In August 2020 BP set a strategy to transform from an International Oil Company focused on producing resources to an Integrated Energy Company focused on delivering solutions for customers. It recently released the Energy Outlook 2020 which outlines in detail the changing energy mix which is in line with the company’s new strategy. REGlobal provides the key extracts from the report. The Energy Outlook 2020 has mentioned three scenarios which explore different pathways for the global energy scenario till 2050.

The Rapid Transition Scenario (Rapid) has all the policy measures in place and is led by a significant increase in carbon prices and supported by more-targeted sector specific measures. All these developments cause carbon emissions from energy consumption to fall by around 70 per cent by 2050. According to the Outlook this fall in emissions is in line with limiting the rise in global temperatures by 2100 to below 2-degrees Celsius above pre-industrial levels.

The Net Zero Scenario (Net Zero) assumes that the policy measures in Rapid are both added to and reinforced by significant changes in societal behaviour and preferences. This helps in the further reduction in carbon emissions. In this scenario, the global carbon emissions from energy consumption fall by over 95 per cent  by 2050, in line with limiting temperature rises to 1.5-degrees Celsius.

Lastly, the Business-as-usual Scenario (BAU) assumes that government policies, technologies and social preferences continue to evolve in a manner and speed seen over the recent past. A slow progress will lead to carbon emissions peaking in the mid-2020s and emissions in 2050 will be just 10 per cent less that 2018 levels.

Low-carbon transition

According to the Outlook, the transition to a lower carbon energy system in Rapid leads to a major restructuring of the global energy system. There are different aspects to this change.

One, there is a big shift away from traditional hydrocarbons (oil, natural gas and coal) towards non-fossil fuels, led by renewable energy. In Rapid, non-fossil fuels (renewable energy) contribute heavily to the global energy mix from the early 2040s onwards. The share of hydrocarbons in global energy will more than halve over the next 30 years.

Two, the energy mix becomes more diversified. The energy transition in Rapid means that for the next 20 years the global energy mix is more diversified than previously seen. In this scenario oil, natural gas, renewables and coal (initially) contribute to the world energy mix. The greater diversity of fuels means that the fuel mix is increasingly driven by customer choice rather than the availability of fuels. This diversity increases with growing importance hydrogen.

The Outlook has specified that the growing diversification of the fuel mix (in Rapid) will lead to greater competition of energy sources as all the sources will compete for market share. The resource owners will compete to ensure their energy resources are produced and consumed. A big positive of the competition would be an increase of the bargaining power of consumers. Slowly, the economic rents will shift away from producers towards energy consumers.Similar trends are also seen in Net Zero, although the pace with which the share of renewables grows is even faster in Rapid.

Carbon emissions from energy are the largest source of greenhouse gas emissions

The Outlook mentions that the major cause of climate change is the release of greenhouse gases (GHGs). According to the World Resources Institute (WRI) the total GHGs were equal to 49.4 Gt CO2e in 2016. Of this, carbon emissions from energy use accounted for around 65 per cent (the largest share).

The estimate of carbon emissions from energy used in the Outlook differs slightly from the definition used by WRI. The Outlook does not include methane emissions from the production of hydrocarbons. The Outlook, however, includes emissions from bunker fuels (which are not included in the WRI calculation). Based on the definition used in the Outlook, carbon emissions from energy use in 2016 were 32.9 Gt CO2e (similar to the WRI estimate of 32.3 Gt CO2e). In terms of the carbon emissions from energy use, almost half of the emissions are generated from industries. The remainder is split between the transport, buildings, agriculture sectors etc.

Renewables lead the transition

The growth in primary energy over the outlook period is dominated by renewable energy, as the world shifts towards lower-carbon sources of energy. The share of renewable energy (including wind, solar, geothermal and bioenergy but excluding hydro power) increases more than 10-fold in both Rapid and Net Zero. The share of renewable energy in primary energy will rise from 5 per cent in 2018 to over 40 per cent by 2050 in Rapid and almost 60 per cent in Net Zero.

Although the growth of renewable energy will be less in BAU, it will still account for around 90 per cent of the overall increase in primary energy over the next 30 years. According to the calculations, the increasing importance of renewable energy will come at the expense of hydrocarbons. The share of the latter will decline from close to 85 per cent in 2018 to around 40 per cent by 2050 in Rapid and 20 per cent in Net Zero.

Fast growth of renewable energy driven by wind and solar power

The use of renewable energy (wind, solar, biomass and geothermal) grows quickly in all three scenarios. This is due to the falling costs of production and favorable policies that encourages a shift to lower-carbon energy sources. In particular the growth of renewable energy is dominated by wind and solar power, due to continuous fall in development costs. Over the next 30 years, wind and solar costs fall by around 30 per cent and 65 per cent  in Rapid respectively and by 35 per cent and 70 per cent in Net Zero.

The fast growth of renewables slightly slows down from the late 2030s. This will because of the rising costs of balancing the intermittency associated with wind and solar power. Still, the share of renewables in primary energy will grow from around 5 per cent in 2018 to 45 per cent by 2050 in Rapid and 60 per cent in Net Zero.

In both Rapid and Net Zero, wind and solar power account for similar increases in power generation. Though there is significant faster rate of expansion in solar power, supported by greater cost declines. The growth of renewables is comparatively slower in BAU, although it will still grow seven-fold and contribute around 90 per cent of the growth in primary energy over the outlook period. In all three scenarios, emerging economies account for the majority of the growth in renewable energy, at the expense of coal.

Significant wind and solar power capacity additions needed

According to the Outlook, the increase of wind and solar power generation in all the three scenarios requires a significant acceleration in development of projects. The average annual increase in wind and solar capacity in Rapid and Net Zero over the first half of the Outlook period is around 350 GW and 550 GW respectively, which is 6-9 times faster than the annual average of around 60 GW since 2000.

Such kind of acceleration in wind and solar capacity will require a significant increase in investment spending. However, the extent of that increase will be partially offset by the falling development costs of wind and solar energy.

The fast growth in wind and solar power generation in Rapid and Net Zero (followed by a subsequent slowing down due to rising costs of intermittency) is reflected in the pattern of capacity additions. The capacity additions peak around 2035 in Rapid and Net Zero before slowing down sharply. This pattern of new additions raises the risk of excess capacity within the renewables supply chain towards the end of the outlook period.

On the other hand, the acceleration in wind and solar capacity in BAU is more gradual and steady. Still, the average annual rate of capacity construction (235 GW) over the outlook period is still considerably faster than the rate of expansion seen in the past. In Rapid and Net Zero, developed countries represent around 25 per cent of total deployment of wind and solar. China accounts for broadly another 25 per cent, with the rest of the share accounted for by other emerging economies. In BAU, developed economies have a larger role: accounting for around a third of total deployment.

Hydropower grows at a slower rate

Hydropower expands throughout the outlook period, but the pace of growth slows down in the second half of all the three scenarios. This is because the availability of the best sites gradually decreases. The greater pressure to decarbonize the energy system in Rapid and Net Zero supports stronger growth of hydropower than in BAU. Even so, the growth of hydropower in all three scenarios over the outlook period, ranging from 1.3 per cent to 1.6 per cent per annum (p.a.), is slower than the past 20 years (2.6 p.a.). The share of hydropower in global power generation is broadly stable in all three scenarios at around 15 per cent.

The slowing rate of hydropower relative to past trends is dominated by China, where the construction of hydro facilities over the past 20 years accounted for around a third of global growth in hydropower. But as the most productive and advantaged sites in China are exploited, the growth of hydro power in China will slow down, averaging between 1.3-1.7 per cent p.a. in the three scenarios. This will be considerably lower from an average annual rate of almost 10 per cent  over the past 20 years.

According to the Outlook, the slowing in the growth of Chinese hydro power generation is offset by acceleration in rest of Asia, Latin America, and Africa, where increase in economic prosperity and power demand will initiate the development of more hydropower projects.

Significant shifts in the pattern of investments

The energy transition towards greater uptake of renewable energy will require significant levels of investment. This will mark a major shift in the pattern investments across different energy sources.

According to the Outlook, Rapid and Net Zero scenarios imply a significant increase in investment in wind and solar power capacity relative to the trends seen in the past. The average annual investment in wind and solar capacity for Rapid and Net Zero is between $500-750 billion. This is two or three times greater than recent levels of investments seen, although it is around only 3 per cent of total business investment in 2018. BAU also implies an increase in investment in wind and solar capacity to around $300-400 billion per year.

The Full Report on BP Energy Outlook 2020 can be accessed by clicking here.