Five global trends shaping the future of energy – part I
30 May 2013
At a time of such uncertainty in global energy markets, it is opportune to highlight five global trends that are set to shape the future of energy. In this issue, we look at 1) Global Energy and Crude Oil Trends, along with 2) Global Emissions Schemes. In the next article in this two-part series, we will examine 3) Crude Oil’s Shale Revolution, 4) Global Natural Gas and, finally, 5) Global Power Trends.
Analysis of the five trends will provide useful information and guidance to consider as you try to navigate your way through the decision-making process related to energy demand, supply and sustainability.
1) GLOBAL ENERGY AND CRUDE OIL TRENDS
Global energy demand will continue to grow in the coming decades…and just not in developed countries.
A number of recent research reports from the likes of the US Energy Information Administration (EIA) and the International Energy Agency (IEA), as well as ‘big oil’ companies such as Exxon Mobil and BP, have served to highlight a common theme running through the world of energy: a distinct dichotomy in global energy consumption has emerged and is set to continue in the coming years.
For although global energy demand is set to grow by a third over the next two decades, demand from developed nations is set to remain relatively flat. In other words, global demand growth will be entirely generated by developing nations.
This is not to suggest that developed countries are going to see deteriorating economic conditions, and hence lower energy demand. They are expected to see slow but consistent economic growth going forward.
It will instead be that greater energy efficiency from technological development will keep demand in check, created by diverse factors ranging from more efficient natural gas-fired power plants to improving fuel standards for vehicles. Essentially, the focus on energy efficiency and lower energy intensity will offset the impact of increased economic activity in developed nations.
Another key influence on energy demand going forward is population growth. The rapid increase in global energy demand over the coming decades seems inevitable when you consider the world’s population is expected to rise by 25% from 2010 to 2040 to surpass nine billion. And the theme of increasing energy consumption from developing nations is only affirmed by the expectation that three-quarters of the global population will reside in Asia Pacific and Africa by 2040.
Higher energy consumption will not only be as a result of a rising global population, but also due to the increasing availability of electric power on a global scale. Currently, 1.3 billion people in the world do not have access to electricity, with leading emerging markets such as India lacking basic electricity access for a quarter of its population. As these nations steadily grow and mature, infrastructure will be built out, and access will accordingly rise.
Industrial demand is another sector that will drive energy use in developing nations; it is projected to account for 70% of global industrial demand by 2040. A countertrend is already under way in developed nations, where lesser manufacturing activity and higher energy efficiency means lower energy consumption from this sector.
Not only do we see a dichotomy between trends in developed and developing nations over the coming decades, but we see divergences in these developing countries themselves as their economies mature and their demographics change.
For example, according to Exxon Mobil, industrial demand for energy in India is expected to triple between now and 2040. Meanwhile, industrial demand in China is expected to peak in 2025 and then subsequently decline by 20% to 2040 as it transitions to a developed nation, with more of an emphasis on energy efficiency.
While much remains unknown for the global economy and changing energy landscape over the coming decades, increasing energy efficiency in the developed world is set to be as strong a trend as any, perhaps only overshadowed by the theme of growing energy demand in developing nations.
What does it mean to you?
Staying abreast of these market developments is a must, because such developments can drive long-term strategic decisions. From new plant sites to input-fuel choices to demand- side management, understanding how and where energy markets are evolving and what it means for prices can help you make competitive strategic decisions. And as global demand increases in developing nations, the focus will shift towards the emerging markets, where a mix of liberalisation and regulation will prove difficult to navigate successfully.
2) GLOBAL EMISSIONS SCHEMES
Harsh lessons for the European carbon market should benefit new emissions schemes.
The experience of the European Union Emissions Trading Scheme (EU ETS) is somewhat similar to ‘first born syndrome’, where a first child is raised differently to subsequent children, as parents learn how to more effectively raise a child.
This scenario is playing out in global carbon markets, with the EU ETS acting as the first born. What has not worked for the EU ETS will ultimately be cast aside by developers of future schemes, while greater focus will be placed on what has been more successful.
The EU ETS has lived through an unprecedented time in the global economy, which has seen it presented with all manner of unexpected challenges and obstacles. The EU ETS has been taught some harsh lessons in recent years, and it is these lessons which should be of the greatest benefit to those new markets that are being planned.
While the first phase of the EU ETS was launched as a test phase in 2005 as part of a ‘cap and trade’ approach to lowering the emissions of the 27 member countries of the EU, prices fell to virtually zero as the phase finished at the end of 2007. The second phase was somewhat more successful until prices tumbled in the latter years due to a combination of an over-issuance of permits and a global recession, which served to drive down demand.
But the EU ETS looks a roaring success when compared to its United Nations counterpart. While European permits have fallen considerably, UN permits have become virtually worthless over the past year, as oversupply has plagued the scheme; something we should be wary of with new schemes. There are also additional challenges to conquer, such as balancing political influence. After all, the EU ETS has seen some member states negotiate overly generous permit allocations, creating inequality in the scheme and exacerbating the situation of oversupply. Meanwhile, some countries such as the UK have taken steps to try to account for the scheme’s shortcomings, introducing a carbon floor price to ensure polluters pay a minimum amount of money for the emissions they produce.
New emissions markets
So where are these new emissions markets? California is leading the charge in the US, as it has established a cap-and-trade programme, which was finalised in October of 2011. The programme began at the beginning of 2013, with the power generation sector the first required participants, while other sectors are expected to fall under compliance over the next five years. The goal of the programme is to reduce GHG emissions to 1990 levels by 2020, carbon credits have been actively trading since August 2011.
China has also started a pilot carbon programme at the beginning of this year, encompassing seven locations – two provinces and five major cities – approved by the National Development and Reform Commission (NDRC) in October 2011. As the world’s largest emitter of CO2, the programmes are targeting emissions reductions from the power generation and manufacturing sectors, with an underlying goal of breaking the country’s reliance on coal.
The NDRC hopes to expand the scheme to a national scale by 2015, but many potential hurdles remain – perhaps none as challenging as for the regulated power market, which limits the ability for power generators to pass on the increased costs of lower-emission resources or efficiency investments onto consumers.
A third and final example is Australia, which has for a long time planned to link to the EU ETS in 2015. The scheme was officially approved in late 2011, but has been brought into question recently given the turmoil seen in the EU ETS market. Regardless, Australia is set to aggressively target emissions reductions from the power generation and transportation sectors, particularly as coal is a large component of generation in the country. This will also help them to achieve their Kyoto Protocol commitments for the second commitment period of the protocol, which begins this year.
Even though the EU ETS scheme may be viewed as much less of a success as initially hoped, it may by the end of the decade still achieve its goal of lowering emissions by 21% from 2005 levels, albeit inadvertently due to challenging economic conditions. The biggest legacy of the scheme, however, may be its self-sacrificing nature. For without the shortcomings of this pioneering and ambitious scheme, other global schemes would likely not be in a stronger position to succeed.
What does it mean to you?
As governments and other organisations trudge up the learning curve of how to successfully reduce emissions, it is a safe bet that those requirements will be passed on to industrial users. Calculating and tracking a company’s global carbon footprint is one of the first steps in creating a Sustainability strategy, though it is no easy step. Throw into the mix the varying schemes in different countries or regions and you have a recipe for confusion. Be sure to understand which countries may bring the most immediate requirements, and how those requirements will impact not just individual plants, but your overall carbon footprint and long-term corporate sustainability strategy.
To read Schneider Electric Professional Services’ White Paper predicting the energy dilemmas of the future, click here.http://www.engineersjournal.ie/2013/05/30/global-trends-to-shape-the-future-of-energy-supply-and-sustainability/http://www.engineersjournal.ie/wp-content/uploads/2013/05/Planet-1024x790.jpghttp://www.engineersjournal.ie/wp-content/uploads/2013/05/Planet-300x300.jpgEleccarbon,energy,European Union,oil,United States