Energy Security & Sustainability

September 16, 2010

Nobuo Tanaka
, Executive Director, International Energy Agency

Jeffrey Goetz
, Managing Director, Poten & Partners, Inc.

Nobuo Tanaka, Executive Director of the International Energy Agency, spoke at Japan Society about the IEA's work on energy security and the transition to a low-carbon world.

Energy security is a more complex matter today than in 1974 when the IEA was founded, during the first oil crisis, Mr. Tanaka said. IEA members have had great success in shifting away from oil toward the greater use of gas, coal, nuclear and renewable energy, and in becoming more energy-efficient. Yet with these changes come new energy security concerns. Europe decides to import gas from Russia, for example, but then has to worry about the effect of tensions between Russia and Ukraine on the stability of that gas supply.

Global patterns of energy consumption have also changed. The developing countries have undergone rapid growth, and IEA members, all of which are OECD developed countries, no longer account for the lion's share of world energy consumption. When the IEA was founded, the ratio of members' consumption to that of nonmembers was 70-30. Today, it is 50-50; 20 years from now, it will be 30-70.

The IEA's public stocks contain some 1.56 billion barrels of oil, representing 62 days' worth of the net imports of its 28 member countries, Mr. Tanaka noted. The agency has released emergency stocks of oil twice in its history, once during the 1991 Gulf War and again in 2005 during Hurricane Katrina. Oil is easier to stockpile than other energy resources, however. Stockpiling gas costs more than stockpiling oil, and can't be done in the absence of specific geological conditions. Stockpiling energy from renewables will require more sophisticated smart-grid technologies as well as advanced batteries and other storage devices.

In its Energy Technology Perspectives 2010 study, the IEA projects that under current conditions, worldwide demand for energy will increase by 84 percent by 2050. Consumption in the developed countries will remain flat, but will roughly double in developing countries. "It's not sustainable in terms of economics, in terms of society, in terms of environment."

The ETP 2010 study outlines an alternative scenario, dubbed the BLUE Map scenario, which aims to reduce global CO2 emissions by 50 percent by 2050, he continued. This target corresponds to that adopted by the Intergovernmental Panel on Climate Change, or IPCC. BLUE Map is not a prediction, but rather an exercise in backcasting: Assume it's 2050, and global CO2 has been cut by 50 percent. When someone asks, "How did we get there?" BLUE Map offers an answer.

Under the BLUE Map scenario, the single biggest contribution to CO2 reduction, 38 percent, will come from greater end-use efficiency. Decarbonizing the power sector through expanded use of carbon capture and storage, or CCS, technologies, as well as renewables and nuclear power, will cut CO2 by 42 percent. Decarbonizing the transportation sector through use of electric, hybrid and possibly fuel cell vehicles will reduce CO2 by a further 15 percent.

To reach the 2050 goal under the BLUE Map model, a full two-thirds of the reduction in carbon emissions must take place in developing economies. The developed countries must help pay the cost of projects in the developing countries, through clean development mechanisms or other means, Mr. Tanaka said.

Under the model, fossil-fuel use will fall to about 46 percent of total energy sources, down from 81 percent today. Oil consumption will drop by about 27 percent, and even natural gas will decline, notwithstanding an expanded use of cheap shale gas.

If the BLUE Map reductions in consumption are not made--the baseline scenario--the price of oil, now in the $70 or $80 range, will rise to $120 a barrel by 2050 in 2008 dollars. If the BLUE Map reductions do take place, the producer price will go down to about $70 by 2050, but the consumer price will be $140--"even higher than the baseline scenario."

"The difference in these two scenarios is who will take the rent," Mr. Tanaka observed. "You can easily see that if the baseline happens, it’s a producer country: OPEC will take the rent. If Blue Map happens, the consumer country will take the rent to invest in efficiency, nuclear power, renewable energy" and other programs.

Policymakers striving to promote the BLUE Map model have their work cut out for them, he acknowledged. American politicians he's spoken with "fully understand" the reality that the era of cheap energy is over, but getting the public to accept that reality is a challenge.

Under BLUE Map, 50 percent of the power sector will derive energy from renewables, 25 percent from nuclear and 25 percent from fossil fuels with CCS. Expanding nuclear to 38 percent would cut power-generation costs by about 10 percent. Conversely, raising renewables from 50 percent to 75 percent would up the cost by about 10 percent, due to the cost of storage, demand site management and other technologies.

To realize this vision, we will have to build 30 nuclear plants every year for the next 20 years--whereas today, only one or two are built each year, Mr. Tanaka noted. "Historically, just before the time of Chernobyl, we built more than 30 reactors a year. Can we do that again?" The biggest challenge won't be the availability of uranium, but finding enough skilled personnel to build, run and maintain the nuclear facilities.

The world's economies will also have to ramp up dramatically the number of electric vehicles, for a total of over a billion electric cars worldwide on the road in 2050. In all, some $46 trillion in additional investments will be needed, half of this in the transportation sector. This figure isn't based on the cost of R&D and production of new vehicles, but on the cost of buying the new vehicles--"so, that's a business opportunity for this sector," he remarked. Overall fuel savings will yield $112 trillion, ignoring the time value of money, and will exceed the $46 trillion investment even assuming a discount rate of 10 percent.

Viewed by region, CO2 emissions under BLUE Map will be reduced by 81 percent in the U.S.; in Europe by 74 percent; and in China by 30 percent, though China's CO2 levels will increase until 2020 and only then start to decline. In India, where the level of economic development is still very low, CO2 will rise by 10 percent.

In per capita terms, U.S. CO2 emissions greatly exceed those in other countries, which means that reducing CO2 by 81 percent will mean "a huge technological challenge. It’s a huge behavioral challenge that we need in the United States to change the lifestyle.... Certainly it’s possible with very high energy prices, or carbon tax" and like measures. "Can we do that? This is really challenging," Mr. Tanaka said.

For the U.S., expansion of the nuclear power sector is the most prominent feature of the BLUE Map scenario; for China, it's the increase in CCS. Indeed, "without CCS in China, simply a 50 percent [overall] reduction of CO2 is impossible. We call it the litmus test of seriousness of the climate change negotiators to give some incentive for CCS."

When Mr. Tanaka spoke at a ministerial meeting in Washington earlier this year, he said, "my message to the energy ministers who gathered there" was "don’t wait for the conclusion of the climate deal. Who knows when it will be completed? But already you know what to do. Technologies, efficiencies, energy infrastructures--we know what to do, and change is happening. So, let’s act now on necessary measures, and then we have a sustainable future."


Presider Jeffrey Goetz of Poten & Partners led off with the first questions:

What are some of the lessons of your experiences in Japan 30 years ago that can be applied to a global environment today?

In 1979, which was the year of the second oil shock, Japan somewhat reluctantly agreed to accept a numerical import target on oil, Mr. Tanaka said. "But what has happened is that this target never ever reached reality, because the Japanese economy changed dramatically" as industry became more energy efficient and consumption shrank.

"So, this is exactly the lesson for China. I talk with lots of Chinese people and leaders, and they believe this climate change negotiation is a conspiracy against China. We felt the same thing.... But we are telling our counterparts in China, 'Yes, you are seeing a huge opportunity before you, and this green model or paradigm shift is the model for other developing economies to follow.'" Assume that higher energy prices are inevitable, and then ask "which country, which company can really improve their business model or system and win the game. This mega-competition, mega-game is just beginning to happen."

Some believe that whenever we become more energy efficient, we end up using more. Is it possible to change that type of thinking?

There are practical limits; you can't drive a car more than 24 hours a day. Beyond that, price signals do have a big impact on consumer behavior--witness what happened two years ago when oil prices spiked to $147 a barrel, Mr. Tanaka replied. Government can help by imposing stricter fuel economy standards for vehicles and efficiency standards for buildings and appliances.

Some of the recent price decline is cyclical, as demand shrank in response to the economic crisis, but some of it is structural, as "symbolized by the collapse of GM and Chrysler," he added.

The IEA predicts demand for oil next year to be relatively flat in OECD countries and grow in non-OECD economies. What are the primary drivers of that outlook?

The IEA believes OECD oil demand reached its peak in 2005. With economic growth continuing in China, India and the Middle East, "we see some increase of about 1.3 million barrels per day in 2011," he said. There are "lots of downside risks," however, including efforts by China to damp down inflationary pressures.

Fossil fuel subsidies are "sending the wrong message to the consumer" in producer countries, and phasing them out would save about 6 million barrels per day and have "a huge impact."

How will IEA maintain its relevance today, given that there are now many global organizations that are more comprehensive?

The IEA works with many nonmember major emerging economies at ministerial meetings, committees and work seminars, Mr. Tanaka said. In October, the agency will begin holding partnership meetings for energy security and sustainability with some 13 nonmember countries, including China, India, Russia, Chile, Brazil, Mexico, South Africa, Thailand, Indonesia, Algeria, UAE and Ukraine. Some nonmembers may eventually wish to join the IEA before joining the OECD, which will require changes in IEA's governing documents. The IEA also will be working with the UN on making energy access part of the Millennium Development goals.

Does the IEA consider climate adaptation to be within its scope of responsibility?

The agency has not done much analysis on this issue to date, but that will change next year, when the world energy outlook will include a focus on water availability and its impact on various energy sources, Mr. Tanaka said.

How will the IEA's mandate change going forward and for directors to come after you?

"Oil is still probably a very important part of our business, and stockpile still continues to be a part of important energy security measures, but we have to think about all other sectors of the energy and how they link together," Mr. Tanaka said.

"In each country the energy security measures could be different. For one country 90 days of stockpile may be the only necessary security, but for other countries maybe coal, gas, or renewable energy or smart grid."

Europe's moves towards a single European energy market serve to even out supply disparities within the region. In North America, the Canadian and U.S. markets for oil, electricity and gas are very well integrated; this is not the case in Latin America. "Can Japan, China, Korea secure their energy security by themselves? Or how could East Asian connection of the grid help their energy security?" he asked.

--Katherine Hyde
Topics:  Policy

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