Challenge of Energy Transition

Andrew McKillop

Andrew McKillop has undertaken professional research missions on energy, has administered energy projects, or worked as a manager or consultant for organizations including Canada Science Council, Papua New Guinea Government, ILO, European Commission, Organization of Arab Petroleum Exporting Countries, Indian Staff College, UN Economic and Social Commission for Asia and S Pacific, World Bank. He has had numerous articles published on energy in The Ecologist, New Scientist, International Journal of Energy Research, Journal of ILO, Le Monde Diplomatique

Biography:

Clean Energy Transition:Policy and Program Challengesby Andrew McKillopFormer chief policy analyst, Division A Policy, DG XVII Energy, European CommissionOctober 19, 2009

INTRODUCTION• Present policies and programs for massively shifting

the world’s energy systems towards non-fossil energy, especially for protecting global climate and environment, are challenged by convergent trends. These focus the global energy economy, the global economy, trade and geopolitical relations, resource and environment constraints, and other pressures or factors.

While the global economy is and remains de facto dependent on the fossil fuels, with overall and total fossil energy demand still rising despite recession, near term future capital expenditure needs for maintaining or increasing world oil and gas supply are forecast to rise very fast. IEA and other estimates suggest that world oil and gas industry capex needs could attain $ 1 000 billion per year from 2016.Depending on definition, the alternative and renewable energy sources and systems extend from nuclear and hydro to the non-hydro renewables and energy efficiency raising. Increasing their percent share or penetration in the global energy mix is forecast to need a radical and near-term stepwise increase in spending and investment, from current levels. Forecast needs range up to about $ 750 billion per year from 2010-2015. In brief and cumulatively, the world’s energy industry may need the biggest-ever increase in its share of national and private investment, with an inevitable trend to higher energy prices and conflicting policy choices on fossil energy, versus non-fossil energy and energy saving.

ACCELERATING TRENDS• Spending plans, and estimates of investment needs

to achieve an accelerated transition from fossil fuels, to alternate and renewable sources are generated by policy and strategic reasoning that features the fight against climate change, and action to ensure energy security, increase job creation and protect the environment. Spending plans and proposals for energy transition away from near-total fossil energy dependence are rapidly rising in the G20 countries.

Present estimates,

• supply security, and improve energy efficiency through energy saving, alternate energy and Not only to protect the environment and limit climate change, but also to improve energy the renewable energy sources has become the focus of converging policy goals. G20 leadership support to “green energy” and “cleantech” is now strong, but financing mechanisms and frameworks are only starting to be discussed and defined. To date, G20 leaderships have made no specific statements on the clear, but undefined policy and investment conflict of massively rising capex needs for world oil and gas, and massively rising forecast spending needs for developing alternate and renewable energy sources and systems.

• Estimates for current global investment and spending in alternate and renewable energy are variable depending on definitions used for non-fossil energy, but the likely total runs at no more than $ 70 billion a year in 2008-2009. Net amounts are probably well below $ 70 bn a year when financial operations, like debt and asset refinancing, leveraged buyouts and IPOs are stripped out of green energy spending figures.

SHRINKING HORIZONS – LARGE GOALS• Under almost any scenario, amounts

invested for energy transition will have to show a stepwise jump, in the next 1 to 2 years. This investment effort will then need to be maintained at a high level, to achieve present and emerging public and international goals for energy transition.

• As recently as 2005 or 2006, energy transition away from high level or ‘structural’ dependence on the fossil fuels, to renewable and alternate energy, was given a horizon of around 40 or 50 years. The 'phasing out' of fossil energy, starting with oil was set for a series of dates well after 2050. By late 2009, G20 leaderships and OECD national energy policies now place the horizon nearer 2035-2040, at least for oil and gas if not coal and uranium.

• Recent large natural gas finds unassociated with oil (‘stranded’ gas) can or may change the timeframe for natural gas substitution and replacement, leaving nearer-term replacement of oil as the priority transition goal. Coal also presents special challenges, due to present technology coal fired power plants emitting the most CO2 per unit kWh produced, but coal energy being cheap and depending on relatively large and accessible world reserves.

At the coming Copenhagen climate summit in December, even shorter timeframes than 2035-2040 for large substitution of oil, and perhaps ‘capping’ of gas and coal energy utilisation could be proposed, if current political momentum, and media and public opinion interest in acting to limit climate change is maintained. The current outlook for continued political and public opinion support to energy transition appears relatively strong, but not assured.

• European Union leaders, meeting in December 2008 set a timeline of 2020 for at least 20% of all European energy coming from renewables and a 20% reduction in energy intensity of the economy from a 2005 base (energy per unit GDP output). The European targets could be raised to 25% or 30%, and for some EU27 countries even higher targets are possible or likely.

• These targets, and related targets proposed or set by regional and national entities however face the ‘reality test’ of continuing high level dependence on fossil fuels. Where economic change in OECD countries features ‘deindustrialisation’ and outplacement, this merely shifts their oil import dependence from crude and products, to embodied oil energy in the form of manufactured products, raw materials and the transport and logistics for supplying them.

• Continuing global dependence on fossil energy (2006 data) is as shown in the chart below

• World fossil energy dependence

FLUID TARGETS – UNSURE POLITICAL AND FINANCIAL ENGAGEMENT• Political engagement for energy

transition, at least through 2008-2009 and in the run-up to the December COP-15 climate summit appears clearly set, but this does not extend to exact targets, nor to global policy coordination and financial or industrial support. Targets are still fluid and uncoordinated, and open to controversy.

• This is evident from energy and climate negotiations at the level of the G20 group of countries, where major non-OECD countries with different energy economies, and different economic goals from OECD countries are unlikely to target rapid energy transition. Factors such as ‘climate change protectionism’ being introduced into world trade relations, at the level of the WTO, or regional groupings, or bilaterally, could for example generate conflict on G20-wide energy transition target setting.

•  As the chart above shows, shifting from current heavy dependence on fossil fuels will demand the substitution or saving of extreme high quantities of energy, even with zero growth of world total energy demand. The increasingly shorter horizon targets for ‘driving oil out of the energy mix’, featured in political speeches by several major OECD leaders, implies drastically reshaping national energy economies, while also radically accelerating the growth of non-fossil energy supplies.

WIND AND SOLAR ELECTRICITY• This sector of non-hydro renewables has attracted the

largest investor support and media attention, due to fast growth and widespread utilization.

• For global electric power production, windfarms and large area solar PV (photovoltaic) power plants could or may attain a relatively high percentage of installed capacity. This however has to face the ‘reality test’ shown in the above chart. Current world installed electric power capacity, not including private commercial plants and mobile power plants, is around 13 000 GW. Including large private industrial capacity eg. for paper and pulp, cement making and aluminium smelting, the world total in 2008 is likely around 17 000 GW, of which about 50% is coal fired.

• Targets as high as 25% of this current-level global electric power capacity (ie. about 4 250 GW), could be possible for global windfarms within 25 to 30 years according to GWEC and other sources.

• At end 2008, using EIA, GWEC and other sources, total windfarm capacity was about 150 GW and growing rapidly, by up to 35% a year in some countries. Large array solar PV power plant capacity was much smaller, but also growing fast.

• Outside wind and solar electricity, the non-hydro renewables however face special challenges, underlined by the recent boom-slump sequence for “first generation” biofuels based on food crop feedstocks. Achieving large percent shares of world commercial energy from non-fossil energy, by 2030 or 2040 can be quantified. Targets of for example 20%, 25%, 33% or more could be set for 2040, but the higher the target and shorter the timeframe, the larger will be investment spending and needed industrial production, logistics, coordination and R&D support. Targets beyond about 25% of current total fossil energy being replaced or substituted by 2035 (needing about 40 Mbd oil equivalent of new supply or energy saving) could be considered unlikely and unfeasible, without truly massive, global, long-term, coordinated action.

FINANCING ENERGY TRANSITION• Basic policy conflict and competing demands for

finance are strong, if mostly latent, between intensified investment and spending on assuring fossil energy supply, and pursuing alternate and renewable energy development. Recent global economic change including the heavy state borrowing and spending in OECD countries and several major non-OECD countries to limit the impacts of global finance crisis may however enable a breakdown of financial barriers to accelerated energy transition.

• Through 2008-2009, according to data compiled by Bloomberg.com, around $ 11 500 bn has been lent, spent, borrowed and guaranteed by government, only in the USA and for the period 2008-2010, to fight recession and bail out the bank, finance and insurance sector. At the global level and according to the IMF and other sources, total loans, borrowing and guarantees may exceed $ 15 000 bn for 2008-2010, depending on the speed and type of economic recovery, and its sustainability. These amounts, if utilised in multilateral coordinated programmes and frameworks for energy transition could probably achieve lasting success in shifting the energy pyramid away from its current and massive fossil energy base.

My own study of financing needs for substituting about 20 to 25 Mbd oil equivalent in the period 2010-2025, to compensate oil depletion, save energy, and develop alternate and renewable energy sources suggest that total investment and spending for this goal would be around $ 11 000 bn in current USD. These findings were published by Australia’s FINSIA in June 2009. Pushing the timelines further forward would however likely raise costs by a large amount, for several reasons including the need to more rapidly attain replacement and savings of current fossil energy, and more rapidly reduce energy dependence on the fossil fuels.

• EMERGING STATE AND PUBLIC-PRIVATE FRAMEWORKS

• State-backed loans, and public-private funding entities operating to accelerate energy transition are already preferred mechanisms for this goal in OECD countries and in the EU. They are likely to be created across the G20 countries is there is continued political and public interest in, and engagement for limiting climate change, assuring energy supply security, and creating lower economic exposure to high priced oil. This movement towards internationally coordinated energy transition could or might give way to G20-initiated global and multilateral frameworks.

• The range of existing and potential measures and mechanisms is large. It includes a global carbon tax, WTO trade tariffs and mechanisms to encourage green energy and incentivize export industry energy saving, preferential feed-in tariffs for green energy, increased climate derivatives trading, and special effort for Cleantech R&D. Sector-wise policy is already developing, for example legislation and incentives, and state or local investment aiming for urban transport ‘decarbonizing’, limits on car fleet average CO2 emissions, consumer product recyclability, reduced household energy use, more energy efficient agriculture, and so on.

• For lower income countries, targeted ODA (development aid) and CDM (clean development mechanism) operations and action will likely be greatly expanded, with linked financing support from financial and economic institutions. This process will also include multiple accompanying measures, both in OECD and non-OECD countries.

• One negative impact of this uncoordinated and unprepared ‘start of energy transition’ is to reinforce the trend to increased opacity and segmentation in energy markets, itself generating and maintaining price volatility. The probable basic impact of this context is simple: energy prices will tend to rise, worldwide. Price volatility for energy derived instruments will also tend to rise. One proof of this is CO2 emissions trading price volatility since the start of trading in 2005, and particularly since late 2008. As shown by the lead role player in energy market price setting – oil prices - the ability for oil prices to increase very fast and with little negative feedback is mirrored by the potential for rapid slumps in energy prices, when or if there is a return of financial and economic crisis. Within a context of generally rising, but very volatile energy prices, organizing and structuring finance and industrial mechanisms for energy transition (or massive rises in oil and gas investment) is difficult or impossible.

FOSSIL ENERGY DEPENDENCE AND ENERGY PRICES

• Green energy transition plans and estimated spending needs are not emerging in a vacuum unrelated to world energy. These plans and spending forecasts, as well as a multiplicity of usually national and uncoordinated legislative, fiscal and financing mechanisms are being set out for a global energy economy that remains totally, and massively dependent on fossil fuels.

• World oil demand in Sept 2009 is now back to levels close to one year previous, at around 85 to 86 Mbd (million barrels/day), after falling about 3.5% during the deepest part of the recession trough, through Jan-April 2009. Including growing natural gas demand (probably around 4% per year or more) and continuing coal demand growth (growing at about 5% pa. until the recession), the three main fossil fuels, as noted above, likely contribute a total of more than 150 Mbd oil equivalent to the global energy economy.

• This is about 8.2 barrels oil equivalent per capita, per year, for the world’s population of around 6.7 billion.

NATURAL GAS PRICING  - A SPECIAL CASE

• Current US and international natural gas prices, struggling to beat a recent ‘psychological ceiling’ at around  $ 4 to $ 4.50 per million BTU, can be seen as a historical anomaly or throwback to another time – when the onrush of new global LNG supplies, and shale-based gas production is not figured into the reasoning. World ‘stranded’ gas finds, as noted above, have radically increased in the last 2 years, allowing forecasts for ‘up to 60 years’ of current consumption being available at relatively low cost.

• World LNG is experiencing a form of boom-bust cycle at this time, with uncertain and unpredictable impacts at the level of long-run prices. This is mainly due to the very high capital spending needed for upstream and downstream infrastructures, such as LNG trains and regasification terminals.

• The “cheap gas window” is probably unlikely to last beyond 2015, but in the next 5 years increasing gas supplies will have a powerful impact in certain sectors, notably electric power. The potential for bulk electricity price averages to fall, and to show very high volatility, is high and rising. Probably this winter, natural gas prices will tend to be dragged up by rising oil prices, and by natural gas producer country capex and investment effort to developing large increments in world gas supply.

Natural gas demand can only be driven higher by demand outlooks for cleaner, lower carbon electric power generating fuels, and by current bargain basement gas prices, equivalent to oil at around $ 27.50 to $ 30 a barrel. Adding the state-backed rush to develop electric cars and vehicles, signaling vast stepwise growths in peak electric power demand wherever EV fleets grow fastest, natural gas demand, and prices, can only be on an upward track – by 2010-2011.