McCrone: Waking up to 25 years of bewildering change in global power system

Angus McCrone, Chief Editor

Bloomberg New Energy Finance

 

In Woody Allen’s 1973 film Sleeper, the hero – a health food shop owner – wakes up after 200 years in a deep freeze. He is taken aback by many things in the world of 2173, not least as a doctor puts a cigarette in front of him and says: “It’s tobacco. It’s one of the healthiest things for your body.”

If a similar experiment were carried out in 2015, with a health food shop proprietor being placed in the chiller for just 25 years, one of the things about 2040 that might cause the sleeper most surprise as he or she thawed out would be what had happened to the electricity system.

Bloomberg New Energy Finance’s latest long-term forecast for world power generation, published on 23 June, highlights a series of bewildering changes that are set to sweep through the normally conservative power industry over the next 25 years. These will include multitrillion dollar investment in small-scale solar and other renewable energy technologies, weaker-than-imagined electricity demand trends as a wave of efficient devices hits the home and business, and the advent of a big new market in “flexible generation” to balance a far more complex and intelligent grid.

The forecast, officially entitled New Energy Outlook 2015, is the product of detailed work by more than 60 specialist analysts around the world, on the cost of generation from different renewable energy and fossil fuel sources, on demand trends, and on the management of load in national power systems.

It finds that a quite staggering amount of money is set to be invested in power generation worldwide over the next two and a half decades, at $12.2 trillion, and that most of it (78%) will be deployed in developing countries to back up economic growth, serve growing populations and extend electricity access. The U.S., Europe and the rest of the developed world will account for just 22% of that spending.

Not only will the geographical mix be unfamiliar, but so will the technology mix. NEO 2015 finds that two thirds of that total ($8 trillion) is going to be spent on renewable technologies. There will be some $2.2 trillion committed to small-scale photovoltaics alone, roughly half of it going on rooftops in richer countries as it becomes cheaper and cheaper for consumers and businesses to generate their own power rather than rely exclusively on the central power network; and half going on local solar systems in emerging markets, some of them bringing electricity to remote locations untouched by the main grid.

Another $2.4 trillion will go into onshore wind, according to the forecast, plus $464bn into offshore wind, $1.5 trillion into large-scale photovoltaic projects, and $1.1 trillion into hydro-electric. Both solar and wind will benefit from radical improvements in competitiveness, on top of what has already occurred in the last few years. NEO 2015 sees project costs falling by 47% and 32% respectively for these two technologies between now and 2040. As early as 2030, in most parts of the world, it will be cheaper to choose wind and solar than to choose coal or gas.

By the time the sleeper stirs, no less than 33% of global electricity will come from non-hydro renewables, up from just 6% in 2014. If you include hydro, the figure globally will be 46% in 2040, and in some countries it will be far above this – take Germany, for instance, at 90%, or China at 52%.

Flexible opportunity

At the same time, there will have been great investment excitement over flexible capacity. This is the balancing that will be needed in electricity systems to deal with peaks in demand and the variability of wind and solar generation. This can come from a number of different technologies, including fast ramp-up gas-fired plant, batteries and other forms of power storage, demand response in which big users switch machines off in return for a fee from the utility, and national and international interconnector cables. By 2040, according to BNEF, there will be nearly 15 times as much flexible capacity globally (858GW) as there is now.

Which of these flexible options will dominate is far from clear. There is currently huge investor interest in batteries, stimulated by Tesla Motors, its plans to establish a battery “gigafactory” and its launch of the Powerwall home storage device. Benefitting from price declines to come, batteries may take a sizeable piece of 2040’s flexible capacity cake, but rival technologies such as demand response should not be underestimated. The likeliest result may be a broad mix of all four approaches.

Another place where technology will have a major impact will be electricity consumption. NEO 2015 predicts that world power demand will grow at 1.8% per year to 2040, far below the 3% annual surge seen in 1990-2012 and also less than the figures suggested in other recent forecasts by bodies such as the International Energy Agency.

If you drill down to the developed economies specifically, the impact of increasing power efficiency in areas such as lighting, computing and air conditioning starts to look quite revolutionary. Bloomberg New Energy Finance sees the power needs of OECD nations increasing by just 5% in total from 2014 to 2026 and then falling by 7% from 2026 to 2040 – this is a staggering conclusion, given the generally accepted wisdom (at least until the last few years) that electricity demand always goes up, if not in lock-step with GDP, at least a pace or two behind GDP.

So would our health food shop sleeper from 2015 be thoroughly pleased to encounter the energy world of 2040? Well, unfortunately not. As with the proverbial super-tanker, some big turns can be made on the helm of energy over 25 years, but the system is extremely heavy and the course taken can only change in slow increments.

Coal survives

The problem is much to do with legacy, and much to do with the realities of electrification in developing countries. The legacy issue is that there are 3.9TW of fossil-fuel (coal, gas and oil-fired) generation already in existence globally in 2015 and, although some of that will be “retired” over the years ahead, a lot of it will not be. The developing country issue is that many nations, as they seek to meet the power needs of growing populations and increasing industrialization, are going to choose a technology that is relatively cheap, energy-dense and can be fitted into a relatively simple and unsophisticated grid. With nuclear more problematic and expensive, and gas subject to notoriously sharp commodity price swings and energy security concerns, that will often mean coal.

NEO 2015 predicts that $1.6 trillion will be invested in new coal-fired power capacity between now and 2040, no less than 98% of that in developing countries – India, south east Asia, Africa accounting for much of it. That does not mean that those nations will be ignoring renewables such as solar, wind and hydro. Far from it, but the reality is likely to be a twin-track of coal and clean.

Between them, the legacy and developing country issues mean that coal will hang on to a 25% share of world electricity generation even in 2040, and that fossil fuels as a whole will still represent 44%, down from 67% in 2014. Since demand will be 53% greater, CO2 emissions will also be up.

The upshot is that, even with the exciting trends on cost-effectiveness of renewables set out by NEO 2015, the world will raise its power sector emissions by 2.2 gigatonnes a year between 2014 and 2029, an increase of 17%.

Only then will emissions from electricity generation start to ease, and that easing will be slow. BNEF’s figures show the annual CO2 emitted from power stations dropping by only half a gigatonne per year by 2040, from that 2029 peak – so that in 25 years’ time, they still be 1.7 gigatonnes more than they were last year.

What does this mean? At the current rate of world emissions, the CO2 content of the atmosphere is increasing by just over two parts per million per year. So the figure measured by the National Oceanic and Atmospheric Administration at Mauna Loa, Hawaii, in late May 2015 was 404 parts per million, up from just under 402 in the same week a year earlier, and 383 in the equivalent period in 2005.

At the current rate of world emissions, the CO2 proportion would reach 450ppm by 2038 at the latest. That figure, of 450ppm, is the one reckoned by the IEA and the United Nations Framework Convention on Climate Change to be the highest level consistent with a greater-than-50% probability of the temperature increase on the Earth remaining below two degrees Celsius.

So, BNEF’s forecast is telling us not that 450ppm is going to be breached in 2038, but that it is going to be breached significantly earlier than that. Of course, the power system is far from the only source of emissions – CO2 is also produced in large quantity by industry, heating and transportation, and by deforestation. However, the power system is a big part of the total, and arguably the part that mankind ought to be able to bring under control most quickly.

Our sleeper from 2015 may, therefore, wake up not just to a warmer world in 25 years’ time, but one that has already emitted enough CO2 to “bake in” the certainty of further climate change. That is unless something else changes in the meantime to change the prognosis. The implication of the BNEF forecast is that while technology is doing a lot, national and international policy will have to do more. That is a timely message ahead of this December’s climate change conference in Paris.

BNEF clients can find the full NEO 2015 report here: https://www.bnef.com/core/new-energy-outlook

High-level findings are publicly available here: http://about.bnef.com/newenergyoutlook

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