Fossil fuels will account for only 41% of electricity generation by 2040 in Australia, as retiring coal and gas plants are replaced by lower-cost wind and solar, according to the New Energy Outlook 2015, published on the same day Australia scaled back its Renewable Energy Target.

The report predicts that natural gas will not be the "transition fuel" to wean the world off coal.

North American shale will change the gas market, but coal-to-gas switching will be mainly a US story.

Many developing nations will opt for a twin-track of coal and renewables, the report suggested.

That will mean greater burning of coal by developing countries will more than offset the substitution of coal-fired power by gas and renewables in developed economies.

World emissions will then fall back, but only to 14.8 gigatonnes in 2040, still 13% above 2014 levels.

Bloomberg New Energy Finance’s report predicts that Australia’s power sector will fundamentally change without any additional policy, as an influx of rooftop PV and energy storage is driven into the system by households and businesses, and utilities preferentially choose renewables to replace ageing coal and gas plants.

Over half of the nation’s electricity generating capacity will be located behind-the-meter in 2040, with 37 gigawatts of small-scale PV and 33GW of battery storage acquired by households and businesses.

“This will be driven by the superior economics of these technologies, which will be able to supply consumers with electricity at a lower cost than the grid,” the co-author of the report’s Australian section, Kobad Bhavnagri, predicted.

“This will limit the requirement for new large-scale capacity to the replacement of retiring generators.”

But old, dirty and less efficient coal-fired power stations won’t be pensioned off quickly.

Over 29GW of fossil fuel plants are forecast to be retired by 2040, but coal plants will only close if refurbishment is not possible, the study says.

Some 12GW of coal capacity that cannot be extended will retire, but 8GW is refurbished to prolong its operational life.

“Old coal is very cheap,” Bhavnagri said.

“With our existing suite of policies, coal generators will run for as long as is physically possible.”

But when new large-scale capacity is eventually required, it will almost exclusively be renewable, the study predicts.

Large-scale PV (15GW) and wind (13GW) will be the technologies of choice, as these projects will be lower in cost than building new coal or gas generators, even without subsidies.

“The economics of new plants are very different from old,” Bhavnagri said.

“Old coal is cheap, because only the running costs need to be met. But building new coal or gas is very expensive, as construction is capital intensive.”

Coupled with the relentless growth in rooftop PV, this will mean over half of Australia’s power capacity, and 59% of generation, will be renewable by 2040.

The grid will be kept stable by large amounts of flexible capacity, which includes at least 33GW of storage – more than Australia’s current coal-fired fleet.

“Sophisticated market mechanisms will have to be developed to enable the system to effectively utilise these assets”, Bloomberg distributed energy specialist Hugh Bromley explained.

“Energy storage will need to be used to meet peak demand in winter from 2033, and households will have more than enough battery capacity to do this. But the grid will need to be managed in a much smarter way to co-ordinate the millions of new household participants.”

Despite the change in makeup, Australia’s power sector will not decarbonise substantially until 2036.

The low-cost and long-life of coal generation will mean power sector emission fall by only 9% by 2030 compared to 2014.

“It is not until 2040, when the bulk of fossil-fuel retirements have taken place, that power sector emissions substantially fall,” Bhavnagri said.

“Carbon emissions will remain stubbornly high unless coal closure is accelerated. Additional policy will be required if Australia is to set a goal for emissions reductions at the Paris Summit that is in line with our major trading partners.”

Prime Minister Tony Abbott may have to consider his preference for a modest carbon emission reduction target ahead of climate talks in Paris in November and December, because Canada and Japan have adopted higher-than-expected targets.

Abbott wants an emission reduction target of between 13-18% by 2030 on 2005 pollution levels, but his Canadian counterpart Stephen Harper, also a global warming sceptic, committed to a 30% reduction target last month, and Japan, the world’s fifth biggest emitter of carbon dioxide, has signalled a 26% target.

Australia risks being shamed for its stingy targets if it does not fall into line with international norms, the report said.

And if Australia wants to match the US target it would need a 40% emission reduction target by 2025.

The Abbott government says Australia is already on track to meeting its 2020 target of 5% below 2000 levels, the equivalent of a 13% emissions reduction below 2005 levels.