Can we keep fuel in the ground?

Peter Garforth says the impact of climate regulation on the energy supply market is becoming clearer.

By Peter Garforth

The updated report on climate change that was the backdrop to both the September conference in New York and the APEC Summit in China continues to raise fundamental questions about the structure of energy markets in the future. The goal of at least an 80% reduction in greenhouse gas (GHG) emissions by 2050 to avoid runaway climate change is the recommendation of the vast majority of the scientific community. The overwhelming majority of these reductions would have to come from deep changes in the way we source, distribute, and consume energy, which are major sources of carbon-dioxide and methane, the two most prevalent greenhouse gases.

Irrespective of individual perceptions on climate change science, there is a growing likelihood of tighter regulation of GHG emissions around the world. Plants being expanded, refurbished or built today will be operating decades into the future and could well be competing in very different regulatory and market environments. The industrial energy manager and senior leadership should factor this into plant engineering in terms of site efficiencies, localized energy supply, and choice of fuels. More and more, this is becoming normal practice in major companies. In fact, I am typing this column on a flight back from Asia after helping a company develop strategies to reduce energy costs and emissions by well over one quarter in a number of major plants in the coming five years.

Rather than focus on the site aspect, I felt it would be interesting to explore how climate regulation could affect the wider energy supply market. The relatively modest regulation and incentives to date has encouraged the development of a wide range of renewable technologies using sun, wind, water, and biofuels. In the early stages, these were more expensive than the existing alternatives and needed subsidies and speculative investment to grow. In this phase, the existing coal, gas, and oil structured market wins hands down on cost and reliability. As a result, their pricing follows the traditional global patterns of demand and supply.

We are now entering a new market phase where some renewable power and heat sources are cost-competitive and offer an attractive low- or zero-GHG alternative. We see this in the rapid proliferation of wind and solar power worldwide, and of biomass heat and power in some major markets. Last year, renewable power capacity expansions outstripped fossil fuel additions in Europe, North America, and elsewhere.

We are beginning to sense the first paradox emerging. As renewables become more competitive and gain share, the traditional alternatives will react by lowering their prices. This in turn will slow down or even halt the penetration of renewables, which is in conflict with the overall goal to reduce emissions to avoid runaway climate change. The most likely regulatory reaction will be to price carbon either through a regulated emissions market or a carbon tax.

The size and timing of carbon pricing will be a delicate balance to ensure a smooth and cost effective transition to a very low carbon energy system. Carbon pricing also needs be set in such a way that it does not become a numbing subsidy, but encourages sustained competition and innovation in the renewable marketplace.

Peter Garforth heads a specialist consultancy based in Toledo, Ohio and Brussels, Belgium.Peter Garforth heads a specialist consultancy based in Toledo, Ohio and Brussels, Belgium. He advises major companies, cities, communities, property developers and policy makers on developing competitive approaches that reduce the economic and environmental impact of energy use. Peter has long been interested in energy productivity as a profitable business opportunity and has a considerable track record establishing successful businesses and programs in the US, Canada, Western and Eastern Europe, Indonesia, India, Brazil and China. Peter is a published author, has been a traveling professor at the University of Indiana at Purdue, and is well connected in the energy productivity business sector and regulatory community around the world. He can be reached at peter@garforthint.com.

This leads to the second paradox. The early development of renewable alternatives really sprang from concerns in the 1960s and 1970s that the world was going to run out of oil, coal, and gas. Today we know that identified reserves and likely new finds in the polar regions and elsewhere suggest we have centuries of supply. The need to reduce emissions by 80% in three or four decades changes the dynamic. Instead of asking whether we have enough fossil fuel, the question today is how do we keep most of it in the ground? This is a politically charged and highly emotional topic, driven by basic arithmetic. There are no easy answers, but this is a debate we need to have.

There are yet more paradoxes. In some major electricity grids, renewable power is approaching 40% of all generation, raising some real challenges. At the margin, renewable power is free, which is hard to compete with. However, it is also unpredictable. Today this means on-demand power must be available to fill in the gaps of wind and solar. How do we pay the owner of the on-demand power generation or storage to be available when needed, but not be free to aggressively compete for every kilowatt-hour? Again, we are at the stage where the question is becoming clearer, but new market models and regulatory structures are yet to emerge.

Whatever the outcomes, today’s plant energy strategies can mitigate possible impacts. This is achieved by being more efficient, open to on-site power and heat production, flexible to include renewables, and target emissions reduction as rigorously as energy cost and efficiency.

Read Peter Garforth's monthly column, Energy Expert.

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