The energy sector significantly affects economies around the world (some to a higher degree than others) and human quality of life in those economies. Indeed, energy is an input to almost every good and service produced and accordingly its influence on any economy is larger than the sum of its parts.
The energy sector may be said to comprise three core activities, namely:
- Generation, which can come through conventional or renewable sources and which essentially involves the use of some energy source and its conversion into electricity as well as its inversion or transformation if required;
- Distribution, which essentially involves the relay of the electricity generated to the place of consumption through physical wiring, which often includes the national electricity grid; and
- Consumption, which entails the absorption of electricity and its transformation into the work required.
The primary conventional sources of energy are all non-renewable resources and include coal, oil derivatives and natural gas. Presently, the energy sources used most by humanity on a global level are non-renewable fossil fuels.
In economic terms, non-renewable resources are goods where more consumption today indicates a reduced amount of the good available for consumption in the future. David Ricardo, in his examination of the prices of non-renewable resources, argued that a mineral resource’s price should rise over time and that the spot price is determined by the mine having the greatest extraction cost, with mine owners enjoying lower costs of extraction benefiting from a differential “rent”. An important contribution with respect to non-renewable resources is the Hotelling’s rule, which outlines the time path of resource extraction that maximises the resource stock value. Another prominent concept in this area is Hartwick’s rule, which argues that economies utilising depletable, non-renewable resources should invest their resource rents in capital in order to maintain their standard of living.
Oil, gas, and coal power the modern economy because they are relatively easy and cheap (with a good proportion of externalities being unaccounted for) to extract and use, and also because of legacy technological developments and the path dependency of today’s technology. Be that as it may, without these fuels, current production and consumption patterns would be nowhere as close as to what humanity has become accustomed to. The heavy dependence on fossil fuels that this situation has brought about along the years means that any scarcity or perceived scarcity in oil supply has the potential to create chaos in economies that highly depend on it.Indeed, fossil fuels – in this particular instance, oil – were the only reason why Saddam Hussein used to be touted as a benefactor of sorts whenever oil supply plummeted between 1990 and 2003.
As various scientific sources have pointed out, and as the Intergovernmental Panel on Climate Change (IPCC) has affirmed on the basis of these scientific sources, carbon, along with other greenhouse gases (GHGs), are key sources of global warming.
Presently, less than a fifth of final energy consumption globally comes from renewable resources. Popular forms of alternative energy sources include solar, wind, geothermal, biofuel, methanol/ethanol and hydrogen. Some renewable sources of energy, such as wind and solar energy, are unlimited (at least until the sun turns into a dead star) and thus cannot be exhausted. Renewable energy sources can play a key part in confronting the challenges of the security of supply of energy and climate change given that they do not have to be imported from fossil fuel-rich countries and that they create less GHG emissions than fossil fuels.
As the cost of renewables fall while that of oil continues on an upward long-term trajectory, and as support by policy makers increases, the shift to renewables-based energy production is gaining momentum. Moreover, concerns over fossil fuel price fickleness, climate change, carbon pricing, the risks inherent in nuclear power, and the threat of peak oil have prompted the commercialisation of renewable energy, expanding the market and raising demand for renewable energy equipment. In the last 20 years, solar and wind power systems have experienced fast sales growth, and decreasing capital and electricity generation costs, while attracting more investment into research and development intended to promote further improvement in equipment performance characteristics.
Despite the rise of renewables and their buoyant outlook, the world is still a long way from being able to take off its fossil fuel shackles and the hiccups in doing so following unfavourable changes in Feed-In Tariff regimes in some countries have prompted waves of bankruptcies and consolidation in the renewables industries affected. Given the advent of carbon trading mechanisms, natural gas seems to be set to be the fossil fuel of choice for the transition from dirtier fossil fuels to renewables, even though the latest reports about fracking seem to suggest that uncaptured releases of methane into the atmosphere might offset the benefits deriving from fuel substitution.
Energy conservation aims to decrease the consumption of energy for a given amount of required work. It can be attained, among other things, by:
- increasing efficiency in the electricity generation process (e.g. by matching demand and supply for electricity more closely thereby reducing excess production or by employing more efficient turbines);
- cutting down on losses in the distribution system;
- encouraging higher equipment power factor ratings, better load-balancing and the deployment of appropriate capacitors and transistors designed for the purpose;
- cutting down on unnecessary electricity consumption;
- using more efficient customer premises electrical equipment; and
- the deployment of energy as a service techniques.
Higher efficiency in the energy sector is not as simple to understand as in other more straightforward sectors where if demand does not change, increasing efficiency will lower consumption. Indeed, it does not merely refer to a reduction in the quantity of energy needed to provide the same work but needs to account for the additional complexities of power factor and energy generation indivisibilities.
Moreover, it is worth noting that numerous energy efficiency improvements do not usually bring about a decrease in energy consumption by the volume forecasted. This is because energy efficiency lowers the cost of energy and consequently tends to increase its consumption.
Energy efficiency and conservation have today become crucial components of the energy policy debate. Moreover, both have acquired a new meaning as climate change and energy security concerns have intensified.
In various countries, energy efficiency is also seen as a key issue of national security. Indeed, it can be utilised to decrease energy imports from foreign countries and the procurement of carbon credits thereby retaining currency in one’s own economy and can also decelerate the rate at which national energy resources are exhausted.
The European Union (EU) has been developing its climate and energy policies by pursuing the three key high-level objectives of:
- Security of supply;
- Competitiveness; and
The above objectives have been translated into binding targets. By 2020, the EU has pledged to:
- Reduce its GHG emissions by 20% (or even 30% if a worldwide agreement is attained which similarly binds other nations);
- Boost the proportion of renewable energies to 20% of overall EU energy consumption;
- Expand the share of renewable energies in transport to 10%; and
- Increase energy efficiency by 20%.
Realising these goals will necessitate considerable advances in the research and development of innovative machinery and equipment. The European Strategic Energy Technology Plan summarises the long-term energy research priorities for the interlude covering 2020 to 2050. It sets the foundations for a European policy for energy technology and creates a framework which brings together different activities in the energy research field.
In various countries, energy efficiency is also seen as a key issue of national security and is regulated in such a way as to require operators to keep a reserve stock, which in specific areas of energy is sometimes referred to as Compulsory Stock Obligation (CSO). As presently framed, the Renewable Energy Directive (2009/28/EC) is intended to guarantee the achievement of the 2020 renewable energy targets. In addition, the European Union’s Energy Roadmap 2050 serves a role in relation to guiding energy policy decisions until 2050 while setting out a long-term strategic framework on the basis of which action can be taken.
The Equinox Advisory team can assist you with a multitude of areas relating to energy economics. Our key areas of specialisationinclude:
- Consultancy and advisory services to governments, regulators and operators in the design of green energy infrastructure and energy efficiency schemes;
- The transition to Energy as a Service (EaaS);
- Tariff structure analysis and design;
- Sector strategies and policy development and analysis;
- Quantitative backing for evidence-based policy advice;
- Collection, collation, storage, management and extraction of data;
- Impact assessments for energy projects;
- Project feasibility studies;
- Project business case development;
- Investment planning and risk assessment;
- Energy and natural resource markets assessments;
- Energy markets forecasts and analyses;
- Industry surveys; and
- The provision of training.