IN DEPTH: Coal’s fate sealed by unstoppable greening of the power sector

The transformation of the power sector is key for meeting the 2°C temperature target set by the Paris Agreement; even more so considering that electricity and heat production is responsible for the largest share of greenhouse gases (GHG) emissions, contributing for 25 per cent of the total (IPCC, 2015).

How are fundamentals of conventional and renewable energy changing and how will this shape the sector in the future?

The Bloomberg New Energy Outlook (NEO) 2017 provides an in-depth analysis of the way the energy sector will look in 2040. Annually released by Bloomberg New Energy Finance (BNEF), the report discloses a large amount of content across its 7 volumes, comprising three regional breakdowns, three thematic foci (solar, wind and fossil fuels) and a global synthesis.

The report relies on projections for the near term based on data on planned new build, retrofits and retirements by country and sector. Forecasting in the medium to long term is instead driven by the cost of different power technologies to meet peaks and average demand by country on a least-cost basis. Importantly, the study does not take into account policy goals and just looks at real economic trends and market fundamentals. With respect to previous editions, the analysis was expanded to new countries and modeling enhanced in key sectors. Among new features, smart (i.e. optimal) charging was introduced for Electric Vehicles (EV), allowing for a first dynamic consideration of mobility-related electricity demand.

A key message from the study is that the power sector is greening at an unstoppable pace. The bulk of investments in power generation capacity, totaling USD 10.2 trillion in the period 2017-2040, will go to renewables (72%) and to solar and wind in particular (see Investment figure). These two technologies alone will attract USD 6.1 trillion and account for 48% of installed capacity worldwide by 2040.

Investment in power generation capacity, 2017 – 2040 (source: Bloomberg, 2017)

Solar is expected to become particularly cheap, with its cost decreasing much faster than expected only one year ago. In 2019 in China it will be more convenient to build a new solar plant than a new coal plant, while in the US the cost of photovoltaic (PV) will cross over the cost of Closed-cycle gas turbines (CCGT) in 2023. This considerably reduces the role gas and coal technologies were thought to play in the future. Moreover, electricity from new PV will soon be more convenient than electricity produced by existing plants, with solar taking over coal in 2027 in Germany and 2030 in China.

The cost of onshore wind is going down as well, and turbines are now 9% less expensive compared to what they were in 1990. Yet the cost of offshore wind is falling even faster and is expected to decline 71% by 2040. This can be explained by the increased size of turbines, lowering costs of maintenance, and fast take up due to the higher political feasibility with respect to onshore solutions.
Against this background, the fate of coal seems to be sealed as global coal-fired power generation will peak in 2026. Gas-fired capacity will play an increasing role (+16% by 2040) but as a flexible way to meet peaks and provide system stability rather than a replacement fuel. While the coal sector will almost collapse in Europe and in the US, China will remain the largest coal consumer and the fuel will still account for 30% of the generation mix in 2040. This fact has important implications in terms of GHG emissions.

Power sector CO2 emissions and total investments in zero-carbon capacity (source: Bloomberg, 2017)

According to the study, emission will peak by 2026 and then decline. The trajectory of GHG emissions traced by NEO 2017 for 2030 drops below that of the Nationally Determined Contributions (NDC), meaning that countries could be even more ambitious in their pledges with no additional costs as market forces are to drive reductions. However, in order to be consistent with a 2°C scenario, substantial investments in zero-carbon capacity are required (see Global power figure). Extra USD 3.5 trillion are needed by 2040, meaning that total investments should be enhanced by 50%. Policy interventions will play a crucial role in that. The good news is that the relevant technology is getting increasingly cheaper, making it more and more cost-effective to rule out old polluting plants.

 

This article was first published on ICCG’s International Climate Policy Magazine n. 47.

(Image: Burbo Bank, offshore wind turbine. Photo credit: The Danish Wind Industry Association/Flickr)