Changes in the World of Energy - Financial Times – Paid Post by BP

A shift to gas

“The easiest transformation to see is the switch from coal to cleaner-burning gas,” says Dr Dominic Emery, vice president for long-term planning and policy at BP. “The technology for gas-fired power is mature and highly efficient, and long-distance transportation has been facilitated by developments in liquefied natural gas. Building pipelines and transmission infrastructure is of course necessary, but the breakthrough US experience with shale gas has shown that this can happen at pace.“

The use of coal is already slowing, particularly because its biggest single user, China, is gradually shifting to less polluting sources of energy.

According to this year’s BP Energy Outlook, gas is predicted to be the fastest growing fossil fuel over the next 20 years, increasing by 1.8 per cent a year. It is forecast to overtake coal as a source of power before 2035, as the growth in coal use slows. The use of coal – which releases twice as much carbon as gas when burnt for power generation – is already slowing, particularly because its biggest single user, China, is gradually shifting to cleaner, lower-carbon sources of energy.

Forecasts suggest that the switch to gas, coupled with big gains in energy efficiency and strong gains in renewable energy, could halve the rate of growth in carbon emissions over the next 20 years compared with the past 20. However, all that and much more will be needed to meet the ambitious emissions targets set out at last year’s Paris climate change summit.

The fastest-growing energy source over the next 20 years is likely to be renewables, trebling their share of global energy output, but starting from a low base means they will still only form 9 per cent of global output in 2035, according to Energy Outlook predictions. Renewables are showing impressive gains in efficiency: every time to date that the installed capacity of utility-scale solar projects in North America has doubled, the cost of the energy they produce has fallen by around 40 per cent. China is expected to add more renewable power over the next 20 years than the EU and US combined.

The pace of improvement in energy efficiency looks set to increase over the next 20 years, playing a vital role in reducing the growth of carbon emissions.

Increasing energy efficiency

Another source of change is improvements in energy efficiency, a well-established trend in the developed world, where energy demand has been flat for around a decade despite growing GDP. “EU energy demand in 2035 is projected to fall back to where it was 50 years earlier, in 1985, even though the EU economy is 150 per cent bigger,” says Spencer Dale, BP’s group chief economist. The pace of improvement in energy efficiency looks set to increase over the next 20 years, playing a vital role in reducing the growth of carbon emissions.

Even the combustion engine is changing rapidly. The average fuel consumption of passenger cars is set to be transformed in the next two decades, thanks to huge gains in fuel efficiency. Today’s global average fuel consumption for passenger cars of around 30 miles per gallon is forecast to improve to 50 miles per gallon in 2035: a 60 per cent increase in just 20 years, making for unprecedented gains in efficiency.

Why energy demand keeps growing

Rising population and most of all rising productivity mean energy demand will continue to increase as the global economy grows.

The world economy is forecast to grow at about 3.5 per cent a year (on the purchasing power parity measure) for the next 20 years. At that rate, it will roughly double in size by 2035 and as a result the world will require a third more energy, according to BP’s Energy Outlook.

Productivity gains fuel energy growth

Demand for energy will grow in part because there will be around 1.5 billion more people in the world by 2035, who will need light, heat and transport. (Some 1.2 billion people lack access to electricity today).

However, a much more important factor will be the huge increases in productivity forecast over the next 20 years, particularly in China and India as these nations increasingly adopt best-practice techniques from the West. Energy Outlook predicts that 80 per cent of the increase in world economic output forecast by 2035 will result from rising productivity.

These productivity gains hold the key to continuing growth in energy demand: as these economies grow and prosper, more energy is required to power the higher levels of activity and improved living standards. Plentiful supplies of energy enable that growth.

The trends that shape the energy system

It is vital to look ahead in the energy business. So how are forecasts made?

Forecasting how the energy market will develop involves an attempt to learn from recent history. Spencer Dale’s team of economists at BP base much of their work on widespread consensus in areas such as predicted rates of economic and population growth and gains in productivity. This enables them to produce broad forecasts based on these assumptions and then test what happens if any of the key judgements and assumptions turns out to be different. The result is a series of forecasts: a “base case” as well as variations that, for example, assume slightly faster or slower economic growth.

The three major global trends

These macro-economic factors are then set against the major trends playing out in world energy markets, specifically: China’s evolution as an engine of global economic growth and therefore demand for energy; the effects on the oil and gas markets of the shale revolution that started in the US; and the world’s transition to a less carbon-intensive era.

Probably the biggest shock for energy market forecasters recently has been the huge impact of the US shale revolution. The Energy Outlook shows how forecasts of output for US shale oil and gas have been revised up every year since 2013 to reflect rapid technological innovation and productivity gains – illustrating just how difficult it is to predict the future of the energy system.