Published August 12, 2021
Power demand is surging as heatwaves hit several continents just as industrial activity is rebounding from recent restrictions, creating a challenge for authorities seeking to accelerate the energy transition away from fossil fuels.
Electricity demand has recovered strongly this year, following a collapse in demand in 2020. Industrial activity across Asia has bounced, just as warmer temperatures increased demand for air conditioning resulting in higher electricity prices.
Industrial activity in China has rebounded strongly over the past 12 months as restrictions have eased. Fiscal stimulus measures and a strong credit impulse have boosted construction activity across the country. Pent up demand for consumer goods has also seen manufacturing activity surge across the country, a key driver of electricity demand in China. Industrial production in China makes up more than 60 per cent of total power demand compared with only 40 per cent across the entire world.
Energy demand rises
Global energy demand is set to increase by 4.6 per cent in 2021, more than offsetting the 4 per cent contraction in 2020, according to the latest estimates from the International Energy Agency (IEA). Most of the growth in electricity demand is coming from the Asia region. In fact, more than half of global growth will occur in China, according to IEA. India, the third-largest consumer, will account for 9 per cent of global growth.
Power markets across the Asia region generate more than half the world’s electricity and are still heavily reliant on fossil fuels. Up to 71 per cent of energy generation in Asia is sourced from fossil fuels, compared to Europe’s 38 per cent.
While investment in renewable energy generation has been strong, it is still below total electricity demand. According to the IEA, global power sector investment is set to increase by around 5 per cent in 2021 to more than $US820 billion. The investment slate is dominated by renewables generation, expected to comprise 70 per cent of 2021’s total of $US530 billion spent on all new generation capacity.
As the world decarbonises, the environment for new coal investment looks challenging. The IEA expects investment in coal supply for export markets to continue to weaken.
However, the outlook for LNG is better with investment in LNG liquefaction expected to grow by over two-thirds in 2021 to over $US23 billion according to the IEA, buoyed by increased activity in Qatar, Russia and US.
With limited growth in the supply of fossil fuel sources amid strong demand, power markets are likely to remain tight in the short term, resulting in elevated coal and LNG prices as the energy transition continues.
Daniel Hynes is Senior Commodity Strategist and Soni Kumari is Commodity Strategist at ANZ.
This story is an edited version of an ANZ Research report. You can read the original report HERE.
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