- Global demand growth will be driven by Asia. As China’s is slowing down, India’s will rise fastest among the BRICs. There is no real strategy for meeting it.
- Energy import will shift from North America to Asia. India will become highly import dependent.
- Emissions will far exceed safe limits. There is no political will to price carbon. Coal-to-gas shifts are best suited to mitigate according to BP.
Every year, BP publishes the ‘Statistical Review of World Energy‘ and the ‘Energy Outlook‘ (this year the ‘Energy Outlook 2035′). These are key publications on the global energy scenario, comparable to the International Energy Agency’s (IEA) ‘World Energy Outlook‘ and the US Energy Information Administration’s (EIA) ‘International Energy Outlook‘. Christof Rühl, the chief economist of BP, has given a very interesting tour-d’horizon lecture at the ORF on the Energy Outlook 2035. (See here the prior analysis of Lydia Powell from ORF.)
Global energy demand growth is slowing to 1.5% per annum. There are two main reasons for this: Europe’s absolute energy demand is falling. It is unlikely that it will ever surpass its 2006 peak as efficiency gains outpace slow growth. Secondly, “China is over the industrialization hump” according to Mr. Rühl. The incredibly rapid build-up of coal-fired power plants between 2000 and 2010 is tailing off. China now needs to find less energy intensive growth options. If not, growth will falter. In either case, its energy demand growth will slow down significantly.
In India, the picture is different. In a continent that drives demand growth, it is the main contributor. It will likely see an energy intensive ‘industrialization’ phase as the only way to provide enough employment to its vast and growing young labor force. Until 2035, BP forecasts a demand growth of 132% (compared to 71% in China and the non-OECD average of 69%). This is an annual rate of 4.3%, 2.8% above the global rate.
According to BP, fossil fuels, which currently make up 92% of India’s energy mix, will in 2035 still provide 87% of the energy (compared to a global average of 81%). BP forecasts that India will continue to rely, like China, heavily on coal as its dominant fuel. India and China will together account for 87% of the global growth in coal demand and in 2035 account for 64% of total coal demand. Coal will cover 66% of India’s energy requirements and 70% of power generation. (The share of oil will fall, as growth will be driven by power generation for industry rather than the transport sector – part of a global trend.)
I personally fail to see how this is possible. Here, the global view of an economist like Mr. Rühl, clashes with the realities of the energy industry in India. India is consistently failing to build large-scale coal mining, transportation and power generation infrastructure as well as the required evacuation grids.
BP projects that in 2035 renewables will make up around 10% of India’s energy mix. In the power sector, that will mean a total growth of 539% (the fastest of any energy source, but from a small basis). While that sounds impressive, it is not enough. As I have argued in several earlier blog pieces , India’s future, by default rather than strategy will be in renewables and distributed generation.
In terms of energy security and trade, the world is changing significantly. Unconventional gas and oil exploration will make the US – for the last decade a major importer of energy – self-sufficient. In 2035, the US will produce 101% of its energy needs. Globally, shale gas will be an important ancillary source of energy, but it will not be a silver bullet. In 2035, the US will supply 20% of natural gas globally or 100 Bcf/d.
Asian demand, at the same time, is rising fast. As a result, global energy trade routes are realigning. This will have many and complex implications on international relations, trading infrastructure and pricing. In 2035, BP projects that India will account for 7% of global energy demand (China 27%). To meet that, energy imports will rise by 163%. Coal imports will increase by 85%. India will then have to cover almost half of its energy requirements from imports. This will pose enormous risks to energy security. India will be dependent on highly volatile international prices (for instance for imported coal) that will have a huge impact on the current account balance. It will also exacerbate India’s volatile geostrategic position between energy hungry and often less-than-friendly neighbors.
For the climate, the picture looks bleak. Under the BP forecast, goals to limit climate change to 2 degrees are failing by a long margin. Total carbon emissions will rise by 29% – rather than decline. This is driven by non-OECD countries, which will contribute almost three quarters of emissions by 2035. On a per capita level, non-OECD emissions will be around half of OECD emissions. In India emissions from energy demand are forecast to increase by 117%.
The main challenge, according to Mr. Rühl is the high carbon intensity of GDP. While the world is making good progress on reducing the energy intensity of GDP (through more energy efficient growth models), the energy used is still too carbon intensive. He suggested that the key lever is a coal-to-gas switch: “a 1% coal-to-gas switch would have the same effect as an 11% growth in renewables.”
India is currently operating under the paradigm that carbon is not priced. As the global pressures of climate change will increasingly come to bear, this might change. If carbon is priced, India will have a further incentive to move away from coal. A coal-to-gas shift might help here, but it would increase further India’s reliance on imports. (Mr. Rühl is pessimistic on India’s non-conventional gas potential.) More realistic, India would focus on improving energy efficiency – and building up renewables.
My main takeaway on the BP forecast and Mr. Rühl’s talk was that there is a fundamental dilemma in looking at the future, particularly the energy future. The world is likely at a turning point at which the energy economy will change fundamentally. A ‘business as usual’ scenario as described by BP is therefore unlikely to be true. (Just think of the US ‘shale gas revolution”, which nobody saw coming.) At the same time, it might be the best forecast we can come up with, as the nature of the transformational change ahead is very difficult to predict. According to BP, “India’s energy mix evolves very slowly”. This has been true in the past. In the future, it is not an option. I know this quote by Albert Einstein is vastly overused, but it just hits the nail on the head: “We cannot solve our problems with the same thinking we used when we created them.”
Tobias Engelmeier is the Managing Director at BRIDGE TO INDIA.