The Next Wave: The Four Transformations of the Global Energy Market

Fatih

00_enGAUGE_Article_LogoThis blog is drawn from an exclusive CII #enGAUGEment with Dr Fatih Birol, Executive Director, @IEA, @IEABirol

Catering to rising energy demand is vital to the economic growth of nations. Experts believe that four major transformations will influence the global energy scenario in the coming decades. Governments around the world, including India, would have to tread cautiously and plan with foresight to successfully crest these transitions.

Dr Fatih Birol, ED, IEA

In the west, despite increasingly adopting protectionist policies, the United States of America is still expected to strongly influence global energy economics. The US shale gas revolution is set to catapult the country to the top of the oil and gas production charts, impacting the traditional geopolitics of energy resource ownership and, consequently, energy security. In the next five years, the US alone will fuel two-thirds of the world’s oil and gas production growth.

Countries like Brazil and Canada will follow the US in oil production and thus play a critical role in the sector. Many experts believe that the discovery of more shale reserves, declining production costs, and technology advancements are driving a second shale revolution in the US, which will disrupt the energy markets all over again. Also, while the overall oil demand will soften to some extent due to the aggressive and widespread adoption of renewables, it will still have big demand from heavy vehicles, aviation and petrochemicals.

The second major recent energy transformation is the emergence of solar photo-voltaic as one of the cheapest forms of mass-scale energy. The solar revolution has been instrumental in catapulting the economic growth of many developing countries, including India. Once pitched as an ‘alternative’ energy source, solar has drawn more investment on the merit of low cost of power generation than even its environmental benefits. Today, renewables are no longer a romantic story; they are a real business.

Renewables have found special resonance in India, which is striving to provide universal and affordable electricity to over 1.25 billion people. The Indian Government has invested in research on alternative energy since the mid-seventies to try and establish a cleaner and secure energy source to balance the cheap and abundant but polluting domestic coal, and expensive imported oil and gas, that form the bedrock of the Indian economy. Solar and wind energy achieving commercial viability now provides that choice to India.

However, the large-scale grid integration of renewables throws up the challenge of tackling the inherent intermittency through investment in energy storage to allow the grid to supply power during supply downtimes. Therefore, even though the overall cost of generating power from renewables has reduced sharply, the high cost of storage systems makes grid integration an expensive proposition. Investment in R&D and indigenous manufacturing to reduce the cost of batteries will make renewables more affordable. For India, effectively managing the transition towards renewables-powered electrification will determine its future energy mix.

Despite the challenges, it is noteworthy that India has significantly improved its energy access numbers, providing electricity to over 450 million people in the last 10 years. In comparison, African nations have lagged: in sub-Saharan Africa, 2 out of 3 people still do not have access to energy, leading to poor socioeconomic and human development. These nations must explore the various models of India to drive universal energy access for their people.

The third major energy transformation is happening in China, the largest energy consumer in the world. Unlike the US emphasis on fossil fuels, China is hedging its bets on clean energy, pushing its credo of ‘making the Chinese skies blue again’ through renewables and nuclear power. The scale of China’s green energy market is already staggering: six of every ten solar products in the world are made in China.

China is also en route to becoming the largest global importer of Liquefied Natural Gas (LNG). This has led to rapid escalation in regional gas prices, which have doubled from US$6 to US$12. In 2017, China drove over 30% of the gas demand growth in its effort to replace coal-based power with gas. Natural gas use goes beyond power to industrial and domestic heating, but its unpredictable supply and prices means that in developing nations such as India, where affordability is a major concern, its adoption has been slow despite its ecological advantages.

Some hydrocarbons experts are also wary of the aggressive push for renewables at the expense of gas, lowering the share of gas from 10 to 6% in India’s energy basket. Others believe that creating infrastructure to supply the available gas to consumers would be key to arriving at a competitive market price, and, unlike in the past, the onus of creating this infrastructure lies with the large consumers of gas, such as India.

The final but greatest transformation that the global energy market is facing is the increasing electrification. While energy demand has been growing steadily over the decades, electricity demand is growing twice as fast now, due to the increase in the number and range of applications and the digitalisation of economies. The electric vehicle sector saw record-breaking sales in 2017, despite still contributing only a minuscule proportion – 300 million – of the over 2 billion cars sold worldwide so far. All trends indicate that this market is set to grow manifold, further pushing up electricity demand.

Is the global energy market ready for these radical upheavals? Some experts are pessimistic about developing countries which still rely on aging, inefficient centralized systems of energy generation. Experts opine that Governments of developing nations must be less interventionist and more technology agnostic, allowing their markets to be more organic and competitive and create their own growth trajectories.

We also have to assess the impact of these energy transformations on climate change. The carbon emissions curve flattened between 2014 and 2016 despite the expansion of the global economy, but has started to rise again since 2017. In the constantly-shifting landscape of global energy markets, India’s sustained growth depends on maintaining the integrity and commercial viability of the vast electricity system which powers most of its economic and social development.

Today, owning resources is no longer the only route to energy security as single product economies are vulnerable to a host of risks. Instead, mastering the art of building and managing technologies to use diverse resources (oil, coal, nuclear, renewables) efficiently will determine the energy growth and security of nations.