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More of a good thing – is surplus renewable electricity an opportunity for early decarbonisation?

Peter Fraser

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We are entering a world where renewables will make up an increasing share of our electricity supply –the electricity sector was the leading sector for energy investment in 2018, the third year in a row that this has occurred.

This trend is set to continue. In WEO 2018’s New Policies Scenario, 21% of global electricity production is projected to come from variable renewables by 2040, up from 7% in 2018, supported by about $5.3 trillion of investment. The EU share is even higher at around 39%. In our more ambitious Sustainable Development Scenario, which aims to get energy system emissions down to levels consistent with the Paris goals, variable renewables are projected to supply 38% of global electricity in 2040 (44% in the EU), a level that would require nearly $8.5 trillion of generation investment.

Regardless of scenario, this rapid expansion of renewables will inevitably lead to particular challenges to operating power systems. This is best highlighted by the so-called duck curve, made famous by the California ISO.

The curve was developed to show the impact of increasing distributed solar PV capacity on the demand for grid electricity.  As solar PV capacity grows, the demand for grid electricity falls during the day with the greatest decrease in the middle of the day when PV production is highest – the belly of the duck.  In the afternoon as PV production declines towards sunset, the demand for grid electricity can grow quite quickly – the neck of the duck.

The duck is growing faster than anticipated. Five years ago, the California ISO had expected California midday demand to drop over 40% on a sunny spring day by 2020 thanks to the growth of small solar PV systems. In fact, by 2018, the spring mid-day demand on the high voltage system had already decreased by two thirds. The consequent increase in supply required in the late afternoon as solar production recedes, was already close to 15 GW, significantly greater than the 2020 anticipated level of 13 GW.

The result is that some excess supply needs to be curtailed to balance the system. While the percentages of solar and wind production that have to be curtailed in California are rather small, in other jurisdictions the share is more significant.

In China, for example, the national average for wind curtailment was around 7% in 2018, with much higher levels in certain provinces. In the Canadian province of Ontario about one quarter of variable renewable generation in 2017 had to be curtailed, along with cuts in nuclear and hydropower output. This was in a jurisdiction where wholesale market prices were zero or negative almost one-third of that year.

The challenges are clear – a world with higher shares of variable renewable energy (VRE) – i.e., wind and solar PV – will face challenges with integration. This is a priority area of work for the IEA, and we are focused on providing insights on the issues and technologies that can be employed to deal with higher shares of variable renewables.

One of these insights is that renewables integration can be divided into a set of six phases dependent partly on the share of variable renewables in the system, but also on other system-dependent factors such as the share of storage hydro and interconnections.

Two countries have already reached Phase 4. Denmark, which has been a leader, has the significant advantage of strong interconnections to handle both surpluses and shortfalls. Ireland has much weaker interconnections and additional measures have been needed to ensure short-term system stability.

No country is yet in Phase 5 (where production can exceed demand) or in Phase 6, where seasonal storage solutions would be needed to match supply and demand.

Strong renewables policies are expected to continue to favour wind and solar power for the foreseeable future.  This will mean that by 2030, we expect more countries, particularly in Europe, to evolve to these higher phases.

Too much of a good thing?

As more countries move to higher shares of VRE, it appears that there could be “too much of a good thing” – excess generation that may have to be curtailed and appears as wasteful.

The tendency is to treat this primarily as a technology problem for the power system to solve. Indeed part of the solution will lie in improvements in technology. We will need some form of energy storage to convert the excess at one time of day into necessary power system supply at another. Smart grids, especially smarter distribution systems, will be better able to manage increasing shares of renewables as well – and they too will likely have more energy storage. And finally, the growth of EVs (currently driving global battery demand) represents a huge potential source of storage and demand-side flexibility as well.

But treating this only as a technical problem is missing the economic perspective. Trillions of dollars of investment in renewables is expected in the coming years, and so there is a risk that billions of dollars of renewable electricity – zero marginal cost, zero carbon – could be wasted.  

Economists have their own tools for solving these type of problems. Many would see not a problem but an opportunity – offering surplus electricity available at a zero (or low) price to customers during periods of surplus is a means to manage this surplus efficiently.

Dynamic pricing of wholesale electricity is often proposed as a mechanism to efficiently manage peak demand of electricity – to charge more when electricity is scarce.  Not surprisingly, passing on high wholesale prices as high retail prices has been met with customer resistance, and the uptake of dynamic pricing has been rather limited.

However, if low wholesale prices were passed on as low retail prices, we would expect customers to be more accepting.  While most small customers might not be expected to respond on their own, low dynamic prices create opportunities for innovators to develop technologies and processes that would make it easy and profitable for the customer to respond.  Many of these will involve using the electricity to replace, at least in part, an energy service provided by fossil fuels. In this way, it can help hasten the decarbonisation goal of the clean energy transition.

Barriers to efficient pricing

Unfortunately for now, there are a range of barriers in our current policies that prevent electricity customers from seeing these prices: the level of electricity taxes, the design of electricity tariffs and more broadly our approach to the electricity demand side. This means there is a need to change outdated policies.

Much of our electricity policy dates from a period where wasteful consumption led to an increasing number of power plants – particularly fossil and nuclear plants. Indeed, electricity was considered to be a particularly inefficient means of achieving a level of energy service.

This has affected the way and level at which electricity is taxed, the way regulated prices are designed, and perhaps most challenging of all, how we address demand side policies and particularly electricity efficiency.

But now we are entering a different era, an era where most of the incremental electricity generation will come from wind and solar power. How should it change our taxation, rate setting and electricity efficiency policies?

Economics should guide us so that:

  1. Taxes are fixed in an efficient way, in order to distort as least as possible consumers and producers decisions
  2. Consumption is efficient, both through taxes and regulated tariffs
  3. Ensuring end-use energy consumption is carbon-efficient

Electricity taxes that exist in many countries today were set as a result of either a deliberate policy to reduce electricity consumption in energy importing countries (Europe) and/or environmentally conscious jurisdictions (Europe, California). They have also provided an easily enforceable tax base for municipalities and subnational jurisdictions. These taxes can be quite substantial, amounting to over half the cost of power for households in some European countries.

Yet many of the reasons for taxing electricity heavily are no longer valid. The emissions argument in particular makes little sense in highly decarbonised power sectors such as Sweden, France, or Switzerland.

In addition to taxation, pricing systems tend to discourage consumption regardless of how clean the production is. There are countries where, paradoxically, a high level of renewable penetration discourages the consumption of renewable energy.

Germany is probably the best known example. Although prices in the wholesale market can fall to zero when wind and solar power are particularly prolific, the end user cannot buy electricity at the real time price, but even if that were possible, it would mean paying the EEG payment (which is intended to recover the cost of renewables) which is currently 6.405 euro cents per kWh.  This means that the end user incentive to use that renewable energy to substitute for fossil fuels in their own consumption is blunted.

What needs to be done instead is to encourage customer response based on the real-time price for power. Most other costs should no longer be recovered on a per kWh basis.

Getting prices right for the end consumer means also addressing regulated prices such as for networks where these are separately specified. Networks remain largely fixed cost entities in developed economies where demand has not been growing. For electricity customers, the value of the electricity network is as the provider of reliable electricity service – a value that is not directly related to the quantity of power delivered.  Increasingly, as more and more customers generate their own electricity, the value of the network is evolving to become a platform to sell some of that power or other electricity services.

Moving towards a fixed charge would recognize the value of the network service for customers. It would also alleviate concerns that customers choosing to self-generate are not contributing sufficiently to the costs of using a network they still require.

Finally, demand-side policies should be designed in a way that minimizes both costs to consumers and their carbon footprint.

As renewables continue to grow and increasingly face curtailment, the optimal policy may no longer to be to encourage electricity conservation. Instead, demand side policies that encourage carbon conservation might be more efficient.

The figure above shows how the prices charged for consuming an additional kWh of electricity in each US jurisdiction is compared to the social marginal cost of producing that electricity. Red means the social cost of production exceeds the marginal cost, suggesting that marginal prices are too low and interventions such as conservation programs could be efficient. Conversely, in the deep blue regions, electricity prices are too high, suggesting that conservation and net metering programs need to be reconsidered.

Ultimately, when marginal prices for clean electricity consumption are adjusted downwards the viability of electrification increases – which can replace other end-uses of fossil fuels.

In fact, these changing circumstances are beginning to be recognized. The California energy regulator, the California Public Utilities Commission, has recently ruled that utility energy efficiency programs can include those that encourage customers to substitute electricity for fossil fuels. 

More of a good thing

The good news is that the direction for electricity investments is positive, with the share of renewables likely to grow rapidly spurred by government policies and falling costs. Yet the resultant growth of wind and solar power will lead to new integration challenges for today’s power systems and these challenges will become greater over time. 

Yet solving those challenges will also lead to economic opportunities in the energy system – opportunities to reduce costs, waste and emissions by making electricity available in substitution of fossil fuels.

Policies are central to realising these opportunities, by reforming electricity taxation, getting regulated prices right, and emphasizing carbon conservation above electricity conservation. The right price signals will encourage the innovation needed to advance the clean energy transition. And in the end, customers will have more of a “good thing”:  greater access to cheaper, clean power.

IEA

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Is OPEC stuck in a cycle of endless cuts?

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In its latest annual World Oil Outlook (WOO) report, published last week, the Organization of the Petroleum Exporting Countries (OPEC) predicted its oil production and market share to fall in the years to come.

This view of the future says a lot about the cartel’s policies in facing the ever-growing U.S. shale which is casting a dismal shadow over the future role which OPEC members are going to be playing in the global oil market.

According to the latest WOO report, OPEC expects its production of crude oil and other liquids to decline to 32.8 million barrels per day (bpd) by 2024 from its current 35 million bpd. This means that the cartel plans to go further with its plans for cutting production even after the current pact is over in 2020.

Considering the significant growth in U.S. shale production over the past few years, and to be exact, since the OPEC decided to cut production in order to relieve the negative impact of U.S. shale’s flow on oil prices, it seems that although OPEC efforts have paid off partially but they have also supported the further expansion of shale production by giving them more market share.

How OPEC sees the future of oil market and its own condition in the future, raises the question that for how long is the group going to continue these “cuts”? And is it going to be enough to maintain the significant role which the cartel has had as an influential body in the global oil market? 

The report

Before we go through the above-mentioned questions and discuss some possible answers, let’s take a look at some of the important information presented in recent WOO.

Two major aspects of the market are import to take into consideration here, first of which is production, and the second is consumption.

In the production part, as we mentioned earlier the organization sees its own production falling about seven percent in the mid-term. While according to the data provided, the cartel expects U.S. shale output to reach 16.9 million bpd in 2024 from the current 12.0 million bpd. 

This prediction means that the Middle East-dominated group has accepted defeat against U.S. shale producers and sees no way forward except further contracting to prevent the prices from falling.

In the consumption part on the other hand, once again, OPEC sees demand for its oil diminishing in the mid-term and cites rising climate activism and growing use of alternative fuels as some of the reasons for the reduction in mid-term oil demand. The true reason, however, lies somewhere else.

The producer of one-third of the total global oil expects oil consumption to reach 103.9 million bpd in 2023, down from 104.5 million bpd in last year’s report. Longer-term, oil demand, however, is expected to rise to 110.6 million bpd by 2040, although still lower than last year’s forecast.

Further cuts

In the past few years, OPEC has been reducing its oil output under a pact with the support of Russia and some other non-OPEC nations to rebalance the oversupplied market. 

Many oil experts and analysts have been recently arguing for an extension in the cuts deal, considering the emerging signs of a slowdown in global economic growth under the shadow of the U.S.-China trade war and a subsequent slowdown in oil demand.

Back in October, OPEC Secretary-General Mohammad Barkindo had announced that deeper cuts in the organization’s oil supplies were one of the options for OPEC and its allies to consider in their upcoming gathering in December.

It should be noted that Russia and Saudi Arabia as two main poles of the OPEC and non-OPEC alliance (known as OPEC+) have slightly different views about the need for further extension of the pact. Russia sees the current range of prices at about $60 good enough while the kingdom requires higher prices to go through with its ambitious Aramco IPO.

The broken cycle

What OPEC has presented in its latest report suggests that the cartel’s policy of controlling production is having an opposite impact. The skyrocketing U.S. shale production levels indicate that OPEC cuts are positively encouraging shale producers to increase their output more and more, and that will not only halt prices from rising but will also reduce OPEC’s share of the global market day by day.

In this regard, many analysts believe that OPEC should once again take into account the warnings of the former Saudi Oil Minister Ali al-Naimi, who had previously predicted that “OPEC’s production cuts only creates more production opportunity for U.S. shale oil and consequently the organization would be caught up in an endless maze of production cuts.

Final thoughts

With OPEC’s report pointing to several production challenges from its competitors, the cartel doesn’t seem to be much concerned about the demand side. 

According to the report, world crude oil consumption will continue to grow up to 2040, so that by 2024 the demand for crude oil will increase one million barrels a day to reach 104.8 million bpd. The demand growth will then continue at a slower pace, reaching 110.6 million bpd by 2040.

OPEC’s share of the mentioned 110.6 million bpd will be 44.1 million bpd, the report says.

So, it seems that OPEC believes it should continue holding its pact with the non-OPEC allies for a few more years when the growth in global oil demand would offset the increase in U.S. shale production and once again rebalance the market. 

From our partner Tehran Times

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Energy investment in emerging economies: Transforming Southeast Asia’s power sector

Michael Waldron

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Experts discuss risks, policies and investment opportunities for renewables in Southeast Asia during an IEA roundtable at Singapore International Energy Week (Photograph: IEA)

Authors: Michael Waldron and Lucila Arboleya*

The new IEA Southeast Asia Energy Outlook 2019 (SEAO) provides a comprehensive overview of energy prospects in an increasingly influential region for global energy trends. Alongside the scenario projections and analysis, the report contains three “deep dives” – on the future of cooling, on regional electricity trade and renewables integration, and on investment – that reflect priorities for cooperation agreed between Southeast Asia energy ministers and the IEA.

Bolstering investment in more efficient and cleaner energy technologies in Southeast Asia’s power sector is a particularly urgent challenge. Policy makers in many countries of the region are stepping up their efforts to support deployment of renewables across the region, but investment has lagged well behind the levels reached in China and India. Electricity demand in Southeast Asia is rising rapidly, and many parts of the power sector are showing signs of financial strain.

Whichever pathway the region follows, it will need a sizeable increase in investment flows and a reallocation of capital, particularly under a sustainable  pathway (in the Sustainable Development Scenario) where renewables spending more than quadruples. 

What can be done to put the region on a more sustainable pathway, from both a financial and environmental perspective? This was the question that we addressed in the new IEA report  and also at a major IEA Roundtable featuring the insights of financial, legal, industry and policy experts from across Asia, which was held in Singapore on 1 November as part of the Singapore International Energy Week.

Bridging investment gaps with more private finance

To date, public actors – including state-owned enterprises and public financial institutions – have provided the bulk of funding for the power sector, particularly in thermal generation. By contrast, wind and solar PV projects have relied much more on private finance, spurred by specific policy incentives.

In addition, funding for over three-quarters of generation investment has come from within the region. This landscape reflects prevailing decision-making frameworks, which have largely revolved around state-owned utilities and the distortionary impact of energy subsidies, but also the ability and willingness of private players to navigate perceived country, regulatory and market risks that have inhibited much higher levels of investment in the power sector across Southeast Asia. 

However, public sources alone cannot cover the sizeable investment needs ahead. Sustained and balanced access to international and regional sources of private finance, complemented by public sources, would better help Southeast Asia fund its energy goals. More robust private financing conditions would help governments to use public capital more effectively, especially in countries with limited fiscal capacity.

Realising this requires reforms and greater policy focus on tackling the risks facing investments, especially in renewables, flexibility assets and efficiency. With the dramatically improved economics of renewables in many parts of the world, the region now has a compelling opportunity to transform its power sector.

While recognizing that market conditions and underlying risks differ starkly by country, the SEAO points to efforts needed across four priority areas:

  • enhancing the financial sustainability of the region’s utilities;
  • improving procurement frameworks and contracting mechanisms, especially for renewables;
  • creating a supportive financial system that brings in a range of financing sources and
  • promoting integrated approaches that take the demand-side into account.

Priority 1: Enhancing the financial sustainability of the region’s utilities

The region’s utilities, mostly state-owned, function as the primary counterparty to private generators and are the main investors in electricity networks (which as highlighted in the SEAO, are also crucial for supporting regional trade and integration). Their financial sustainability depends on their ability to recover costs, which is influenced by customer connections, operational performance and regulatory frameworks. Cost-recovery varies across Southeast Asian markets, with particular challenges related to setting retail tariffs in a way that balances system needs and affordability for consumers.

For example, despite improved borrowing conditions for Vietnam Electricity (EVN), financial performance is tenuous and tied to government decisions on electricity prices, which remain low by international standards. By contrast, in Malaysia, a combination of improved operations, better financing and regulations for cost-pass-through supports a relatively high level of per capita investment for grids. 

Underperformance can put pressure on government budgets, as in the case of Indonesia. Following several years of improvement, increased financial pressure on PLN, due to rising power purchase and fuel costs in the face of frozen retail tariffs, prompted a year-on-year boost in government subsidies in 2018 (equivalent to over 3% of total state spending). Looking ahead, PLN’s subsidy burden could be sizeably reduced through more cost reflective electricity tariffs. Moreover, changes to retail prices could be tempered through better utilisation of existing generation, more focus on efficiency measures to help slow Indonesia’s demand growth and less dramatic expansion of capacity with contractually onerous terms.

Priority 2: Improving procurement frameworks and contracting mechanisms, especially for renewables

Investment frameworks for power generation have evolved considerably, but further reform could help improve private financing prospects. While independent power producer (IPP) investments are playing an increased role, these have come mostly through administrative mechanisms, such as direct negotiation with utilities, which are often not transparent in terms of price formulation. Price incentives (e.g. feed-in tariffs) under licensing schemes have driven most investment in renewables, but their design is not always effective; in some cases (e.g. Indonesia) tariffs have been set too low to attract investment at current project costs.

Competitive auctions, which can provide price discovery and clear risk allocation through contracts, have helped drive down renewable purchase prices around the world. Most Southeast Asian countries have been slow to adopt them, but implementing such transparent mechanisms for orderly market entry, with a commitment to sustain their use over time, would go a long way to reassure investors.

The case of Viet Nam illustrates challenges and opportunities in terms of policy design and bankability. Attractive feed-in tariffs spurred a boom in solar PV deployment in the first half of 2019, financed mostly by regional players. Yet, perceived risks and financing costs are relatively high and international banks remain reluctant to lend to renewables projects. This stems from risks associated with the standard power purchase agreement offered to IPPs, including areas related to dispatch and payments, as well as concerns over the adequacy of local grids to accommodate a rapid increase in variable generation. Clearer regulations, better policy design, and measures to address system integration and contractual concerns could help to improve the affordability of investments. With financing terms equivalent to those found in more mature markets, generation costs for solar PV and onshore wind could be around one-third lower.

Priority 3: Creating a supportive financial system that brings in a range of financing sources

As changing financing conditions make investing in some legacy parts of the power system more difficult, more effort is needed to cultivate a supportive financing environment for newer technologies while ensuring security of supply. To illustrate, final investment decisions for coal power in the region have fallen to their lowest level in over a decade in 2019 (reflecting a mixture of increased financial scrutiny by banks and overcapacity concerns). There has been a reduction in the number of financiers involved in transactions in the past three years, while IPP projects that have gone ahead continue to rely on a high share of international public finance. 

At the same time, mobilising capital in newer areas requires improving the cost and availability of finance. The average loan duration in Southeast Asia is just over six years, far less than the lifetimes of energy and infrastructure assets. The cost of capital for an indicative IPP varies widely – with estimates in Singapore, Thailand and Malaysia at 3-5% (nominal, after-tax), while those for Philippines, Viet Nam and Indonesia are much higher (7-10%). Investors cite limited availability of early stage project development equity and long-term construction debt for renewables and storage, though some dedicated funds, such as the Southeast Asia Clean Energy Facility, are emerging to fill the gap.

Priority 4: Promoting integrated approaches to investment that address the demand side

Integrated approaches to investment, which take into account the demand side, could help to address rising consumption needs more cost-effectively. This is particularly true in fast-growing areas, such as demand for cooling, which is a major driver of supply requirements during peak hours but where more efficient air conditioner units, including those manufactured locally, are available at affordable prices. Efficiency investments can face barriers due to the small transaction sizes (from the perspective of banks), high upfront capital requirements (from the perspective of consumers), challenges in evaluating creditworthiness, and lack of clear labelling to support purchase choices. Low and subsidised retail power tariffs can also distort the investment case. 

Addressing information barriers, enhancing financing models and reducing subsidies would better support investment. Energy service companies are addressing the scale and upfront financing challenge of investment. They are well established in markets with long-term energy savings targets and supporting regulations, such as in Malaysia, Thailand and Singapore. Targeted use of public funds, insurance and capacity building can help reduce performance-related risks, as in Indonesia’s Energy Efficiency Project Finance Program. Progress in aggregating and securitising projects, through green bonds for example, could also help attract lower cost finance from a bigger pool of investors. Despite picking up in 2018, with over 40% targeting low-carbon buildings, Southeast Asia accounts for only 1% of global green bonds issuance to date.

Higher investments would yield multiple benefits

Overall, achieving Southeast Asia’s energy goals will call upon stronger policy ambitions across a range of energy sources and significant new capital commitments in the years ahead. As international experiences have demonstrated, where governments provide frameworks that allow for the efficient allocation and management of investment risks, the private sector responds and the cost of capital is reduced. 

These efforts would also yield multiple benefits – in the Sustainable Development Scenario, average annual capital spending across the entire energy sector of more than $140 billion over 2019-40 (higher than the $110 billion under the State Policies Scenario), is offset by the nearly $200 billion that Southeast Asian economies would save annually on fossil fuel imports by 2040. Such financial savings would come in addition to improved local air quality and universal energy access, as well as a reduced contribution to global climate change.

There is now an opportunity for investors and companies in Southeast Asian countries to engage with governments in order to encourage financial decisions and policy making that are better aligned with sustainability goals. This includes not just traditional utilities, developers and banks, but also the crucial perspectives of development finance institutions and the institutional investors, whose participation will be critical to funding the region’s energy goals.

As the world’s “All-fuels and All-technologies” energy authority, the IEA will continue to assist ASEAN Member States to tackle their energy policy challenges, including through good data and analysis, training and capacity building and enhanced engagement.

*Lucila Arboleya, Energy Economics and Financial Analyst.

IEA

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Understanding the World Energy Outlook scenarios

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Authors: Laura Cozzi and Tim Gould

Today’s energy choices and their consequences

Today’s energy choices will shape the future of energy, but how should we assess their impact and adequacy? This is the task the World Energy Outlook takes on. It aims to inform the thinking of decision makers as they design new policies or consider new investments. It does so by exploring possible futures, the ways they come about and some of the main uncertainties – and it lays out the consequences of different choices for our energy use, energy security and environment.

One key element of this is to assess where the global energy system is heading, based on the policy plans and investment choices we see today. A second is to assess what would need to be done differently in order to reach the climate, energy access, pollution and other goals that policy makers have set themselves.

As ever, this year’s World Energy Outlook, to be released on 13 November, brings many changes from the 2018 edition. In this commentary, we wanted to highlight two in particular.

Introducing the Stated Policies Scenario

In this year’s Outlook, the New Policies Scenario is renamed as the Stated Policies Scenario (the acronym is STEPS – STated Energy Policies Scenario). As with its predecessor, this scenario is designed to reflect the impact not just of existing policy frameworks, but also of today’s stated policy plans. The name change underlines that this scenario considers only those policy initiatives that have already been announced. The aim is to hold up a mirror to the plans of today’s policy makers and illustrate their consequences, not to guess how these policy preferences may change in the future.

The planned policies analysed in this scenario cover a wide spectrum. For example, a country might state that it intends to remove fossil-fuel consumption subsidies or, alternatively, that it will walk back a previous reform. Another might say that it will tighten future fuel efficiency standards or step up support for electric vehicles. One might open up new resource developments in oil and gas while another might limit them.

Many countries today are raising their ambitions for clean energy deployment, as reflected by the rising interest in offshore wind that we explored in depth in a special focus from this year’s World Energy Outlook that was released separately in Copenhagen last week. Countries may also announce new rural electrification targets or ambitions to bring clean fuels to parts of their population that rely on firewood or other solid biomass for cooking.

All of these stated policies are assessed individually and their impacts are modelled. In our updated and expanded online explainer on the World Energy Model, the large-scale simulation model that is used to generate all our projections, we have made all the key policy assumptions available for all scenarios, along with all the underlying assumptions on population, economic growth and energy resources (which are held constant across the scenarios) and information on prices and technology costs (which vary by scenario depending on the market and policy context).

There is one type of policy announcement that deserves special attention: the growing number of long-term decarbonisation targets, including “net zero” commitments. After the UN Climate Summit in September, there were at least 65 jurisdictions, including the European Union, that had set or were actively considering long-term net-zero carbon targets. These economies together accounted for 21% of global gross domestic product and nearly 13% of energy-related CO2 emissions in 2018.

Are these “net zero” targets all incorporated into the Stated Policies Scenario? It depends. The target has to be announced or adopted officially, but the crucial variable is how visible the pathway is to reach it. As always with the World Energy Outlook, the details matter. Is there a strategy to decarbonise heat? What about heavy industry? What about trucks or aviation? To the extent that these pathways are laid out, then the overall ambition is also reflected in this scenario.

And it’s not only about national governments: other commitments are becoming increasingly important, whether from sub-national authorities, cities, companies or investors. We also keep a close eye on changing public attitudes and preferences, as these can be very significant in shaping energy use (as, for example, with the rising popularity of SUVs).

In aggregate, these commitments are enough to make a significant difference. The comparison with the Current Policies Scenario, which only looks only at policies in place but from which the effects of announced policies are excluded, makes this clear. However, there is still a large gap between the projections in the Stated Policies Scenario and an energy system that meets global sustainable energy goals.

Extending the Sustainable Development Scenario to 2050

What should policy makers do? What pathways might help meet these targets? What technologies need a boost? Where should innovation, research and investment be directed? How can we balance growing energy demand with the need to reduce air pollution and carbon emissions? How can millions of people gain access to critical energy services while also meeting climate goals?

The IEA seeks to help policy makers in government and industry shape a more secure and sustainable energy future. This is why the World Energy Outlook has been providing detailed climate mitigation scenarios for more than a decade. Two years ago, we introduced a new scenario, the Sustainable Development Scenario, which also incorporates two other crucial elements of the Sustainable Development agenda: cleaner air and universal access to energy, in addition to climate targets.

In the IEA’s view, these elements are profoundly interconnected aspects of global energy transitions. The Sustainable Development Scenario is one of the very few deep decarbonisation scenarios that considers all of them in detail and provides a pathway that achieves them simultaneously, along with detailed attention to the security and affordability of energy supply. In our view, no vision of a sustainable energy world can be considered complete if parts of the global population do not have access to modern energy.

Another new feature of this year’s WEO is that the horizon for the Sustainable Development Scenario is extended by a decade to 2050. This has little impact on achieving modern energy for all, both for electricity and clean cooking. That goal is reached by 2030 in this scenario. But it provides a clearer view on how dramatic improvements in air quality reduce pollution-related premature deaths. And it gives considerable additional clarity on how the scenario meets the Paris Agreement goal of holding the rise in global temperatures to “well below 2°C … and pursuing efforts to limit [it] to 1.5°C.”

The Sustainable Development Scenario models a rapid and deep transformation of the global energy sector. It is consistent with all the “net zero” goals contemplated today being reached on schedule and in full. The technology learning and policy momentum that they generate means that they become the leading edge of a much broader worldwide effort, bringing global energy-related CO2 emissions down sharply to less than 10 billion tonnes by 2050, on track for global net zero by 2070.

This means that the Sustainable Development Scenario is “likely” (with 66% probability) to limit the rise in the average global temperature to 1.8 °C, which is broadly equivalent to a 50% probability of 1.65 °C stabilisation. These outcomes are achieved without any recourse to net negative emissions.

How does this scenario relate to the pursuit of a 1.5 °C outcome? For one answer to this question, we turned to the IPCC Special Report on 1.5 °C. Almost all the 1.5 °C scenarios assessed by the IPCC (88 out of 90) assume some level of net negative emissions. A level of net negative emissions significantly smaller than that used in most scenarios assessed by the IPCC would provide the Sustainable Development Scenario with a 50% probability of limiting the rise in global temperatures to 1.5°C.

However, as we have pointed out in the past, there are reasons to limit reliance on early-stage technologies for which future rates of deployment are highly uncertain. That is why the Outlook has always emphasised the importance of early policy action. That is also why, in the WEO-2019, we explore what it would take to achieve stabilisation at 1.5 °C with a 50% probability without net negative emissions.

Two different types of scenario make a powerful mix

The World Energy Outlook incorporates two different approaches to scenario design. The first defines a set of starting conditions and sees where they lead; the Stated Policies Scenario and the Current Policies Scenario are of this type.

The second approach does the opposite, defining a set of ambitious future outcomes and then working out how they can be achieved: this is the principle underlying the Sustainable Development Scenario.

Each of these approaches, on its own, offers powerful insights. In combination, they provide a broad perspective not just on the energy and climate challenges that we face today, but on what can be done to address them.

*Tim Gould, Head of Division for Energy Supply Outlooks and Investment.

IEA

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South Asia14 hours ago

The efficiency of German contribution in the Afghan peace process

Germany is heavily involved in the afghan affairs since 9.11.2001; the country has brought in to being the modern Afghanistan...

Energy News16 hours ago

IRENA Facilitates Investment and Renewable Projects on Ground in Africa

Boosting renewable energy projects on the ground requires scaling up investment. IRENA’s state-of-the-art analysis of enabling policy frameworks and finance...

East Asia18 hours ago

Implications of French President’s Visit to China on the International Arena

French President Emmanuel Macron pursues a policy of opening up to China and solving problems that may arise peacefully and...

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