Why the International Energy Agency has grown bullish, but perhaps not bullish enough, on renewables

This year, the International Energy Agency (IEA) brought some good news about renewable energy. In its 2016 Medium-Term Renewable Energy Market report, it boosted its five-year forecast for renewable energy (RE) by 13 percent over last year’s. Between 2015 and 2021, it expects RE capacity to grow by 42 percent, or 825 gigawatts.

2016’s World Energy Outlook (the “bible of the energy world”) brought more good news: “nearly 60 percent of all new power generation capacity to 2040 in our main scenario comes from renewables and, by 2040, the majority of renewables-based generation is competitive without any subsidies.”

(Carbon Brief)

Energy investment flows are shifting toward renewables. RE growth is outpacing fossil fuel growth in the developed world electricity sector. It’s growing even faster in China (though only half as fast as fossil fuels — China’s still growing really fast).

There are two twists to this story about renewables, one bad, one potentially good.

The bad news is that the progress being made on RE is not enough to hold global warming to under 2 degrees Celsius, the agreed-upon global target. It may be enough to plateau the growth of carbon emissions, but it’s not enough to rapidly and substantially reduce them, which will be necessary for any chance at 2 degrees.

The good news is that IEA may be underestimating the growth of RE. It has a very long history of doing just that. While it has boosted RE’s prospects in its central scenario, that is based entirely on new policy (in the US and China), not any larger reassessment of its models.

Over at Carbon Brief, Simon Evans puts together a pretty good case that IEA is still low-balling. He quotes analysts at Energy Watch Group and the Institute for Energy Economics and Financial Analysis saying that IEA is overstating RE capital costs and understating the rate of decline in total systems costs. “They will be upgrading their renewable energy forecasts again next year,” said Tim Buckley of IEEFA.

I recently called to have a short chat about these issues with Fatih Birol, the executive director of IEA. Our conversation has been edited for length and clarity.

(Wikipedia)

David Roberts

Why is the new World Energy Outlook (WEO) so much more optimistic about renewable energy?

Fatih Birol

When we make scenarios, we are looking at what kind of policies governments put in place and where those policies bring us. But we also look at what needs to be done — our 2 degrees scenario.

In our main scenario, the New Policies scenario, we look at policies put in place and in the pipeline. We have increased our renewable energy (RE) estimates significantly, mainly because two major countries put new policies in place.

As you know, the US government renewed the federal investment tax credit and production tax credit in December 2015 [see Vox’s story here]. And the Chinese government adopted its 13th five-year plan [which boosted its RE goals, see here].

These are the two main reasons why we have increased our RE projections. We expect 40 percent RE in electricity generation in the year 2040.

But this is not enough to be in line with a 2 degree trajectory. To catch the 2-degree trajectory, we need stronger government policies. And we need at least 60 percent share of RE in the electricity generation mix by 2040.

David Roberts

America has just elected a very different kind of government. The Clean Power Plan and other regulations are likely to be rolled back. The US is likely to pull out of the Paris agreement. The clean energy tax credits might even be canceled. Will you do a new set of scenarios that factor in likely Trump policies?

Fatih Birol

We are following very closely what is being written and discussed after the US elections.

We are not an advocacy group at the IEA. We know that governments come and go around the world — this is a perfectly normal thing — and energy policies change with the changes in the governments. We may well see a change in US policy, and given the sheer size of the US economy, and its importance in the global economy, these changes may well have implications for the world. If there are such policy changes, we will include them in our analysis.

But for now it would be premature to speculate on what these policies might be. We will wait for real policies to be announced and put in place. We will look at the implications of those policies, whether or not the consequences are deemed good by the governments. All stakeholders should judge the policies in the light of those findings.

David Roberts

Every WEO shows growth in RE plateauing; even this new, more optimistic WEO shows that. Yet every year, RE has grown rapidly. Why think growth will plateau this time?

(Carbon Brief)

Fatih Birol

One should not mix the capacity numbers and electricity generation numbers. When you look at our electricity generation numbers from RE, they are definitely growing.

We also know that RE installations have peaked in some parts of the world, as a result of the change of government policies — for example, in Europe, champion of RE.

David Roberts

The IEA’s RE projections are consistently more pessimistic than, say, those from the International Renewable Energy Agency (IRENA). Why is that?

Fatih Birol

First of all, I have great respect for all the international organizations working on energy, especially IRENA. We work very closely with IRENA.

But I believe that you cannot look at one field in isolation of the general market context. There's a 100 percent pie. If the share of RE grows, the share of something else needs to be lower. It's the competition between different fuels; they all have advantages and disadvantages. As IEA, we look at all the fuels from the same perspective, from the same arm's length.

So one of the two important differences is, we look at global energy markets, and look at RE as a part.

The second is our approach to projections. We are not saying what is likely. What we are saying is, if these policies are put in place, what are the consequences?

For example, [IRENA] looks at what happens if RE capacity doubles, and works back from that. Ours is a bit different. We say, if you have these policies and these cost assumptions, you end up with this.

There are two different approaches. I cannot say that one is better than the other. But this is the philosophy of the IEA: We look at policies, carefully analyze them, look at cost assumptions across the energy sector, including RE, and come up with results. If governments change policies, as a result of changes in administration or other factors, we will change our projections -- hopefully upward, but maybe downward.

David Roberts

Policymakers and analysts often seem to confuse IEA’s scenarios with predictions. Is there a better way for IEA to communicate that distinction?

Fatih Birol

There is always room for improvement in everything — for making scenarios, writing articles, making movies, there are many ways of improvement. We write very clearly that these are neither predictions nor what we would like to see; these are the numbers, the result of clinical policy analysis and economic analysis. It is the reason the WEO is called the "bible of the energy world."

David Roberts

Some people argue that RE costs have dropped enough that it doesn’t need policy support any more. IEA’s scenarios, however, show it extremely dependent on policy.

Fatih Birol

Costs are dropping substantially. We have seen solar costs in the past five years drop by 80 percent, wind by a third. This is great news for RE.

In some cases, they are competitive; in many cases, they still need government support. But even in our central scenario, by 2040, more than 70 percent of RE will be competitive without government support.

But one should be careful. Two things.

One, if you say that RE doesn't need government support — this is playing with fire. Then you will be alone, competing against cheap coal in Asia or cheap gas in other countries.

Number two, the RE discussion up to now is too focused on electricity generation. There's huge room in heating for industry, for buildings, and in the transportation sector.

I believe this is the second chapter [for RE]. Serious people who really want to see RE grow need to pay attention to the policies, the real financial mechanisms, necessary to foster RE penetration in these sectors.

David Roberts

Who is making strides on RE heat?

Fatih Birol

Biomass is used in industrial boilers in many countries in emerging Asia, and in residential heat in France, Italy, Canada, and Finland. There is a significant number of solar water heaters used in China, Germany, Turkey, South Africa, and Israel.

By the way, when we look at the numbers, in the last year, the energy delivered by solar water heaters worldwide was nearly twice that from solar PV.

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