Global energy forecast, part 3 of 5: Fossil fuels
- Nov 12, 2019 5:00 pm GMT
- 1745 views
Fossil fuels have dominated the global energy system for a long time. As shown below, data from the BP Statistical Review indicates just how difficult it is to reduce the market share of fossil fuels. Nuclear made some inroads in the 1970's and 1980's and, recently, renewables have started making a meaningful impact. But there is a very long way to go…
Fossil fuels did not reach this dominant position by chance. The global energy system looks like it does today because oil, coal and natural gas are highly practical and abundant energy carriers conveniently packaged in liquid, solid and gaseous states. They can be easily stored, traded internationally, and deployed on demand over a wide range of applications.
Fossil fuels are also very cheap. For example, the projected breakeven oil costs in 2030 as determined by Wood Mackenzie are shown below. The average barrel of oil can be produced at about $30, which translates to about $18/MWh, and this cost will drop further when we eventually manage to start reducing fossil fuel demand. In comparison, the average global cost of onshore wind and solar PV in 2018 were $56/MWh and $85/MWh, respectively, according to IRENA.
As climate change policies and other pollution controls continue to improve, the cost of fossil fuels will increase. For example, with a $50/ton CO2 tax, the $18/MWh mentioned above will increase to about $30/MWh. But fossil fuels will remain highly competitive and highly practical for many energy applications.
The global fossil fuel addiction will therefore be difficult to shake. Despite these challenges though, I think the world will make good progress in diversifying away from fossil fuels over coming decades. Transitioning at the speed required by 1.5 °C climate targets is unfortunately not going to happen, and even 2 °C will be very difficult to reach. But the energy mix by 2050 will certainly be much more balanced and much cleaner.
The next sections give my view on how this will play out.
Being the most widely used and probably the most controversial fossil fuel, oil grabs plenty of headlines. I think, however, that oil's reign will not last for much longer. My forecast suggests that the world will reach peak oil just before 2030 – around the time I hope that technology-neutral climate and energy policies will be implemented. This peak will then be followed by a relatively steep decline.
As a result, oil's share of global primary energy will almost halve by 2050. As shown below, this decline is almost in line with the IEA Sustainable Development Scenario (SDS) and well below the central New Policies Scenario (NPS).
The main reason for oil's decline will be falling demand from the transportation sector. Many factors are at play here. Battery electric vehicles are the most popular, but not the most important factor. Hydrogen fuel cells and biofuels will also play an important role. But continued efficiency increases of internal combustion engine drivetrains, mainly through hybridization, will continue outpacing the contributions from these new drivetrain options.
But my biggest reason for forecasting such a rapid decline in transportation oil consumption is behavioral change. The old model of highly economically inefficient single-person-in-car commutes to work or the mall is slowly going out of fashion. It will be replaced with much more efficient models involving telecommuting, small electric vehicles and virtual shopping in cities built for people instead of cars. Due to the long-lived infrastructure involved, this will not be a fast process, but I believe it will continue gathering momentum as the first couple of pilots demonstrate the vast superiority of this model, both in terms of economic efficiency and quality of life.
While oil demand declines in transportation, it will remain robust in other sectors such as industry and petrochemicals. I even see a bit of an uptick in oil use for power generation towards the end of the forecast period as lower demand reduces prices and the need for highly convenient energy storage increases to ensure the stability and affordability of systems with high shares of variable renewables.
Gas will be the big fossil fuel winner over the next three decades for a number of reasons: It has the lowest CO2 intensity of the three fossil fuels, offers the cleanest combustion, complements wind and solar, has seen considerable innovation in cost-effective production methods, and is increasing its international reach through LNG.
I therefore agree with the IEA that gas demand will continue to grow over the forecast period, taking oil's throne as the world's largest energy source shortly before 2040. As shown below, my forecast for gas as a share of primary energy is close to the IEA scenarios, but my electricity forecast is somewhat lower for two reasons: I forecast stronger electricity growth with more renewables than the IEA and, as a result of the higher renewable share, my forecast assumes lower gas power plant capacity factors.
Gas demand in industry will also see robust growth as climate policies increase the competitiveness of gas relative to coal. I also see an uptick in gas use in the transportation sector, both from direct natural gas vehicles and hydrogen production for fuel cell vehicles from steam methane reforming. A particularly promising prospect is flexible power and hydrogen production from natural gas with CO2 capture to simultaneously balance variable renewables and decarbonize sectors other than power.
Fugitive methane emissions will become an increasingly scrutinized issue as gas use continues to grow in magnitude and importance. However, even moderate policy incentives to reduce these emissions can lead to considerable reductions, so I believe this problem will not offer overly strong headwinds to a continued natural gas expansion.
Despite being the most carbon-intensive of the three fossil fuels, coal refuses to go away in my forecast. The reason for this is simple: Asia. This large continent, home to 60% of the world population and 75% of global coal consumption will secure robust coal demand for decades to come.
Three main causes can be identified. First, almost all of Asia is still developing. The already enormous Asian economy will have to quadruple just to reach Western standards of living, requiring tremendous amounts of cheap energy as well as cement and steel (both large coal consumers). Second, aside from Russia in the far north, Asia is poor in natural gas, the most practical and cost-effective coal substitute. And third, the very high population density of the most energy intensive Asian regions and the lack of natural gas will impose strong limits on the welfare-optimal wind and solar market share.
Coal will continue its terminal decline in the rest of the world (although Africa is a bit of a wild card), but, due to the sheer size of Asia, my coal demand outlook is not far from the central IEA scenario (NPS). Still, coal will be passed by natural gas around 2030 to fall to last place among fossil fuels. In the electricity sector, my forecast for coal market share is lower than the NPS, mainly due to higher electricity demand growth and competition from many cleaner alternatives.
So, despite putting in a strong bid for being the most hated commodity on Earth, I think that coal will stick around for a long time to come. But innovation will continue to make coal cleaner, driven by strong pollution standards on new plants and political pressure to retire old cheap & dirty plants. CCS will also have an important role to play after the belated advent of technology neutrality. Like natural gas, flexible power and hydrogen production from coal with CCS holds great promise.
Thus, in conclusion, coal will continue to frustrate green lobbies for the foreseeable future, but fortunately, its effects will be less severe than feared.
Some perspectives on fossil fuel competitiveness
It is in the power sector where fossil fuels face the greatest competition, both from renewables and nuclear. That is why I think essentially all the very strong electricity growth over the next three decades will come from sources other than fossil fuels (see the first article in this series). However, fossil fuels will remain steady due to their central role in power system reliability.
The only technology that can displace almost all fossil fuels from the power system in a cost-optimal way is nuclear power. This is illustrated below using results from the same power system model described in the previous article.
The first two cases show that fossil fuels with conventional CCS retain a high generation share in a cost optimal power mix with a CO2 price of €100/ton when nuclear is not available, even without accounting for the grid-related costs of wind and solar. But the second two cases show the high nuclear share that emerges when nuclear is allowed into the power system. Nuclear takes almost all market share when natural gas is also not available or very expensive (i.e. several large Asian economies).
However, the political headwinds facing nuclear and the political favor enjoyed by wind and solar make the first two cases more likely. In addition, more efficient and flexible next generation CCS plants can significantly boost the competitiveness of gas and coal. For these reasons, fossil fuels are likely to retain a sizable share in the power sector over coming decades.
But the power sector accounts for only about a third of fossil fuels consumption today. These primitive fuels will be substantially harder to displace from other sectors such as transport, industry and heat, and other applications such as petrochemicals.
The figure below shows how I think the use of fossil fuels will change over the next three decades. Consumption in the power sector will decline moderately, with a pronounced coal to gas switch. In the transport sector, fossil fuel use will also slightly decline despite huge increases in the demand for mobility for the reasons outlined earlier in the discussion around oil. However, I think that oil's decline will be partially offset by some hydrogen and other synfuel production from coal and gas with CCS.
In the remaining sectors, however, I think fossil fuel use will continue to see slow but steady growth. This is due to the lack of economically viable alternatives and the fact that most of the global economy is yet to be built. Hopefully, most developing countries would have reached a decent standard of living around 2050, allowing demand for heavy industry to start a natural decline. But before that happens, I'm afraid that industrial fossil fuel demand will remain strong.
So, what do you think? Will the world will find a way to detox from fossil fuels more rapidly than this forecast? How can this be done? I'd be interested to read your views in the comments section!