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Energy Transition Outlook
Energy security has again risen to the top of governments' priorities in the face of rising gas and energy prices following Russia's invasion of Ukraine. This has put the focus squarely on non-fossil-fuel power generation, such as from renewables (solar, wind, and hydro) and nuclear. In a five-part series of articles, analysts from S&P Global Ratings, S&P Global Commodity Insights, and S&P Global Market Intelligence provide their views on latest developments in the energy transition.
Published: August 15, 2022
Energy Transition
The heightened urgency of the climate crisis has accelerated calls to action for the global energy industry to shift from fossil-based systems of energy production and consumption—including oil, natural gas, and coal—to renewable energy sources.
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Gas' Role Varies By Sector And Region Amid Security Of Supply Concerns
In light of surging global gas prices, security of supply concerns, and a weakening economic outlook, prospects for gas demand growth are more uncertain but supported by strong demand in Asia-Pacific. Natural gas to meet incremental power generation needs may be the area where demand softens most. By contrast, the use of gas as a raw material in chemical production will be difficult to substitute. The industrial sector represents almost 40% of gas demand globally, with the power sector accounting for 36% of global gas use. Gas use in different sectors can vary widely by geography. For instance, in Europe, about 40% of gas supplied has historically been used for residential/commercial heating, almost double the global average.
Highlights
— Demand for gas should keep rising through 2030--fueled by Asia, with demand growth stable in the U.S. and still highly uncertain in Europe--but seems set to drop according to S&P Global Commodity Insights (Platts).
— Security of supply, and gas' comparative price disadvantage versus coal and nuclear power generation in China, mean that, although its use is increasing, gas will represent only 9% of China's primary energy mix by 2030, compared with 30% for the U.S.
— Russia's invasion of Ukraine and subsequent concerns regarding gas supply and interruption risk are accelerating Europe's shift to renewables and greener gases, which could account for 20% of European gas demand by 2030 if the EU achieves its REPowerEU goals.
Thermal Coal Will Remain Important In Asia-Pacific
The reduction of coal demand will be slow and uneven across regions. Currently, coal accounts for about 25% of primary energy globally (and about two-thirds of the power sector's generation), but is set to reduce to 21% by 2030 and trend down thereafter according to S&P Global Commodity Insights (Platts)' reference scenario. China and India together account for 70% of the world's coal demand. The steep rise of power demand expected in those two countries as their economies expand implies that coal generation is not being displaced by renewables, which are not sufficient to meet higher demand, unlike in the U.S. and Europe. Other industrial sectors like cement and steel are also slower to transition but the focus on decarbonization is increasing.
Highlights
— Demand for thermal coal is set to decline after peaking in 2024 as coal-fueled power is increasingly replaced with renewables in Europe and the U.S.
— However, transitioning away from coal is complex and slow for countries like China and India, which account for 70% of global coal demand and are facing a steep rise in power demand, with a fairly new coal fleet ensuring affordable power.
— The success of meeting net zero goals for countries like China, India, and Indonesia hinges significantly on the future economic and technical feasibility of carbon capture, usage, and storage (CCUS) technology.
Nuclear's Path Is Diverging In Developed And Developing Nations
Energy security has again risen to the top of Europe's priorities in the face of rising gas and energy prices following Russia's invasion of Ukraine and the EU's pledge to reduce reliance on Russian gas. The European Parliament has just approved the labelling of nuclear as green under the EU Taxonomy, underlining the view of certain countries that nuclear should be part of the response to decarbonization and security of supply.
Highlights
— China plans to double the share of nuclear in its power mix by 2035 to almost 10% of generation output, whereas in the U.S. and Europe the share of nuclear power will likely reduce to 15% by then from close to 20%, according to S&P Global Commodity Insights (Platts).
— The gas and power crisis in Europe has increased the focus on security of energy supply, possibly leading to greater support for nuclear; while in the U.S., various states have contemplated incentives to extend the lifespan of nuclear plants to support the reliability of the power grid.
— From a credit perspective, S&P Global Ratings generally views new nuclear investments as high risk, not only because of uncertain returns when new builds are exposed to long-term market power prices, but also high construction risks and difficult-to-quantify nuclear asset-retirement obligations.
— We think private investors and operators will remain generally averse to taking on such risks, unless they are mitigated by explicit state backing and/or regulatory or contractual support mechanisms.
Renewables Remain The Cornerstone Of Future Power Generation
Renewable energy sources (solar, wind, and hydro) account for the majority of annual investments in power generation. Yet they still represented only 13% of global primary energy consumption in 2020, according to S&P Global Commodity Insights (Platts). Climate policies, cost competitiveness, and the strategies of power companies and investors will likely help this share increase to 18% by 2030 (two-thirds wind and solar, one-third hydro). This means that, by then, renewable energy could equate 60% of the primary energy previously sourced from oil, versus only about 25% a decade ago.
Highlights
— Renewables are forecast to increase to 60% of power generation in Europe by 2030, and possibly approach 40% in the U.S. and China according to S&P Global Commodity Insights (Platts), but still account for only 18% of global energy demand.
— Continued policy support remains important to reduce credit risks from volatile and potentially declining long-term power prices as the share of zero- or low-marginal-cost plants increases.
— Security-of-supply considerations further support an accelerated renewables rollout, notably in Europe, while back-up facilities, including from power plants fuelled by natural gas, may play an increasing role in the coming decades as the share of intermittent renewable power generation rises.
Developing Markets Are Still Fueling Demand For Oil
Global oil demand growth is set to continue this decade. It had already peaked in developed countries in 2019, before the pandemic, but further growth will now be fueled by developing countries. We expect global oil demand growth to continue into the next decade, peaking at 112 million barrels per day (mbpd), up from 101 mbpd this year as developing markets keep expanding
Highlights
— We expect global oil demand growth to continue into the next decade, peaking at 112 million barrels per day (mbpd), up from 101 mbpd this year as developing markets keep expanding
— In a scenario where the world is on track toward limiting global warming by 2 degrees, the likelihood of which we consider low, oil demand will still exceed 87 mbpd by 2040, corresponding to a decrease of 1.5% per year on average, according to S&P Global Commodity Insights (Platts)' forecasts.
— Should demand decrease more steeply, S&P Global Ratings believes credit risks for the oil sector will be partly mitigated by OPEC's ability to adjust supplies and by the typical annual 4%-5% natural decline of oil fields.
— We see the access and cost of funding as an important new credit risk for the sector, given investors' increased focus on climate change.