The power generation sector in many countries faces the dual challenge of decarbonization without sacrificing the economic growth and rising electricity demand associated with increasing standards of living. As these countries embark on the energy transition to address this dual challenge, we see five key trends emerge.
The first trend is the long-term vision toward a low-carbon power generation sector, as solidified in the various pledges made during the Paris Climate Agreement. While the pace of this transition will vary, the trend will not.
The second trend is that among the many, sometimes competing, routes to decarbonization, electricity demand will expand significantly. The International Energy Agency (IEA) projects that global electricity demand will grow at 2.1% per year until 2040 at twice the rate of primary energy demand – rising from 19% of total final energy consumption in 2018 to 24% in 2040 (and possibly reaching 31% by 2040 under the Sustainable Development Scenario). ExxonMobil and Shell both project a similar trend, with the former projecting that global electricity demand will rise 60% between 2017 and 2040 at three times the rate of overall energy demand. The latter forecasts, under its Sky Scenario, that electricity will rise from 20% of end-use energy consumption in the 2010s to more than 50% by the 2070s.
The third trend is the fall of coal power. The cost-competitiveness of solar and wind energy is the clear driving force here, along with the rise of an international natural gas trade. The below figure shows Lux Research's projections of global coal and natural gas power generation capacity through 2050. Due to the wide range of future energy outlooks, Lux Research forecasts high, medium, and low coal- and natural gas-fired electricity demand based on several global and industry-specific outlooks. The speed of coal's decline is uncertain, but recent developments due to COVID-19 in the developed and the developing world lead us to believe that coal's future will more closely follow the low scenario. Natural gas capacity will continue to rise in the short-to-medium term, replacing a portion of coal capacity and continuing to support renewable energy capacity additions.
The fourth trend is that electricity demand growth will be concentrated in non-OECD countries, with Asia, the Middle East, and Africa driving capacity expansions. Under the IEA's Stated Policies Scenario, these regions will grow from around 50% of total global electricity demand in 2018 to 60% in 2050 as demand continues to fall in North America and Europe.
The fifth and final trend is that these growth regions will also see the greatest forecasted rise in fossil fuel thermal power generation. As seen in the figure below, non-OECD countries will likely see growing coal and natural gas capacity. Our projections of renewable energy power generation support this trend, as countries like China and India will still have fossil fuel-based thermal power generation making up around 50% and 40%, respectively, of their total electricity mix. This is a stark contrast to other regions like Europe, where renewable energy will make up more than 70% of the electricity mix by 2030.
In light of these five trends, a clear threat hangs over the fossil fuel-based thermal power generation sector – stranded assets. With a growing number of decarbonization mandates passed by local and federal governments, projected continuing price decreases of energy storage systems, and improved digital controls to better manage the rise of distributed energy resources, the specter of stranded assets casts a growing shadow over the power sector.
The International Renewable Energy Agency has quantified the magnitude of stranded assets required to meet decarbonization targets in the power generation sector globally at $1.9 trillion. Notably, the build-out of coal-fired power plants in the developing world in the near term will have a significant impact on the ultimate cost of stranded assets. Specifically, the power generation assets of China and India will make up between 25% and 45% of the total value of stranded assets in each country.
To avoid stranded assets, companies with thermal power plants must start planning for decarbonization. Carbon capture comes to mind first and will play a role in select hard-to-decarbonize industries. However, in many use cases, carbon capture will remain too expensive and limited by too few carbon utilization or storage opportunities. As a result, broad decarbonization will consist of technologies and strategies that fall within three main innovation pathways – power cycles, fuels, and hybrid systems. Power cycle innovation continues in developing new cycles like those using supercritical carbon dioxide as the working fluid and adding cycles to extract more power (the key of combined-cycle plants). In all cases, the goal of improved efficiency means lower fuel costs, and thus lower emissions, per unit of energy produced. Fuel innovation involves switching from fossil fuels to less carbon-intensive fuels or to fuel mixes, which can help reduce power plant emissions. These fuels include biofuels, synthetic fuels, hydrogen, and ammonia, each with its own operational and supply chain challenges. Finally, hybrid systems, based on coupling thermal assets with other power systems, such as electrochemical or thermal energy storage or fuel cells, mean rethinking the primary mover in the total energy system of a power plant.
In addition to emission reductions, the potential pros for these pathways are the abilities to retrofit stranded assets, improve economics, and unlock new revenue streams. The clear con is the high capital requirements for updating existing plants or building new plants with more novel technology. Yet, in the face of the threat of forced idling of plants or stranded assets, a relatively higher capital cost now can help prepare companies for a low-carbon power grid.
On the macroeconomic level, what all decarbonization scenarios have in common is a vast uncertainty around timelines. This uncertainty is both economic and policy-driven, with government emission reduction mandates likely to move faster and with less warning than markets. What is often overlooked, as the COVID-19 pandemic shows, is that unforeseen, if unlikely, events can vastly disrupt carefully constructed timelines. We are already seeing some effects of climate change emerging quicker than models had predicted. This added uncertainty serves as another cautionary note about timelines.
Looking just at the larger trends, the climate will become more unpredictable. It follows logically that climate unpredictability will affect the speed of decarbonization by changing individual and company behaviors and influencing government policies. These effects will, of course, be spread unevenly across regions and industries. However, waiting for economic, policy, or customer behavior changes is a poor strategy for Owning the Energy Transition. For those interested, especially in Asia, North America, and regions with significant projected thermal asset capacity additions, the time is now to plan for an uncertain future to avoid shocks from stranded assets.
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