by Roberto Vigotti, Chair of REWP IEA

What are the main findings of the Agency analysis on future energy trends?
Current trends in energy supply and use are patently unsustainable - economically, environmentally and socially. The IEA World Energy Outlook 2008 (WEO ) shows that, if policies do not change, primary energy demand will grow by almost 50% by 2030 with a persistent dominance of fossil fuels - oil, gas and coal. Demand will come mainly from developing countries, in particular China and India, whose continued growth will progress along with the need for more transport, cooling and heating. At the same time, growing fossil fuel consumption will drive up global CO2 emissions, pushing up the average global temperature by as much as 6 °C in the long term and contributing to potentially catastrophic climate change. We can and must change the path that we are now on, but this will take an energy revolution, with low-carbon energy technologies at its heart. Energy efficiency, many types of renewable energy, carbon capture and storage (CCS), nuclear power and new transport technologies will all require widespread deployment if we are to reach our greenhouse gas emission goals.
In recent months, global developments - namely, lower oil prices and the economic crisis - may have eclipsed the public’s focus on critical energy and climate change challenges. The current turmoil in markets is nothing short of critical. But IEA analysis highlights the importance of continuing to maintain a focus on the medium- to long-term target of achieving a cleaner, more secure energy future. This longer-term objective requires both careful planning for the future as well as substantive action now.
Despite the severity of the current financial and economic crisis, it cannot be allowed to distract us from addressing critical and strategic climate change and energy challenges. The energy sector produces 60% of global greenhouse gas emissions and so it must also be a key part of any strategy to reduce them.


What is the relation between the present economic crisis and the investment needs in the energy sector?
The IEA has identified a clear need for substantial investment in all segments of the energy chain. Yet the current global financial crisis has triggered the worst recession since the Second World War, with significant consequences for the energy sector. The IEA has analyzed the impact that this crisis is having on global energy investment. In the report The Impact of the Financial and Economic Crisis on Energy Investment, IEA 2009 to this year’s G8 Summit in Italy, the Agency warns of a slide in energy investment as a consequence of the economic downturn. The tougher financing environment, weakening final demand for energy and falling cash flows have all sharply reduced investment throughout the energy supply chain, from production to end use. New investments that were attractive just last summer are not so much today. Falling energy investment will have far-reaching and potentially grave effects on energy security, climate change and energy poverty. There is clear evidence that energy investment in most regions and sectors will drop sharply in 2009.
In the oil and gas sector, there has been a steady stream of announcements of cutbacks in capital spending and project delays and cancellations, mainly as a result of lower prices and cash flow.
We estimate that global upstream oil and gas investment budgets for 2009 have already been cut by around 21% compared with 2008 - a reduction of about USD 100 billion. Over the last six months, many planned large-scale upstream oil and gas projects, involving around 2 mb/d of oil production capacity and 1 bcf/d of gas capacity, were deferred indefinitely or cancelled. A further 35 projects, involving 4.2 mb/d of oil capacity and 2.3 bcf/d of gas capacity, were delayed by at least 18 months.

So, in the near term, weaker demand is likely to result in an increase in spare or reserve production capacity. But there is a real danger that sustained lower investment in supply in the coming months and years, could lead to a shortage of capacity and another spike in energy prices in several years time, when the economy is on the road to recovery. We should have learned the lesson last year. We should not repeat the same mistake.
In terms of the power sector, we estimate that global electricity consumption could drop by as much as 3.5% in 2009 - the first annual contraction since the end of the Second World War. In the OECD, electricity demand in the first quarter of 2009 fell by 4.9% on a year-on-year basis. Non-OECD regions have also seen weaker demand: in China, for example, demand fell by 7.1% in the fourth quarter of 2008 and by 4% in the first quarter of 2009.
The drop in electricity demand is reducing the immediate need for new capacity additions. But if a recovery takes longer than expected, and energy prices remain at depressed levels relative to recent peaks, we would expect to see a shift to coal- and gas-fired plants at the expense of more capital-intensive options such as nuclear and renewables.
Indeed, we are already seeing that investment in renewables is falling even more rapidly than that in oil, gas and other types of generating capacity. We estimate that for 2009 as a whole, investment in renewables could drop by as much as 38% if the trends of the first quarter were to continue for the rest of the year. This will have implications for greenhouse gas emissions. In the short term, slower economic growth will curb growth in emissions. But, in the medium and longer term, the crisis may lead to higher emissions, as weak fossil fuel energy prices and financing difficulties curb investment in cleaner energy technologies, prolonging or even increasing reliance on fossil-fuelled capacity.


How then to transform the financial crisis into an opportunity?
The current economic crisis in fact makes the need for sustained and focused investment in energy supply, energy efficiency and low-carbon technology both timely and urgent.
Investments in greater efficiency, renewables or smart grids will tackle unemployment and create new jobs. However, we have to look more carefully. Measures to battle the economic crisis and boost the economy should be “timely, targeted and temporary”. Some economic incentives could require many years to achieve their desired results, as in the case of European feed-in tariffs for renewables that guarantee prices for ten years or more. Nonetheless, tremendous opportunities still exist. If drafted carefully, economic stimulus packages provide an excellent opportunity to ensure greener and more sustainable growth in the energy sector. Most countries can simply choose to improve and extend existing programs and instruments in order to be able to invest quickly.
Fortunately, many countries recognize this, and around USD 100 billion or 5% of the total USD 2.6 trillion of public spending in short-term economic stimulus packages announced to date has been directed at energy efficiency and clean energy. Of this, about USD 20 billion is for renewable power investment. This action represents small but significant steps in the right direction.
But much more needs to be done. The investment needed to limit the increase of global temperatures to around 2 °C (which is in line with reducing and stabilising greenhouse gas emissions at about 450 parts per million (ppm) in CO2-equivalent terms, the so-called 450 ppm scenario), far exceeds the additional investments that are expected to occur as a result of the stimulus packages so far announced.

Looking at the energy sector as a whole, we note that it would be necessary to increase annual investments in nuclear energy, renewables and energy efficiency by about USD 400 billion compared to recent levels.
Today’s stimulus packages area good start. We estimate that they will stimulate additional investment of around USD 100 billion over the next year - in addition to some important R&D funding for CCS. Yet to achieve the generally agreed upon goal of stabilising CO2 emissions in the atmosphere at around 450 ppm in the long term, our analysis suggests that, relative to their recent announcements, governments should increase the degree of new funds committed to cleaner and more efficient energy use (including CCS) and of other stimulus measures triggering private investments by about four times to USD 400 billion.
With regard to renewable power investment, our analysis suggests that to achieve the 450 ppm scenario, governments should be looking to increase by a factor of around six the level of total (public and private) investment triggered by their policy frameworks and incentives. This is an increase of USD 120 billion and this level of investment would have to be sustained each and every year for decades to come.
We must view the financial crisis as an opportunity - rather than a challenge - to move toward a cleaner, more secure energy future. Sustained and carefully targeted energy investment strategies must be at the heart of every economic stimulus package. Energy ministers will need to ensure that the green elements of these stimulus packages are sufficient to stimulate private investment towards a 450 ppm pathway in the future.


What is the IEA message on policies to address climate change?
With the energy sector accounting for about 80% of CO2 emissions and 60% of greenhouse gas emissions, energy and climate change are two sides of the same coin and must be addressed together.
In the IEA World Energy Outlook 2008 (WEO), the business as usual scenario shows that emissions from OECD countries are rather stable. An increasing share of these emissions comes from non-OECD countries, as the green section of the chart below shows. Global CO2 emissions from energy will jump by 45% between 2006 and 2030 to 40.6 gigatons (growth rate of 1.6% pa), if no new policies are introduced. This trajectory of a 45% growth in emissions puts the world on track for a global temperature increase of around 6 degrees. This is clearly not sustainable. Coal in non-OECD countries is the single biggest contributor to CO2 emissions and its share will increase considerably over time, unless we act.
In light of this pressing challenge, we set out two alternative energy policy scenarios which would take the world to a lower emissions future: 550 ppm, and 450 ppm of CO2-equivalent in the atmosphere. The 450 scenario requires decoupling of economic growth from CO2 emissions which would mean a temperature rise of around 2 °C. This would eventually indicate a 50% reduction of current levels of CO2 by 2050, which is the aim of this year’s climate change talks in Copenhagen.

Two-thirds of emissions reductions take place in non-OECD countries where the most economic growth will happen. GDP growth in OECD countries will be 2% per annum, but in non-OECD countries, it will be 4.8% per annum. Measures in three areas are vital:
Energy efficiency plays the largest role globally in reducing CO2 emissions. Globally, in the 450ppm scenario, energy efficiency represents 54% of CO2 reductions and when we look at non-OECD countries, this increases to 59%. - Changes to the energy mix through the use of renewable energy and nuclear power is also important. - CCS after 2020 is necessary also. Coal is an important source of energy and as the chart shows, CCS is particularly important in OECD countries - accounting for 21%. This scenario assumes a CO2 price of USD 180 per ton by 2030. Today in the European Union, the CO2 price is about EUR 15 per ton of CO2. A carbon price signal is essential to attract private investment to cleaner technologies and practices.

Concerning the power sector, what does the IEA 450 ppm Scenario mean for electricity generation?
The share of fossil fuels decreases while renewable and nuclear electricity generation increases. Renewables would grow from their current world share of 18% to 40% in 2030. This means that we need to build 18,000 windmills of 3MW every year, 300 concentrating solar plants and 50 hydro plants. Furthermore, nuclear power generation would almost double to reach 5200 TWh in 2030. To make this possible, we need to build 20 nuclear power plants every year. For the coal sector, 30% of coal-fired power plants should have installed CCS technology by 2030.
Another important area is energy efficiency. In many cases, such policies will provide savings to consumers. But we have to pick the right policy approaches for the right sectors. The IEA has presented 25 energy efficiency recommendations, which were endorsed by G8 Leaders at their Summit in Hokkaido, Japan, last year. The IEA estimates that if these recommendations were implemented globally and without delay, around 8.2 gigatons of CO2 could be saved annually by 2030. This is more than the current emissions of the USA and Japan combined. For that reason, we welcome the recent establishment of the International Partnership for Energy Efficiency Co-operation (IPEEC), which will play a central role in energy efficiency implementation.
To support low-carbon technologies and energy efficiency, G8 Leaders at their Hokkaido 2008 Summit asked the IEA to develop global technology roadmaps. We have identified 19 roadmaps, on both the supply side and the demand side. During 2009, we are working on roadmaps for solar PV, wind, electric/hybrid vehicles, CCS technologies, nuclear energy, and the cement industry. CCS in particular will be crucial. Together with the Carbon Sequestration Leadership Forum, the IEA will report to the G8 in 2010 on progress toward the establishment of 20 CCS demonstration plants globally. Further roadmaps will also be completed in time for the 2010 G8 meetings.

But these roadmaps are not self-executing. The next important step will be implementation. To achieve implementation globally, an international strategy to promote continuous investment, and to ensure the widest international co-operation for accelerating the development and deployment of low-carbon energy technologies, will be vital. This could take the form of a global platform on low-carbon energy technology as recently endorsed by the G8 leaders at their summit in L’Aquila. Such a platform should embrace an open philosophy that encourages the participation of all countries and private organizations willing to contribute their fair share to the work. The IEA Secretariat, under the guidance of its Governing Board, stands ready to support such international initiatives, including by working with industry and IEA non-member countries, through the IEA international energy technology network and other collaborative efforts.

An additional priority for the IEA is to address “energy poverty”.
Energy poverty has two chronic components:

► lack of access to electricity; and
► the unsustainable use of firewood, agricultural waste and traditional biomass.

According to estimations in the World Energy Outlook 2006, an estimated 1.6 billion people worldwide have no access to electricity - most of them in sub-Saharan Africa and southern Asia. This situation is unacceptable economically, socially and even morally. But, looking ahead to 2030, the IEA 2008 WEO estimates that, with current practices, despite the slowing down of population growth and future economic growth prospects, the number of people without access to electricity in 2030 will still be 1.4 billion. About two-thirds of this number will live in sub-Saharan Africa.
The second primary element of energy poverty relates to unsustainable traditional energy sources. According to our estimates today, 2.5 billion people use these sources of energy mostly in Africa, but also in Asia and Latin America. Firewood, charcoal, agricultural waste and traditional biomass for cooking purposes, have far-reaching implications for the economy. The fuel sources also have a big impact on women and children. According to joint IEA/World Health Organization analysis, we estimate that, each year, 1.5 million women and children die prematurely from respiratory disease caused by indoor pollution by the burning of firewood in primitive stoves.

The 2008 WEO included a special analysis of ten oil and gas-exporting countries in sub-Saharan Africa. Despite the vast hydrocarbon wealth in these countries, most citizens have limited access to modern energy services. Today, about 65% of the population in these ten countries, have no access to electricity and 75% rely on firewood for cooking, which has adverse health implications, as mentioned earlier. The 2009 World Energy Outlook will contain an updated, comprehensive database quantifying the number of people still lacking electricity access today.
The WEO analysis shows that tackling energy poverty is well within the means of these countries. We estimate that the capital costs of providing minimal energy services, namely electricity and liquefied petroleum stoves, to these households is about USD 18 million between now and 2030. This is equivalent to just 0.4% of the oil and gas export revenues of these ten countries. In other words, with this percentage, energy poverty could be overcome at least in these countries.

The financial crisis has far-reaching implications on energy poverty. The overall cutback in power sector investment will impede the fight against poverty. The estimated 1.6 billion people worldwide still lacking access to electricity may grow as a result of the crisis. Some households that previously had access to energy services may no longer be able to afford to pay and financial constraints may limit the ability of utilities to connect new customers. Although the crucial importance of energy has been repeatedly stressed in the context of energy poverty alleviation, we have to admit that there has been a failure to agree to any international strategies towards reducing energy poverty, especially in Africa.

How can responses to the financial crisis contribute to the outcomes of the Copenhagen summit?
We must put the world on the right energy path. The full participation of OECD and non-OECD countries is needed for this to happen. The IEA will provide timely data and early WEO 2009 analysis in the lead-up to Copenhagen to assist negotiators in this regard. We all need to be much more efficient in the way we use energy and, secondly, we must decarbonize the power sector. To do this quickly and most efficiently, CCS, renewables and nuclear must all be embraced. It is also imperative that the necessary conditions are created to attract private investment. A carbon price and government support measures are therefore essential. We hope that Copenhagen can help deliver on these priorities for the energy sector. We should remember that ensuring a sustainable future also enables us to enhance our energy security. Mitigating climate change should thus be seen as an opportunity, not as a burden.

Responding to the financial crisis by addressing the energy sector in stimulus packages is not a policy measure that should substitute for other, more long-term approaches. Rather, such a response must comprise measures that would have been taken in the energy sector later, or in a different way, without the economic crisis. Indeed, it should focus on those measures that will foster the necessary investments for energy supply to meet demand in the next economic upturn. Low energy prices are temporary and recent developments have shown that supplies cannot always be assumed to be secure. From this perspective, focusing on energy investments now in this time of economic crisis might in fact be the most promising and certain way to take a determined first step to a sustainable future - from a security, environmental and affordability point of view.

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