What's Driving Global Energy Demand Growth Around the World?

Providing energy affordably, securely, and sustainably is a complex undertaking that requires massive investments and long lead times. As a result, it is critical that asset managers pay close attention to the factors impacting the future of global energy demand, supply, and pricing.

Predictability

Certain factors that drive energy trends can be predicted with reasonable confidence. For example, population growth tends to stay within predictable limits. According to the United Nations, there will be 9.7 billion people in 2050—up from 7.3 billion today.

A factor that can be forecast with a degree of certainty is economic growth. There is widespread consensus that the growth of the middle class around the world will increase global energy demand in the coming decades—as more people acquire refrigerators, televisions, air conditioners, cars, and other modern conveniences.

A Time of Transition

Other factors are more difficult—if not impossible—to predict with much confidence. These include new policies, new technologies, and future energy prices. These difficulties are exacerbated by the ongoing transition to a less carbon-intensive global energy economy, which is creating uncertainty in several dimensions.

An example of a fundamental policy driver (the effects of which we have yet to see) is the Paris Agreement on climate change, which went into effect last year. Close to 200 climate change pledges reinforce that, as the New York Times notes, driving energy policies in individual countries. Analyzing the impacts on global energy demand is no small task. It is made harder by suggestions that the US and perhaps other countries might withdraw because of the impact on competitiveness.

Technology advancements add an unpredictable element to demand forecasting. A prime example is the development of technologies to extract hydrocarbons from shale rock, which has led to a rise in unconventional natural gas and light tight oil (LTO) production in North America.

The effect that individual businesses, large and small, can have on demand is not to be underestimated, especially as these organizations work to increase energy efficiency and reduce their carbon footprint. A recent Harvard Business Review article concludes that there are "enormous opportunities to reduce risk, improve resilience, and create value." Factors driving this trend include "rising expectations about corporate environmental performance, innovations in energy technologies and business models, and plummeting renewable energy prices." Among the companies at the forefront of such change are household names such as Apple, Microsoft, Walmart, GM, Nike, and Johnson & Johnson. The Harvard Business Review notes: "Social pressure to reduce emissions is rising, and clean brands and offerings can effectively engage stakeholders of all kinds."

World Energy Outlook

Arguably the most influential long-term energy outlook is the annual World Energy Outlook published by the International Energy Agency (IEA). It posits a number of scenarios constructed to show the likely outcomes of various factors that impact energy. The latest edition, which looks ahead to 2040, is of particular relevance to the electricity industry.

The central scenario, the New Policies Scenario (NPS), is modeled on the basis of existing energy policies, "as well as an assessment of the results likely to stem from the implementation of announced intentions." Crucially, the latest edition takes into account the pledges that underpin the Paris Agreement (but was published too late to consider the US presidential election result).

In the NPS, the IEA projects that world primary energy demand increases by 30 percent between 2014 and 2040 but stresses that "the relationship between global economic growth, energy demand, and related carbon dioxide emissions is steadily weakening." The ongoing trends of declining energy intensity—energy used per unit of economic output—and carbon intensity—carbon dioxide emissions per unit of economic output—are welcome news. However, they are not pronounced enough to meet the Paris Agreement target of limiting global warming to below 2°C, so there is pressure to ramp up policy ambitions.

The NPS also projects major changes in the fuel mix, as demand for natural gas, renewables, and nuclear power increases. However, despite the rapid growth rates of non-hydroelectricity renewables, the world remains heavily dependent on fossil fuels. Factors that will limit the growth of renewables include their variability and the costs of some technologies that render them noncompetitive without subsidies. Nuclear, meanwhile, has the drawback of not having the flexibility to respond quickly to fluctuating grid demands.

Electrifying

A positive conclusion for the electricity industry is that electrification of the world's energy economy is increasing strongly. Two-fifths of the growth in energy demand over the coming 25 years will be for electricity—up from 25 percent over the past quarter century.

At the same time, however, the relationship between electricity supply and capacity is changing. "A large share of future investment is in renewables-based capacity that tends to run at relatively low utilization rates," says the IEA, "so every additional unit of electricity generated is set to necessitate the provision of 40 percent more capacity than during the period 1990–2010."

One final trend to note is that "the renewables-led transformation of the power sector has given focus to a new debate over power market design and electricity security." The agency adds, "Structural changes to the design and operation of the power system are needed to ensure adequate incentives for investment and to integrate high shares of variable wind and solar."

The global power industry is no stranger to change, but these are indeed interesting times.