|
COSTS AND CHALLENGES OF ENERGY TRANSITION ABSTRACT Depending on targets and timelines, global Energy Transition away from fossil fuels can be given a wide range of costs. Major factors impacting the cost range of course include the quantity and rate of commercial fossil fuel substitution by low carbon alternative energy, versus the amount of current commercial energy demand that is eliminated by energy conservation and restructuring of the energy economy, the economy, and society. Also greatly affecting the cost ranges obtained, various hypotheses or scenarios are needed for technology, industrial, institutional, economic, financial, legislative, normative or regulatory, and other factors and considerations affecting targets that are set for energy transition, both nationally, regionally or multilaterally over various periods of forward time. During this, there can be major changes in policy and public appreciation of the urgency or not of energy transition. Most cost scenarios compare existing energy supply systems and infrastructures, on the upstream, with downstream economic and social energy needs and uses, notably using the yardstick of energy consumption per unit GDP. Due to these parameters being far from fixed or rigorous, scenarios for both the future energy targets, and the overall balance of "energy saving or energy substitution" over the next 15 - 25 years ahead are necessarily approximate and need care in how they are appreciated. The approach used in this paper is to focus one key driver of energy transition, not limited to the important question of climate change-linked energy transition. This concerns oil and gas substitution needed due to geological depletion of reserves during the 15 - 25 years forward period we cover. Using data sources as widely different as the IEA, ASPO, Total Oil SA, and others such as the OPEC Secretariat, we find increasing convergence of views on this subject, enabling us to advance an oil only target of 25 Mbd (Million barrels per day) as the likely minimum possible target for energy transition to 2025. This excludes natural gas reserve depletion to 2025, and the somewhat anguished question of coal. Some climate change experts claim coal must be 'eliminated from the energy mix' within 20 years unless completely functional CCS (clean coal and carbon sequestration) technology and systems can be developed and retrofitted to all coal-fired power plants worldwide. These currently supply over one-half of the world's entire electricity. Very large or extreme cost estimates are available for this specific target, of retrofitting all coal power plants with CCS. We have considered that world coal burning will probably continue at around current rates (about 6 Bn tons/year) while natural gas burning (about 2.7 Bn tons oil equivalent/year), simply due to depletion, will necessarily fall. We therefore take account of the many studies, eg. by McKinsey & Co for the European Commission on very major potentials for energy saving, including gas, rather than fossil fuel supply substitution. However the total costs, timelines, policy and industrial contexts for massive energy saving instead of supply substitution are all subject to wide forecasting margins at this time. On these bases and with these caveats, we can provide approximate Energy Transition costs in 2009 US dollar terms starting at around 750 Billion USD-per-year, for a minimum program investment and spending need, also expressed in 2009 USD terms, of around 11 000 Bn USD for 25 Mbd oil substitution by 2025. Major considerations for Energy Transition Energy intensity (average demand per capita): It can be argued the main goal of Energy Transition for the OECD countries, due to their very high present oil and gas intensity, should be reducing the fossil energy intensity of the economy and society – necessitating a 'twin strategy' of energy saving and development of all feasible sources of renewable, non-fossil and low carbon energy. We can note the 27-nation European Union regional grouping of states has already decided (December 2008) to target a 20% reduction of fossil energy consumption by 2020, and the development of renewable and low carbon alternate energy supply able to cover 20% of total EU energy demand by 2020. Cost estimates for this program are widely variable at this time. GHG (Greenhouse Gas) emissions reduction: Various national, regional and international targets and proposed targets exist for eliminating or reducing CO2 and other greenhouse gases (GHG) produced by current fossil fuel burning, and increasing national energy security for fossil energy import-dependent states, notably the OECD group. The above cited European Union "climate-energy package" of Dec 2008 also targets a 20% reduction in GHG emissions by 2020. Electricity is the major focus of current national and regional GHG reduction targets. Reduction of coal burning is of course 'controversial' due to the absence of economically-viable CCS, but increased dependence on coal and lignite is probably certain due not only to their lower cost but also their larger remaining world reserves relative to oil and gas. At present, about 28.5% of world commercial energy is supplied by coal and lignite, and about 55% of world electricity is coal-based. Only about 11% of world electricity or 6%-7% of world commercial energy is renewable hydropower based, using US EIA data for 2007. Electricity accounts for about 20%-40% of final commercial energy demand, depending on country and economic structure. Climate change and fossil fuels: CO2 and other GHG emissions from fossil fuel burning probably total about 28 Bn tons annual, or 30 Bn tons annual including release of unburnt methane (natural gas) and coal loss. These emissions are vastly higher than all natural volcanic, tectonic, seismic and geological sources of GHG, which likely total less than 0.5 Bn tons annual. At least 10% of world nameplate natural gas capacity is vented, flared, or lost in transmission. Equally intense in climate change impact, coal production and transport losses, worldwide, total around 90 – 125 M tons-per-year, much of it lost through underground fires in abandoned mines. While having less impact on the world's climate, but massively polluting the world's oceans, and some land areas, at least 1.4 Million barrels-per-day (Mbd) of oil is lost "from well to wheel". This loss rate is increasing much faster than production, notably due to extreme depth offshore production and tertiary production from tarsands and oilsands. Electricity demand: Due to extreme high growth rates for electricity consumption in many countries and specially the Emerging Economies (often close to or above 10% per year until the present recession), renewable hydroelectricity and windpower penetration, or share of global electricity and commercial energy demand has in fact tended to stagnate or decline in 2005-2009 to date. Other renewable and low carbon energy, including the 'new renewables' such as emerging solar thermal and photovoltaic, wavepower, geothermal, biomass fuel and electricity, and low carbon landfill methane, coalbed methane, etc, accounted only for another 1% - 1.25% of world total commercial energy, in 2008, according to the OECD's IEA. Energy demand and Economic structure: One major problem for substituting the approximate 55% of world electricity presently supplied by coal burning (more than 75% of Chinese electricity, 2008), by non-coal or non-fossil primary energy sources, is the linkage of power demand growth with GDP growth. Oil and natural gas demand are less close linked, that is percent growth of electricity demand per unit GDP growth under current economic structure is above unity ( 1 ) in most countries, but is often much lower for oil and gas. In recession oil and gas demand can fall while GDP can weakly grow for a few quarterly periods, but this is rare for electricity. The steady and long-term shift to higher electricity intensity of the economy on a worldwide basis therefore presents as many problems as solutions – for example the claimed advantage of most 'new renewables' only delivering electricity as their final type or form of commercial energy. Economic recession impacts: Only during recession, we can note, is oil intensity seriously reduced. During the most powerful economic recession before the present (1979-83) contraction of global oil demand was about 9.6% through the 3 most-intense years of economic recession (1980-1982). Conversely, due to price, world gas demand did not contract in the same period. Quantities of fossil fuels to be substituted: Taking the fossil fuels of oil, coal and natural gas it is coal and lignite, with the highest 'carbon footprint', that have the highest current demand growth profiles. This is almost exclusively due to coal being cheap. Also due to simple cost difference – natural gas is 'historically' cheaper than oil – world natural gas demand has grown much faster than oil. Gas demand more than tripled through 1969-2008, but oil demand 'only' doubled in the same period. Obviously the question of energy prices and energy taxation (including carbon tax) will determine which fossil fuels are most easily substituted or eliminated. Reliance on Free Market mechanisms: Reports such as the 2006 report by Lord Stern (UK) present various economic methodologies and costing for not avoiding, or not mitigating climate change. One of Lord Stern's scenarios suggests that economic losses due to insufficient climate change mitigation could attain around 50 000 Bn USD/year (2006 USD value), by about the year 2040. This amount is approximately equivalent to current world total GNP. However the Stern report, like others, gives major prominence to the present European ETS (emissions trading scheme) free market-based process for supposedly 'reducing or limiting' GHG emissions. This process, which apart from being very small relative to other markets (such as equities, currencies, government paper, energies and non-energy commodities, etc) is remarkable by its opacity and volatility. Operating since 2005, the European ETS has so far had zero impact on fossil energy consumption in Europe, with several EU ratifying countries 'robustly' increasing their oil, gas and coal burn through the 2005-2007 period of fast economic growth and only trimming their fossil energy demand on entry to recession in 2008. Dimensions of the Problem Substituting oil, then natural gas, and preferably coal and lignite, presents huge challenges. These include massive and long-term financing, and global-scale industrial effort to achieve Energy Transition without catastrophic economic impacts, or further geopolitical conflict specially in the Middle East, central Asia and Africa. Adding the pressing need to quickly develop and deploy CCS ("clean coal") to reduce impacts from coal and lignite burning worldwide, and the problems for raising biofuels production while also increasing world food supply, the immense challenges of Energy Transition are very clear. Various data sources, including both the IEA and ASPO suggest that global oil depletion may attain about 27 Mbd of capacity loss from conventional sources simply in the period 2007-2015. Using IEA-only estimates, projected requirements of "new, replacement or additional" oil and gas supply capacity needed through the period to about 2030-2035 total some 63 Mbd oil equivalent. IEA estimates of investment and spending costs to achieve this target are given as about 26 000 Billion US dollars, 2008 value. Other cost estimates for broadly similar targets, notably by Matt Simons come to a total spending need of around 100 000 Billion US dollars. Assuming similar costs for alternate energy, we can give estimates from anywhere between 11 000 Bn USD and over 40 000 Bn USD as costs for substituting 25 Mbd of oil supply through the period to about 2025. On a "straight line" annual basis, in 2009 dollars, this would amount to a minimum of around 750 Bn USD/year. Given that the majority of non-fossil and low carbon energy supply sources and systems are considerably more expensive than oil or natural gas (and much more costly than coal and lignite), it is prudent to raise this cost estimate closer to 1000 Bn USD/year. Unfortunately, the current financial mechanisms to achieve this end remain vague, volatile, speculative and very small relative to needs. To date in early 2009, speculative asset creation and trading, and financial engineering activities including private venture start-ups and asset refinancing of alternate energy companies, M&A activity, LBOs, etc, has already led to collapse of the so-called 'biofuels boom'. Estimates for 2008 and 2009 ytd (year to date) free market activity in the very broadly defined 'alternate and green energy sector', by Cleanedge, suggest that new investment trends of around 75 Bn USD/year in 2008 had considerably fallen by early 2009. World effort to develop renewable and low-carbon energy sources and systems are currently concentrated in the OECD countries, despite very large resource potentials in low-latitude countries. As noted above, the 'boom-and-slump' sequences that have already taken place, with biofuels, with wind electric power development, specially in Europe, and probably soon with emerging solar photovoltaic electric power show that global investment in alternate and renewable energy is hostage to the whims of private market players, and victim to their very classic short-term oriented and profit-maximising behavior. This strongly suggests the need for urgent attention to creating at least partly automatic financing frameworks for multilateral energy transition with adequate planning, regulation, and control. This would be a truly global and necessarily long-term process, extending well beyond 2025 and take account of the realities of oil and natural gas depletion, as well as climate change imperatives. CONCLUSIONS Costing what is a massive Energy Transition effort, far bigger than any changes in world energy during the last 30 years, encounters the difficulty of integrating a myriad of decisions that will be made. These will be made at all levels from final users to government deciders, concerning energy saving versus energy supply substitution by renewable and low carbon energy. Under any hypothesis, however, it is necessary to assume that large energy savings, or demand side management Costs of energy transition will be large under any hypothesis. Using a reference target of 25 Mbd oil substitution by low carbon energy to 2025, and comparing this with recent performance in the world oil and gas industry we find that a minimum of 750 to 1000 Billion USD/year of investment and spending will need to be mobilised.
CONTACT
INFORMATION |
