’s position in the global energy mix would not be simple to deliver. There are 2 080 GW of coal-fired power plants in operation worldwide and a further 170 GW under construction. Almost 60% of today’s coal-fired fleet was built in the last 20 years, much of this in developing countries in Asia where the average age of existing plants is just 12 years old.

There are different options – explored in the WEO 2019 – to bring down emissions from the existing stock of coal-fired plants: to retrofit them with CCUS or biomass co-firing equipment; to repurpose them to focus on providing system adequacy and flexibility while reducing operations; or to retire them early. In the SDS, most of the world’s existing coal-fired capacity would be affected by one of these three options.

These solutions all involve financial or social costs. If they are not implemented, or pursued only in part, then many existing coal plants could expect to operate for decades to come. Emissions just from the continued operation of the existing global coal fleet would make sustainable energy targets very hard to reach.

This could imply additional pressure on other sources of emissions, i.e. oil and/or natural gas, as emissions from these sources would then need to fall even faster in order to be in line with international climate objectives.

For example, if coal demand were to remain as in the STEPS, then this would require dramatic adjustments in oil or natural gas use to keep cumulative emissions to 2040 within the levels of the SDS. In 2040, oil demand would need to fall to around 20 mb/d and gas demand to 1 500 bcm, i.e. both fuels would be around two-thirds lower than the levels projected for 2040 in the SDS.

Moreover, even without considering a hard carbon constraint, more robust coal demand in developing economies would deprive natural gas of some markets that it might otherwise be in a position to claim, notably the provision of process heat for industry.

The oil and gas industry is often warned to watch out for the rise of electrification and renewables. But the discussion about the future of oil and gas in energy transitions also needs to take place with one eye on what happens to coal.