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    Global Industry Overview: Power Mix To See Long Term Shifts Amid Energy Market Volatility


    September 16, 2022 - Fitch Solutions Sector Intelligence

     

      • Power
      • Global
      • Global Industry Overview
      • Fitch Solutions

      Global Industry Overview: Power Mix To See Long Term Shifts Amid Energy Market Volatility

      • 16 Sep 2022
      THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS COUNTRY RISK & INDUSTRY RESEARCH and is NOT a comment on Fitch Ratings' Credit Ratings. Any comments or data are solely derived from Fitch Solutions Country Risk & Industry Research and independent sources. Fitch Ratings analysts do not share data or information with Fitch Solutions Country Risk & Industry Research.

      Key View

      • This quarter’s gas generation outlook reflects a volatile pricing environment and threats to energy security which have eroded the long-term appeal for gas use in many power markets with shifts most acute in Europe.
      • Coal generation to see faster net global decline, despite a marginal rise in short term coal usage over the coming year.
      • Surging renewable growth in the near term will stabilise slightly over the coming decade, but still represent 80% of all new generation capacity entering the global power sector.
      • An overreliance on renewables will see storage and power management become ever more pertinent globally.

      This quarter’s gas generation outlook reflects a volatile pricing environment and threats to energy security which have eroded the long-term appeal for gas use in many power markets with shifts most acute in Europe. The Russia-Ukraine conflict has brought two key factors of import energy exposure and price volatility into focus which will drive trends in large-scale gas fired power generation. Globally we expect to see gas generation fall to just under 200TWh by 2031, from a peak at 2019. Our Oil & Gas team expects that prices over 2022 will average at GBP2.3 per therm, nearly six times higher than the average of GBP0.41 per therm between 2016 and 2020. Prices are expected to remain high over 2023 and 2024 between GBP1.5-1.1 per therm. Europe’s wide exposure to Russian gas imports is driving a sizeable shift in energy policy for major EU gas power markets such as Germany, Italy and the UK where eroding support for new capacity growth has markets seeking to diversify the energy mix to lessen natural gas consumption. As represented below, Europe’s gas generation outlook has changed significantly against last quarters outlook with a long run decline.

      New Gas Fired Power Outlook Weakened Long Term As Markets Seek To Ensure Energy Security
      Global – Q222-Q422 Forecast Comparison For Gas Generation, TWh

      f = Fitch Solutions forecast. Source: EIA, Fitch Solutions

      Coal generation to see marginally slower net global decline due to rise in short term coal usage over the coming years. We highlight that gas market price volatility and droughts in large parts of Asia and Europe has led to a surge in support for alternatives including a near term uptake in use of coal over the 2022/2023 period. However, we do not expect this marginal upside to last over the forecast period. Our long term outlook for coal has weakened globally against last quarter with more markets seeking to phase out the sector. We highlight that net coal generation growth between 2022 and 2031 will decline at a marginally slower rate than previously expected, falling by 30TWh in our Q322 outlook against 45TWh over Q222. The downwards shift is brought on most strongly by North America and Western Europe (NAWE). That said net declines in our NAWE coal generation forecast have fallen from -562TWh over our Q222 forecast against -531TWh in our new outlook, reflecting shifts in European energy policy.

      Asia Remains Sole Coal Power Growth Region As Global Decline Accelerates
      Global – Net Coal Generation Change Between 2022 & 2031, TWh

      Source: EIA, Fitch Solutions

      Surging renewable growth in the near term will stabilise slightly over the coming decade, but still represent 80% of all new generation capacity entering the global power sector. We highlight that renewable technologies will be the largest beneficiary of a declining use in the coal and gas sectors. As such the renewable sector will see just over 2.1TW of new capacity come online over the coming decade, representing nearly 80% of all new power capacity globally. Growth has surged over 2022 and is set to remain elevated over 2023 as project deployments are accelerated through stimulus effects post Covid-19. Furthermore, new funding and policy support to speed up diversification efforts away from gas-fired power will sustain strong growth. This will be targeted primarily at easing the deployment of renewable technologies and unlocking capacity frozen in legislative deadlock in Europe. However, we expect these effects to subside slightly as renewable growth falls to an annual average of 218GW against an average of 254GW in the near term.

      Renewable Growth To Remain Strong Although Additions Will Temper Long Term
      Global – Annual Net Capacity Growth By Power Group, MW

      e/f = Fitch Solutions estimate/forecast. Source: EIA, Fitch Solutions

      An overreliance on renewables will see storage and power management become ever more pertinent globally. With declining baseload power supply and gas we expect power storage technologies, chiefly pumped hydropower and battery storage, will rise in significance in tandem with renewables. By absorbing supply surpluses and plugging supply deficits, storage facilities will enable markets to integrate more wind and solar power, supplementing the flexibility provided by gas fired power. Our Key Projects Database has 262GW of utility-scale battery storage systems in development globally, much of which is slated for completion over the coming two years. That said, pumped hydropower will represent the largest share of power storage facilities globally. This comes as major markets such as Mainland China champion large growth targets. In Mainland China, we expect pumped storage capacity to grow from 36.4GW at the end of 2021 to 91.5GW in 2031.

      We also see markets becoming ever more interconnected and see regional developments in Europe as a further key to integrating large renewable capacity while providing more flexibility. New power transmission interconnection capacity will release pent up generation potential and create energy corridors between MENA and Europe. A large number of grid connection projects are seeking to bind together the Middle East region and couple into the European grid. We highlight that such projects will establish physical links between the two regions. As the EU deals with significant energy supply disruption and variable renewable power rises, new grid connections to multiple partners will aid in ensuring energy security.

      This report from Fitch Solutions Country Risk & Industry Research is a product of Fitch Solutions Group Ltd, UK Company registration number 08789939 ('FSG'). FSG is an affiliate of Fitch Ratings Inc. ('Fitch Ratings'). FSG is solely responsible for the content of this report, without any input from Fitch Ratings.

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