In power markets, renewables have become the technology of choice, making up almost two-thirds of global capacity additions to 2040, thanks to falling costs and supportive government policies. This is transforming the global power mix, with the share of renewables in generation rising to over 40% by 2040, from 25% today, even though coal remains the largest source and gas remains the second-largest.

This expansion brings major environmental benefits but also a new set of challenges that policy makers need to address quickly. With higher variability in supplies, power systems will need to make flexibility the cornerstone of future electricity markets in order to keep the lights on. The issue is of growing urgency as countries around the world are quickly ramping up their share of solar PV and wind, and will require market reforms, grid investments, as well as improving demand-response technologies, such as smart meters and battery storage technologies.

Electricity markets are also undergoing a unique transformation with higher demand brought by the digital economy, electric vehicles and other technological change. As part of its deep-dive into the electricity sector this year, WEO 2018 also examines what impact of higher electrification in transportation, buildings and industry. The analysis finds that higher electrification would lead to a peak in oil demand by 2030, and reduce harmful local air pollutant. But it would have a negligible impact on carbon emissions without stronger efforts to increase the share of renewables and low-carbon sources of power.