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.
The International Energy Outlook (IEO) 2010 projections for the total world consumption of marketed energy see consumption increasing by 49% from 2007 to 2035. This is a modest increase on the predictions made in the May 2009 report by the US Energy Information Administration (EIA), which saw the total world consumption of marketed energy increasing by 44% over the period from 2006 to 2030.
To put this in context, in 1990 the world required 355 quadrillion Btu. (“Btu” stands for British thermal unit and is the amount of heat required to raise one tenth of a gallon of water by 1°F—a measure that means very little intuitively, but has come to be the way that global demand is measured. A quadrillion is 1015, or one thousand million million).
By 2007 this had climbed to 495 quadrillion Btu. The projected demand for 2030 is 687 quadrillion Btu and by 2035 this is expected to rise to 739 quadrillion Btu. In other words, demand is not just projected to increase, the rate of increase remains roughly consistent, with the world needing an additional 48 quadrillion Btu every five years. That is worth pondering, since adding that much additional capacity decade after decade without wrecking the planet is going to pose some very serious technological challenges.
These challenges have become more formidable since the Japanese earthquake and tsunami in March 2011,which led to the partial meltdown of the cores at Japan’s Fukushima nuclear plants. The incident sent shock waves through the global nuclear industry and put question marks over nuclear power generation as a way of backstopping the world’s constantly rising energy demands. Some countries, particularly China, have said that they intend to continue an aggressive strategy of adding new nuclear power stations to their generation mix, but with increased safety requirements. Others, such as Italy and Germany, have either abandoned nuclear altogether (Italy) or called a moratorium on further nuclear builds (Germany) while safety considerations are re-examined. One thing that seems certain is that the cost of building nuclear power stations is going to increase sharply as a result of the Fukushima incident.
Interestingly, an alternative technology, nuclear fusion, which does not come with either a nuclear waste problem or a radiation hazard problem, now looks like it might become commercial by around 2035. Nuclear fusion has the capacity to be a complete game changer and could solve the world’s energy challenges in the decades after 2035. Mainstream energy analysts tend to be skeptical since the nuclear fusion story has been around for decades, promising much and achieving little, with the promise of clean power always just a few decades off. However, a seven-nation consortium known as ITER (which includes Japan, now assumed highly motivated as far as fusion is concerned) is engaged in building the first nuclear fusion demonstration reactor in the south of France. The ITER project is due to produce fusion power by 2017. This will be a project well worth watching.
To date, OECD member countries have accounted for the largest share of current world energy consumption. However, the EIA believes that this situation will change over the next two decades, with more rapid growth in energy demand in emerging non-OECD economies and some falling away of demand in advanced economies.
In 2006, 51% of world energy consumption was in OECD economies; but by 2030 their share is predicted to fall by 10%, to 41%. OECD energy use grows slowly over the projection period, averaging 0.6% per year, as compared with 2.3% per year for the emerging non-OECD economies.
As the fastest-growing non-OECD countries, China and India are rapidly becoming key world energy consumers. Since 1990, energy consumption as a share of total world energy use has increased significantly in both countries. China and India together accounted for about 10% of the world’s total energy consumption in 1990, but by 2006 their combined share was 19%. Continuing strong economic growth for both countries going forward will put their combined energy use at 28% of world energy consumption by 2030. By contrast, the United States’s share of total world energy consumption is predicted to fall from 21% in 2006 to about 17% in 2030 according to the EIA.
Non-OECD Asia would show the most robust growth of all the non-OECD regions, with energy use rising by 104% from 2006 to 2030. Energy consumption in other non-OECD regions should also grow strongly over the projection period, with forecast increases of around 60% for the Middle East, and for Central and South America, and 50% for Africa. A smaller increase, of about 25%, is expected for non-OECD Europe and Eurasia (including Russia and the other former Soviet republics), with demand being restrained by a declining population and offset by substantial gains in energy efficiency resulting from the replacement of inefficient Soviet-era capital equipment with modern energy-efficient equipment.
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 amount of green 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 0.92% over the period until 2030. Renewables are the fastest-growing source of world energy, with consumption increasing by 3.0% per year.
Natural gas 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 1.6% per year on average, from 104 trillion cubic feet (ft³) in 2006 to 153 trillion ft³ in 2030. With world oil prices assumed to rebound following the current economic downturn, and then rise through 2030, consumers are expected to choose less-expensive natural gas to meet their energy needs whenever possible, particularly in the industrial sector, where, for example, newly constructed petrochemical plants are expected to rely increasingly on natural gas as a feedstock.
Net electricity generation worldwide will reach around 31.8 trillion kilowatt hours (kWh) in 2030, 77% higher than the 2006 total of 18.0 trillion kWh. The EIA forecasts that the strongest growth in electricity generation will take place in non-OECD countries, where the projected increase is 3.5% per year, as rising standards of living increase demand for home appliances and the expansion of commercial services, including hospitals, office buildings, and shopping malls. In OECD nations, where infrastructure is well-established and population growth is relatively slow, much slower growth in generation is expected, averaging 1.2% per year from 2006 to 2030.
The EIA says that, currently, natural gas and coal together account for the largest share of total world electricity generation, at more than 60% of global electricity supply. They will remain the world’s most important sources of supply in 2030, the organization says, with a 64% share of total generation. In non-OECD Asia, where coal resources are ample, higher prices for oil and natural gas make coal a more economical source of energy for electricity generation.
The EIA forecasts that electricity generation from nuclear power worldwide will increase from 2.7 trillion kWh in 2006 to 3.0 trillion kWh in 2015 and 3.8 trillion kWh in 2030, as concerns about rising fossil fuel prices, energy security, and greenhouse gas emissions support the development of new nuclear generating capacity.
Renewable energy sources will be the fastest-growing energy source for world electricity generation, increasing by an average of 2.9% per year from 2006 to 2030. Much of the growth is in hydroelectric power and wind power. Of the 3.3 trillion kWh of new renewable generation added over the projection period, 1.8 trillion kWh (54%) is attributed to hydroelectric power, and 1.1 trillion kWh (33%) to wind power. Other than hydroelectric power, most renewable technologies are not able to compete economically with fossil fuels over the projection period, except in a limited number of niche markets. Government policies and incentives typically are the primary drivers for the construction of renewable generation facilities.
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. Coal is far more plentiful than oil or gas, with around 120 years of coal remaining worldwide.
There are environmental concerns with coal. However, continuous improvements in technology have dramatically reduced or eliminated many of the environmental impacts traditionally associated with the use of coal in the vital electricity generation and steel making industries, according to the World Coal Institute (WCI), which was established in 1985 to provide a forum for the exchange of information and the discussion of challenges relating to the coal industry. The WCI says that viable, highly effective technologies have been developed to tackle the release of pollutants, such as oxides of sulphur (SOx) and nitrogen (NOx), and particulate and trace elements, such as mercury.
The WCI says that over 5,845 million tonnes (Mt) of hard coal is currently produced worldwide, and 951 Mt of brown coal/lignite. The largest coal-producing countries are not confined to one region—the top five hard coal producers are China, the United States, India, Australia, and South Africa. Much of global coal production is used in the country in which it is produced; only around 16% of hard coal production is destined for the international coal market.
Having said that, coal is in particular demand in Asia. China’s total coal imports more than tripled in 2009, reaching 125 million tons, while India reached record coal import levels of 80 million tons. In 2010, some 60–70 million tons of coal production or imports were needed just to replenish low inventories in China and India, while hundreds of millions of tons will be needed in 2011 to satisfy the extra power plants and steel mills coming on-stream in Asia.
Wind Power
Global wind energy markets are expected to continue their rapid growth, with the world’s wind power capacity increasing by 160% over the coming five years, according to the annual industry forecast presented by the Global Wind Energy Council (GWEC), the industry forum for the global wind power sector, in April 2010.
GWEC expects that the global installed wind capacity will reach 409 GW by 2014, up from 158.5 GW at the end of 2009. This assumes an average growth rate of 21% per year, which is conservative compared to the 29% average growth that the wind industry experienced over the past decade. By 2014, the annual market will be more than 60 GW, up from 38.3 GW in 2009.
Even in the face of a global recession and financial crisis, wind energy continues to be the technology of choice in many countries around the world. “Wind power is clean, reliable, and quick to install, so it is the most attractive solution for improving supply security, reducing CO2 emissions, and creating thousands of jobs in the process,” said Steve Sawyer, GWEC secretary general. “All of these qualities are of key importance, even more so in times of economic uncertainty.”
The two markets leading global wind power expansion will continue to be the United States and China. The North American market is forecast to stay flat for the next couple of years, and then pick up again in 2012, to reach a cumulative total of 101.5 GW by 2014 (up from 38.5 GW in 2009). This would translate into an addition of 63 GW in the United States and Canada over the next five years.
In China, growth is set to continue at a breathtaking pace. By 2009 China accounted for one-third of total additional annual wind capacity, with 13.8 GW worth of new wind farms coming on stream each year. By 2010 China’s installed base was 25.9 GW, overtaking Germany as the country with the most wind power capacity. China will remain one of the main drivers of global growth in renewables in the coming years, with annual additions expected to be over 20 GW by 2014. This development is underpinned by a very aggressive government policy supporting the diversification of the electricity supply and the growth of the domestic industry. The Chinese government has an unofficial target of 150 GW of wind capacity by 2020, and with its current growth rate, it looks likely that this ambitious target could well be met well ahead of time.
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 per 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
We have already sketched out the problems for the nuclear sector raised by the Japanese earthquake of March 2011. However, according to the International Atomic Energy Agency (IAEA), 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. Nuclear power is one of the few options available to meet this increased demand, the IAEA argues.
The second point, the IAEA says, is that “one size does not fit all,” and questions such as “is nuclear power economic?” depend on the other energy options available to countries. In a region with abundant gas, oil, or coal reserves there are obvious competing alternatives. Where those reserves do not exist, nuclear becomes a much more relevant option.
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.” Perhaps the major factor in the cost of nuclear is the safety requirements that regulatory agencies place on the sector. In the wake of the Fukushima disaster, that cost can only increase.
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. This held steady through the 1990s but fell to around 15% by 2006 as older reactors reached the end of their life cycle and were not replaced. The global picture is extremely varied, with some countries (China) presently with just 2% nuclear in the mix, and others (France) having 78% of their electricity generated from nuclear.
According to the IAEA, as of January 2011 there were 442 nuclear power plants in 30 countries, with an installed net capacity of 375 GW, together with a further 65 plants under construction in 16 countries (total capacity 63 GW). By way of comparison, according to the IAEA, in March 2008 there were 439 nuclear power plants in the world, with a further 35 under construction, with 20 of these 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.
www.qfinance.com