Global and regional trends in power generation over the next five years
“Our power of prediction is so slight, our knowledge of remote consequences so uncertain,” wrote John Maynard Keynes, one of the most influential economists of modern times. He was referring to the difficulty of predicting what would happen in the future to the investments we make today.
Yet, plan and invest we must. Businesses have to identify the trends, assess the market and try to understand which way the economy and the world are going. Fortunately, the data is available in a way it wasn’t in Keynes’ life-time; it makes forecasting an industry’s future over the next 5-10 years less uncertain than before. Forecasts beyond 10 years are considered unsound; the unknowable variables are simply too many to allow detailed analysis.
ABB, like any other global company, continually assesses market and industry trends. Using data from our eight regional power generation hubs and other well-known industry analysts, we have gauged what we think will be the major industry developments over the next five years (2016-2020). We present an outline of some of the findings below.
Power generation is flourishing and growing
The number of units producing energy continues to grow healthily across all types of power generation between now and the end of the decade. The world’s total generating capacity will grow significantly by around 22%, from 6,224 gigawatts (GW) in 2015 to 7,576 GW in 2020. About 300 GW of new capacity will be added annually, ranging from a low of 286 GW in 2016 to a high of 326 in 2019.
Trillions of dollars in investment
In financial terms, these investments in new capacity between 2016 and 2020 will be worth around $ 2.4 trillion. Almost half of them (47%) will be made in the Asia-Pacific region, with China by far the single biggest investor in new capacity. In fact, China is the leading investor in all categories of power generation, from coal and nuclear to wind, solar and hydropower. Other countries that stand out as major investors are Japan in large-scale photovoltaic (PV) and the USA in natural gas.
Asia-Pacific is the engine
Unsurprisingly, the Asia-Pacific region – which includes China, India and Japan - will continue to be the engine for global growth in power generation. Almost half of all new power plants in the next five years will be built in this part of the world. This new capacity will be evenly spread between conventional fuels and renewables. There will be no major shift in the way electricity is generated; established trends, such as the turn to renewables, will continue. Global power consumption will rise worldwide by around 3% per annum, mainly in the Asia-Pacific region, less so in Europe and the Americas.
Coal remains king
Capacity additions in new conventional power plants – primarily coal, natural gas and nuclear - will decline moderately, by between 1-4% annually over the five-year period. Coal will account for half of those additions.
The use of coal in new power plants is restricted almost exclusively to the Asia-Pacific region, primarily China and to a lesser degree India. China set a record for the amount of new coal-fired in 2015, and is set to break will rise worldwide by energy in 2015, and is set to break that record again in 2019. Even though the Chinese government has introduced measures to reduce the use of coal, we estimate the amount of new coal- fired power coming online will remain relatively high. It will peak at 49 GW in 2019 before dropping to 34 GW in 2020 when government targets start to make an impact.
Natural gas and nuclear
In the United States, the combination of domestic supplies of natural gas and the government’s Clean Power Plan to reduce CO2 emissions by a third has caused a switch from coal to natural gas in power generation, with coal-fired generation declining and natural gas generation hitting all-time highs. Large capacity additions of new gas-fired plants are also taking place in the Middle East, Africa and Russia in particular.
There is significant activity in the nuclear segment, with 66 nuclear units currently under construction worldwide. Twenty-four of these units are in China, followed by Russia, India and the USA. Even though nuclear accounts for only 9% of new capacity addition, it eats up 41% of the total amount of money invested in new power generation facilities, due to the high up-front cost of building a nuclear power plant.
The switch to solar
The switch to solar is a worldwide phenomenon. Between 2015 and 2020 global installed capacity will almost triple, from about 220 GW to 600 GW. The global trend of annual double-digit increases in new capacity will continue beyond the five-year period, with almost two-thirds of those investments being made in China and other Asia-Pacific countries.
Investments in small-scale PV installations will flourish in all markets, with the exception of Japan. But utility-scale investments will not share the same upward path, peaking at 38 GW in 2017 before tailing off in 2020. New PV capacity additions will almost double in China, from 17 GW in 2015 to 31 GW in 2020. Although India’s target of installing 100 GW of solar generating capacity by 2020 seems ambitious, with our estimates predicting less than half that amount.
Government subsidies have been the key driver of solar investments and growth over the past 40 years. That trend will continue over the short and medium term. Even though huge cost reductions have been achieved, solar energy still remains more expensive to produce than power from conventional fuels and wind in most parts of the world.
Cost-competitive wind power
Around 60 GW of wind power were installed worldwide in 2015, setting a new record. This high level of new capacity is expected to continue over the next five years, diminishing slightly after 2018 when the US subsidy scheme comes to end. Around half of all new installations are in the Asia-Pacific region.
Like solar energy, most wind power installations are driven by government policy and subsidies. This is likely to continue in much of the world, but not everywhere. In some parts of Europe,
Australia and the Americas, onshore wind power is already cost-competitive with coal and natural gas. In the coming years, most of the global onshore market is expected to become independent of subsidies.
Around 90% of new wind power installations are onshore. Offshore power, which has much higher investment costs, will grow by 10% annually over the next five years, mainly in Europe. Offshore wind installations will become cheaper to build over the next two decades, but will still require government subsidies for some time to come.
Looking ahead to 2040
The International Energy Agency (IEA) and Bloomberg New Energy Finance (BNEF) have both projected long-term trends for the next 25 years. Their forecasts for the power generation market in 2040 arrive at similar conclusions.
Both predict a decoupling of national economic growth from power consumption, with power demand falling or rising slowly in the developed economies of the northern hemisphere: the USA, Canada, Europe, Japan, but also Russia. Almost the entire southern half of the globe will expand capacity at a medium rate, with only India, of the major developing economies, increasing capacity at a high level. Global growth in new power generation will average 2-3% per annum over the 25-year period.
Both the IEA and BNEF agree that renewable energy (solar, wind, hydro, nuclear and others) will make up 50% of the energy mix in 2040, although BNEF predicts a faster growth rate than the IEA. Coal´s share of the energy mix will fall from 41% in 2015 to 30% in 2040, although paradoxically the number of units in production will grow by about 1%.
A common challenge that power generation facilities face in the coming years
- regardless of application, region or trend – is that they will have to operate at peak performance and with a high degree of flexibility in order to respond quickly to rapid market changes. The best way for them to meet this challenge is to harness the opportunities provided for service and maintenance by big data and analytics in the Internet of Things, Services and People.