New market analysis finds energy incumbents are talking up future demand
LONDON/NEW YORK, October 22 — Rapid advances in technology, increasingly cheap renewable energy, slower economic growth and lower than expected population rise could all dampen fossil fuel demand significantly by 2040, a new study published today by the London-based Carbon Tracker Initiative finds.
The analysis challenges nine business as usual (BAU) assumptions made by the big energy companies when calculating that fossil use will continue to grow for the next few decades. Typical industry scenarios see coal, oil and gas use growing by 30%-50% and still making up 75% of the energy supply mix in 2040. These scenarios do not reflect the huge potential for reducing fossil fuel demand in accordance with decarbonisation pathways.
The in-depth analysis exposes that fossil fuel industry thinking is skewed to the upside, and relies too heavily on high demand assumptions to justify new and costly capital investments to shareholders. Reviewing previous industry, IEA and U.S. EIA projections, shows them to be too conservative in their expectations for renewables growth. This raises questions over the likely accuracy of their future projections.
Carbon Tracker’s head of research, James Leaton, said:
“We have seen in recent weeks how the fossil fuel sector has misled consumers and investors about emissions — the Volkswagen scandal being a case in point — and deliberately acted against climate science for decades, judging from the recent Exxon expose. Why should investors accept their claims about future coal and oil demand when they clearly don’t stack up with technology and policy developments?
“Investors need to challenge companies who are ignoring the demand destruction that the market sees coming through much sooner than the business as usual scenarios being cited by the industry. Otherwise they will be on the wrong side of the energy revolution.”
The report, entitled Lost in transition: How the energy sector is missing potential demand destruction, examines alternative trajectories to mainstream energy industry modelling, produced by reputable financial houses like Bernstein and CitiGroup, that signal a more concerted drive to a low-carbon energy transition, hitting fossil fuel demand as a result.
The study finds that conventional fossil fuel company business models could be woefully behind the curve due to, for example, underestimating changes in emissions policy, technological advances or energy efficiency gains that can cause dramatic changes in demand trends. This is the first time a wide-range of fossil fuel industry demand scenarios has been compared with alternative and credible financial market views.
The analysis shows how the industry is assuming very slow incremental changes in the energy supply mix going forward. This ignores the potential downside risk explored in the research. Across all factors contributing to energy demand there is scope for reducing future emissions levels and staying within the 2˚C threshold. This includes considering different fundamental market conditions relating to population rise and GDP growth as well as more obvious advances in energy efficiency and clean technology.
Carbon Tracker’s senior analyst and co-author, Luke Sussams, said:
“The incumbents are taking the easy way out by exclusively looking at incremental changes to the energy mix which they can adapt to slowly. The real threat lies in the potential for low-carbon technologies to combine and transform society’s relationship with energy. This is currently being overlooked by Big oil , coal and gas.”
Key findings of the report are (Please see Executive Summary for detail):
- Global population growth may not rise to 9 billion by 2040 – the UN’s 2015 median-variant forecast applied by all fossil fuel companies – but population may only climb to 8.3 billion according to climatic and socioeconomic modelling.
- GDP growth could be lower than expected in major markets, including China and the U.S. For example, the OECD sees global GDP grow at 3.1% to 2040 rather than the 3.4% assumed by the IEA – a key industry reference point. This difference equates to roughly a drop in demand equivalent to half a year’s global energy demand in 2012.
- Moreover, the world is increasing its ability to decouple energy demand from economic growth. For example, we find that demand is drastically lower if global energy intensity of GDP falls by 2.8% per annum in line with the IEA’s 450 Scenario as opposed to 2.2% in the IEA’s New Policy Scenario.
- Fossil fuel company assumptions about future carbon intensity are inconsistent with decarbonisation plans set out by some 150 countries in their Intended Nationally Determined Contributions (INDCs). Incumbents generally expect carbon fuels to make up 75% of energy demand by 2040. We calculate that their scenarios see cumulative CO2 emissions to 2030 being up to 100GtCO2 higher than in an INDC scenario. These higher carbon intensity assumptions overlook huge shifts that are occurring in the energy sector:
- The speed and scale of advancements in the competitiveness of renewable energy technologies is exceeding expectations. We show the extent to which the IEA in particular has been hugely conservative in the past and remains so compared to other industry forecasts.
- The cost of energy (battery) storage is falling rapidly and is seven years ahead of average forecasts made last year, meaning the technology could be cost-competitive with power grids by 2025. The synergy between energy storage and renewable energy technologies has the potential to transform energy markets, but is not being factored into fossil fuel scenarios.
- Global coal demand is structurally declining. China has shifted its energy system to such a degree that peak coal demand could occur in the very near-term. India has an ambitious short-term solar PV plan (160GW of solar and wind by 2022) that, by our calculations, could displace 158 million tonnes – roughly India’s total coal imports in 2012.
- Electric vehicles (EVs) and energy efficiency will hit demand. Fossil fuel companies expect oil demand to grow between 0.4% and 0.8% a year to 2040, much from the road transport sector, oil’s biggest market. However, regulations requiring greater efficiency from combustion engine cars will hit oil demand in the short-term. Longer-term, oil industry scenarios see negligible take-up of electric vehicles (EVs) by 2040 but EVs could be cost-competitive with combustion engines by 2025 according to alternative forecasts, resulting in exponential growth.
- All scenarios see future growth in gas demand. But as energy markets change, the levels of gas demand will be lower if the fuel loses its base-load role and switches to being a backup for renewables.