No. 2, 2010
GUIDELINES FOR ENERGY SUSTAINABLITY
Interview with Nobuo Tanaka, Executive Director of the International Energy Agency
The International Energy Agency (IEA) is an intergovernmental organization which acts as energy policy advisor to 28 member countries in their effort to ensure reliable, affordable and clean energy for their citizens. The current work of IEA focuses on climate change policies, market reform, energy technology collaboration and outreach to the rest of the world, especially major consumers and producers of energy like China, India, Russia and the OPEC countries.
Q: Mr. Tanaka, what, in your opinion, were main negative consequences of the economic crisis for the oil and gas industry?
A: Energy investment initially fell sharply in 2009 in the face of a tougher financing environment, weaker final demand and lower cash flow. In the oil and gas sector, many companies announced cutbacks in capital spending, as well as project delays and cancellations, mainly as a result of lower prices and cash flow, and demand uncertainties. After October 2008, over 20 planned large-scale upstream oil and gas projects, involving around 2 million barrels per day (mb/d) of oil production capacity, were deferred or cancelled, mainly among the Canadian oil sands, although company announcements towards the end of 2009 and in early 2010 suggest that some of these projects are back on the drawing board after oil prices remained in a relatively steady price range of $60-80 per barrel and prospects for global economic recovery have improved. Upstream spending also shows signs of rising again in 2010 and falling costs in 2009 provided somewhat of an offset to lower spending. The consequences of the temporary cutbacks in spending for the adequacy of oil and gas supply capacity in the medium term are uncertain. The risk of tightening capacity appears greatest for oil, although the outlook depends on how quickly demand recovers as the global economy emerges from recession and how investment levels rebound in the coming years. Our Medium Term Market Report however suggests that amid persistent constraints on the pace at which new productive capacity can be added, the path of economic recovery remains critical to oil market fundamentals through mid-decade: a reversion to global GDP growth of 3.2% per annum for 2009-2014 could see OPEC spare capacity fall back towards 3.5 mb/d by 2014, whereas 30% lower GDP growth in the event of a weaker recovery could see current levels of spare capacity between 6-7 mb/d being retained throughout. Moreover, a combination of accelerated investment and enhanced efficiency gains could also help sustain more comfortable levels of spare capacity, even with higher economic growth.
Q: Could you name positive lessons of the recession for the energy sphere?
A: The financial and economic crisis has had a considerable impact on the energy sector worldwide. One positive aspect of the recession is that it has delayed some investment decisions that may otherwise have locked-in carbon-intensive technologies for many years. As a result, CO2 emissions could have dropped in 2009 by as much as 3% - steeper than at any time in the last 40 years. Of course investments in low-carbon technologies have also been deferred, but if the economic stimulus funding is used to reverse some planned carbon-intensive investment decisions this may prove an opportunity as a result of the recession. In the face of the economic crisis and recession, the economic stimulus packages adopted by many governments are providing an excellent opportunity to ensure cleaner, more sustainable growth in the energy sector - both through immediate measures with impacts in the near term, and by influencing longer-term investment decisions. While the proposed economic stimulus packages differ widely in their overall focus on clean energy investments, energy efficiency measures are part of many of the packages covering a wide range of activities associated with energy efficiency in buildings, appliances, transport as well as investments in smart grids.
One of the most attractive options for maximizing the impact of stimulus spending while saving on future energy costs, lies with refurbishing buildings. Renovating them to meet high energy efficiency standards and replacing outdated heating systems would cut energy use dramatically while creating jobs in manufacturing and building trades. Publicly-owned buildings could be the first target. The transportation sector also holds enormous potential for savings. Proposed government support for the auto industry could be designed to promote more fuel efficient vehicles, including through scrappage and buy-back schemes. Renewable energy can also play a role, with support through tax changes and targeted investments.
Q: Many experts argue about a "just price" of oil. What price band, according to your estimations, is optimal for the world economy?
A: Historically, attempts at managing a price range do not generate much confidence. It is not clear that such moves are either effective or desirable. Attempts at market management often under-shoot or over-shoot. So more, rather than less, price volatility might in fact result. Current perceptions of a certain "ideal" price band are not clear. The revenue aspirations of OPEC members are likely to change over time, according to domestic political and social priorities. Costs for new production in future may also swing up or down, depending on upstream access terms, and technological and environmental progress. We have long said that market fundamentals should determine the price. However, enhanced producer consumer dialogue, unblocking the investment cycle, encouraging greater efficiency of oil use and greater transparency are all more likely to have a beneficial impact on market stability than any artificially selected price range.
Q: How do you think, can we expect any real energy technology breakthroughs in the nearest future?
A: In many of my talks around the world I have presented a figure which shows the world abatement of energy-related CO2 emissions - the trajectory we are currently on in a business as usual scenario and one that shows the path we need to be on for a sustainable future. This graph shows the combination of energy technologies needed to help us to stablise the concentration of CO2 in the atmosphere at 450 parts per million (ppm), the level climate scientists believe gives us a 50% chance of limiting global temperature increase to 2 degrees C. In the scenario, energy efficiency measure is the key, accounting for two thirds of the 3.8 Gt of abatement in 2020. This is good news because energy efficiency can be implemented now - the technology exists - and is low or negative cost. The IEA noted with great interest the passage of Russia's Energy Efficiency Law in November 2009. The IEA is interested in supporting Russia in its efforts for its effective implementation, given its many decades of experience of IEA member governments.
In addition, the graph also shows that we need the equivalent of 17000 windmill turbines, 17 nuclear power plants and 2 Three Gorges Dams, among others, built every year to achieve the 450 Scenario. We therefore must dramatically change the way we produce and use energy. In terms of renewable energy - Russia has made a major step forward supporting access to renewable energy in its electricity sector through its Decree of January 2009. I understand that the development of related regulations to make effective implementation of this law is still in progress. The IEA remains keen to support Russia in this effort and in the Russian government's target to increase the share of renewables from less than 1% to 4.5% of total primary energy supply by 2020.
Q: Energy industry significantly contributes to the environmental pollution and global warming. What can you tell about the initiatives of the IEA to help preserve the ecological equilibrium in the planet?
A: While the global economic crisis has lowered short-term energy supply and demand, the coming decades will need investments in energy infrastructure of unprecedented magnitude. At the same time, addressing climate change, and limiting the temperature rise to 2 degrees, requires that global energy-related CO2 emissions peak by 2020. Failing to properly guide the next investment wave towards low-carbon technologies will greatly undermine an adequate response to climate change. A global energy strategy to cope with climate change must combine massive improvements in energy efficiency and a move towards the decarbonisation of energy supply - especially in power generation. Energy efficiency is a prerequisite for a least-cost option. To support governments in monitoring the implementation of energy efficiency policies and measures, the IEA recommended the adoption of a broad range of specific energy efficiency policy measures to the G8 Summits in 2006, 2007 and 2008. The consolidated set of IEA 25 recommendations covers fields of action across seven priority areas: cross-sectoral activity, buildings, appliances, lighting, transport, industry and power utilities. If these 25 recommendations were implemented globally, the IEA estimates that 8.2Gt/ CO2 could be saved annually (which is equivalent to half of China, EU, Russia and US CO2 emissions combined (16.5 Gt CO2/y)). Timing however is crucial. To reach this potential, governments need to implement the full set of recommendations without delay.
Q: In your view, what kind of renewable energy would have best chances to successfully compete with fossil fuels in perspective?
A: Putting a price on CO2 through emissions trading mechanisms is an essential driver for cost-effective CO2 emission reductions and further deployment of renewable energy technologies. In addition, feed-in tariffs, fiscal instruments, subsidies and green certificates systems have been established to encourage the deployment of renewable energy technologies at various stages of maturity. Such policies reflect both the lack of a clearly identified CO2 price path for the longer term, and other policy priorities (energy security and diversification, local pollution). For technologies at less advanced stages of development, a huge effort of research, development and deployment (RD&D) is needed. However, public energy RD&D spending today, at some $10-11 billion per year, is in real terms about half its level 25 years ago.
Today's economic crisis may make this a more urgent area of attention for energy policy makers. The current credit shortage is putting many clean technology developers at risk of losing production capacity and know-how. In recent years, most of these activities have grown thanks to public support to market deployment, with a clear view on a long-term need; as far as climate change is concerned, the view has not changed, yet support is no longer adequate in some regions. Policies must be adjusted quickly to ensure the sustainability of these activities. Public-private partnerships can also be envisioned to play that role. It is also legitimate to ask if some international policy co-operation could achieve faster progress in this area through economies of scale and learning-by-doing.
Q: There are 28 member countries of the IEA. How is the cooperation developing between the IEA and non-member countries, particularly Russia?
A: The IEA and its member countries have recognised that engagement with non-member countries (‘partners in dialogue') is an essential part of the Agency's mission to improve energy security and environmental sustainability. Trends in global energy use and emissions mean that we will be able to solve today's energy challenges only on the basis of joint efforts and international cooperation. An expression of this engagement was the participation of China, India and Russia at the 2009 IEA Ministerial Meeting (the first time these three countries participated together!), but the Agency has also been developing cooperation with other countries and stakeholders around the world. The Joint Statement agreed with Russia at the Ministerial meeting in October provides a useful summary of key areas of co-operation between the IEA and Russia.
A major focus of co-operation over the past few years has been in the area of energy efficiency. It is a challenging time for Russia to be re-embarking on its energy efficiency focus, having just passed its Energy Efficiency Law in November 2009. For this reason the IEA is keen to support Russia in any way it can through its analysis and assessment of its 28 member country experience. On the request of the G8, in 2009 the IEA completed a report providing an assessment of the progress made by the G8 in implementing the IEA's 25 Energy Efficiency Recommendations across various sectors of the economy. The report provides useful examples of policy measures and practices which could help Russia implement and put into action its new Energy Efficiency Law. The Report is available at www.iea.org. The goal to aspire to is not just to have an Energy Efficiency Law - but to ensure that this framework legislation engenders the environment and tools for efficient end-use energy decisions to be made across all sectors of the economy.
