There continues to be much debate on how the world’s energy mix will evolve over the medium and longer-term, and the consequent climatic impacts of this evolution. On one side of the debate the environmental lobby continues to argue the case for accelerating renewable energy uptake, claiming that only a quick transition will mitigate climatic change risks and rejecting accusations that such a rapid transition will undermine supply security, while the ‘energy lobby’ reasons that a more progressive low carbon transition is required to ensure a secure, sustainable and affordable future energy market.
In January, two reports on the UK market were highly critical of the government’s renewable-centric policy and its perceived impact on energy costs, including the costs of renewable subsidies and the back up energy required to protect against the intermittency of wind power. Both the government and the environmental lobby were quick to dismiss these reports, even though a recent government-commissioned report accepts that energy prices will increase over the next twelve years as a result of its renewables policy.
While these reports address specific UK market concerns, the concerns are also highly relevant to other OECD, and arguably non-OECD, countries, with the central concern being the role of the market in the low carbon transition. And it is the role of the market that is the main difference between the environment and energy lobbies; with the former believing in regulations and subsidies to protect renewable energy growth, while the latter believes in the free market. And while both lobbies agree that a broadly low carbon market should be in place by the middle of this decade to meet long-term emission reduction targets, the environment lobby believes that with the right regulations and subsidies a largely renewable-centric energy market can be achieved within the next twenty years.
In January BP published its second ‘Energy Outlook 2030’, which adopts a global view of the how the global energy market will evolve over the next two decades. The report’s main message is that there has to be an open, competitive energy sector, which encourages innovation and thereby maximises efficiency, in order to benefit from energy that is sufficient, secure and sustainable into the future.
Central to the report’s energy forecasts is a series of market realities and opportunities, and it is only by accepting these market realities, ie those factors that cannot be changed, that the market opportunities can be realised. In other words, while the underlying global drivers of energy demand cannot be changed, the way the world satisfies this demand can. And it is how this demand is satisfied that will determine how the energy mix evolves over the coming decades.
According to the BP report, the five global market realities over the next twenty years are strong growth in energy demand, the continuing dominance of fossil fuels, that fossil fuels will remain dominant in transportation, that new oil reserves have to be found as well as alternatives to oil, and that greenhouse gas emissions will continue to rise over the next twenty years.
Clearly these realities will be more pronounced in non-OECD countries where demand growth is highest and climate change policies are least developed, but these market realities are just as pertinent for OECD countries. Fossil fuels will continue to dominate the energy mix in 2030 simply because global demand growth will outstrip renewable growth. Other impediments to renewables displacing fossil fuels are the relative immaturity of the renewable sector and the challenges faced by development costs, technology, infrastructure and logistics. Consequently, if fossil fuels are still dominating the energy mix by 2030 there needs to be new oil resource finds, typically via deep water drilling, and more work towards developing oil alternatives, and a fossil fuel centric market will lead to increasing greenhouse gas emissions.
Only by accepting these market realities can a pragmatic energy policy be developed. Yet not only does the environment lobby not accept these realities, rejecting any investment in oil or other fossil fuels, and also believing it can reverse them by claiming that a renewable-centric OECD market is possible within the next two decades. By denying these market realities the environmental lobby has effectively become anti-market and in doing so it has also become blinkered to the opportunities presented.
These market opportunities, according to the report, are: efficiency, technology, competition, natural gas and biofuels. Again, as with the list of market realities, these are global opportunities, but they are nonetheless relevant, particularly the first three, to both the OECD and non-OECD countries.
No one disputes that energy demand will increase over the next two decades, and that the introduction of energy efficiency measures is critical to addressing supply security by reducing reliance on imports, and to addressing sustainability by reducing emissions. Efficiencies are also best enabled through technology advances, such as advanced boiler technology, smart meters and more fuel-efficient car engines, and a major driver of technological innovation is competition.
The opportunities presented by natural gas and biofuels are clearly more contentious to the environment lobby, with it expressing concern that more investment in gas-fired generation will limit investment in renewable generation, while it fears the expansion of biofuels will damage the food chain. Yet gas-fired generation is the obvious back up for intermittent wind and solar generation and will displace unmitigated coal-fired plant, while the development of biofuels will help displace oil as the primary transportation fuel. Both of these market opportunities have to be realised if the world is keep on track toward a low carbon market by the middle of this decade.
Just as there is a clear correlation and causation between the market realities, the market opportunities are also closely linked with competition, efficiency and technology acting together to increase supply security and limit demand. But if the role of the market is diminished then the value of competition is reduced, as is the contribution of efficiency and technology toward supply and demand.
The key message from the BP report is that only an open and competitive energy market can deliver a secure and sustainable energy future, and it is the right message. Consequently, the challenge for the less developed non-OECD countries is to look at competition as an opportunity, while for OECD countries the challenge is to keep faith with the free market and encourage, not limit, market competition across the energy sector.
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