In this year’s World Energy Outlook the International Energy Agency states: ‘It is no exaggeration to claim that the future of human prosperity depends on how successfully we tackle the two central energy challenges facing us today: securing the supply of reliable and affordable energy and effecting a rapid transformation to a low-carbon, efficient and environmentally benign system of energy supply.’
Although an exaggeration, it does address the key proposition put forward by policy makers that it is possible to develop a reliable, affordable and sustainable energy supply system. But is it? Certainly the IEA, European Commission and numerous governments around the world believe this to be possible, but there is also a growing number of sceptics.
With the race to agree a new post-Kyoto global climate agreement gathering pace this year, ahead of the UN’s December 2009 climate agreement deadline, there has been a notable shift in the prominence of climate issues within energy policy. In January, the European Commission published an energy and climate package that was heavily climate-centric with its challenging renewable, efficiency and emission targets. And ahead of his inauguration next month US president-elect Barack Obama has said that among
his earliest legislative actions will be a green economy bill prioritising renewable energy development and a commitment to cut US greenhouse gas emissions. Welcome as this commitment to an environmentally sustainable future is, front-loading energy policy with various environmental restrictions is inadvertently subordinating the supply security initiatives that should be at the centre of any responsible policy. After all, the central functions of any energy market should be physical supply and demand.
Consider the potential supply security impact of the EU’s 2020 renewable energy targets. By a huge margin the greater part of this target will have to be achieved through investment in new wind capacity (both on and offshore), with the UK, for example, looking at wind providing up to 40% of its generation. But this share of wind capacity is simply unsustainable. Wind farm load factors are typically below 30%, and with no technology to store wind-generated electricity this will require substantial back-up generation. But is there reciprocal policy momentum behind investment in clean coal to provide this back-up capacity?
Proponents of radical emission cuts argue that it is possible to maintain secure energy supplies while reducing emissions below climate-critical levels. Consider the latest report on emission targets from the UK government-appointed Committee on Climate Change, much of which reads like seductive science fiction. The CCC calls for 34% emission cuts by 2020 relative to 1990, and rising to a 42% cut once a global agreement is in place, yet actually concedes that these cuts can be achieved with technology that is currently neither firm nor funded. In other words these cuts are largely aspirational since they are dependent on the necessary renewable/clean energy technologies being developed and, or, commercialised.
There has been so much effort applied to move climate change from the realms of science fiction to science fact, with the science still only 90% proven on the climatic effect of man-made emissions, that unfortunately the technologies to mitigate these climate effects have not been developed as much as the climate science. In other words there is an imbalance between the science of climate effects and solutions, and it is this imbalance that places supply security at risk if climate-centric energy policies are adopted.
It is an unpalatable fact that, in the medium-term, the market has to return to a security-led policy approach, as only when climate change mitigating technologies, such as carbon capture and storage, are fully developed commercially can security and sustainability carry equal weight within any energy policy. And reverting to a security-centred approach does not mean that climate issues would be ignored, just that they would be more measured than the rapid emission reductions advocated by current policy proposals.
Through the rush to develop climate policies and legacies, governments and policy makers have lost sight of the rudimentary supply security basics on which decades of energy policy has been developed. Seduced by the emotive environmental lobby these policy makers have seemingly convinced themselves that renewable energy will plug any impending energy gap. And through generous government subsidies and incentives these policy makers have, in turn, seduced the market into championing renewable energy. But renewable energy will not plug the impending energy gap and, without renewable incentives, the market would continue to invest in ‘traditional’, and cheaper, gas and coal-fired generation.
Today’s energy market bears almost no resemblance to that of just a decade ago, when policy makers were championing market competition as the way forward. Then the key energy issue was affordability and today, with a worsening global economy and countries queuing to enter recession, energy affordability is once again becoming a prominent concern and will likely influence policy debate in the coming twelve months and beyond.
If developing an energy policy to provide security and sustainability is considered problematic then integrating affordability into such a policy would be considered near impossible. Yet this is the Holy Grail of energy policy, and something has to give.
A decade ago, the rationale behind market competition was that it would provide transparent price signals to ensure the correct infrastructure investment was made to provide supply security. More importantly, the development of competition models also handed power back to the market.
Unfortunately, governments and regulators couldn’t totally step back and allow these markets to develop freely, and partly as a consequence of government/regulator meddling the competitive market has failed to reach its full potential. Now, with the advent of climate and economic concerns, governments appear to have an ‘excuse’ for increasing their hold on energy markets, with signs that some energy economies may be moving slowly from a free market to one that is more centrally controlled.
A free market will always be preferable to a centrally controlled market, and it is conceivable that if competitive markets had been allowed to properly evolve over the past decade then many of today’s security/sustainability issues would not be so pressing. And although a free market will not immediately solve all the affordability/security/sustainability trilemma it will provide a better platform for future progress toward these policy goals than a centrally controlled market.
Obama’s central presidential election message was the need for change. For the energy markets the required change is to have more confidence and trust in free markets.
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