The New Energy Outlook: looking to 2040

VOICEOVER Welcome to the DNV Talks Energy podcast series. Electrification, rise of renewables and new technologies supported by more data and IT systems are transforming the power system. Join us each week as we discuss these changes with guests from around the industry.

MATHIAS STECK Welcome to a new episode of DNV Talks Energy. My guest today is Justin Wu, Head Asia Pacific of Bloomberg New Energy Finance. Welcome, Justin.

JUSTIN WU Thank you for having me, Mathias. Really glad to be here today.

MATHIAS STECK Justin, BNEF has issued the New Energy Outlook 2017, which is a long-term forecast 2040 about power generation, and I’m looking forward to discuss the findings of this report in a minute with you. But before we start, could you give us a brief introduction about yourself, as well as Bloomberg New Energy Finance?

JUSTIN WU Sure. So, Bloomberg New Energy Finance is a research division within Bloomberg. We’re about 200 people worldwide and our job is to provide research and insights to help inform decision makers on the future of energy and transport. I have been based in Hong Kong for the last seven years, and I manage our Asia Pacific group, which is spread out around the region and covering all the major markets, including Japan, Korea, China, India, the countries in SouthEast Asia and also Australia.

MATHIAS STECK So to start with, could you tell us a bit more about the Energy Outlook 2017, what it covers, how you gathered and combined the information and how you came to your conclusions?

JUSTIN WU So the New Energy Outlook, or NEO for short, is our annual long-term economic forecast of the world’s power sector. We’ve been doing a long-term forecast since about 2009, and the NEO report is really focused on the electricity system. So, we combine the expertise of over 80 of our market and technology specialists around the world to provide a unique view on how the market will evolve over the next 20-something years. Now, what sets NEO apart from other long-term forecasting that you might see, is that our assessment is focused on the parts of the system that are driving rapid change in the markets – grid systems and also business models. So, this includes looking at the cost of wind and solar technology, battery storage, electricity demand and also the uptake of electric vehicles, among other things. This year we have updated the model, and our approach, and we’ve added a few new things.

So, in addition to refreshing our inputs, the technology cost curves, fuel prices, macroeconomics and also consumer adoption assumptions, we also have looked at a few new areas, so one new area is looking at dynamic electric vehicles charging, and its impact on the grid systems. We also looked at batteries, what they could do for providing peak demand in the future if more of these are installed, either on the utility scale or behind the meter, residential households. We also have taken a slightly new and more evolved approach towards looking at offshore wind costs, and also we’ve included some new geographies in terms of looking at them in more detail, specifically SouthEast Asia, some new countries in the Middle East and Africa, Turkey, South Korea. And, also, we split up the world’s largest power market, China, into six grid regions; and also the US, we’re looking at seven different ISOs.

MATHIAS STECK That sounds very interesting, Justin. Could you share the major findings of this report with us?

JUSTIN WU Sure. So, the main finding of this report is that we’re seeing a future where most of the new generation capacity in the world, that the world adds, will be solar and wind, and that’s being driven by the increasing cost competitiveness of these two technologies. So, more specifically, we see global installed capacity were nearly doubled to about 13,000GW by 2040, up from about 6,800GW today. And while solar and wind are only about 12% of the installed capacity today, they will be nearly 50% of that installed capacity by 2040. Now, for generation capacity, obviously renewable energy operates at lower capacity factors than nuclear or other fossil fuels, but we also see quite significant growth for it over the next 20-something years.

So, in 2016, for instance, renewable energy, or rather, the variable renewable energy, such as PV and wind, are only about 6% or so of global electricity generation. But by 2040 we’re going to see onshore wind rise to 15%; utility-scale and small-scale PV combined, 17% of generation capacity. Interestingly enough, the largest provider or generator of electricity in 2040 is still going to be coal, at 22%, followed by gas at 16%, and then hydro and onshore wind tied at 15%. So, fossil fuels are still going to generate a good chunk of the electricity in 2040, but the size of renewables or the proportion of renewable generation is going to increase significantly over the next 23, 24 years.

MATHIAS STECK So, what would you think what impact will that have on future investments?

JUSTIN WU In terms of investment, what we see is that from 2017 to 2040 the world is going to invest about US$10.2 trillion in new generation technologies and capacity. About 86% of this figure is going to be zero carbon, so that’s renewable energy and nuclear, and 14% will come from fossil fuels. In terms of the breakdown by technology, wind is going to attract the most investment at about 3.3 trillion, followed by solar at 2.8 trillion, and then nuclear at 1.4 trillion, so that’s the top three. Gas and coal a lot less, but there will be something, so gas will be about 800 billion and coal will be 700 billion.

MATHIAS STECK This is an outlook that is pleasantly positive about renewables – how do you compare BNEF’s report to other forecasts out there?

JUSTIN WU So, you might sort of listen to these figures and think that this is very bullish on renewable energy, and this is certainly true. Our long-term forecasting, if you compare that against, say, what the International Energy Agency or other organisations that do long-term forecasting, we are certainly much more bullish on renewable energy. But what we will say about this is that if you look at sort of long-term forecasting, every year, everybody has revised up their forecasts for renewable energy, including ourselves as well. And, despite that, the market itself, in terms of the actual capacity of solar and wind being built every year, is actually above, even above our rather bullish forecasts. So, we actually see that history has shown that actually the market is moving even faster than some of our forecasts.

MATHIAS STECK Justin, what are the main drivers for this transformation on the energy mix, and how will those potentially shift over time?

JUSTIN WU So, obviously one of the reasons we’re seeing this rather large uptake of renewable energy, and particularly of solar in the future, is cost. So, the cost of solar or photovoltaics is falling dramatically, and one of the key things that we see is, for instance, in the cost of or the price of solar modules. So, for example, in 1976 a PV module costs about $82 per watt in 2016 dollars, but at the end of 2016 this has fallen to only 41c per watt. So, if you think about this as a learning rate, in other words, the cost of reduction per every doubling of solar capacity, it is about 28%, which is a very powerful trend. And this is made possible by a combination of technology innovation, economies of scale, and also manufacturing experience. And what’s important to note is that this trend is going to continue in the future. We’re certainly going to see the cost of solar modules fall even faster as time goes on, and as we have more installations in the future, to the point that by 2040 we’re seeing modules cost only about US 12 cents per watt. And it’s not only the module actually either; it’s the entire project itself. So, other softer costs around the balance and plan, EPC and services will also see a reduction.

And for the other technologies, such as wind turbines or offshore wind, and batteries, we’ve looked at similar cost trends, although they’re a bit different from the way that solar works, but we also analyze how these cost trends are happening and factor that into our work and modelling. So, what that does for us is, actually, we’re looking at the LCOE, or the Levelized Cost of Electricity, for renewable technologies versus others. And, basically, in this work we see two things: so, first of all, we compare the levelized cost of electricity between newly built projects. So, let’s say a project, a new solar project being built in a specific country in a year - that cost versus a new coal-fire power project or a gas project being built in that year. And on that one, we do see a number of interesting so-called tipping points in many markets. So, for instance, in the case of China, we’re seeing that soon after 2020, new-build onshore wind will be more competitive than a new-build coal-fired power plant. Or after about 2023 or 24, a new-build utility scale PV project in China will be more cost competitive than a coal-fired power plant.

Similarly, in the US, which is a little bit different from China in the sense that coal is more expensive, but gas is cheaper, we also see that in the early 2020s, onshore wind and also utility-scale PV will be cheaper than a new-build gas plant in the US. So, that’s the first thing we looked at, is the comparison between a newly built power plant versus a newly built power plant. But, interestingly, an additional point we looked at is the cost of new-build renewable energy versus existing power generation projects. So, in other words, is there a tipping-point between a new-build solar plant that could be cheaper than an existing coal-fired or gas-fired powered power plant? And in a few countries we do actually see examples of that happening as well. So, for example, in Germany, after 2030 we do see that the cost of onshore wind and utility-scale PV will be cheaper than an existing coal-fired power plant or combined cycle gas turbine plant.

Part of the reason of that, of course, is the cost reduction in renewable energy, but another reason here is that there is a rising carbon price in Europe as well that’s driving up the cost of operating these plants. But there’s also another point here in the sense that after a certain period of time, if you have a high penetration of renewable energy within a certain market, the average operating hours of your base load fossil fuel plants are going to be lower and lower, because renewable energy obviously is going to cut into these base load hours, and renewable energy operates with zero marginal cost. So, there is a certain point in some markets where, when the penetration reaches a certain point, you are going to see renewable energy crowd out existing operating capacity or operating plants.

MATHIAS STECK So, despite what you just said, and despite the Paris Agreement, we still see new coal-fired power plants coming up somewhere around the globe. What do you think about the development of that sector? What do you think about the development of coal?

JUSTIN WU Sure. So, as I’ve said at the beginning, coal, we do still see a future for coal. In 2040 coal is still generating about 22% of the world’s electricity, which is still the largest portion. And, of course, there’s going to be a large regional variation of what happens to the coal. So, basically, in the US and Europe, coal-fired generation is on a continuous decline. It’s going to, over the next 20 years it’s going to keep falling gradually over this time in terms of the amount of coal generation in the mix. China, which is obviously the leading generator of coal, is going to see its coal generation capacity peak at about 2025, and then it’s going to come down fairly dramatically after that, so that in 2040, it’s going to generate just over 3,000TWh of coal, which is lower than the amount of coal generation in China today, which is around 4,000TWh. India and SouthEast Asia will continue to see an increase in coal generation, but both countries, or regions, rather, are far smaller in terms of coal generation than China. So, in that sense, the world’s coal generation is closely tied to the fate of China. So, global coal generation is going to also peak around 2025, around the time of China’s peak, and going to gradually come down after that, so that by 2040 the total amount of global coal generation is going to be slightly below where we are in 2016.

MATHIAS STECK So, what are your thoughts on gas, then? Some people call it the transition fuel. I would be interested in your outlook on that.

JUSTIN WU So, gas is also an interesting story. So often we hear that, and as you correctly mentioned as well, gas could be called a transition fuel. In other words, it’s a transition between a high-carbon coal sort of present reality, to a zero-carbon renewable energy in the future. And gas obviously is a base load power source, and is a lot less carbon-intensive than coal. However, we also say that gas is a transition fuel, but not really in this sense, in terms of the transition between high to low carbon. Rather, we see gas playing an increasing role in helping balance electricity systems that see more renewable energy coming to the mix, play a role in terms of meeting peak demand and peak capacity in many markets. So, what that means is that in most of the world, gas is going to play a role as a source of flexible generation to help meet needed peaks and provide system stability, rather than as an outright replacement for base load coal. So, by 2040 we see that gas-fired capacity is going to increase by about 16% from where it is today. In North America it’s slightly different, given that gas is plentiful and cheap there. There, it does play much more of a central role, especially in the near term in terms of providing base load power generation capacity.

MATHIAS STECK So the things we have just heard now in the last 15 minutes or so, how will those impact emissions and the Paris Agreement, the achievement of the 2 degrees target?

JUSTIN WU Well, on emissions and also on the whole issue of meeting our CO2 emissions goals. First the good news: in our 2017 report, as compared to last year, we do see global power sector CO2 emissions overall wind up in the lower place in 2040 than what we had forecasted last year. We also see that power sector CO2 emissions are going to peak in 2026, so within ten years. So, that is definitely the good news in terms of where that is. And also, I might add, another piece of good news is that in terms of where our forecasts for power sector CO2 emissions, in terms of where we wind up in 2040, it is going to be lower than the NDC, or the Nationally Declared Contributions scenario as painted by the Paris Agreement. So, in other words, we do believe the world is going to actually reduce emissions further than what the countries have so far pledged in the Paris Agreement. So, all of that is good news. Unfortunately, the bad news is that, as you can imagine, if we were to hit our goal of not preventing more than 2 degrees of average temperature rise around the world, we are actually quite a way from that. So, to have a 2 degrees trajectory, the world is going to need to invest an additional $5.3 trillion in zero-carbon technologies by 2040 in order to reach that goal. So, much more work is needed there. So, yes, even for our forecasts, which is very bullish on renewables and we see this fundamental transformation in the energy sector in the next 20 years, we are still not there in terms of meeting our 2 degrees goals.

MATHIAS STECK I kind of saw that coming at the moment I asked you that question.

JUSTIN WU So, unfortunately, I hate to sort of end our podcast on a rather sad note, but there’s really a lot more in this report as well. So, if anyone is interested, I do welcome that you take a look on our website, www.bnef.com. There’re more details; you can also download the summary of this report, which shows you more results also on electric vehicles, on batteries and also on what consumers are doing with solar as well, so, certainly some other interesting results.

MATHIAS STECK Thanks for this, Justin. And also reminds me to mention that also DNV is launching DNV’s Energy Transition Outlook 2017 in September, and we will have an episode about this in Series Three of this podcast. Justin, many thanks for your time, many thanks for these very interesting insights you shared with us.

JUSTIN WU Thanks for having me today, Mathias. It was a pleasure being here. Thank you.

NARRATOR Thank you for listening to this DNV Talks Energy podcast. To hear more podcasts in the series, please visit dnv.com/talksenergy.