sustainable energy security report risks and opps for business froggatt_lahn

8/7/2019 Sustainable Energy Security Report Risks and Opps for Business froggatt_lahn

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SUSTAINABLEENERGY SECURITY

Strategic risks andopportunities for business

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about lloydsLloyds is the worlds leading specialist insurance market, conducting business in over 200 countries and territoriesworldwide and is often the rst to insure new, unusual or complex risks. We bring together an outstanding concentrationof specialist underwriting expertise and talent, backed by excellent nancial ratings which cover the whole market.

about 360 risk insightGlobal risks change rapidly. Companies need to anticipate tomorrows risks today. At Lloyds, weve been helping businessesdo just that for over 300 years. From climate change to terrorism, energy security to liability, boards must anticipate andunderstand emerging risks to successfully lead their companies into the future.

Lloyds 360 Risk Insight brings together some of the views of the worlds leading business, academic and insurance experts.We analyse the latest material on emerging risk to provide business with critical information. Through research, reports,events, news and online content, Lloyds 360 Risk Insight drives the global risk agenda as it takes shape. We provide practicaladvice that businesses need to turn risk into opportunity.

Get the latest reports and analysis on emerging risk at www.lloyds.com/360

about chatham houseChatham Houses mission is to be a world-leading source of independent analysis, informed debate and influential ideas onhow to build a prosperous and secure world for all. Chatham House pursues this mission by drawing on its membership topromote open as well as confidential debates about significant developments in international affairs and about the contextand content of policy responses. The Energy, Environment and Development Programme (EEDP) at Chatham House aims toadvance the international debate on energy, environment, resources and development policy and to influence and enabledecision-makers governments, NGOs and business to make well-informed decisions that contribute to achievingsustainable development.

about the authorSAntony Froggatt is a Senior Research Fellow at Chatham House. He has worked on international energy and climate issues forover 20 years providing research and information for a wide range of bodies including companies, governments, the media,non-government organisations and international organisations and has published over 50 reports and papers.

Glada Lahn is a Research Fellow specialising in energy governance and development issues at Chatham House. She has publishedseveral papers on Asian energy security and oil and gas investment trends and is currently researching energy policy in the Gulf.Glada has also worked for a number of organisations as a freelance consultant on Middle East political and economic issues.

acknowledgementsLead authors: Antony Froggatt and Glada LahnContributing authors: William Blyth, Kirsty Hamilton, Bernice Lee, John Mitchell, Cleo Paskal, Felix Preston and Paul Stevens(all Chatham House)We would like to thank the following peer reviewers and commentators: Liz Collett, Dr Muriel Desaeger (ToyotaMotor Europe), Mark Dominik, Dr Oliver Inderwildi (Smith School, University of Oxford), Chris McCann.At an early stage of the drafting, we also held a workshop to discuss key themes with the businesscommunity. Representatives from the following companies and organizations took part: Alstom,Anglo American plc, Arthur D. Little, Beazley, BP, Deutsche Bank, E.ON-UK, The Foreign and Commonwealth Office,

Gaz de France, Maersk Group, McKinsey, Shell, Siemens AG, Statoil, Travelers, Walmart, Watkins Syndicate.These individuals offered valuable suggestions and advice during the drafting process. However, the authorsare solely responsible for any opinions expressed in the text and for any errors or omissions.
http://www.lloyds.com/360http://www.lloyds.com/360


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1

ForewordExecutive SummaryIntroductionTrends

1. The changing dynamics o energy demand andresource availability1.1 The resurgence o coal1.2 Gas as the transition uel1.3 Oil consumption driven by transport and price1.4 Uranium

2. Climate change and the drive towardsrenewable energy

3. The risks associated with a newtechnology revolution3.1 National and international policy risks3.2 New scarcity risks in some raw materials3.3 Competing resource uses3.4 New environmental risks

4. Risks to energy and transport in rastructure4.1 Power sector risks4.2 Changing risk landscape or transport routes4.3 Oil and gas in rastructure

Challenges and risks or global businessesImplications and risks or business in generalImplications and risks or the energy sector

New business opportunitiesConclusionsRe erencesUse ul contacts

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sustainableenergy security

Strategic risks andopportunities or business

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Lloyds 360 Risk Insight Sustainable energy security: strategic risks and opportunities or business2

IllustrationsFigure 1: Global energy demand in 2007 (million tonnes

o oil equivalent mtoe)Figure 2: Middle East oil surplus vs Asia-Paci c de citFigure 3: Historical coal consumption in major world

regions (mtoe)Figure 4: Growth in global natural gas consumption

and uture projections (mtoe)

Figure 5: Range o oil price orecastsFigure 6: Impact o Copenhagen Accord onglobal emissions

Figure 7: Global growth o renewable energy in thepower sector (excluding large hydro)

Figure 8: Global shipping routes, pipelines andworld ports

Figure 9: Global nal energy consumption (2005)Figure 10: Major global energy users in the

manu acturing sector (2005)Figure 11: Risks or the wider business sector

Figure 12: Energy use in the UK ood sectorFigure 13: Risks or the energy sector

TablesTable 1: Material use on new energy sources

8

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11

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19

23

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26

3031

20

0910

10121313

14

16171819

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BoxesBox 1: Chinas global energy impactBox 2: A change in the energy market balance between

East and WestBox 3: Geopolitics o EnergyBox 4: What can we expect rom shale gas?Box 5: The impact o government policy on energy pricingBox 6: Oil research: below ground constraints

Box 7: Unconventional ossil uels: prospects andproblemsBox 8: The progress o nuclear powerBox 9: Renewable energyBox 10: The ailure o Copenhagen to set a 2C pathwayBox 11: The carbon reduction commitment and the

building tradeBox 12: Rare earth metalsBox 13: Electricity and gas cut-o s: the case o the textiles

industry in PakistanBox 14: European carbon market

Box 15: How the ood industry could be a ected byenergy disruption

Box 16: Centrica rom energy supplier to energy servicesupplier?

Box 17: Carbon capture and storageBox 18: Energy and water use - a new fashpoint?Box 19: Smart energy systems bring new opportunities

and risksBox 20: Competition and collaboration or the low-carbon

space the example o electric vehicles


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Lloyds 360 Risk Insight Sustainable energy security: strategic risks and opportunities or business 3

orewordrom the chie executive o fcer o lloyds

This report, jointlyproduced by Lloyds 360Risk Insight programmeand Chatham House,should cause all riskmanagers to pause.What it outlines, in starkdetail, is that we have

entered a period o deepuncertainty in how wewill source energy orpower, heat and mobility,and how much we willhave to pay or it.

Is this any di erent rom the normal volatility o the oilor gas markets? Yes, it is. Today, a number o pressuresare combining: constraints on easy to access oil; theenvironmental and political urgency o reducing carbon

dioxide emissions; and a sharp rise in energy demandrom the Asian economies, particularly China.

All o this means that the current generation o businessleaders and their successors are going to have to

nd a new energy paradigm. As the report makes clear,we can expect dramatic changes: prices are likely torise, with some commentators suggesting oil may reach$200 a barrel; regulations on carbon emissions willintensi y; and reputations will be won or lost as the publicdemands that businesses reduce their environmental

ootprint. The growing demand or energy will requirean estimated $26trn in investment by 2030. Energycompanies will ace hard choices in deciding how todeploy these unds in an uncertain market with mixedpolicy messages. The recent Deepwater oil spill showsall too clearly the hazards o moving into ever moreunpredictable terrain to extract energy resources. Andthe rapid deployment o cleaner energy technologies willradically alter the risk landscape.

At this precise point in time we are in a period akin toa phony war. We keep hearing o di culties to come,but with oil, gas and coal still broadly accessible and

largely capable o being distributed where they areneeded the bad times have not yet hit. The primarypurpose o this report is to remind the reader that allbusinesses, not just the energy sector, need to considerhow they, their suppliers and their customers will bea ected by energy supplies which are less reliable andmore expensive.

The ailure o the Copenhagen Summit has not helped toinstil a sense o urgency and it has hampered the abilityo businesses particularly those in the energy sector to plan ahead and to make critical new investmentsin energy in rastructure. Like the authors o this report,I call on governments to identi y a clear path towardssustainable energy which businesses can ollow.

Independently o what happens in UN negotiating rooms,businesses can take action. We can plan our energyneeds, we can make every e ort to reduce consumption,

and we can aim or a mix o di erent energy sources. Thetrans ormation o the energy environment rom carbonto clean energy sources creates an extraordinary riskmanagement challenge or businesses. Traditional modelsthat ocus on annual pro ts and, at best, medium termstrategies may struggle. Parts o this report talk aboutwhat might happen in 2030 or even 2050 and I make noapology or this. Energy security requires a long term viewand it is the companies who grasp this who will trade oninto the second hal o this century. Dr Richard WardChie Executive O cerLloyds


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executive summary

1. BUSINESSES WHICH PREPARE FOR AND TAKE ADVANTAGE OFTHE NEW ENERGY REALITY WILL PROSPER FAILURE TO DO SOCOULD BE CATASTROPHIC

Energy security and climate change concerns are unleashing a wave o policy initiatives and investments around theworld that will undamentally alter the way that we manage and use energy. Companies which are able to plan or andtake advantage o this new energy reality will increase both their resilience and competitiveness. Failure to do so couldlead to expensive and potentially catastrophic consequences.

2. MARKET DYNAMICS AND ENVIRONMENTAL FACTORS MEANBUSINESS CAN NO LONGER RELY ON LOW COST TRADITIONALENERGY SOURCES

Modern society has been built on the back o access to relatively cheap, combustible, carbon-based energy sources.Three actors render that model outdated: surging energy consumption in emerging economies, multiple constraints onconventional uel production and international recognition that continuing to release carbon dioxide into the atmospherewill cause climate chaos.

3. CHINA AND GROWING ASIAN ECONOMIES WILL PLAY AN

INCREASINGLY IMPORTANT ROLE IN GLOBAL ENERGY SECURITYChina and emerging Asian economies have already demonstrated their weight in the energy markets. Their importance inglobal energy security will grow. First, their economic development is the engine o demand growth or energy. Second,their production o coal and strategic supplies o oil and gas will be increasingly power ul actors a ecting the internationalmarket. Third, their energy security policies are driving investment in clean energy technologies on an unprecedented scale.China in particular is also a source country or some o the critical components in these technologies. Fourth, as actorieso the world, the energy situation in Asian countries will impact on supply chains around the world.

4. WE ARE HEADING TOWARDS A GLOBAL OIL SUPPLY CRUNCHAND PRICE SPIKE

Energy markets will continue to be volatile as traditional mechanisms or balancing supply and price lose their power.International oil prices are likely to rise in the short to mid-term due to the costs o producing additional barrels rom di cultenvironments, such as deep o shore elds and tar sands. An oil supply crunch in the medium term is likely to be due to acombination o insu cient investment in upstream oil and e ciency over the last two decades and rebounding demand

ollowing the global recession. This would create a price spike prompting drastic national measures to cut oil dependency.

5. ENERGY INFRASTRUCTURE WILL BECOME INCREASINGLYVULNERABLE AS A RESULT OF CLIMATE CHANGE ANDOPERATIONS IN HARSHER ENVIRONMENTS

Much o the worlds energy in rastructure lies in areas that will be increasingly subject to severe weather events caused byclimate change. On top o this, extraction is increasingly taking place in more severe environments such as the Arctic andultra-deep water. For energy investors this means long-term planning based on a changing rather than a stable climate.For energy users, it means greater likelihood o loss o power or industry and uel supply disruptions.


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6. LACK OF GLOBAL REGULATION ON CLIMATE CHANGE IS CREATINGAN ENVIRONMENT OF UNCERTAINTY FOR BUSINESS, WHICH ISDAMAGING INVESTMENT PLANS

Without an international agreement on the way orward on climate change mitigation, energy transitions will take placeat di erent rates in di erent regions. Those who succeed in implementing the most e cient, low-carbon, cost-e ectiveenergy systems are likely to infuence others and export their skills and technology. However, the lack o binding policycommitments inhibits investor con dence. Governments will play a crucial role in setting policy and incentives that willcreate the right investment conditions, and businesses can encourage and work with governments to do this.

7. TO MANAGE INCREASING ENERGY COSTS AND CARBONEXPOSURE BUSINESSES MUST REDUCE FOSSIL FUELCONSUMPTION

The introduction o carbon pricing and cap and trade schemes will make the unit costs o energy more expensive. Themost cost-e ective mitigation strategy is to reduce ossil uel energy consumption. The carbon port olio and exposure o companies and governments will also come under increasing scrutiny. Higher emissions standards are anticipated acrossmany sectors with the potential or widespread carbon labelling. In many cases, an early capacity to calculate and reduceembedded carbon and li e-cycle emissions in operations and products will increase competitiveness.

8. BUSINESS MUST ADDRESS ENERGY-RELATED RISKS TOSUPPLY CHAINS AND THE INCREASING VULNERABILITYOF JUST-IN-TIME MODELS

Businesses must address the impact o energy and carbon constraints holistically, and throughout their supply chains. Tightpro t margins on ood products, or example, will make some current sources unpro table as the price o uel rises andlocal suppliers become more competitive. Retail industries will need to either re-evaluate the just-in-time business modelwhich assumes a ready supply o energy throughout the supply chain or increase the resilience o their logistics againstsupply disruptions and higher prices. Failure to do so will increase a businesss vulnerability to reputational damage andpotential pro t losses resulting rom the inability to deliver products and services in the event o an energy crisis.

9. INVESTMENT IN RENEWABLE ENERGY AND INTELLIGENTINFRASTRUCTURE IS BOOMING. THIS REVOLUTION PRESENTSHUGE OPPORTUNITIES FOR NEW business PARTNERSHIPS

The last ew years have witnessed unprecedented investment in renewable energy and many countries are planningor piloting smart grids. This revolution presents huge opportunities or new partnerships between energy suppliers,manu acturers and users. New risks will also have to be managed. These include the scarcity o several essentialcomponents o clean energy technologies, incompatible in rastructures and the vulnerability o a system that isincreasingly dependent on IT.


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INTRODUCTION

In some cases, the surprise elementis only a matter o timing: an energy transition, or example is inevitable; theonly questions are when and how abruptly or smoothly such a transition occurs. Anenergy transition rom one type o uel( ossil uels) to another (alternative) is anevent that historically has only happened

once a century at most with momentousconsequences.US National Intelligence Council 2008 1

The rst part o this report sets out several trendspropelling us towards a carbon-constrained world, theseinclude: the dynamics a ecting availability and demand

or hydrocarbons; and the international climate changemitigation agenda. It considers the responses romgovernment and industry in terms o renewable energyand carbon legislation, and the new risks emanating rom

technological change and climate instability. The secondpart explores the implications and associated risks o these trends or businesses in general, and or the energysector speci cally, in the coming decade.

The report looks at short-term (one to ve years)and medium-term ( ve to ten years) risks to generalbusiness. It also considers longer-term (ten years plus)issues, particularly as they impact on technological andinvestment choices or the energy sector. While energysupply disruption is requently the result o technical

aults and strike action, we do not deal with this here,but concentrate instead on the impacts o constraintson carbon and carbon-based resources.

A new look at energy securityHistorically, energy security has been understood asde ence against supply disruption and price instability.Within this mindset, protecting the status quo isparamount. Yet dynamic trends, including the sharprise in demand rom newly industrialising economies,

carbon-dioxide (C0 2) induced global warming and thegrowth o alternative energy technologies, mean thatprotecting traditional energy practices will make us ar

less secure, and less competitive, in the uture. This is inaddition to the threat that climate change poses to energyin rastructure. These are not issues or the energy sectoralone. The return to high and volatile oil prices a ter 2005rein orced the link between energy prices, pro ts andeconomic stability or most businesses.

The looming climate challenge

Climate change creates many risks and uncertaintiesor society and industry. Anticipated disruption aroundenergy, water and other critical natural resources posenew political, economic and human security challenges.

We know that to keep global warming to 2C abovehistorical levels requires a step-change in the way energyis produced, transported and used. But internationalprogress has been slow. The Copenhagen Accord o 2009lists actions that the governments o over 100 developedand developing countries propose to take to achieve this,

but there is no binding legal commitment.

Until now, supply concerns and relations with energyexporters have tended to dominate national energypolicies, but this is changing. Energy e ciency willbe the mantra o governments trying to ensure bothnational security and C0 2 reductions, and energy usersare increasingly central in this vision. Energy e ciencyis also vital or economic competitiveness and insulatescompanies rom the worst o the energy price volatility.On the supply side, renewable energy has moved intothe mainstream and is now supplying the majority o new electricity in some regions. To increase e ciencyand allow the uptake o more renewable energy, radicallydi erent in rastructures are being planned around theworld. These may include local and transnational smartgrids that communicate with household and industrialappliances and electric vehicles, and can send powerback into the grid to help regulate demand fows.

Why is it important or businesses?

Meeting the dual challenge o maintaining stable energyservices in the short term, without jeopardising them inthe long term, means re ormulating energy security as


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securing the transition to a low or no carbon economy.This cannot be based purely on access to a ordableunits o energy, be it litres o uel or kilowatt hour (kwh),but rather one which prepares or a long-term vision o e cient, clean, sa e delivery o energy services to meetsocietal needs. 2

At the global level, there is little sign that energy

demand will go down, with business as usualorecasts suggesting a 40% increase by 2030. This willrequire $26trn o investment - some 1.4% o globalGDP.3 Given the global commitment to radically reduceemissions and the inite nature o conventional ossil

uel sources, a rapid movement towards a highly

e icient non- ossil energy uture would seem to bethe logical investment choice.

For energy businesses, the higher up ront investmentcosts, technological uncertainties and lack o con dencein the short-term economics (compared with conventional

uels) raise problems and risks. These include the dangerso changes in policy or higher costs associated with being

a rst mover. Businesses in the wider economy alsoneed to be aware o the changing energy context theiroperations and supply chains will rely on. Businesses thatcan adapt their activities to bene t rom emerging energytrends and manage the risks will gain an advantage overtheir competitors.


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1176 Biomass & waste

265 Hydro

709 Nuclear

2512 Gas

4093 Oil

74 Other renewables

3184 Coal


trends

Secure and reliable energy supply andin rastructure impacts the easibility andcosts o doing business rom perspectiveso competitiveness and productivity.Energy security is a vital consideration,not only or day-to-day operations, butalso or long-term investment.International Chamber o Commerce, 2007 4

Today, the majority o our heating, power and mobility relyon extractive energy resources. Oil, coal, gas and uranium,account or around 90% o the worlds traded energy. Oilin particular, because it is widely traded on global marketsand is the main uel or transport, has been one o thedrivers o global growth over the last century. With worldpopulation growth and pressure or higher standards o living in developing countries, demand or energy willreach new heights. But how long can we rely on theseultimately exhaustible and, with the exception o uranium,

C02 emitting uels?

The chart below (Figure 1) shows the contributionso di erent energy sources to global demand. It alsohighlights the importance o biomass (material rom livingor recently living organisms, eg wood or dung) and waste,which is o ten not traded but plays a vital role particularlyin developing countries and rural areas.

Figure 1: Global energy demand in 2007 (milliontonnes o oil equivalent mtoe)Source: International Energy Agency 2009

There is now widespread acknowledgement that we arein a transition period heading towards less-polluting,more-sustainable orms o energy. Yet there are a varietyo views as to what this involves, the duration, and towhat extent hydrocarbons should be part o the energymix. Added to this is the uncertainty around what willreplace them. This involves scaling up new technologiesand introducing completely di erent energy delivery

systems. These changes will naturally impact jobs,pro ts, national economies and the environment, just asthe dramatic increase in coal use during the industrialrevolution and the onset o the oil age did in the rstpart o the 20th century. This means that there will bepush and pull actors rom stakeholders. This will ormthe political context or many business transactions andoperations over the next 30 years.

This section looks at the trends that will a ect thistransition in terms o changing energy demand and

resource availability; climate change policies and thedrive towards renewable energy; a technology revolution;and energy and transport in rastructure in a changingclimate. While we cannot orecast exactly when and howthis transition will take place, there are several indicatorswhich business should be aware o . These are: Global energy demand is putting pressure on fossil fuel

markets and increasing price volatility Past investment trends coupled with resurging demand

suggest that an oil supply crunch is imminent. This willlead to harsher national policies to restrain oil consumption

Increases in policy and regulation to reduce carbonemissions are inevitable and will impact on theeconomic viability o current investments andoperations

Renewable energy has attracted an unprecedentedupsurge in investment and been promoted into themainstream energy mix in some countries

The rapid deployment of new technologies bringsnew risks

As the climate changes, our existing energy and

transport in rastructure are vulnerable to extremeweather events.


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Several variables will infuence demand or di erentuels in the coming years. These include: the pace o

economic growth in developing countries; technologicaldevelopment; and policies to augment energy securityand reduce greenhouse gas emissions.

This creates risk or energy companies and naturalresource owners who must invest large amounts o

capital years in advance o expected returns. However,the obvious trends in the short to mid term are a hugesurge o demand or all uels rom Asia, particularly China(see Box 1) a declining market or oil and coal in theAtlantic region and the increasing use o gas or electricitygeneration across the globe.

Energy exporters with comparatively low domestic pricing,such as those in the Middle East, are also increasinglysigni cant as energy consumers. This will have a dramatice ect on where oil will go, where competition or oil

resources will take place, and who has the power tobalance the oil market in the coming years (see Box 2).

Box 1: Chinas global energy impactGrowth in China will impact upon the energy trade likeno other country in the world. Currently Chinas energyconsumption is dominated by domestic coal. In theelectricity sector it provides 80% o the power. Whilethe Chinese government aims to reduce its share in themix, an additional 450 gigawatts (GW) o new coal- redgenerating capacity is planned between now and 2030. Inspite o Chinas massive coal reserves, the pace o growthis leading to signi cant coal imports. Recent Chinesecommercial investments in Australian coal demonstratethis expectation. Domestic oil production in China isexpected to peak in 2013, while demand could more thandouble by 2030. This would account or nearly hal o thepredicted global increase over the same period. Becauseo the toll the extra imports would take on Chinas oreigncurrency reserves and the volatility o the oil market, the

government is keen to encourage alternative transport

uels at home as well as securing long-term oil supplycontracts at stable prices. China is also becoming a major importer o gas, boththrough pipelines rom Turkmenistan (and later Russiaand Burma) and shipped liquid natural gas (LNG). By 2030,around 50% o the countrys gas demand is expectedto be met by imports. Energy security is resulting in

strong policies to improve energy e ciency and developrenewable and nuclear energy. In the longer term, whathappens in the areas o policy and new technology toreduce consumption in China, India and other developingcountries will shape and catalyse the energy transition inthe rest o the world.

Energy is a globalised commodity. Sudden demandpressures or certain uels in one place, coupled withprevious inadequate investment in the necessary resources

elsewhere, will push up prices on the international market.As traditional Organisation or Economic Co-operation andDevelopment (OECD) countries decline as oil consumers,so will their power as rule setters in the international oilmarket. For example, Chinese strategic oil stocks (not yetincluded in the International Energy Agencys securitymechanism) will become vital to balancing global markets.

Be ore new models o international energy governance aredeveloped, insecurity will encourage strategic investmentsby the most import-dependent countries. Together withpolicies to reduce subsidies and increase e ciency, thesetrends will drive up nal consumer prices or transport,

uel, heat and electricity in the short to mid term.

While price rises will vary rom country to country (seeBox 5), all businesses will be a ected through theirown exposure to energy costs or that o their suppliers.The more e cient will have an important competitiveadvantage in times o high and volatile energy prices,especially in energy-intensive sectors or where supply

chains are sensitive to energy costs.

1. The changing dynamics o energy demandand resource availability


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000 b/d

30000

Middle East surplus

Year

25000

20000

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10000

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0

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Asia-Pacific deficit


Box 2: A change in the energy market balancebetween East and WestAdvanced economies remain the biggest consumerso primary energy per person but by 2008 non-OECDcountries led by China and India had outstripped themin terms o the share o world demand. 5 This shi t beganin the 1990s, partly because manu acturing shi tedeastwards. Meanwhile, lower population growth, de-

industrialisation, greater e ciency, higher uel prices anda concern or the environment are lowering demand oroil-based uels and coal in the OECD.

These consumption trajectories mean there is likely tobe a tipping point in 2015 when countries in Asia-Paci cneed more imported oil in total than the Middle East(including Sudan) can export.

Figure 2: Middle East oil surplus vs Asia-Paci c de citSource: John Mitchell, Chatham House 2010

o power are not new, but the changing growth dynamicshave introduced new actors and relationships to thegame. Key hot spots include:

African countries, where the industrialised andindustrialising world increasingly view resources asripe or taking. For example China, is reported to haveinvested up to $50bn in the past decade on accessing

raw materials in A rica, including uranium reservesin Niger, oil interests in Southern Sudan and bauxiteconcessions in Guinea. Former US Vice President, DickCheney said: Along with Latin America, West A rica isexpected to be one o the aster-growing sources o oiland gas or the American market. 6

Countries in Central Asia, which have become a keyarea or competition amongst Russian, Chinese andwestern oil companies. Turkmenistan in particular willbe crucial or the diversi cation o gas or both China

and the EU.

The Middle East, whose dominance in global oil and gassupply is growing, as other resources deplete see Box 2.

Russia, a vital energy supplier, not only to Europe, butalso to East Asia. Currently, the EU depends on Russia

or 33% o its imported oil and 42% o its gas, withgrowing dependency in both sectors. Sales o gas andoil to Asia are increasing with the construction o newpipelines, including the 4,700km East Siberia-Paci cOcean oil pipeline, which reached China in 2009. Thisdiversi cation o customers gives added security andinfuence to Russia.

The ollowing sections look at the demand trends or coal,gas, oil and uranium, and how they might be met, withspecial attention to e ects on the price o oil.

1.1 The resurgence o coal

In spite o high CO2 emissions per unit o energy (twoto three times more CO 2 than natural gas when burnedin conventional thermal power plants), coal is the

West A rica, Eastern Russia, Central Asia and NorthernIraq are becoming pivot zones which can export to bothwestern and eastern markets. These are already centres

or competition and collaboration between western andAsian (usually state-backed) companies.

Box 3: Geopolitics o EnergyCompetition among states or access to resources andthe impact o energy trade on the international balance


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3500

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01965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005

Total Asia-Pacific

Total Africa

mtoe

Total Middle East

Total Europe and Eurasia

Total S. & Cent. America

Total North America

3000

2500

2000

3500

1500

1000

500

0

1965

1972

1979

1986

1993

2000

2007

2014

2021

2028

Total Asia-Pacific

Total Africa

Total Middle East

Total Europe and Eurasia

Total S. & Cent. America

IEA - Reference Scenario

mtoe


astest growing ossil uel. Demand or coal or electricitygeneration in places with large national and usually cheaperreserves (like China and the US) is rising. This illustratesthe clash between policies to keep the cost o energydown and reduce dependence on oreign imports by usingcheap domestic resources and policies to mitigate climatechange, which may be more expensive in the short termand require resource imports, such as gas or technologies.

Figure 3 shows the extent o the growth that is driven byincreases rom South East Asia. Between now and 2020,546 GW o new coal- red power generation is plannedin Asia - more than double that currently deployed in theEU.7 China and India lay claim to the worlds third and thlargest coal reserves respectively, yet they are consumingcoal aster than they can develop domestic mines. In thelast ve years, China has gone rom being a signi cantexporter o thermal coal to a net importer. 8

Figure 3: Historical coal consumption in majorworld regions (mtoe)Source: BP Statistical Review o World Energy 2009

Prices will rise in response to demand surges, with knock-one ects on electricity prices in other coal-importing countries.For example, wholesale electricity prices in the UK rose by66% between 2007 and 2008 due not only to the risingprice o gas, but also higher world coal prices a ected byChinas import demand.

Given transportation di culties, shortages o coal stocks

at power plants are also likely to cause more requentpower disruptions in emerging economies (see also 4.2).

1.2 Gas as the transition uelMany countries plan to increase the share o natural gas intheir national energy mixes as it has lower emissions thancoal and oil and is more versatile (eg it can replace coalas a uel or electricity generation and oil-based transport

uels in gas-to-liquid and compressed orms).

Figure 4: Growth in global natural gas consumption

and uture projections (mtoe) Source: BP Statistical Review o World Energy and IEA WEO 2009

The supply outlookWhile estimates suggest coal reserves are plenti ul, 9

a gap in supply may arise as a result o sharp demandrises in Asia be ore new extraction projects are

completed. There will be strong expectation romAustralia and Indonesia who provide around hal o global exports, and there are doubts about the abilityo these countries to expand exports ast enough.

Uncertainty surrounds the supply and demand or gasin Asia and, in particular, China over the next decade.The Chinese government projects a tripling o currentconsumption to 300 billion cubic metres by 2020. Giventhe lengthy negotiations over routes rom Russias ar east

gas elds it is hard to tell how much will be politically oreconomically possible via pipeline, and how much Chinawill rely on the LNG market. The EU is also planning toincrease imports o LNG as a diversi cation strategy.


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The supply outlookRecoverable reserves o natural gas are enough to meetworld demand or heat, power and petrochemical uses toat least 2030, according to the IEA. But production equal tothat o two Russias would need to come on-stream by thenjust to make up or the decline in existing elds. 10 Over hal o conventional natural gas resources are concentratedin three countries Russia, Iran and Qatar, and there are

political, geological and technological obstacles that mayrestrict international supplies in the short to medium term.

Two developments are counted on to ease gas supplyconstraints, the greater use o lique ed natural gas andthe exploitation o shale gas. Until recently, getting gas

rom reserves to markets was limited by the direction andeasibility o pipelines. LNG, which can be transported by

sea allows a more fuid trade and greater security optionsor gas-dependent countries.

The recent exploitation o shale gas is adding to globalsupplies by alleviating the need or imports o gas to theUS, and may do the same or other regions (see Box 4).This has led to a gas glut in the global market, discouraginginvestment in LNG.

Box 4: What can we expect rom shale gas?

A major new actor unconventionalnatural gas is moving to the ore in theUS energy sceneit ranks as the mostsigni cant energy innovation so ar thiscentury. It has the potential, at least, tocause a paradigm shi t in the uelling o North Americas energy uture.HIS-CERA 201011

Unanticipated technological developments dramaticallyincreased the availability o non-conventional (mostlyshale) gas in the US last year. In 2000, non-conventional

gas provided just 1% o total gas supply, but by 2009 it hadreached 20%. Forecasts suggest this will reach 50% by2035. As natural gas prices ell in the US, demand or LNG

ell internationally and volumes destined or US importwere redirected to other (mainly Asian) markets. But the

ull impact is highly uncertain. Production rom shale gaswells seems to peak much aster than conventional gas,and data is limited. Assessments o the Barnett wells inthe US using horizontal drilling showed that most o therecoverable gas is extracted in the rst ew years. 12

Is the US experience set to become a globalphenomenon? Some suggest that resources in OECDEurope are large enough to displace 40 years o importso gas at the current level, assuming recovery rates inline with those in North America. 13 Exploration is alreadyunder way in Europe (including in France, Germany,Poland and the UK) to assess this potential.

1.3 Oil consumption driven by transportand priceGlobal oil demand will grow in the medium term. Butrecent demand trends vary regionally. China, India and theMiddle East show high rates o oil consumption growth(6% to 10% a year), while consumption in the OECDdeclines at around 1% a year.

In the developing world, increasing car ownership andsubsidised uel prices will continue to drive up oil demandin the next ew years. Whereas uel e ciency standards,taxed uel prices and alternatives, including bio uels,reduce demand in the advanced economies. Peak oildemand (the suggestion that reductions in demand as aresult o policy, technology and behavioural changes willoccur be ore any geological driven change) is a distinctpossibility in the longer term.

Unsustainable consumption trends are orcing manycountries, particularly oil exporters, to rethink theirenergy pricing and subsidy systems to encourage greatere ciency (see Box 5). Strong policy measures here, andthe uptake o new vehicle technology in major markets,

such as the US and China, could set oil- uel consumptionon a downward trajectory.


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Box 5: The impact o government policyon energy pricingNational taxation or subsidisation is a major actordetermining the price o uel at the pump and power atthe plug. For example, in Europe the wholesale price o diesel uel is relatively constant across the EU at about 0.6 per litre, and the nal price varies rom around 1to over 1.4, depending on the tax. 14 However, in China

the nal price would be around

0.75, in India

0.52 andin Saudi Arabia 0.7.

Governments that tax domestic energy become dependenton the revenue, which makes them reluctant to reduce it inthe event o higher international prices. Governments thatdo not tax energy, or that subsidise it, are under pressureto raise prices when the international price is high. Thisis or various reasons: to encourage greater e ciency;to lower dependency on energy imports; to reduce thesubsidy bill; or to ree up more energy resources or

export. For example, the Chinese government doubledprices or gasoline and diesel between 2004 and 2008,and the Egyptian government recently committed tophasing out energy subsidies or industry by 2011.

The supply outlookDespite the global importance o oil (the most widelyused ossil uel) there is disagreement on how much willbe available to meet uture demands. There are basicallythree positions on this:

Using advanced technologies will allow us to carry onproducing enough oil or generations, particularly romnon-conventional sources, such as oil sands and shale.

Oil production will reach its peak level and go intoirrevocable decline sooner than we are prepared or, withcatastrophic e ects on our societies and economies.

There may be plenty of oil in the ground but above-ground

actors such as cost, willingness to invest and politicalbarriers will constrain its production.

Box 6: Oil research - below ground constraints

Peak oil presents the world with a risk management problem o tremendouscomplexity.US Department o Energy 2007 15

A vast array o studies have attempted to predict the time at

which global oil production will reach a maximum level, romwhich point it will go into irrevocable decline. Some suggestthat this peak has already occurred, while others maintain itis either impossible to predict or shows no sign o appearing.Looking urther than a decade into the uture presents manyuncertainties, including: the availability and cost o extractiontechnologies; substitute technologies; pricing systems inmajor economies; and carbon legislation.

A comprehensive two-year study by the UK Energy ResearchCentre completed in August 2009 ound that a peak in

conventional oil production be ore 2030 appears likely, andthere is a signi cant risk o a peak be ore 2020. With averagerates o decline rom current elds, the report says that justto maintain current production levels would require theequivalent o a new Saudi Arabia coming on-stream everythree years. Whats more, giant elds pass peak productionlevels and there is a shi t to smaller, more di cult to produce

elds that have aster depletion rates meaning the rate o decline will accelerate. 16

This uncertainty makes it hard or governments andbusinesses to plan the move away rom oil. A reportproduced or the US Department o Energy highlightedthe economic chaos that would result rom the onset o declining oil production as global demand continued to rise.It recommended a mitigation crash program involving aradical overhaul o the transportation system at least 20years be ore peaking. Yet it acknowledged that enactingsuch policies and paying or it with tax-payers money wouldbe di cult without clear evidence or the peaking date. 17

Even be ore we reach peak oil, we could witness an oilsupply crunch because o increased Asian demand. Major


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new investment in energy takes 10-15 years rom theinitial investment to the rst production, and to date wehave not seen the amount o new projects that wouldsupply the projected increase in demand. 18

The IEA projections assume that additional supply fromthe Organization o the Petroleum Exporting Countries willlargely ll the gap between declining non-OPEC production

and rising world demand. But this implies the willingnessand ability o those countries to invest or attract oreigninvestment into their oil sectors. The evidence revealsa serious lack o investment relative to demand growththroughout the 1990s, and a subsequent all in the rate o discoveries. A look at the orecasts and actual outcomes

or both OPEC crude capacity and non-OPEC productionshow that country targets and IEA expectations over thepast decade have generally gone unmet. I

In the wake of the oil price crash of 2008 and the

subsequent global nancial crisis, over 20 plannedlarge-scale upstream oil and gas projects were de erredinde nitely or cancelled. 19

Production rom Iraq is the wild card. The current targeto 12 million barrels a day by 2016 would make Iraq theworlds number one producer, potentially increasingglobal spare capacity and sending the oil price down.However, numerous legal, security and administrativeproblems hinder this development.

Box 7: Unconventional ossil uels: prospectsand problemsThe constraints on access to conventional ossil

uel reserves, namely oil and natural gas, have ledto the expansion o the exploitation o the so-calledunconventional ossil uels.

The primary di erences between conventional andunconventional petroleum liquids are the density o the

liquid and how easily it fows. Petroleum or conventionaloil is ound in liquid orm and fows naturally or is capableo being pumped without being treated.

Unconventional oil, including very heavy oil, oil sands,and tar sands (bitumen), has a high viscosity. It fows veryslowly and requires processing or dilution to be extractedthrough a well bore. Very heavy oil in Venezuela, oil sands

in Canada, and oil shale in the US account or more than80% o unconventional resources.

While some oil companies have invested large amounts innon-conventional oil, there are a number o limiting actors,including: environmental impacts; capital and operatingcosts; and the energy balance o the whole operation (howmuch energy is required to extract, process and transportthe uel compared to the nal product).

Unconventional natural gas resources include tight sands,

coalbed methane, and gas shales. The primary di erencebetween these and conventional gases is the reservoir inwhich the gas is located. To extract these gases requireshydraulic racturing (use o pressurised liquids to crackthe rocks) o the host reservoirs.

The costs, environmental impact and securityimplications o these options di er and are at the centreo erce debates about the trade-o s between climateand energy security. For example, CO 2 emissions romoil sands are at least 20% higher than or oil currentlyconsumed in the US. 20 This is because the energy input(usually in gas) needed to get the oil out is around threetimes as much as or conventional oil. It also takes threebarrels o water to produce each barrel o oil, most o that being too toxic to return to the rivers. 21 Emissions

rom shale oil are likely to be higher and those romcoal to liquids are at least double the levels o those

rom conventional oil-based uel. Gas to liquids wouldproduce emissions some 10% to 15% higher than those

rom conventional petrol or diesel. 22

I For example, plans such as the development o Kuwaits northern oil felds has been delayed or over 15 years due to ongoing parliamentaryobstruction to oreign participation.


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140

160

USD per barrel

120

180

200

100

80

60

40

20

02010 2015 2020 2025 2030

Bank America/ Merill Lynch (range)OPEC (high)OPEC (low)EIA 2009 reference (2007 USD)

Barclays CapitalIEA WEO 2009 reference (2008 USD)Deutsche BankPaul Stevens, Chatham House


The May 2010 Deepwater Horizon rig explosion and oilleak in the Gul o Mexico has highlighted the problemswith di cult to reach oil. Operating at depths o 5000

eet below the sur ace has been technically challenging,which is all too graphically demonstrated by the inabilityo the companies to stem the vast amounts o oil (withestimates ranging rom 5,000 to 60,000 barrels per day)that are gushing out.

The long-term impact on the environment, the companiesinvolved and the sector as a whole is di cult to predict.One commentator likened the accident to Three MileIsland: The real legacy o Three Mile Island wasnt whathappened back in 1979, but rather what happened - ormore precisely didnt happen - over the course o thenext 40 years in the US. Literally overnight, the near-meltdown o the reactor core changed public acceptanceo nuclear power plants. No company in the US has builta new one since. 23 Already President Barack Obama has

suspended his recent decision to open new o shoreareas or oil development and has declared a moratoriumon new drilling.

Supply constraints will drive up the price o oil

A supply crunch appears likely around2013given recent price experience,a spike in excess o $200 per barrel isnot in easible Pro essor Paul Stevens, Chatham House 24

Oil price changes a ect the price o other types o energy, particularly natural gas, and many aspects o the economy, or example: mobility; transported goods,including essential oods; importing government taxrevenues or subsidy costs; and exporting countryinvestment income. The global impact o higher oilprices on the economy was illustrated by the globalrecession o 2008-2009. 25 Given the expense o extracting

unconventional and di cult oils, the cost o oil is likely torise. The question is when and by how much. Although

there is a huge variety o opinion on how high the oilprice will rise, and when it will reach these gures, mostcommentators agree that the trajectory is upwards(see Figure 5).

Figure 5: Range o oil price orecastsSource: Chatham House, listed sources.

A price spike, inevitable i the supply crunch describedabove takes place, would prompt government action tomake legal and in rastructural changes that would lead toa declining demand or oil. 26

1.4 UraniumTo meet energy and climate security objectives, manycountries are planning new nuclear power plants. Atpresent, these depend on uranium - also a nite resource.Estimates rom the OECD assume that, at current prices,the economically viable reserves or uranium (assumingthe same level o nuclear production) will last or around80 years. I the number o reactors increases as suggestedby some, other uel sources and technologies would need

to be added to increase the longevity o nuclear power(see Box 8).


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The threat o man-made climate change andsupply security concerns is challenging the relativecompetitiveness o ossil uels in terms o cost,environmental impact, energy output and access.This is driving the rapid deployment o renewableenergy technologies, which hold the promise o energy generation ree o greenhouse gas emission,with virtually in nite inputs that are o ten available

domestically. As President Obama said in his Stateo the Union address in February 2010, We know thecountry that harnesses the power o clean, renewableenergy will lead the 21st Century. Renewable energysolutions can help diversi y the energy port olio o many businesses, bringing added price and supplysecurity in the long-term while adding to a companyssustainability pro le.

Box 9: Renewable energy

There are a large variety o sources o renewableenergies that are available in di erent concentrationsall over the world. These include:

Heating and cooling: passive solar architecture; solarthermal collectors; biomass-based combined heat andpower; and geothermal energy.

Electricity: solar photo-voltaic; solar thermal; hydro;solid biomass; biogas; geothermal; on and o shorewind; marine energies like sea current, wave andtidal energies.

Transport (internal combustion-based): bioethanol;biomethanol; oils rom biomass; and biomass-basedsynthetic uels.

Until the last decade, the commercial renewable energyeld was dominated by hydropower or electricity,

biomass or heating, and solar thermal or hot water.However, the commercial strength o onshore wind hasled to unprecedented growth in this area in a numbero regions. This trend is likely to continue, as will thedevelopment o solar power or electricity production.The use o bio uels as a transport uel remainscontroversial, due to the impact on ood prices, landuse and water consumption. I the use o bio uels is

to be expanded, it is likely to require rapid technologyinnovation and the use o non- ood sources or uel,such as algae.

The most common critique o wind and solar power isthat they both rely on intermittent sources. This meansthat thermal or nuclear capacity is still needed as back-upto compensate or times when the wind doesnt blowor the sun doesnt shine. Solutions are being developedwhich involve storage and super smart grids and whichwill enable ar greater e ciency and trans er o excess

electricity across borders (see also Box 19).

For the majority o the worlds scienti c community,one o the greatest challenges that the human race

aces is how to avoid global temperatures rising by 2Cover pre-industrial levels. II Developed countries willhave to make sharp emissions cuts and move close toa zero-carbon economy by 2050, with major developingcountries ollowing suit well be ore the end o the century.

A 50% global reduction by 2050 implies average globalemissions o around two tonnes o CO 2 per person(less than hal the present Chinese level, a th o the level in Europe and a tenth o that in the US). Thisimplies a trans ormation in the way we live and the waygovernments regulate our activities, particularly in relationto industry, transport and buildings.

2. Climate change and the drive towardsrenewable energy

IIA concentration level o 450 ppm CO2 eqivalent would maintain a 50% chance o staying below 2C, with a 400 ppm CO2eq providing agreater than 50% chance. To achieve either o these targets, global emissions would need to be at least 50% below 1990 levels by 2050.This would imply cutting developed country emissions to at least 3035% below 1990 levels by 2020, while allowing developing economyemissions to grow until 2010 or 2020, but reducing them substantially therea ter.


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150

Billion tons C0

2e per yea

r

Year

100

50

02000 20402020 2060 2080 2100

Businessas usual

965 ppm

AtmosphericC0 2

AtmosphericC0 2e

Temp. increaseover preindustrial

(90% C.I.)

1410 ppm 4.8C (2.9 - 7.7)8.7F (5.2 - 13.9)

775 ppm 1020 ppm 3.9C (2.3 - 6.2)7F (4.2 - 11.2)

585 ppm 725 ppm 2.9C (1.7 - 4.7)5.2F (3.1 - 8.4)

470 ppm 520 ppm 2C (1.2 - 3.1)3.5F (2.1 - 5.7)

Confirmedproposals

Potentialproposals

Lowemissions path

Global C0 2 Equivalent Emissions 2100 Values


Box 10: The ailure o Copenhagen to seta 2C pathwayDespite great expectations, the Copenhagen Summit inDecember 2009 did not lead to a binding internationaltreaty on global greenhouse gas emission reductions.The Copenhagen Accord did create a ramework in whichnational low-carbon pledges are monitored, even thoughthese do not yet pave the way or the 2C scenario.Figure 6 describes the short all and points to the potentialincrease in global emissions that could lead to a rise o 3C to 4C by 2100.

The outcome is seen by many in the private sector asa missed opportunity. Without clearer and strongerdomestic policies in key markets, it is unclear whetherthere are su cient drivers or large-scale renewableinvestment and deployment. At the same time, the weakoutcome rom Copenhagen has revitalised discussionaround carbon leakage and addressing it throughborder measures. Unilateral action to impose border taxadjustment outside any global climate agreement is likely

to prompt trade-related retaliatory actions, underminingthe global trading system.

To achieve the 2C target (by the IEAs calculation)countries and markets must stimulate opportunitiesin low-carbon and energy-e cient investments acrossthe globe and generate $30trn o investment in thenext two decades. 28 This requires a massive increase o investment in both e ciency and the renewable andclean energy sector.

According to Bloomberg New Energy Finance, the extento global investment in clean energy sources reached$112bn in 2009, up rom just $18bn in 2004. Only strongpolicy incentives will promote renewable energy activityunder existing market conditions. This is o ten describedas a market ailure in need o market mechanisms orpolicies that actor in the environmental cost o higheremitting uels or subsidise cleaner ones, as a public good.

Lack o con dence in the binding nature o nationalrenewable energy targets or incentive mechanismshas hampered the growth o the sector. But wherethere is political will, investments are taking place. By

2008, nearly a quarter o all new electricity generationwas rom renewable sources In Europe. In 2009, wind

Figure 6: Impact o Copenhagen Accord on global emissionsSource: Climate Scoreboard, 2010 27


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2002

2.9% 2.9%

5%6% 6%

15%16%

23%

3.1%3.2% 3.6%

3.9% 4.4%

2003 2004 2005 2006 2007 2008

Additional Renewable generation as % of all power additionsInstalled Renewable generation as a % of overall generation mix


power installations accounted or 39% o new powerinstallations, the second year running that morewind power was installed than any other generatingtechnology. Renewable power installations in generalaccounted or nearly two-thirds o new installations inEurope in 2009.

Figure 7: Global growth o renewable energy in the

power sector (excluding large hydro)Source: UNEP et al., Global Trends in Sustainable EnergyInvestment 2009, 2009

doubling o production in the last ve years. This equatesto around 5% o US transport uel.

Electric vehicles, which could encourage renewableelectricity generation through their capacity or storage,are also generating a high level o interest. China isdeploying large volumes o electric motorbikes and isseen both as a centre or manu acturing and a market.

Box 11: The Carbon Reduction Commitment andthe building tradeAs part o the UK government commitment on climatechange, it launched the legally binding CRC EnergyE ciency Scheme ( ormerly the Carbon ReductionCommitment) in 2010. It requires companies that paymore than 500,000 a year or electricity to report oncarbon emissions rom all energy sources consumedby xed installations. This a ects not only the standards

that construction companies work to but also createsa market or them, especially among large companies

or whom the only way to reduce the emissions romtheir operations is to make their buildings more energye cient. It provides the demand or energy e cient

t out and re urbishment services which many o the bigger construction companies have diversi edinto: The CRC is having an impact on many large UKcompanies because it increases the cost o carbon,increases the risk o nes associated with incorrectreporting, and also introduces a per ormance leaguetable or publicly rating companies on their carbonreduction, said Liz Collett, Group Environment Managerwith Morgan Sindall Fit Out. Morgan Sindall has toreport on carbon both as a company in its own right andas a supplier to Government departments - so the clientpressures or reporting are increasing.

The success o wind power is not con ned to the OECDcountries in manu acture or deployment. In 2009, Chinabecame the worlds second largest installer o windpower and the largest manu acturer. It has now settargets to deploy 100 GW o wind power by 2020. Similarly,India has a strong wind industry, with rapid developmentsalso taking place in A rica and Latin America. This globalproduction will urther reduce costs and drive orwardtechnological innovation.

Renewable energy is also making a growing contributionin the transport sector. Given the virtual monopoly o oilin aviation and road transport, there are strong industriale orts and government mandates or the production anddeployment o bio uels. In Western Europe, the EU has seta binding target o least 10% o liquid transport uels to

come rom renewable energy sources by 2020 - most o this is expected to come rom bio uels. The US has seen a


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The trans ormation o the energy sector has beendescribed as the third industrial revolution. 29 It willchallenge all aspects o energy services: rom energysources and storage; to user-technologies, such aslighting, vehicles and electric motors; and in rastructure.Available technologies can deliver a large part o thenecessary changes, especially in the eld o energye ciency, but new ones will need to be developed, tested

or scaled up to meet this global challenge. Below we setout some emerging material, environmental and securityrisks that businesses will need to take into account asnew energy resources and technologies are developed.

3.1 National and international policy risksIn spite o broad international agreement on theimportance o inventing and deploying technologies atscale to meet energy and climate security goals, progresshas been too slow. Uncertainties around domestic andinternational regulations and pricing structures can

stall investment, discourage collaborative projects andgenerally dampen investor con dence. For example,inconsistent policies have entrenched a pattern o boom and bust in the renewable energy and e ciencyindustries in many parts o the world, including the US.

Enacting policies and reeing up the necessary nanceor technological trans ormation is even harder in the

context o the global nancial crisis and volatile energyprices. Technology developers worry about recoupingtheir investment in R&D and losing their intellectualproperty. Naturally, all businesses worry that governmentsubsidies, tax breaks or unds might avour theircompetitors and disadvantage them. Uneven deploymento technologies across the world is inevitable, withbreakthroughs occurring in those countries where there ismost encouragement, and consistency, in terms o policy

rameworks and market signals.

3.2 New scarcity risks in someraw materialsAs demand or certain technologies rises, so will thedemand or their raw material components - some o which are rare (see Box 12 on rare earth metals). Theavailability and price o these materials will determine theprospects or large scale commercialisation. Table 1 givessome examples o new energy technology elds and the

materials used in their manu acture.

Table 1: Material use on new energy sourcesSource: Materials Innovation Institute, November 2009 30

Raw materials (application)

Fuel cells Platinum

Palladium

Rare earth metals

Cobalt

Hybrid cars Samarium (permanent magnets)

Neodymium (highper ormance magnets)

Silver (advanced electromotorgenerator)

Platinum group metals (catalysts)

Alternative energies Silicon (solar cells)

Gallium (solar cells)

Silver (solar cells, energycollection / transmission,high per ormance mirrors)

Gold (high per ormance mirrors)

Energy storage Lithium (rechargeable batteries)

Zinc (rechargeable batteries)

Tantalum (rechargeable batteries}

Cobalt (rechargeable batteries)

3. The risks associated with a new technology revolution


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The demand or these minerals has prompted moreresearch into their availability. This is leading to anincrease in reserves in the case o some, but not all,minerals. One study that looked at 57 cases o mineralextraction detected a clear production peak in 11 o these. This included zirconium, the extraction o which isin decline despite demand and rising prices. 31 Companiespursuing technologies which rely on these and other

limited mineral resources will need to consider the abilityto re-use or recycle the material or to substitute oralternatives.

Box 12: Rare earth metalsRare earth metals (REMs) are a group o 17 elementswhose unique properties make them indispensable ina wide variety o advanced technologies. They are animportant example o material scarcity in the third energyrevolution, because they are indispensable or so many

o the advanced technologies that will allow us to achievecritical national objectives. 32 As such, disruption to theirglobal supply is a new energy security concern. Their production, alongside the metals and magnets thatderive rom them, is dominated by one country, China.At present, China produces 97% o the worlds rare earthmetals supply, almost 100% o the associated metalproduction, and 80% o the rare earth magnets.

REMs such as neodymium are the worlds strongestmagnets and are key components or more e cientwind turbines, each o which requires about two tonnes.They are also important in enabling the miniaturisingo electronic equipment; consequently demand grewbetween 15% to 25% per year rom 2003 to 2008. 33

3.3 Competing resource usesThe production o energy can compete with resourcespreviously destined or other uses. Two well knownexamples are the production o rst-generation bio uelsand the development o coal to liquids, both beingdeveloped primarily to combat security o supplyconcerns around oil.

The growth o the current generation o bio uels isexpected to slow due to environmental concerns andthe impact o such large-scale production on land useand ood prices. These concerns have accelerated thedevelopment o the next generation o bio uels, which willno longer use potential ood sources or the productiono ethanol (such as wheat), but arm waste instead. Thesecould become more widespread in the next couple o years. 34 Commercially viable third-generation bio uels

rom specially armed plant orms, such as algae, are atthe research stage.

3.4 New environmental risksThe development o new technologies can bringimmediate or longer-term adverse environmental impacts.The industrial landscape is littered with technologies thathave been widely used and then abandoned because o their e ect on the environment (eg DDT or asbestos).

There are numerous environmental liability concernsrelating to major new energy in rastructure, such asnuclear power stations, and carbon capture and storage(CCS) acilities or adapting ossil uel generation. Forexample, or CCS to be e ective it must contain the CO 2

or at least a ew centuries until we develop a way toneutralise its e ects on the atmosphere. However, it islikely that the companies engaged in the storage willeither cease to exist or will change ownership over thisperiod. The legal mechanisms which will be put in placeto ensure adequate accountability in the eventuality o system ailure is a crucial issue or the industry.


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Energy generation, extraction, re ning, processingand distribution depend on a complex, interlinked,expensive (and sometimes global) in rastructure. Yetmuch o that in rastructure lies in areas that could beincreasingly subject to severe weather events causedby climate change. Energy businesses owning orplanning in rastructure now will need to ensure theyare resilient to a changing climate, taking account

o more requent unusual weather events and moreextreme seasonal fuctuations.

4.1 Power sector risksEnergy in rastructure tends to have a long li espan. TheHoover Dam in the western US was completed in 1935and is still an important hydroelectric generator. Newsites or re neries, coal power plants and high-voltagetransmission lines are likely to be resisted by localcommunities and there ore replacements are o ten builton the same locations. This means that sites chosen in

the 1980s may still be in operation in 2080 and beyond.

Water fows are undamental or agriculture, powergeneration and cooling. Hydropower contributes around15% o global electricity production, by ar the largest o any renewable energy. It relies on the ability to predict thevolume o water entering the system. Be ore construction,care is taken to assess river levels, hydrological cycles andprecipitation patterns. Until recently those ndings wereconsidered to be constants. However, climate changeis expected to cause accelerated changes in the rain allpatterns and what were constants are now becomingvariables. This can cause problems or both glacier-dependent and precipitation-dependent power plants.

In Europe, cooling or electrical power generation(including both nuclear and ossil uel plants) accounts

or around one-third o all water used. During Europes

record-breaking heat wave o 2003, temperatures acrossthe continent reached more than 40 Celsius. As a result,France had to power down 17 nuclear power plants,because o heat and water problems. In 2006, France,Spain and Germany all had to power down nuclear plants

or the same reasons. The UK Met O ces Hadley Centreor Climate Change predicts that, by 2040, such heat

waves would be commonplace. 35

4.2 Changing risk landscape ortransport routesEnvironmental change (extreme weather events, watershortages, changing sea levels and melting glaciers)will generate great threats to critical in rastructure andto transport routes that underpin traditional energyproduction and delivery systems. The map below (Figure 8)illustrates the density o a hand ul o shipping lanes uponwhich global energy trade depends.

All o the worlds largest energy importers are dependenton sea imported oil. The US imports 60% o the oil itconsumes (over 95% delivered by tankers) while thegrowing markets o China and India import 90% by sea.Japan is almost completely dependent on maritime oilimports. The tra c is increasing as countries requiregreater energy imports urther rom their markets. Forexample, both China and India are importing coal romColombia or the rst time in 2010 and bottlenecksat the Australian port o Newcastle in 2007 and 2008kept coal vessels waiting or weeks restricting supplyand contributing to the increasing price o deliveries tothermal power stations.

The development o Arctic resources will create new andriskier shipping routes. Climate change will bring risingtides and more requent extreme weather events thatcould increase shipping accidents and damage ports.

4. Risks to energy and transport in rastructure


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Energy Infrastructure

World ports PipelinesNightime lights

Low

High

High

Low Shipping density


Figure 8: Global shipping routes, pipelines and world portsSources: Hadley Centre (2010), NCEAS (shipping routes1), FAO (ports2), GIS-Lab (pipelines3), NOAA (night-time lights)

4.3 Oil and gas in rastructureAs accessible oil and gas sites are depleted, moredi cult o shore and coastal sites are becoming moresigni cant. O shore and coastal oil and gas extraction iscarried out under a wide range o conditions, rom thetropics to the tundra.

Over a quarter o US oil production and close to 15% o US natural gas production comes rom the Gul o Mexico.In the summer o 2005, Hurricane Katrina shut o whatamounted to around 19% o US re ning capacity, damaged457 pipelines and destroyed 113 plat orms. Oil and gasproduction dropped by more than hal ; causing a globalspike in oil prices. Much o the in rastructure destroyed in2005 was rebuilt in the same location, leaving it vulnerableto similar weather events in the uture.

The US Geological Survey estimates that the Arcticmight contain over a th o all undiscovered oil and

gas reserves. 36 Siberia could contain as much oil as theMiddle East. 37 However, dreams o a resource bonanzain the north are premature. The environment is di cultand becoming increasingly unpredictable as a resulto the changing climate. The thawing o perma rost inthe north is already causing in rastructural damage andreportedly costing Russia around $1.9bn a year to repairin rastructure and oil and gas pipelines in West Siberia. 38

Many o the challenges outlined above can be overcomewith su cient research, planning, engineering and

nancing. In some cases it may even be possible tointegrate change into planning in such a way that energyoutput increases with changes rather than decreases.For example, hydro installations in regions that areexpecting higher rain all could be designed to eventuallytake advantage o that excess fow, rather than be

overwhelmed by it.


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Predictable supply o energy is oneo the top policy priorities or businessand governments in the major globaleconomies.Business and Industry Advisory Council to theOECD - 200639

The constraints on carbon in terms o resource availability,

price, policy and the move to a low-carbon economy willhave a huge impact and risk implications or businesses,both within and outside the energy sector. This sectionlooks at the implications o the trends outlined above

or businesses in general, as well as the energy sectorspeci cally. The last section discusses some opportunitiesthat the shi t to a decarbonised energy system presents.

Key challenges that will a ect businesses across theboard are:

Cost and stability o services: All businesses dependon energy, both directly and indirectly, and projectedchanges in prices and resource availability will a ecttheir competitiveness and economic viability. Withoutlong-term contracts or hedging mechanisms, the impacto changes in direct costs (such as uel or transport,heating or electricity) will be immediate, and will resultin signi cantly higher running costs to business. Indirectcosts, such as materials or delivery charges a ectedby higher energy inputs through the supply chain, maybe less immediate, but would reduce pro t margins onexposed product lines or services. The potential or actualpower outages and uel shortages could also be direct(a ecting the area o operations) or indirect (disruptingthe supply chain).

Pressure to reduce carbon emissions: The carbonport olio o companies and governments will also comeunder increasing scrutiny. Higher emissions standards areanticipated across the major sectors. These will requirecare ully planned changes in practice and technologyin the most energy intensive sectors - energy, heavyindustry, construction and transportation. Carbon ande ciency standards in major markets will not only a ect

national industries, but also those in manu acturingexport centres. In the transport sector, we can alreadysee how binding legislation or voluntary standardsare a ecting the worlds major vehicle markets andencouraging competition in e cient technologies.

For energy sector businesses, the dual task o meetingrising energy demand and leading the transition toradically lower carbon emissions presents enormousopportunities. Risks will vary considerably depending onthe location o operations and specialisation, as well as

technology and practices.

The trans ormative changes in the energy sector: The use o di erent resources, technologies and networkswill in turn a ect the way that we manage energy security.This also presents great business opportunities and newmarkets. The carbon market and policy mechanisms, suchas eed-in-tari s, are making new investments viable.

In all areas, an assessment o vulnerability to changesin the energy system and markets, and early preparation orthese new realities, will give businesses a competitive edge.

Challenges and risksor global businesses


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3% Other

26% Transport

9% Service Sector

29% Households

33% Manufacturing

22.7% Other

1.9% Aluminium

6.4% Pulp and Paper

8% Cement

23% Steel

34% Chemical/Petroleum


Three sectors dominate global energy use today:manu acturing, household consumption and transport(see Figure 9). We can gauge the price exposureo a company by looking at its turnover divided byenergy costs. The energy costs o heavy industry andtransportation are likely to orm a larger share o revenuethan, say, an IT company or a retailer. But the speci cnature o a rms processes will determine the impact o

higher prices or supply insecurity on its bottom line. Canmanu acturing processes in a plant stop and restart withlittle impact? Will it be practical to switch uels? Firmswhich have long and complicated supply chains will needto consider the potential exposure o suppliers or logisticsoperators to energy prices just as care ully. For example,Walmart has 100,000 rst-tier suppliers. A just-in-timebusiness model (used by many companies) will meanthat disruptions can quickly escalate costs and damagereputation. There ore, risk managers should investigatewhether this model is adequate to cope with emerging

energy risks.

Figure 9: Global nal energy consumption (2005)Source: IEA 200840

Figure 10: Major global energy users inmanu acturing sector (2005)Source: IEA 200841

Implications and risks or business in general

We have grouped the risks or business into broadcategories, but these will overlap and be prioritiseddi erently within each company. Some require airlyrapid decisions and contingency measures to prevent

either disruption to operations or unsustainable costs.Others deal with events or conditions that should betaken into account in strategic decision-making in orderto minimise vulnerability and maximise advantage overa longer time period. Although reputational damageis treated as a separate risk, mismanagement o anyo these other dimensions can also contribute toreputational risk.


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Uncertain political commitmentto technology incentives

Policy change underminingviability of investments

Lack of global climatepolicy framework forlong-term planning

Regional carbon pricing

Carbon price uncertainty

Increasing legislation andstandards on efficiency

Consumer pressure for CO 2

emissions labelling

Government policies

Higher and volatileenergy prices

Fuel and electricity

supply disruptions

Scrutiny of carbon portfolio

Delivery of servicescompromised by

energy disruptions

Technological risks

Risks for general business

Longer-termoperational risks

Financial andregulatory risks

Short term operationaland supply chain risks

Reputational management


Figure 11: Risks or the wider business sector

Pro ts in the transport sector are especially sensitiveto the upward price trend o oil. For the aviation andshipping industries, this exposure is high and largelyunavoidable. The movement o goods is also dominatedby ossil uel, in this case diesel, which accounts or82% o movements. This lack o diversity makes thesesectors vulnerable to oil price spikes and tightermarkets or diesel. For example, United Airlines decidedto ground around a th o its feet when the oil pricewas at its highest in 2008. In an attempt to reduce uelcosts, research is underway into the use o bio uels,with L thansa announcing that by 2012 they wouldbe blending bio uels with traditional uel. The key risk

management strategies or the transport sectorsinvolve long-term strategic and investment decisions to:

Short term operational and supply chain risks:price and supplyUltimately, governments will determine end-user energyprices - so where a businesss operations and supplychains are located is crucial. Its place in the supplychain will also a ect vulnerability to price. Energy-intensive sectors, such as chemicals, steel or cement,are by nature more exposed to changes in the price oravailability o energy (see Figure 10 or the share o majorenergy users in the manu acturing sector). For thesesectors, even small changes in the prices they pay orenergy domestically will a ect the economic viabilityo manu acturing. Costs will be added onto the price o

traded goods, a ecting their global competitiveness. Thishas encouraged the shi t o energy-intensive sectors tocountries where the price o energy is comparatively lowand o ten subsidised.


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Use energy more ef ciently. This may include upgradingbuildings, installing smart electricity managementsystems and planning operations to maximise theproductivity o energy.

Diversify energy supplies and types. This may involvethe investment in own back-up generation or largeand more permanent domestic generation, such as

very small or micro renewables. However, this mayalso lead to active support o research into anddevelopment o alternatives.

Energy supply disruptions will a ect businesses di erentlydepending on how reliant their activities are on certaintypes o energy, where they are located and how theirsupply chains work. However, the absolute dependenceo modern societies on electricity means that evenshort-term disruption to this electricity may causemultiple operational ailures and incur heavy restart costs.

Although energy supply disruptions have decreased inmost OECD countries in recent decades, signi cant losseso electricity supply still occur. For example, in Cali ornia(2000), New York (2003) and Italy (2003) technical ailurescoupled with inadequate back-up systems and poorelectricity management resulted in widespread blackouts.Many larger businesses and in rastructure operators haveinvested in back-up generators. In 2010 the city o NewYork purchased stand alone generators or their watertreatment plans as a result o the experiences in 2003.

Resilience measures tend only to be justi ed asresponses to crises. A 2006 study ound thatrisk managers in the ood industry tended to takeuninterrupted power supply or granted and believedthe government would step in to ensure uel provisionin the event o a crisis. 42 However, in terms o essentialnational services III, the ood and nance industries are notguaranteed state protection in the event o a uel supplycrisis (see Box 15).

More requent outages are likely in the developing worldwhere capacity cannot keep pace with demand growth.

Access to reliable electricity is still not guaranteed, evenor major industries and cities in developing countries. The

lack o uel or power stations and signi cant over-demandhas led to power rationing and requent power cuts.Rolling blackouts in South A rica in 2008 (which causedthe shut-down o major industries, including gold mines)and brownouts (periods o reduced electrical voltage orscheduled cut o s or selected users) in eastern China in

winter 2010 demonstrated the vulnerability o emergingeconomies to a depletion o coal stocks. As an increasingnumber o manu acturing and service industries are basedin Asia-Paci c countries, this will have a major impacton global supply chains. The case o the textiles industryduring the ongoing energy crisis in Pakistan illustrates thiswell (see Box 13).

Box 13: Electricity and gas cut-o s: the case o thetextiles industry in Pakistan

The e ect o unscheduled electricity blackouts and gassupply cuts on industry in Pakistan gives a clear exampleo the problems acing rapidly industrialising nations. Asdemand o

sustainable energy security report risks and opps for business froggatt_lahn

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