Profound changes underway in energy markets Signs of decoupling of energy-related CO 2 emissions and global economic growth Oil prices have fallen pre

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1 Keisuke Sadamori Director of Energy Markets and Security, IEA The 88th IEEJ Energy Seminar, 5th October 215

2 Profound changes underway in energy markets Signs of decoupling of energy-related CO 2 emissions and global economic growth Oil prices have fallen precipitously, raising questions over the competitiveness of renewables But policy drivers for renewable electricity energy diversification, local pollution and decarbonisation remain robust Renewables are key to the unprecedented pledges ahead of COP 21 Renewables to become first source for electricity in the longer term, but addressing policy uncertainty in the next five years is crucial 2

3 Renewables are becoming the largest source of new power generation capacity World net additions to power capacity GW Fossil fuels Nuclear Hydropower Non-hydro renewables Analysis from the IEA Medium-Term Renewable Energy Market Report 215 and the New Policies Scenario of the World Energy Outlook 215. The share of renewables in net additions to power capacity continues to rise with non-hydro sources reaching nearly half of the total 3

4 Growth shifting to emerging markets and developing countries Shares of net additional renewable capacity, India 9% Brazil 5% Rest non - OECD 13% EU 13% USA 9% Japan 5% Rest OECD 8% China 38% As the OECD slows, non-oecd countries account for two-thirds of renewable growth, driven by fast-growing power demand, diversification needs and local pollution concerns 4

5 More renewables for less money 16 Global indicative generation costs for new plants = Onshore wind Solar PV - utility scale Offshore wind High levels of incentives are no longer necessary for solar PV and onshore wind, but their economic attractiveness still depends on the regulatory framework and market design 5

6 Evidence of lower costs on the horizon Recent announced long-term contract prices for new renewable power Onshore wind Utility-scale solar PV Germany USD 67-1/MWh Germany USD 96 /MWh United States USD 47/MWh United States USD 65-7/MWh Canada USD 66/MWh Turkey USD 73/MWh China USD 8 91/MWh India USD /MWh Brazil USD 81/MWh Brazil USD 49/MWh Jordan USD 61-77/MWh United Arab Emirates USD 58/MWh Chile USD 85-89/MWh Uruguay USD 9/MWh South Africa USD 51/MWh South Africa USD 65/MWh Egypt USD 41-5/MWh This map is without prejudice to the status or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area Australia USD 69/MWh A combination of price competition, long-term contracts, good resources and financial derisking measures is creating deployment opportunities in newer markets and at lower costs 6

7 Renewables can power Africa s economic growth Sub-Saharan Africa power demand growth versus supply sources TWh Power demand growth With huge resources, improving cost-effectiveness and policy momentum, renewables account for almost two-thirds of demand growth in Sub-Saharan Africa 7

8 Renewables can power Africa s economic growth Sub-Saharan Africa power demand growth versus supply sources TWh Other renewables Hydropower Fossil fuels With huge resources, improving cost-effectiveness and policy momentum, renewables account for almost two-thirds of demand growth in Sub-Saharan Africa 8

9 Renewable growth can be accelerated back on track to meet climate goals GW World renewable power capacity growth, main versus accelerated case Historical Forecast United States Japan EU-28 Other OECD India China Brazil Other non-oecd Renewable energy can be brought back rising annual installation growth, through enhanced domestic policies, e.g. grid integration of variable renewables 9

10 Renewable growth can be accelerated back on track to meet climate goals GW 1 World renewable power capacity growth, main versus accelerated case Historical Accelerated case United States Japan EU-28 Other OECD India China Brazil Other non-oecd Main case Renewable energy can be brought back rising annual installation growth, through enhanced domestic policies, e.g. grid integration of variable renewables 1

11 A decisive moment for the future of renewables Increasingly affordable renewables are set to dominate the growing power systems of the world The effect of the lower oil price environment on global renewable growth is more perception than reality, though biofuels are an exception Further policy action is needed for heat and biofuel sectors, in the face of structural challenges. Yet, wavering policy commitments risk undermining investor confidence and are dampening growth While variability of renewables is a challenge energy systems can learn to adapt to, variability of policies poses a far greater risk 11

12 Global Renewable Technologies 12

13 Renewable electricity expanded at its fastest rate in 214, despite sharp fall in oil prices World net additions to renewable power capacity, historical and forecast (GW) Annual additions (GW) Ocean Geothermal STE Solar PV Offshore wind Onshore wind Bioenergy Hydropower Accelerated case The global expansion for renewable electricity remains robust and renewable power capacity rises by 4% over The outlook stems from greater cost-effective deployment of solar PV and onshore wind. Still annual forecast remains relatively flat, with a dip in 216/17 13

14 Onshore wind leads global renewable capacity additions, with higher growth forecast versus MTRMR 214 World net additions to renewable capacity, absolute and percentage growth, Net additions (GW) % 13% 7% 76% 129% 144% MTRMR 214 MTRMR % 39% 241% 229% 136% 8% 34% 29% Hydropower Bioenergy Onshore wind Offshore wind Solar PV STE/CSP Geothermal The forecast for onshore wind is more optimistic mostly due to China and Brazil. Solar PV is the second-largest source of capacity growth, with a raised forecast reflecting more optimistic growth prospects across a number of markets. 14

15 Strong global momentum for renewable electricity generation World renewable generation and forecast (TWh) Generation(TWh) Ocean STE Geothermal Solar PV Offshore wind Onshore wind Bioenergy Hydro In 22, renewable generation reaches over 7 15 TWh, more than today s combined demand of China, India and Brazil 15

16 Generation cost profile for fossil-fuels varies under fixed prices versus historical volatility USD/MBtu Historical gas prices by region versus price range for LCOE of new CCGT at USD 6-8/MWh Jan-5 Jul-5 Jan-6 Jul-6 Jan-7 Jul-7 Jan-8 Jul-8 Jan-9 Jul-9 Jan-1 Jul-1 Note: LCOE for CCGT is calculated using a ~65% capacity factor and 7% discount rate. No carbon pricing is included in LCOEs. Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 US Henry Hub Europe - UK NBP Asian LNG price (average contracted import price) Asian LNG (spot) Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17?? Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-2 Gas prices at which new CCGT today has LCOE at USD 6-8/MWh (Benchmark for recent wind costs) More robust competitiveness assessments would account for value of electricity generated when and where, and fossil fuel and carbon price volatility 16

17 The heating sector offers particular challenges for policy makers Share of renewable energy in total FEH in different world regions, 213 Share in total energy use for heat 5% 45% 4% 35% 3% 25% 2% 15% 1% 5% % OECD Americas OECD Asia Oceania OECD Europe China India Brazil Africa Non-OECD Americas (excl. Brazil) Non-OECD Asia (excl. India) Non-OECD Middle East Europe and Eurasia Geothermal Solar thermal Modern bioenergy There are no targets and support policies for renewables hearting and cooling in Japan, while the strongest policy drivers today have been adopted in OECD Europe as a result of the EU s mandatory 22 targets for renewable energy 17

18 Focus on Japan 18

19 In OECD Asia Oceania, despite strong annual growth in the near term, the additions will slow OECD Asia Oceania historical and forecasted capacity additions, generation and investment Annual additions (GW) USD 214 billion Generation(TWh) Hydropower Bioenergy Onshore wind Offshore wind Solar PV Geothermal STE Ocean Investment Renewable additions are expected to slow over the medium term, with uncertainties over progress in integrating higher levels of variable renewables in Japan and reduced expectations in Australia, where electricity demand is expected to stagnate. 19

20 Drivers and Challenges in Japan Drivers Strong policy environment backed by generous FITs and need for new generation Potential for increased system flexibility in the electricity sector through planned reforms Challenges Integration of variable renewables in certain regions and maintaining a dynamic approach to support scheme adjustments Implementation of new electricity sector reforms and new strategic plan 2

21 Over 214-2, solar PV expands by 36 GW, but deployment pattern may be volatile Japan annual net additions to renewable capacity and new investment Annual additions (GW) Ocean STE Geothermal Solar PV Offshore wind Onshore wind Bioenergy Hydropower While the solar PV cumulative capacity reaches 6 GW in 22, the pattern may be volatile, with high levels in 215 followed by a shrinking market, due to assumed grid constraints. 21

22 Japan s solar PV approaching benchmark prices Japan estimated solar PV LCOE ranges versus FIT and end-user price levels 6 Solar PV below 1 kw (residential scale) 6 Solar PV above 1 kw (commercial and utility scale) USD 214/MWh Feed-in tariff Average household power price (ex tax) Average industry power price (ex tax) Solar PV residential and commercial LCOEs are seen falling to near current household and industry retail prices, potentially creating incentives for deployment under self-consumption 22

23 However, Japan s solar PV costs still remain high compared with international standards Historical and forecasted typical solar PV investment costs, beginning year USD 214/kW Utility ground-mounted Commercial rooftop Residential rooftop Forecast Forecast Forecast Australia China Germany India Japan United States Global reference Japan s utility-scale solar PV investment costs remain notably higher the general investment cost range in the world (USD 1-2 /kw), in part due to constricted land availability and grid connection and permitting challenges 23

24 Onshore Wind Investment costs in Japan remains highest Typical onshore wind total investment costs per kw in selected countries (21-2) USD 214/kW China India United States Turkey Brazil South Africa Germany Japan Difficult topography, costly turbines adapted to special meteorological conditions, high construction costs and lack of grid availability combined with expensive and long predevelopment process are the main factors behind these high investment costs. 24

25 Priorities for Renewables in Japan Objective should remain to foster a well-balanced portfolio of renewable energy technologies Proceed in the power system reforms Strengthen interconnections and enlarge balancing areas Allow for fair and equal grid access conditions Policies on Solar PV should be adapted to reduce unit costs as much as possible and rapidly align with international benchmarks prices For development of renewable heating and cooling policy, need to obtain reliable data on production, utilisation and costs 25

26 IEEJ: October 215, All Rights Reserved. For further insights and analysis The Medium-Term Renewable Energy Market Report 215 was launched on 2 nd October and can be purchased online at: Thank you for your attention! Contact:report@tky.ie 26