Energy Market: which way the wind is blowing?

The world population is growing rapidly and according to demographers by 2035 it will reach 8.5 billion people.  Subsequently, the world primary energy demand is anticipated to increase at an average annual growth rate of 1.5% under annual GDP growth of 2.8%.  Environmental, economic and energy experts forecast the results of possible strategies of world energy development and calculate whether the world will meet 2 Degree Celsius (2C) target - a widely agreed international objective of the UN Framework Convention on Climate Change to avoid global warming by 2020.

 Yet, with the Arab Spring, earthquake in Japan and global recession impacting energy markets, it will inevitably be tougher to reach the 2C goals. 2011 was a year when we had to learn the importance of reserving spare capacity for dealing with potential supply disruptions. We have seen oil at record high prices due to instability in the Arab world; we witnessed the dangers of nuclear power on the case of Fukushima incident. We also observed continuation of long-term trends such as global energy consumption growth at 2.5% with the boost in emerging economies and downturn in the developed economies of the OECD.

Each nation had to determine their own strategies in energy development to deal with those disruptions and to cut down on CO2 emissions at the same time.   Thus, there was good progress in renewable power generation with above average 17.7% growth. However, fossil fuels still dominate world energy consumption, with a market share of 87% (BP Statistical Review of World Energy, published in June 2012). China alone accounts for 71% of global energy consumption growth which makes it the world number one energy consumer.

Oil still remains the world’s leading fuel, accounting for 33.1% of global energy consumption, but this figure is the lowest share on record. The unrest in Libya caused oil supply disruptions and those losses were offset by record oil production in Saudi Arabia, the UAE and Qatar.

Oil production in the US has also reached the highest level since 1998 due to strong growth in production of shale liquids. According to BN Statistical Review of World Energy 2012, the US had the strongest growth in production outside the OPEC countries for the third year in a row.

The only fossil fuel to record above average growth by 5.4% is coal. It is also the fastest-growing form of energy other than renewable energy. It now accounts for 30.3% of global energy consumption, the highest share since 1969. Within the last decade China has more then tripled its installed capacity of coal, while India’s capacity rose by 50%.  EIA report, Tracking Clean Energy, notes that coal remains the cheapest power generation source in the current market, despite an increasing coal price.

Natural gas still has a good part in energy mix and especially accepted in the US, Russian, the UK and Qatar. World natural gas production increased by 3.1% in 2011 with the consumption up by 2.2% respectively. EU countries, however, have seen the sharpest decline in natural gas consumption on record (–9.9%).

Nuclear Power: worth expanding?

Following Japan’s ongoing nuclear crisis, the scaling up of nuclear power deployment faces increasing challenges. A 2011 survey showed that public attitude in opposition to nuclear power rose from 60% in 2005 to 72% in 2011. IEA reported the largest decline on record in nuclear output with 4.3% worldwide.  Japan and Germany have phased out their nuclear capacity by 44% and 23% respectively.  Belgium and Switzerland are revising the scale of their original plan for nuclear power generation. Indonesia, Thailand, Malaysia and the Philippines are also stalling nuclear power incentives due to mounting opposition.

Potentially shorter reactor life spans, along with longer planning and tougher licensing procedures in nuclear energy deployment means a projected drop of around 15%, when compared against capacity projection before the Fukushima incident. This is below the level required to achieve the 2C objectives.

Being the world’s largest source of emission-free energy as well as the most eco-efficient of all energy sources nuclear power is likely to retain its place in the energy mix. However, it is patently clear that it is not a fitting model in regions most prone to seismic waves or economically weak countries, which are not able to provide strong safety measures.

Meanwhile, as countries continue to turn away from nuclear power they have to come up with alternative energy sources.  Japan spent an estimated $6 billion on increased additional liquefied natural gas (LNG) imports in 2011. This figure is to 29.2% year on year in January 2012. The US has secured more energy independence through aggressive investments in shale gas production and Europe along with China are concentrating more on renewable energy sources.

Green Energy: are we on track?

 According to a U.N. report released in June, the world renewable energy market went though a tremendous transformation in 2011 with 13% annual growth on average, with global growth reaching a record $257 billion. This was the first time renewable power investments exceeded that of fossil fuels. As for the causes, IEA report Energy Technology Perspectives 2012 points out that rapid reduction in technology costs and attractive and secure rates of return for investors, stimulated deployment for both Solar PV and wind power.  Hence, cost reductions have led to significant annual growth rates at 27% for onshore wind power with Solar PV at 42%.  Only these types of renewable energy technologies are currently on track to meet the 2C objectives.

China, the world’s biggest polluter, has ironically not only topped the list for fossil fuel consumption, but also leads as highest renewable energy investor. They have a fifth of the total investment volume in renewable energy with $52 billion spent last year. Government backed Chinese banks entered loan agreements of $32.6 billion with Chinese solar-energy companies.   Those loan commitments have been expanded further by another $8.1 billion, according to Mercom’s market intelligence report.

In order to encourage renewable technology development Chinese authorities greatly emphasise the importance of green energy in their current 12^th Fifth Year Plan. Detailed incentive policies and programmes include the Golden Sun Programme providing financial subsidies, technology support and market incentives to facilitate   the development of the solar power industry.

One prime example being the most recent  plan of Chinese renewable energy company Sky Solar, along with China Development Bank and Chilean Industrial Group Sigdo Koppers , which is to build a  $900 million solar park, generating 300MW of solar energy.

Technologies in solar energy are becoming more competitive with the US investing $51 billion along with Germany, Italy and India rounding out the top five. However, renewable energy still accounts for only 2% of global energy consumption and is considered more expensive then fossil-based energy.

The Middle East and North Africa hold the world’s greatest potential for renewable energy, but at present renewables contribute only 1 % to the region’s primary energy mix. In North Africa, energy poverty is more prominent due to the high level of social poverty and minimal access to modern energy technologies. Approximately 58% of their population has limited access to electricity.  It is disturbing that among all the world regions Africa shows the highest interest in the energy water nexus in spite of the already depleted water reserves. If dry cooling is not implemented at power plants, there will not be enough water to sustain the current population along with the necessary cooling for the region’s power plant.

Embracing the benefits and deploying renewables in this region requires energy technologies from developed countries, wide investment and the adoption of appropriate policies at a national level.

Wind output accounted for the majority share of renewable power generation for the first time.  In general, the overall trend in wind energy markets shifted from OECD region to Asia, and primarily China. Thus, since 2010 China also leads in total installed capacity of wind, ahead of the US.

In Europe, the UK government also eager to meet ambitious targets to generate clean energy through offshore wind power and already has the capacity to produce the same as the rest of the world combined.  UK offshore wind farm, The London Array, could eventually power up to 750,000 homes and reduce CO₂ emissions by 1.4 million tonnes a year. It is claimed that at 1,000MW, the project is currently the world’s largest offshore wind farm development and will be built in two phases.

Another recent deal between Danish company Dong Energy and Siemens, will see 300 giant wind turbines installed off the coast of Britain, estimated £2.3bn and generating power supply to more then 1.5 million houses.  The industry has the ambitious plant to build a total of 10,000 onshore farms by 2020.

It is arguable whether the negative environmental impact from wind turbines outweighs its benefits as a clean source of energy. Norway commissioned a study of wind power in Denmark and concluded that it has serious environmental effects to wildlife, with insufficient energy produced when considering the high construction and maintenance costs; wind turbines are developed for only a 25-year life-span.

Shale gas is the future?

Shale gas has transformed North America’s energy outlook. Nuclear power still accounts for a significant 20% of the whole energy output in the US, but shale gas now plays an important role in the global energy market, largely due to the US. Global production is likely to increase to 30% by 2030, with 70% of this coming from the US and Canada. EIA report World Shale Gas Resources published in April 2011, noted that the US currently accounts for 13% of the global total, although China may have the world’s largest minable shale gas reserves, about 20% of the world’s total, according to the report published on the website of the Ministry of Land and Resources. Countries in Europe with known shale gas reserves together account for about 10% of the global total. However, Europe is not rushing to invest in shale gas deployment technology and, in fact, stays very sceptical about the environmental impact of shale gas. Shale gas is extracted by hydraulic fracturing knows as fracking. During this process, studies have proven that methane gas and toxic chemicals leak out from the system and contaminate nearby groundwater. Only 30-50% of the fracturing fluid is recovered, the rest of the toxic fluid is left in the ground and is not biodegradable.  This poses potential environmental concerns about impact on climate change and air pollution. Secondly, the National Petroleum Council for the US Department of Energy report for 2011 notes that current shale gas reserve could supply about 100 years of demand at today’s consumption rates. Europe’s reserve is enough only for 30 years. This makes it just a temporary energy solution and it is arguable whether it is worth investing in. Lastly, investment in shale gas may cause even larger issue. Ernst & Young’s Global Oil & Gas Centre emphasises the strong possibility of cheap shale gas replacing coal but this might discourage investment in renewable sources. Although emissions from a new gas-fired power generation would be lower than that from existing coal plants, the reduction would not be sufficient on its own to meet the long-term emissions targets.

Thus, the future of world energy is uncertain and it is hard to determine the best strategy when the world is so much affected by political, social and environmental changes and differences. However, it is certain that, despite from being far from ideal, renewable technologies is still the long term solution and vital for the environment.   Nevertheless, current practice shows that it still has to be accepted by some countries, and in particular the USA. The debate over shale gas has by no means reached a conclusion.  Perhaps, it is the easiest way for the USA to provide a cheap energy supply and loosen its dependence on Middle East and Asia, but is it not yet known whether its environmental impact will ultimately outweigh its value as a long term solution. The USA is loosing out in the ability to be competitive in green energy due to subsidies provided to oil and natural gas.  It seems that the market in the US tends to seek short term profit at the expense of long term benefits. Still, world practice shows that when it comes to force majeure, any type of energy supply can be vital and shall have it place in energy mix.

The current shift to low-carbon energy is affordable and represents great business opportunities too. A big advantage of renewable energy over any other is the speed of deployment. Thus, wind and solar, for example, can be deployed quickly which means generating quick income to pay off the investment.  The investors’ confidence still remains low because governments fail to create and maintain supportive business environments for low-carbon technologies. The IEA data supports the idea that for renewable energy to compete with fossil fuels, they need more short term subsidies and other incentives.

Along with developing renewable technologies the priority has to be on reducing energy consumption in the construction and automotive industries. Surely, with the boost in emerging economies, the world energy consumption will rise further. But investing in today’s best available technology in the automobile industry, construction and electrical devices technology would slow growth in energy use. Efficiency is critical to understanding the physical basis of the global economy system and driving progress towards an efficient world.