November 2011 saw cliff-hanging discussions that had the potential to affect all our lives for decades to come. Europe looked ready to plunge into a fragmented collapse reminiscent of the 1920s. The Durban Conference on Climate Change appeared unlikely to resolve any issues related to reducing greenhouse emissions. The outcome of both situations would have huge impacts on global business and industry, and very specifically on energy management strategies. But what a difference a week makes.
By early December 2011, 26 of the 27 European Union (EU) members agreed to fast-track a new treaty aimed at wider and deeper financial and fiscal integration. The ultimate success of this agreement will not be known for years, but reframing how a quarter of the world’s economy manages its finances affects us all. On the energy front specifically, much of the policy, technology and investments aimed at energy efficiency and emissions around the world has emanated from the EU. This could easily be stalled or reversed by economic crisis in the continent.
The less than excitingly named “17th Conference of the Parties” in Durban was widely forecasted to go nowhere in gaining a global agreement to reduce greenhouse gas emissions. Since 70% of these emissions come from the use of coal, gas and oil, pressure to reduce them affects all major energy users and energy management investments and priorities. At the start of the Durban Conference, most assumed the Kyoto Treaty would fade away at the end of the current agreement term and that any hope of a binding international agreement would not survive the political standoff between the United States, China and India. At best, most expected national or regional ongoing commitments, lip service to “clean energy”, and some important but relatively small funds made available for projects in developing countries.
“In the Unites States, energy prices in recent years have been relatively low, especially in the case of natural gas. ”
What actually happened surprised many. The Kyoto Protocol was extended to 2017, meaning countries that have ratified the agreement must stay committed to obligatory reductions. There was also agreement to finance the Green Climate Fund aimed at helping poorer countries adapt to climate change and invest in more efficient and cleaner energy systems. Most surprisingly, all participants agreed to start negotiating a legally binding treaty to be in force by 2020. A working group called the Durban Platform for Enhanced Action will begin work on this immediately. The devil will be in the details, but the fact that all parties are now recommitted to a global framework with binding targets is an outcome that few expected. These agreements will shape part of the energy manager’s task for years to come. Still, there remains concern from some scientists that this may be too little, too late, given the accelerating emissions concentrations.
In the Unites States, energy prices in recent years have been relatively low, especially in the case of natural gas. This, combined with the economic slow-down and legislative uncertainty over emissions regulation, has made it tougher to get management’s attention on energy efficiency projects, let alone projects targeted at greenhouse gas emissions reductions. Some of these objections have been due to the historically higher costs of low-carbon or efficient alternatives. However, as shown in the EU, the combination of policy and scale has had a major effect on lowering costs for clean energy options in the recent years, a trend which is now more likely to continue.
At the same time, China has recognized the challenges and opportunities of clean energy and is becoming both a major consumer and supplier of efficient technology, adding scale and further accelerating price reductions. In one example, the cost of solar PV panels has dropped by more than 300% within the past five years and is on a curve where these reductions could continue. In Durban, China hinted for the first time they could possibly accept binding emission targets. In the final communication, they were committed to the negotiating process, along with the United States, EU and India. Globally, it is being realized that it would be an unwise business decision to be counted out of the potential value of having a sound energy and climate policy, irrespective of the short-term vagaries of local politics.
In the same week, another interesting indicator was making the rounds. In 2010, investments in renewable energy exceeded investments in fossil fuel. According to the International Energy Agency, the equivalent of $187 billion was invested in renewables against $157 billion in fossil fuels. The subsidy picture is equally telling of underlying changes. The $409 billion subsidies to fossil fuels are being steadily phased out, whereas the $66 billion subsidies to renewables are expected to quadruple in the next two decades.
The likely trajectory for emissions targets is already known and will be about an 80% reduction on 2005 levels by 2050. Irrespective of the minutiae of negotiations, we are seeing the groundswell of market transformation. For the energy manager, this means managing breakthrough targets with limited human and financial resources. For the entrepreneur, it means new market opportunities measured in the hundreds of billions.
Peter Garforth is principal of Garforth International, Toledo, Ohio. He can be reached at email@example.com.