The stakes are rising

With the recent release of the International energy agency’s World Energy Outlook 2009, IFandP takes a moment to discuss its findings and what the future might hold for the global power sector with its chief economist, Dr Fatih Birol.

IFandP: Given the drain on the public finances of many countries resulting from economic stimulus packages and bank-bail outs, would it be fair to say that governments in the OECD will be sidelined in terms of investment, compared to the role of private utilities?

Dr Fatih Birol: In the near-term, many governments have actually stepped up their direct investment in some types of energy infrastructure and have increased incentives for private investment, especially in clean-energy technologies. But, clearly, in the longer-term, the need to reduce budget deficits can limit the scope for public investment. So, yes, a growing portion of times in the run-up to Copenhagen, many countries’ announcements are encouraging. Although more is needed to be on track with the 450ppm scenario in our World Energy Outlook 2009, current pledges, if implemented, are more in line with a 550ppm scenario (leading to a 3°C increase in global temperature)”. The IEA believes there is room for optimism given the growing political will globally. For example, the US EPA has recently identified carbon dioxide and five other greenhouse gases as dangers to public health and welfare.

IFandP: Given the clear need for rapid action called for by the WEO 2009, how do you think the rate of progress could be accelerated at both the national and international level? It seems clear that while democracy and a consultative approach are laudable, they may be ill-suited to the speed of response required to prevent runaway climate change. Given that the developed world is not going to adopt China’s political system, what can be done to create the consensus needed to get the job done?

Dr Fatih Birol: The energy path to stabilise climate is clear, but only vigorous action will put our economies on that path to green growth. Major technological and financial breakthroughs are needed. Right, timely and clear incentives need to be given to investors (and consumers). A strong political signal is needed now to drive the necessary changes. Stimulus packages can be prolonged well beyond economic crisis, which can provide additional clear signals of strong political will. Some of the current proposals include strong voluntary efforts as well as fund-raising addressed to developing countries in order to fight against climate change.

IFandP: Following on from this, should international organisations be working to reduce the influence of interest groups and lobbyists who might see the reference scenario as being in their interest?

Dr Fatih Birol: The role of the IEA is to advise our member governments on how to achieve their stated policy objectives and to facilitate policy cooperation among member and non-member countries alike. All our governments agree that we need to move away from the Reference Scenario and, through the World Energy Outlook and other activities, are showing them how they might go about achieving that.

IFandP: What response would you like to see from North American and European power utilities going forward?

Dr Fatih Birol: In the 450ppm scenario of the World Energy Outlook 2009, North American and European power utilities are implementing the cap and trade system with a CO₂ price reaching US$50/t by 2020 and US$110/t in 2030.

In the US, a substantial amount of coal-fired generation is replaced by gas-fired generation, as well as by increased renewables and nuclear generation. By 2025, with CO₂ prices going beyond US$50/t, about 30GW of nuclear plant additions will have been built, replacing substantial numbers of coal plants and non-hydro renewable sources will have increased almost five-fold over the 2010 levels. By 2030, electricity generation from renewables will account for 26 per cent of the total, nuclear for 25 per cent, gas without CCS for 24 per cent, CCS plants for 15 per cent (almost 90 per cent of which is coal-based) and coal without CCS only 10 per cent.

In the European Union, where the CO₂ price already in place gradually converges to the level for OECD+ countries as a whole by 2020, the adoption of lower carbon emitting technologies is accelerated relative to other countries and regions. Renewable sources account for most of the increase in electricity demand and contribute to displacing generation from coal-fired plants, which are mothballed or retired. Wind alone will account for 20 per cent of electricity generation by 2030, nuclear will see by 2030 an increase of around 20 per cent over 2007 levels. Generation from CCS plants is to account for six per cent of the total generation in 2030.

IFandP: Is it fair to say that as we start relying on more and more difficult to reach oil, the lead-time for projects will increase, making the industry as a whole more vulnerable to the oil price volatility seen over the past two years?

Dr Fatih Birol: The lead time for greenfield projects has been growing steadily in recent years as the focus shifts to more difficult terrain and to larger projects. That trend is likely to continue, though it may be offset by some degree by technological advances which may speed up the time it takes to bring new discoveries into production. Any further increase in average lead times would indeed make the market more vulnerable to price volatility.