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Dawn of a New Energy Era?

In November 2015, IEA released its flagship report, World Energy Outlook. Energy economists engaged in long range planning, consider this report as Bible.

Dawn of a  New Energy Era?

Though there are some features of the projections, which do support IEA’s assertion of new energy era, three of its scenarios are a continuation of the trends seen in the past. IEA might have been influenced by the likely outcome of the climate summit in Paris to make such a startling statement.

No doubt the Paris climate summit has motivated both the developed and developing countries to decarbonise the energy economy by increasing shares of renewable energy sources, adapting higher energy efficiency standards and restructuring the economy. But none of IEA’s projected development in energy space can be considered as new.

IEA has considered four distinct scenarios: new policy scenario, current policy scenario, 450-scenario, and low oil price scenario.

It is only under the 450-scenario when stringent steps are taken, there are hopes of limiting temperature rise to 2 degrees. IEA does not dare to give any probability of this happening.

In Central policy scenario, global energy demand is expected to increase by 32 per cent between 2013 and 2040.  Table-1 captures this vividly. Energy growth is predicted to decline from observed 2 per cent since 1990 to 1 per cent from now to 2040. Energy consumption growth is only in developing countries, a trend that we experienced earlier.

Table-2 gives the likely development in energy demand by different regions and by fuels for three different scenarios. It is under the 450-scenario that there is a marked difference in a significant drop in carbon-di-oxide emissions. This is both because of lower global energy demand and increased use of renewables to replace fossil fuels. If the countries follow the current policies, carbon-di-oxide emission will continue to increase and even under New Policies (Central Scenario) based on the submissions made by countries before the Paris climate summit (Intended Nationally Determined Contributions) carbon-di-oxide emission reduction is not all that significant.

World oil demand is expected to increase to 103.5 metric million barrels per day (mbd) by 2040, an increase of 13.1 mbd. While OECD countries can reduce their oil consumption by 11 mbd, India and China increase their demand by an equal amount. The rest of the regions also increase their oil demand by a similar amount.

Having recognised the inherent impossibility of predicting future oil prices, IEA has considered two oil price scenarios. Under the central scenario, oil price will reach $80 per barrel by 2020 and then will slowly increase to reach $128/bbl by 2040. Under low oil price scenario, oil price will be $50/bbl till 2020 and then slowly increase to reach $85/bbl by 2040. This scenario is similar to the one that took place soon after the collapse of oil price in 1986 as a result of Saudi Arabia increasing its market share.

However, IEA places a lower probability of low oil price scenario. This placing of a lower probability is because of the difficulty likely to be faced by OPEC countries in meeting its revenue requirements. IEA feels that OPEC may relax its strategy of maximising market share and may succeed in controlling supply/demand to create an artificial deficit. Also lower oil prices for a long time may reduce non-OPEC production and any political crisis in the Middle East as in the past may give rise to oil prices jumping to much higher levels.

IEA had predicted a golden age for gas demand in 2011. However in this outlook, IEA does not expect a smooth sailing for the natural gas industry though it expects its demand to go up by 50 per cent - the largest, compared to other fossil fuels.

The coal sector is expected to change dramatically. While coal met 45 per cent of energy demand growth during the last decade, it is expected to meet only 10 per cent in the future. Even though the developing countries will continue to rely on coal to meet their increasing energy demand like India, developed countries will reduce their coal consumption by 40 per cent by 2040. By 2040, Asia alone will account for 80 per cent of world coal consumption.

While coal faces a turbulent time, renewables face a glorious future. In EU countries, renewables will meet 50 per cent of power needs, 30 per cent in Japan and China, and 25 per cent in the US and India. In contrast, coal meets only 15 per cent outside Asia. If this comes through then, it is a significant contribution from the developed countries to reduce GHGs. If the Republican Party come to power in the US, it may not follow the policy of Obama in it curtailing coal use.

Though statistics associated with China’s energy scenario overwhelms all other countries, IEA has decided to highlight the energy scenario of India as though it is India which has a major role on the path towards winning the war against climate change. Is there a hidden agenda of putting pressure on India to reduce its dependence on coal?

Without doubt, India has an important role in contributing to the combined efforts of the world in reducing Green House gases. But in comparison to China and developed OECD countries, and on a per capita basis, it is not fair to expect India to take a big financial burden. China by huge distance is the largest producer and consumer of coal.

From now to 2040, India will account for the largest rise in global energy growth (25 per cent) and also the largest absolute growth in coal and oil consumption. India’s oil demand is expected to reach ten mbd by 2040 from the current level of 4 mbd. Oil import dependency will be 90 per cent by 2040 - a critical level from energy security consideration. India will continue to depend on coal to meet 50 per cent of total energy requirement. By 2040, coal consumption will be 1.3 billion tonnes from the current level of 488 million tonnes. India will be the second-largest coal producer - not an envious position in a world facing climate crisis.

Though the world GDP grows by 150 per cent by 2040, energy demand is expected to go up by only a third. This remarkable decoupling of energy and GDP growth is because of adaption of higher energy efficiency standards in all sectors of the economy. Despite all the efforts of de-carbonisation, energy efficiency and adaption of renewables, energy-related carbon-di-oxide emissions in Central scenario are projected to be 16 per cent more in 2040 (Table -5). Because of this, IEA is not optimistic that the World can succeed in limiting temperature rise to 2 degrees. Under 450 scenario, carbon-di-oxide emissions will be significantly lower to achieve that goal. But it is likely to remain as a dream scenario unless there is some miracle and IEA’s projected New Energy Era may not dawn.

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