Assessment
The energy markets play a key role for all sectors. From the domestic user to large, energy intensive industries, energy is purchased. The supply market has two key dimensions. Firstly, the primary cost is generally agreed to be on an upward trend and there have been concerns that peak oil would occur about now. However, the reality is that oil prices fluctuate and are difficult to predict. Oil prices tend to drive gas prices. Secondly, the supply market is a commercial business and so the prices offered to purchasers are driven both by basic costs and additional commercial margins.
Many organisations are now beginning to become more engaged with the supply market, to better offset future price rises and to gain direct benefits through improved purchasing for the immediate present. Nevertheless, understanding the market and the cost-effective purchasing of energy can be a complex business. The procedures and options vary from gaining more in-house experience to employing external help.
You work for an international organisation, they have assigned you to draft a proposal that describes the various aspects of energy in transition, moving towards renewables and looking at ensuring security of supply in a globalised economy. You have been asked to help write a strategy for this, explaining how the markets work and what the scope of choices would be, for better engagement in terms of energy finance and pricing. Bearing in mind your knowledge of risk management strategies and an overview of the traditional Geo- political dynamics that govern the conventional energy supply and demand sectors.
Solution
Introduction-Role of Energy in Economy:
Energy is one of the basic elements of economic systems and the human life as well. Far below, in the floor of deep oceans, tubeworms cluster around vents releasing heat. All life depends on sunlight. The human need for energy can be realised from the fact that about 10 percent of the economic output represents energy resources, while the other 90% is dependent on it. From agriculture to industries, without energy in its any form, every activity tends to stop. This dependence is more evident in developing countries. Today, Fossil fuel, which includes, coal, natural gas and oil are the dominant fuel source. However, the transition to other better sources like renewable energy sources has been initiated. Government policies of each country tend to have a significant effect on the transition of energy sources. The global and UK’s need and actions were taken in this respect, and aspects of securing of the energy supply are discussed in the next sections (Harris & Roach, 2017).
Evaluation of Different Energy Sources:
There are many sources of energy which are being used globally. The graph below shows the consumption of energy sources globally. About more than 80% of the energy source consumed is from fossil fuel (Harris & Roach, 2017).
Figure 1: Global Energy Consumption 2013
This energy supply mix is needed to change in future. For this reason, all energy sources are to be evaluated for their best cost-benefit analysis. For this purpose, the price, availability, net energy, environmental impacts, suitability, and net energy of these energy sources are to be considered. The energy consumption and supply by countries varies. The OECD countries have been the highest consumers of the world energy. It has changed substantially in a few years; however, still, the major demand is attributed to the OECD countries. Thus, the global inequality in energy access is going to continue in future.
The transition from fossil fuel is not because of its sacristy. Research has shown that the oil production will increase in the future, specifically after consideration of the unconventional oil reserves. However, the effects of oil energy in the shape of climate change, the greenhouse effect would give priority to other sources of oil. The natural gas is considered as the cleanest of the fossil fuels, whereas coal is considered as the most damaging fossil fuel. The process of extracting natural gas or hydraulic fracturing has been causing concerns for the environmentalists.
Crude Oil Prices Control:
The fossil fuel energy is no more considered a secure, reliable and affordable alternative for energy supply as the oil prices are very unpredictable. Lower oil prices can damage the global economy and affect the oil-producing economies as well. The Arab oil producers are going to be vulnerable to this crisis with their complete revenue, dependence on oil, and rising local consumption. Only China is one of the importers which is benefiting from the decline in oil prices. However, this benefit is not expected to remain (Salameh, 2015).
Geopolitics
The control of oil prices can be attributed to the geopolitics. Many analysts believe that oil is overpriced. The speculative, ever-changing geopolitical nature causes oil price fluctuations. The geopolitical factions in the Middle East can disrupt oil supplies. North Korea is another actor whose nuclear missiles targeted at Japan, South Korea; the US can up raise oil prices (Royal, 2018).
OPEC and Russia
Russia and OPEC countries have decided to curb their production throughout the year 2018 for raising the prices of oil to $60 per barrel. Russia and Saudi alliance are one of the constituents for keeping the oil market stable without bringing US shale oil supply (Raval, 2017). It shows how OPEC and Russia are controlling the oil prices.
Lower Oil Prices Effect on UK energy policy & UK Climate- to $10 per barrel
The fluctuations in oil prices affect the UK climate change and energy policy. The drop in oil prices to $45 per barrel caused investors to not invest in low carbon energy by being other cheaper alternatives available. The UK energy economy is dependent on gas prices, which are dependent on the oil prices. Falling oil prices would certainly cause more oil and gas consumption and thus can alter the investment in renewable energy, but the UK is expected to adhere to its 2030 targets for the renewable transition. Analysts believe that it will affect but not substantially as the price is not the only motivator for decarbonization (Hope, 2015).
Higher Oil Prices- $100 per barrel:
The higher the oil prices, the higher would be the gas price as well. It would mean that UK investors would decline more towards CCS and renewable energy investments.
Oil prices remain same:
The current Oil Prices, UK government, is committed to achieving its transition targets. The change in oil prices or no change will not cause a change in its policy. The change will only be in the interest of the investors. Thus, with lower prices, the UK government would have to invest more effort and resources on attracting the investors to renewable sources.
Gas Supply Security in Europe:
Until the transition to the renewable sources, the security of supply of energy sources specifically of LNG is to be established to meet the highest demands. The current gas pipelines from Russia, Middle East, Africa, and Central Asia are used to import gas.
Current Gas Pipelines to Europe:
Israel
Israel has come forward in the world of hydrocarbons, but red tape and political hurdles have delayed its development of offshore gas fields and the establishment of two export routes to Europe. The initial export plans include countries like Jordan, Turkey, and Egypt, but have aimed for accessing western European market as well through its pipeline to Turkey or through Cyprus in Greece (Reuters Staff, 2016).
Russia
Russia is another country which is building pipelines to Europe for exporting gas. With all the sanctions, the costs to be paid to Ukraine as transit fees would be the biggest cost. The Nord Stream and Turk Stream bypass Ukraine. Until they start, Ukraine route is to be used. The sanctions by the US are in expectation to provide US LNG to Europe, and not to get in the way of Ukraine-Russian relationship (Kobzeva & Carbonnel, 2017).
South Caucasus Pipeline:
This pipeline connects Caspian with Europe. Through Georgia, and Turkey from Ahah Demiz field gas is exported into Europe.
Nabucco
It is under consideration which connects the Middle East, Europe, Caspian, and North Africa.
Nord Stream & South Stream:
The North stream is the stream which connects Russia with Europe via the Baltic Sea. The South Stream connects via the black sea.
Blue Stream:
It also connects Europe with Russia through the Black Sea.
Green Stream:
This stream connects Northern Africa with European markets
Langeled:
The Langeled pipeline connects Norway with UK east coast. It is one of the longest subsea pipelines in the world (RigZone, 2015).
Aspects of LNG supply to Europe:
The dependence on the natural gas pipelines imported into the EU has raised concerns about the security, reliability, and affordability of its supply. The transportation of LNG by sea is considered another alternative. Researchers have found, however, that the diversity and security of supply of LNG will reduce as a small number of suppliers control it. Moreover, it is one of the most expensive and complicated energy projects. The adaptation will cause higher prices for consumers. Furthermore, LNG is intensive in greenhouse emissions and methane leaks, making it less environmentally friendly. Though the quality is much purer, but the EU is more tuned to the leaner gas quality. Finally, the shipping cost of LNG transport is highly volatile. Thus, concluding, LNG transport to Europe is not a secure option for energy supply (Kavalov et al., 2009).
Possible diversification options for Gas Supply Security
The EU can work on expanding Southern Gas Corridor by reducing its dependency on few suppliers. For this EU needs to expand in this corridor through taking the following actions:
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- Include infrastructure projects of the corridor in the EU’s list of projects having a common interest.
- Cooperating with gas suppliers from Iraq, Azerbaijan, and Turkmenistan
- Cooperating with transit countries like Turkey, Azerbaijan, and Georgia
- Negotiating with countries for a Trans-Caspian pipeline
Furthermore, the EU can also work on the development of the Mediterranean gas hub for diversification of its energy routes and suppliers (European Commission, 2015).
Transition to Renewable Energy
The remaining energy source; renewable energy sources are unlimited, as it gets replenished naturally. The solar energy supply of one day is enough to meet the demand of one year of all humans. But only some of the regions are more suitable for the solar and wind energy. Northern UK is more suitable for wind energy.
Middle East Energy Plans
Where countries are looking to transition to new energy sources and reduce their dependence on fossil fuel sources of energy, Middle East countries are doing the same, moving to nuclear energy. The expected increase in the energy consumption by 30% by 2028 in the Middle East has raised concerns about dependency on fossil fuel sources (EIA.gov, 2018).
The case for the transition to Renewable Energy
Analysts believe that theoretically, almost 100% renewable energy sources can be achieved in nearly four decades. The uncertainty from the intermittent renewable can be decreased by the ramp-up of grid connections and load sharing. Then there are regulatory and technology hurdles as well. The cost of renewable energy is going to be considered high by corporations luring them to cheaper fossil fuel sources. The analysts have persisted that the fossil fuel sources should be priced for their total social price, means the inclusion of carbon tax will make corporations to opt for renewable sources instead.
The transition can take 100 years. It is not an easy transition, but it is possible, and everyone needs to move in its direction. With manufacturing, infrastructure, mining, maintenance costs, it is still not zero emission. But the more efficient the processes are, the more reduction in carbon footprint will be (Wharton, 2015).
The capability of Renewable Energy Sources:
Another important aspect of the transition is to realise if the renewable sources are enough to cater with the dependence on fossil fuel sources. One study has found that the renewable sources, including the wind, solar, and water can provide the energy newly produced by 2030 and replace all fossil fuel energy sources by 2050.
The table shows the available global renewable energy from renewable sources in trillion watts. The projected demand for energy in the year 2030 is expected to be 17 trillion watts which are fulfilled by wind and solar combined (Harris & Roach, 2017).
Figure 2: Availability of Renewable Energy Globally
However, there are many aspects of this transition to happen. The geopolitical, social, economic, governmental, and legal aspects would affect the transition process. For instance, the infrastructure required for the production of the renewable energy is projected on the table below (Harris & Roach, 2017).
Figure 3: Infrastructure Requirement for Transition to 2030 Demand
Then there is the technology need, which already exists for this transition. There will be a need for upgrading of the electric grids globally and new capacity for storing and power transfer. It is evident that significant infrastructure will be needed for the transition; however, the barrier is not economical. Barriers are primarily political and social.
Another factor which remains is that of cost. The cost of energy supplies, cost of infrastructure, and the daily cost of energy supply are the economic costs. The environmental costs are also to be considered to realise the true value. The cost of nonrenewable sources of energy seems to be cheap. However, their environmental costs are not considered here. Consideration of their environmental cost will make these high priced.
Different studies have estimated different costs for the various energy sources. Some have found wind, and solar energy to be competitive with the coal energy source. Concluding, it can be said that the prices of renewable sources are going to decline where the prices of fossil fuel are uncertain. Moreover, the energy sources of renewable are also expected to be more predictable as compared to oil. Solar is expected to emerge as the least cost generation technology by the year 2030 (Harris & Roach, 2017).
UK Government Policy in past years
The policy of UK government includes the transition to nuclear and renewable technologies to decline emissions by capturing and storing carbon (CCS). It is aimed to enable the UK to have a secure supply of energy, reduce its carbon footprint, greenhouse emissions, climate change reduction, and stimulate new jobs and business. The actions taken by UK government include;
Innovative Low Carbon Energy Technology
The UK is committed to reducing greenhouse emissions by 2050 by 80%. Through LCICG public corporations are backed by the government to support low carbon innovation.
Exploitation of Renewable Sources:
The Renewable Obligation provides incentives or the renewable electricity generating on large scales attracting the suppliers of UK to produce a portion of their electricity from renewable sources.
Feed-In Tariff Scheme:
The UK is one of the countries who has devised precise action plans to transition to low-carbon sources. In 2010 the government of the UK had introduced Feed-in Tariffs. This scheme was started to encourage the small-scale renewable uptake and low-carbon technology adaptation to total capacity of 5MW. The government reports on a yearly basis the results of the scheme. In the 7th year reported scheme results show that the market responded to the new changes made in the 6th year of the scheme. These changes included deployment caps and depression mechanism changes. It caused a reduction in tariff values. As compared to the 6th year, 25% of 6th year new installations were made in the 7th year (OFGEM.Gov.uk, 2017). It is a glimpse of the efforts made by the UK government in this respect.
Renewable Heat Incentive:
Providing incentive to consumers using renewable heating as compared to fossil fuel heating
UK Renewable Energy Roadmap:
Using of offshore wind, onshore wind, solar PV, ground source, marine energy, and biomass energy plan to heat pumps and transport.
Renewable Transport Fuel Obligation:
Forcing companies are providing more than 450,000 of fuel to supply a share of renewable sources
Investing in Nuclear Power:
By 2019, UK is committed to generating electricity through its new nuclear power station
New Carbon Capture and storing industry
It is created, by rising competition with £ 1 billion of capital funding to assist commercial-scale CCS, reduce costs, develop the supply chain, technologies, and infrastructure for CCS (UK Government, 2015).
National Renewable Energy Action Plan of UK
The national action plan of the UK was devised in 2009 giving the roadmap to achieve its target for renewable energy transition.
Renewable Energy targets
The European Union has set the target of 15-20% of their total energy to be coming from renewable sources by 2020. All European Union countries have devised their action plans for meeting these targets. These countries have also committed to targeting 27% of the final energy consumption combined with renewable sources by the year 2030 (Harris & Roach, 2017). Following chart shows the Energy consumed from renewable sources in the UK (IEA.Org, 2009).
Expected Consumption 2020
The final energy consumption targeted by each sector (IEA.Org, 2009) is depicted in the table;
How to transition
Geographies of Energy transition
The energy challenge of this century is characterised by the energy transition to a sustainable, independent, secure energy system, which will provide universal access to a secure and reliable supply of low carbon efficient energy sources. Another important aspect of transition discussed by researchers is that this transition would require new geographies which mean new ways of producing, working, and living with the energy. These new geographies are evidently not well defined. The UK government has targeted to transition to low-carbon energy sources and made it their policy. The UK Low Carbon Transition Plan proposes for transformation in power, housing, transport, business, and agriculture sectors; however, it ignores the impact of these changes on the geographies of economic activity and energy in the UK. The consideration of co-existence of multiple possibilities; durability of the energy systems, the process of fragmentation and integration of new infrastructure is important (Bridge et al., 2013).
How to achieve Renewable Energy targets?
The set targets can be achieved through the following of consumption targets for each of the sectors.
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- 30% of electricity consumption includes the 2% of small-level sources
- 12% of the heat consumption
- 10% of transport consumption
The target consumption will make the UK achieve 15% of its 2020 target of sourcing of renewable energy. The UK policy is made up of three components;
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- Financial support to the renewable sourcing
- Erasing the barriers to delivery
- Development of emerging technologies.
UK World Energy Trilemma Ranking:
The Trilemma index ranks countries as per their ability to provide sustainable energy regarding energy equity, energy security, and environmental sustainability. A is considered as the best. The UK has the rank of AAA. The UK has performed very well in all three areas, but the security of supply is still a challenge. Following is the energy profile of the UK (Worldenergy.Org, 2017).
The solution for UK Energy Trilemma:
The five focus areas for accelerating the transition process need transforming of the energy supply, improving efficiency, advancing of energy access, managing demand, addressing its affordability, and decarbonising of the energy sector (World Energy Council, 2016).
Policy Recommendations to UK government for securing Supply of Natural Gas:
For diversifying its energy sources to secure its energy supply UK and EU can work on following suggestions:
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- Put confidence on Egypt, which is the only country in the region having the large enough reserves and export infrastructure? The need of energy reforms in Egypt can be catered by securing investor confidence.
- Build a pipeline connecting Israel and Cyprus to the south of Europe, or to create a network of the pipeline from and into Egypt. Egypt is the better option as Israel needs regional cooperation and a number of buyers to start mass production and Cyprus reserves are too small.
- Strengthening of regional diplomacy by the development of projects of common interest and working with Turkey and Cyprus to resolve their dispute, and provide cooperation to Egypt in its exploitation of gas reserves(Baconi, 2017).
References:
Baconi, T., 2017. Pipelines and Pipedreams: How the EU can support a regional gas hub in the Eastern Mediterranean. [Online] Available at: http://www.ecfr.eu/publications/summary/pipelines_and_pipedreams_how_the_eu_can_support_a_
regional_gas_hub_in_7276 [Accessed 7 March 2018].
Bridge, G., Bouzarovski, S., Bradshaw, M. & Eyre, N., 2013. Geographies of energy transition: Space, place and the low-carbon economy. Energy Policy, 53(2013), pp.331-40.
EIA.gov, 2018. Middle East countries plan to add nuclear to their generation mix. [Online] Available at: https://www.eia.gov/todayinenergy/detail.php?id=35192 [Accessed 7 March 2018].
European Commission, 2015. Gas and oil supply routes. [Online] Available at: https://ec.europa.eu/energy/en/topics/imports-and-secure-supplies/gas-and-oil-supply-routes [Accessed 7 March 2018].
Harris, J.M. & Roach, B., 2017. Chapter 11: Energy: The Great Transition. In Environmental And Natural Resource Economics: A Contemporary Approach. 4th ed. Global Development And Environment Institute, Tufts University.
Hope, M., 2015. Expert views: How low oil prices affect the UK’s climate and energy policy. [Online] Available at: https://www.carbonbrief.org/expert-views-how-low-oil-prices-affect-the-uks-climate-and-energy-policy [Accessed 7 March 2018].
IEA.Org, 2009. National Renewable Energy Action Plan for the United Kingdom. [Online] Available at: https://www.iea.org/media/pams/uk/PAMs_UK_NREAP.pdf [Accessed 6 March 2018].
Kavalov, B., Petri´c, H. & Georgakak, A., 2009. Liquefied Natural Gas for Europe-Some Important Issues for Consideration. [Online] Available at: http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.172.7870&rep=rep1&type=pdf [Accessed 7 March 2018].
Kobzeva, O. & Carbonnel, A.d., 2017. Russian gas pipelines to go ahead despite U.S. sanctions. [Online] Available at: https://www.reuters.com/article/us-russia-sanctions-gazprom-analysis/russian-gas-pipelines-to-go-ahead-despite-u-s-sanctions-idUSKBN1AJ1AN [Accessed 7 March 2018].
OFGEM.Gov.uk, 2017. Feed-in Tariff Annual Report 2017. [Online] Available at: https://www.ofgem.gov.uk/publications-and-updates/feed-tariff-fit-annual-report-2016-17 [Accessed 6 March 2018].
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Reuters Staff, 2016. Israel seeks new gas routes to Europe after fixing red tape. [Online] Available at: https://www.reuters.com/article/israel-gas/israel-seeks-new-gas-routes-to-europe-after-fixing-red-tape-idUSL8N1BD3XT [Accessed 7 March 2018].
RigZone, 2015. How Do European Natural Gas Pipelines Move Gas to Markets? [Online] Available at: https://www.rigzone.com/training/insight.asp?insight_id=335 [Accessed 7 March 2018].
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Salameh, M.G., 2015. What is Behind the Steep Decline in the Crude Oil Prices: Glut or Geopolitics? International Association for Energy Economics, pp.25-28.
UK Government, 2015. Policy paper 2010 to 2015 government polic: Low Carbon technologies. [Online] Available at: https://www.gov.uk/government/publications/2010-to-2015-government-policy-low-carbon-technologies/2010-to-2015-government-policy-low-carbon-technologies#appendix-5-the-renewables-obligation-ro [Accessed 7 March 2018].
Wharton, 2015. Making the Transition to a Low-carbon Economy. [Online] Available at: http://knowledge.wharton.upenn.edu/special-report/making-the-transition-to-a-low-carbon-economy/ [Accessed 6 March 2018].
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