Major Industry Trends
Energy is the lifeblood of civilized society. It is also intimately bound up with the future of the planet, in the eyes of many, in that the industrialization of the West, fueled by energy from coal for the most part, and latterly from oil and gas, has added to or brought about global warming. Now, the industrialization of emerging nations like China and India, again largely driven by coal, but with both countries having a voracious appetite for oil and gas, is adding to the pressure on energy resources, and on the environment.
According to the June 2008 report from the US Energy Information Administration (EIA), which provides official energy statistics, the total world consumption of marketed energy will increase by 50% over the period from 2005 to 2030. The largest projected increase in this growth in demand comes from non-Organization for Economic Cooperation and Development (OECD) economies, with demand from these economies outstripping that of OECD economies some time around 2012.
The EIA projection of energy demand takes into account the fact that oil prices will inevitably rise again in the near term. The rise is likely to slow the growth of energy demand, but robust economic growth, particularly in Asia, allied to expanding populations in the world’s developing countries, will keep demand rising by around 2.5% year on year. By way of contrast, energy demand in the OECD economies is projected to increase at an average annual rate of only 0.7%.
In 1980, China and India together accounted for less than 8% of the world’s total energy consumption. By 2005, that share had grown to 18%. By 2030, these two countries will account for 25% of total world energy consumption, the EIA projects. In stark contrast, US energy consumption, which currently dominates global consumption, is projected to fall from 22% in 2005 to around 17% by 2030.
The EIA report is good news for the “green agenda,” in that it predicts that sharply rising oil prices will be far more effective than any lobbying in moving societies away from a long-term dependence on oil. The consumption of oil and gas will increase at an average annual rate of 1.2% over the period until 2030. Instead, the dominant growth will be in the use of renewable energy and coal, with consumption increasing by 2.1% and 2.0% respectively. Abundant coal reserves in large energy-consuming countries such as China, India, and the US, make coal an economical fuel choice, the EIA says.
Natural gas, however, will continue to be an important fuel for electricity generation worldwide, being more efficient and less carbon-intensive than other fossil fuels. The EIA sees total natural gas consumption increasing by 1.7% per year on average, from 104 trillion cubic feet, to 158 trillion cubic feet over the period. The share of natural gas in electricity production will go up from 20% in 2005 to 25% by 2030, it says. Coal will account for 29% of world energy consumption by 2030.
Net electricity generation worldwide will reach around 33.3 trillion kWh (kilowatt hours) in 2030, nearly double the 2005 total of 17.3 trillion kWh, with non-OECD electricity generation increasing by 4% year on year, as rising standards of living generate increased demand.
Nuclear power will continue to play an important role, the EIA says. It expects electricity generation from nuclear power to increase from 2.6 trillion kWh in 2005 to 3 trillion by 2015, and 3.8 trillion by 2030. This prediction is predicated on older nuclear plants in the OECD and non-OECD countries having their lives extended, as well as new-build programs coming on stream.
However, the EIA sees several issues that could slow the commissioning of nuclear power plants. Plant safety, disposal of radioactive waste, and concerns over nuclear weapons are all factors, it says.
Countries will also be turning to renewables, particularly hydroelectric power, but also to other grid-connected renewables. Much of the growth in renewable energy consumption is expected to come from mid-to-large-scale hydroelectric facilities in non-OECD countries. China’s 18,200 MW Three Gorges Dam project, the EIA points out, is due to start generating soon. China also has the 12,600 MW Xiluodu project on the Jisha River, which is scheduled for completion in 2020, plus another project, the 6,300 MW Longtan plant on the Hongshui River.
OECD Europe is doing exceptionally well in implementing renewables, with 8,554 MW of new capacity brought on stream in 2007. The EU’s target of achieving 20% of energy consumption from renewables by 2020, of which 10% will come from biofuels in cars, is very achievable.
Market Analysis
The Future of Coal
In its report, “Technology to clean up coal for the post-oil era,” Deutsche Bank Research argues that the dominant energy-generation technology for the post-oil era will be solar power. The main generating areas will be the world’s deserts. Electricity will be sent via transmission lines to the world’s cities. However, en route to this brave new world, coal will have a critical role in filling the gap between the end of oil (which comes about when oil is just too expensive to use, rather than when it runs out) and the arrival of solar power in sufficient quantities, the report argues. Populous emerging economies will generate more demand for energy than can be filled by oil or natural gas. The natural alternative to meeting the needs of the world’s three main energy consuming arenas—power generation, the heating market, and transportation—is coal, Deutsche Bank argues.
However, as coal causes 40% of global CO2 emissions (source: Deutsche Bank: Energy Special, February 6, 2007), mining more coal will require the deployment of new technologies to clean up coal-fired emissions.
The report points out that, at the start of 2007, there were already plans to invest some US$10 trillion in coal-fired power-generation plants. The demand is not just in China and India. Germany has passed a law mandating a move from nuclear power to “other sources.” The report points out that coal accounted for 24% of Germany’s primary energy consumption in 2005, a higher percentage even than natural gas (23%), and it accounted for nearly 23% of Germany’s electricity generation.
According to statistics from Germany’s Federal Institute for Geosciences and Natural Resources, coal comprises some 55% of the global reserves of all non-renewable sources of energy, including oil, gas, and uranium. Mapping current reserves to current usage, there are sufficient reserves of coal to continue at this pace for the next 153 years. By way of contrast, oil and gas would last just 42 years and 62 years, respectively, at current consumption. Using liquefaction techniques (coal to liquids), coal could even replace oil as a motor fuel, the report points out.
Wind Power
The world’s wind energy capacity will nearly triple in the five years to 2014, according to the Global Wind Energy Council (GWEC), the industry forum for the global wind power sector. This development will be led by what the GWEC calls “tremendous growth in China,” and steady expansion in Europe and North America. GWEC predicts that in 2013, five years from now, global wind-generating capacity will stand at 332 GW, up from 120 GW at the end of 2008. During 2013, 56.3 GW of wind-generating capacity will be added, more than double the annual market in 2008.
The year-on-year growth rates during this period will average 22%, which is modest compared to an average increase of 28% over the last ten years. Strong policy support for wind power will continue to drive growth in the three main markets of China, Europe, and the US. Steve Sawyer, Secretary General of GWEC, says: “Governments are turning the current crisis into an opportunity, putting wind power at the center of their economic stimulus and recovery programs. This will create many thousands of jobs, improve energy security, and help address the climate crisis.”
For the past few years, the US and China have continuously outperformed GWEC’s most optimistic expectations. However, for the next year or two, developments in the US are expected to be hampered by a lack of financing and the overall economic downturn, before the stimulus package will start having a major impact on the market. At the same time, growth in China is set to continue at a breathtaking rate, driving a substantial increase in global wind energy installations in the coming years.
According to Arthouros Zervos, GWEC’s chairman: “All of the fundamental drivers that have made wind power the technology of choice for those seeking to build a secure, clean energy future are still in place. Wind power is clean, indigenous, fast to deploy, creates many jobs, uses virtually no water, and is economically competitive. Neither the threat of climate change nor the macroeconomic insecurity (in some countries) due to reliance on imported fossil fuel is going to go away because of the recession.”
Biofuels and the Biofuel Controversy
The World Bank has carried out several studies into the use of biofuels, and has looked at the trade-offs between sustainability and the risk of diverting farmlands away from food production. It argues that current biofuel policies could lead to a fivefold increase in the share of biofuels in global transport, from just over 1% at present to around 6% by 2020.
The World Bank points to the crucial role of subsidies from governments in getting biofuel initiatives off the ground. “Such support includes consumption incentives (fuel tax reductions); production incentives (tax incentives, loan guarantees, and direct subsidy payments); and mandatory consumption requirements. More than 200 support measures, which cost around US$5.5 billion to US$7.3 billion a year in the United States, amount to US$0.38 to US$0.49 per liter of petroleum equivalent for ethanol,” it notes.
Domestic producers in the European Union and the United States receive additional support through high import tariffs on ethanol. The World Bank argues, too, that it is now clear that biofuel production has pushed up feedstock prices. “The clearest example is maize, whose price rose by over 60% from 2005 to 2007, largely because of [demand from] the US ethanol program, combined with reduced stocks of maize in major exporting countries.” Feedstock supplies are likely to remain constrained in the near term, the Bank says, but as farmers will respond to high feedstock prices by planting more land to grow maize, the price will stabilize. Moreover, as the feedstock price rises, the profit from—and, therefore, the incentives to manufacture—biofuels will diminish. However, the ethical dimension of the food or fuel debate does not look promising for the future of biofuels, the Bank suggests.
“The grain required to fill the tank of a sports utility vehicle with ethanol (240 kilograms of maize for 100 liters of ethanol) could feed one person for a year; this shows how food and fuel compete. Rising prices of staple crops can cause significant welfare losses for the poor, most of whom are net buyers of staple crops,” the Bank says. However, it admits that the picture is not straightforward. Many other poor producers, who are net sellers of these crops, would benefit from the higher prices to be gained from growing maize for ethanol production. Moreover, shifting ethanol production from maize to timber waste could potentially reduce the pressure on food crops, it says. The debate still has a long way to go.
Nuclear Power
According to the International Atomic Energy Agency, debates about nuclear power generation must take into account three principal realities. The first is that as oil and gas prices rise, and as citizens in developing countries look to achieve Western standards of living, demand for energy increases and, as a corollary, expectations for nuclear power are also on the rise.
The second point, the IAEA says, is that “one size does not fit all,” and questions such as “is nuclear power economic?” do not have a single, universally applicable answer. “As with just about everything else in life, the answer is ‘it depends’—sometimes yes, sometimes no.”
The third element, the IAEA says, is economics. Whether nuclear power lives up to the rising expectations will depend on how cheap it is compared to alternative energy sources. “Certainly, the nuclear industry can influence this issue by bringing down costs, but there are factors outside the industry’s control, such as the price of natural gas or of carbon credits, that will also determine, for any particular investor, whether nuclear is a cost-effective option.”
From 1960 to the mid-to-late 1980s, global nuclear capacity grew to the point where nuclear power generated some 16% of total global electricity generation. This held steady through the 1990s but fell to around 15% by 2006. The global picture is extremely varied, with some countries (for example, China) having just 2% nuclear in the mix, and others (France) having 78% of their electricity generated from nuclear.
According to the IAEA, as of March 2008, there were 439 nuclear power plants in the world, with 35 more under construction, and 20 of these are in Asia. At the same time, 28 of the last 39 nuclear plants connected to the grid are in Asia, which tells its own story. The IAEA’s highest estimate of nuclear production by 2030 is 691 GW of capacity, or a 93% increase in the world’s nuclear capacity.
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