How to find cheap, sustainable and non-polluting forms of energy is an ongoing challenge for global leaders, who have also to contend with climate change, decarbonisation and political insularity. James King looks at what the future holds within the market.

Renewable energy

When decision-makers consider the world’s energy future, they usually have three priorities: how to find energy sources that are affordable, secure and environmentally friendly. This so-called energy 'trilemma' has occupied the busy intersection of debate between consumers, policy-makers and energy producers for some time.

But today, balancing this triumvirate of challenges has become increasingly difficult as the process of climate change, technological innovation and free-market approaches to energy supply and decarbonisation all collide.

Redesigning the blueprint

According to the World Energy Council (WEC), a global alliance, this will require nothing less than a redesign of the existing energy contract. These processes are unfolding as the landscape of populations and economic growth also changes.

Though the world population may be rising, the rate of this growth is slowing. At the same time, the growth rates of the global economy are expected to moderate in the coming years. These trends are occurring as several demand-side improvements are now making the world a more energy-efficient place. So although energy demand will still develop in the coming years, per capita energy demand is expected to peak by about 2030, according to the WEC.

“The big picture context is that the world, independent of the energy landscape, is changing. Population growth is slowing and labour force growth will average about 40% of the historical rate up to 2060. In this environment of slowing economic growth, investment and consumption, the implications for the energy sector will be significant,” says Christoph Frei, the WEC's chief executive.

But slowing growth does not diminish the scale of the challenges facing policy-makers and consumers alike. Global energy demand is expected to rise between 25% and 30% between now and 2040 under most long-term scenarios.

Decarbonisation difficulty

In addition, the push to decarbonise the global energy sector will be difficult to achieve. Fossil fuels are expected to account for 79% of primary energy supply in 2030, according to data from the WEC. Research from energy company ExxonMobil comes to a similar conclusion, with fossil fuels still meeting close to 80% of global energy demand by 2040.

“The decarbonisation of the global energy sector will involve changing the reality of half the world’s invested capital, as well as its underlying trading fundamentals, which are built around oil, gas and coal,” says Mr Frei.

But with the exception of natural gas, the use of fossil fuels comes with a heavy environmental cost. Carbon dioxide emissions are accelerating the process of climate change, which in itself is having a notable impact on the world energy production. To address this, the COP21 agreement signed in Paris in 2015 has set a target for global policy-makers to keep global warming at or below a 2 degree Celsius target. But doing so will effectively leave many of the world’s fossil fuel reserves ‘stranded’.

“There are about 2800 gigatonnes [GT] of carbon dioxide in proven oil, gas and coal reserves in the world today. But to stay below the 2 degree Celsius climate target, no more than 1000GT can be safely emitted. So we are either talking about breaching this target or we are talking about an issue of stranded reserves,” says Mr Frei.

Coal fall

Indeed, of all the fossil fuels, only coal looks set to experience a notable disruption in the coming years. Today, China accounts for about 50% of global coal demand, but with the government pushing hard to develop renewable capacity this figure is likely to fall. Indeed, Chinese demand for coal peaked in 2013, according to research from the International Energy Agency (IEA). In place of coal-fired power generation facilities, natural gas is expected to fill the void.

“We expect to see a steady decline in Chinese coal use, along with a similar reduction in Europe and the US because gas-fired power generation is now cheaper than coal,” says Laura Cozzi, deputy head of the chief economist’s office at the IEA.

Most observers agree that natural gas will experience a second revolution in the coming years, underpinned by new supply sources coming online, from the US, to Egypt to Mozambique, among many others, as well as a 30% increase in global liquefaction capacity. This shift will see the share of liquefied natural gas in the global long-distance gas trade rise, from just 26% in 2000 to a projected 53% by 2040. Supportive policy frameworks are expected to accelerate this transition.

“We tend to think that gas demand will be strong in the coming years. It’s environmentally friendly and there's plenty of growth to be found in industry and power generation,” says Dan Smith, director of commodity services at Oxford Economics.

Oil still a contender

The long-term dynamics for the oil market sit squarely in the middle of the fossil fuel hierarchy. Less environmentally friendly than natural gas but used more widely than coal, oil demand is expected to grow by 20% up to 2040, according to ExxonMobil. The WEC expects oil’s contribution to total primary energy supply to hit 103 million barrels per day by 2030, in one of its three main energy scenarios for the period, although demand could fall after this point. Taken together, oil is far from dead.

“The idea that oil demand will peak relatively soon has become popular. We do not share this view. There is still a strong growth story in the aviation sector, in petrochemicals and from freight trucks, particularly in Asia. We don’t see any substitute fuel filling these gaps any time soon,” says Ms Cozzi.

Though they will still account for the bulk of energy supply and demand in the coming years, the world is nevertheless trying to move beyond the use of fossil fuels, particularly for power generation. Solar and wind power technology are now leading the charge. In 2014, solar and wind energy accounted for 4% of global power generation but this is expected to rise to between 20% and 39% by 2040, according to the WEC. Over the past five years alone, the cost of solar power generation has decreased by 80%.

“Technology improvements are drastically cutting the cost of renewable energy production,” says Ms Cozzi.

But herein lies one of the world’s biggest energy challenges; adjusting to new forms of energy, and in particular, renewable sources of power generation. When fossil fuels are used to create power, the output is a known quantity. But renewable sources are intermittent, at times producing an excess of electricity and at times not producing enough. For existing grid infrastructure, this presents a challenge, particularly as the development of large-scale storage technology remains elusive.

“Electricity is a force, so it can’t be stored. Instead, it has to be processed in a way that, when reversed, will produce the same amount of energy. This can be achieved by using a chemical or mechanical battery, for instance,” says Gretchen Bakke, professor of anthropology at McGill University and author of The Grid, an assessment of the US's electrical grid.

Move to renewable

For the kind of large-scale, centralised grid infrastructures that exist in most advanced economies, this means that enough baseload capacity has to be present to cover any gaps in energy output. Not only does this reduce overall efficiency but it also means the baseload capacity might be fossil fuel-driven, which to an extent undermines efforts to decarbonise the energy sector in the first place. Yet many see the transition to renewable sources as inevitable.

“Thermal electricity has reached its limit. Fossil fuel plants, excluding natural gas, run at about 34% efficiency, so the model of building bigger plants to serve a growing population has stopped working. So this broader energy transition was going to happen anyway,” says Ms Bakke.

With a lack of effective battery options at the level of the grid, smaller and independent innovators are driving the solutions to the question of renewable energy power generation. As the WEC’s Mr Frei notes, the innovation curve for renewables has reached a tipping point whereby very little policy-based actions are needed to drive further developments in the sector. Bottom-up development of power generation technology is now taking hold around the world.

Increasingly, small-scale local power producers are incentivising businesses and households to opt out of the traditional grid structure with much more attractive pricing and the ability, on a smaller scale, to store energy in battery form for later use. Tesla, a US automaker, has developed a successful household battery to store excess energy. This process has been helped by the deregulation of energy markets in a number of advanced economies and the decoupling of power generation from transmission.

“Looking ahead, it’s going to be a case of small versus big power producers, as well as smart versus old. This dynamic is going to have big implications for existing grid structures,” says Ms Bakke.

Energy self-reliance

For traditional utilities, these trends are having a profound impact on profitability. In Germany, grid defection, whereby individual consumers or organisations opt to generate and store their own electricity, is hitting the performance of the country’s major power providers. In 2014, the German Chamber of Commerce announced that one in every six companies in the country was generating its own power.

Similar processes are occurring in the US, where research from the Rocky Mountain Institute, a non-profit research foundation, indicates that utilities could lose about $38bn in revenues to 2030 as a result of customers adopting their own generation capacity.

But these trends will not remove the need for centralised grids completely. “Clearly in cases where you have mega-cities or massive industrial complexes, then you need a system ‘backbone’ to support it. But in the future we are increasingly likely to see individuals and entities opt out of the central grid if they can find a better price for their energy at a local level,” says Mr Frei.

This localised production of energy is also occurring in emerging economies in Africa and parts of Asia. Some observers argue that progress in these regions is outpacing that of Europe or the US. With a limited grid structure in place, local power generation initiatives are harnessing the power of renewable energy providing local solutions to local problems.

“In rural Africa, new business models for energy supply and consumption are likely to deliver a different story to the centralised grids seen in other parts of the world. Localised, or even linked household solutions, are being developed in micro-grid systems,” says Mr Frei.

Supply security

This more dispersed model of power generation comes with a number of advantages. Enhanced energy security is the most obvious of these. The impact of climate change has increased the frequency of extreme weather events across the planet by a factor of four over the past 45 years, according to the WEC.

Based on current climate change projections, this figure is set to rise in the coming years. As such, developing an energy system that can respond to this challenge will be crucial, particularly in parts of the world most afflicted by these weather patterns.

“From an energy perspective, these events bring the parable of the oak and the reed to mind. Building a strong, centralised system that can withstand extreme weather events will ultimately be too expensive. It is better to develop small, decentralised power systems that can be easily regenerated in the event of a catastrophe,” says Mr Frei.

A matter of cost

Large-scale investments in centralised power generation capacity are also very costly and arguably come with a higher degree of risk – nuclear power being a case in point. Today, about 400 reactors are in operation in 31 countries on five continents but their global development peaked in the 1970s and has, with the exception of China, declined further across the board since the nuclear disaster in Fukishima, Japan, in 2011. The political and public mood around nuclear energy has now soured in a number of jurisdictions, including Sweden and Germany.

Underlying the decline of nuclear power, however, is the simple issue of cost. Constructing and operating a nuclear plant remains, on the whole, prohibitively expensive, leaving consumers to foot the bill through higher energy prices. Renewable energy is now cheaper, as is gas-fired power generation. With new sources of gas coming online the commodity remains cheap, abundant and environmentally friendly, adding even stronger headwinds to the outlook for nuclear energy.

Meanwhile, hydroelectric power generation might offer an effective source of clean, lasting energy but its future is under a climate change-related threat in some markets. Today, the world’s nine largest operating power plants are hydroelectric facilities and development on new and massive hydro projects continues at a pace in a number of markets. But water scarcity – a problem that is expected to grow in the coming years – is now undermining hydro power generation, from the US to Venezuela to Zambia.

“Today, 98% of electricity generation depends on water. We need to consider ways to lower the water footprint because shifting hydrological patterns will only accentuate the challenges presented by the energy-water nexus,” says Mr Frei.

Water woes

In Zambia, the Kariba Dam, the world’s largest, has seen its water levels fall to just 21% of capacity as a result of a severe drought that has hit much of southern Africa. This has resulted in a 1000-megawatt power shortfall from the hydro facility on the dam, which accounts for almost half of the country’s total generation capacity.

Meanwhile, Ms Bakke’s research on Venezuela points to the El Niño-related drought hitting the country’s hydro facilities, including the Guri Dam, severely limiting power output. In April 2016, the government introduced a two-day working week for public sector employees to suppress energy demand, while scheduled blackouts are a feature of daily life.

Similarly, a devastating drought in India has hit the country’s hydro-generating capacity hard. According to data from the Central Water Commission, in early 2016 total usable water (for power generation purposes) in 91 reservoirs had fallen to just 19% of capacity. Major dams, including the Tehri Dam, were unusable during the year.

While these challenges may be geographically specific – hydroelectric dams in Norway and Canada, for instance, remain untouched by drought – they nevertheless point to future difficulties facing regions of the world with the fastest growing energy demand.

Uncertain future

The issues the world faces regarding its energy future make accurate predictions difficult. Accompanying climate change, disruptive innovation, grid defection and decarbonisation is the further problem presented by the global policy environment. Meeting global challenges will require coordinated actions at both regional and international level. The current trend of more insular, isolationist politics taking hold in some leading economies is therefore worrying.

“If consumers want cheap, abundant energy quickly, then this demand will empower the international frameworks to deliver it. But if countries become more inward looking and isolationist, the opposite could be true. More barriers at an international level could inhibit innovation and the natural learning curve that develops,” says Mr Frei.

For the time being, however, it seems that the future of energy will be a cleaner and more efficient one, driven by innovation, the liberalisation of energy markets and a greater environmental consciousness. In the most positive scenario predicted by energy analysts, this could lead to a more resilient and low-carbon energy system.

But such an outcome is far from clear. If climate change targets are missed – which seems likely – and politics of energy assumes a more nationalist tilt, then extreme energy price volatility, coupled with an intensification of climate change-related weather scenarios, could be the outcome. As such, how the world meets the challenge of the energy trilemma in the future remains in the balance.

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