Net Zero and the Role of Gas and Coal in Energy Transitions

Dr Carole Nakhle CEO, Crystol Energy

IEA-IEF-OPEC Symposium on Gas and Coal Market Outlooks 28 April 2021

Energy Expertise. Global Reach. Evolution of global electricity mix

Share of Electricity Production by Evolution of Electricity Mix by Fuel Source, World 45% 40% 2019 35% 30% 25% 20% 15% 10% 1985 5% 0%

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 0% 20% 40% 60% 80% 100% Coal Gas Hydro Coal Gas Hydro Renewables Solar Oil Renewables Solar Oil Wind Nuclear Wind Nuclear

Source: BP, 2020, Ember, 2021 2 Electricity generation by fuel type in selected countries/regions

Electricity Generation by Fuel Type

China

Africa

Middle East

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Oil Natural Gas Coal Nuclear Hydro Renewables Other

Source: BP, 2020 Note: EU includes UK 3 CO2 emissions by country/region

CO2 Emissions by Country/Region 12000 40000

35000 10000 30000 8000 25000

6000 20000

MillionTonnes 15000 MillionTonnes 4000 10000 2000 5000

0 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 US Middle East Africa China EU World (rhs)

Source: BP, 2020 Note: EU includes UK 4 Europe: underneath the trend, a multispeed energy region Electricity generation by fuel, 2019 100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0% Germany Italy UK Poland Netherlands Spain EU Oil Natural Gas Coal Nuclear Hydro Renewables Other

Source: BP, 2020 Note: EU includes UK 5 Climate, economics and politics

• EU aims to be climate-neutral by 2050 – an economy with net-zero greenhouse gas emissions. • Notable progress to date (23% reduction in CO2 1990-2018). • However, whatever has been accomplished to date has to be done now roughly three times faster.

• In power generation, key target to lower GHG emissions should be to minimize the role of coal. • From a climate perspective, ideally best is to replace coal fired with renewable generation but varying (and unpredictable) utilisation rate. • Natural gas can complement wind and solar both during seasonal variations in wind and solar availability and provide back-up during very short-term, literally minute to minute fluctuations in their outputs.

6 Daily gas, wind & solar electricity generation in Germany (2017 – 2020)

Wind & Solar generation Gas generation

45,000 2020 2019 12,000 2020 2019 40,000 10,000 35,000 30,000 8,000 MWh 25,000 MWh 6,000 20,000 15,000 4,000 10,000 2,000 5,000 - - 01/01 03/01 05/01 07/01 09/01 11/01 13/01 15/01 17/01 19/01 21/01 23/01 25/01 27/01 29/01 31/01 01/01 03/01 05/01 07/01 09/01 11/01 13/01 15/01 17/01 19/01 21/01 23/01 25/01 27/01 29/01 31/01 January January

Source: Eikon Terminal 7 Gas vs coal

• A complete switch from coal (and oil) to gas would achieve a CO2 emissions reduction equivalent to 6-years’ worth of the historic annual reduction rate of CO2 emissions (ca. 43 mn tCO2).

• By comparison, to replace coal (and oil) with renewables (instead of gas) means to have to wait more than 11.5 years (assuming the average growth rate of renewable production achieved in the past 10 years).

• Europe’s energy transition will largely be a story about gas and modern renewables.

• However, despite the climate rationale: • Pressure in some member states to protect coal mining jobs, especially when coal is often produced in remote and otherwise disadvantaged regions, with long (and proud) local tradition. • Low carbon price. • Security of supply concerns.

8 China: Reading between the lines

• Climate targets: • Reduce carbon intensity of the Chinese economy (i.e., carbon emissions per unit of GDP) by 65% from 2005 levels, compared to the original commitment of 60-65% made in 2015. • Achieve carbon neutrality by 2060.

• While these pledges may seem ambitious, the fact that the carbon emissions reduction target is promised in terms of intensity (per unit of GDP) means that China will retain some flexibility.

• Unlike many advanced economies which have committed to a reduction of carbon emissions in absolute terms (e.g., in terms of tonnes of CO2 relative to a particular benchmark year), choosing a relative carbon intensity target could also mean that GDP growth is expected to decelerate; in this case carbon emissions would not be reduced as strongly as the numbers suggest.

• Indeed, in the recent 14th Five Year Plan (FYP) (approved 11 March), instead of explicitly setting a numerical GDP growth rate target (as China would routinely do in every FYP), the government suggested a system of indicative economic growth rates for the period 2021-2025.

9 Uncertain gas outlook in favour of coal

• The 14th FYP contains two rather specific energy targets:

1. An increase of nuclear electricity generation capacity from the current level of 52 GW to 70 GW by 2025:

– All else equal, this increase would boost the share of nuclear in primary energy to 5.7%, from the current level of 4%.

2. Achieve 20% of primary energy consumption from non-fossil fuel by 2025.

1. However, it has not capped the consumption of coal. This opens the option of reducing other fuels to reach the 20% target.

• These targets could curtail a strong push toward increased gas consumption.

• Carbon price not high enough to incentivise coal to gas switching.

• Higher gas prices may lead to a slower shift from the more competitive coal to gas.

• Under existing conditions, the maximum technical potential to switch from coal to gas in electricity generation in China is only ca. 9% of current coal generation level.

10 US success

Electricity generation mix 6,000 100 5,500 90 5,000 80 70 4,500

60 4,000 50 3,500 40 30 3,000 20

% of total generation 2,500 US CO2 emissions, mn tCO2eq 10 2,000 0 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023 2026 2029

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Historic CO2 emissions Coal Natural gas Linear trend (2007-30) Petroleum Non-carbon generation Biden's 2030 climate target

Source: EIA 11 But a lot more to be done

• US President Biden’s recent climate target (50% GHG emissions reduction by 2030 relative to 2005) is very ambitious • Requires enormous investment in all types of clean technologies and low carbon energy sources.

• To put this target in the historic context of US CO2 emissions trend: • since 2007 till 2019 emissions have been decreasing at an average pace of 67 mn tCO2eq/year. • This past trend indeed considers the effect of switching from coal to gas in the power sector, given the shale gas revolution. • However, to achieve Biden’s new climate target, the rate of decline in CO2 emission would need to be 184 mn tCOeq/year between now and 2030. This is almost three times the rate of decrease that the US achieved in the recent past. • The role of gas in this journey to meet the newly announced target will clearly be more important than ever.

12 Thank you! [email protected] @carole_nakhle @CrystolEnergy @AccessWIE www.crystolenergy.com

Crystol Energy, 4 -12 Regent Street, London SW1Y 4PE, United Kingdom Tel: +44 203 356 2976