24 July 2015

There’s more than meets the eye about the growth of Renewable Energy


The name Will Rogers is not well known this side of the Atlantic.  On the other side of the pond, however, the folksy wisdom of this Cherokee cowboy, vaudevillian, movie actor, humorist, newspaper columnist and social commentator is still a regular feature of political debate, his words frequently quoted by journalists who want to take politicians down a peg.  As Will Rogers said, ‘I don’t make jokes. I just watch the government and report the facts.’  My personal favourite: ‘It’s easy being a humorist when you’ve got the whole government working for you.

Will Rogers was brought to mind by a slightly unexpected speaker just the other week, Spencer Dale, the Chief Economist at BP.  Will Rogers was a straight talker, a keen observer of human nature and an insightful commentator. So too is Spencer Dale.  Inspired by the spirit of Will Rogers let me take you through the global energy landscape as sketched out by Spencer.

The problem ain’t what people know. It’s what people know that ain’t so. That’s the problem

The global consumption of renewables grew 12% from 2013 to 2014, the single largest percentage growth in primary energy consumption of any technology, thanks largely to the ambitions of the US, China and Germany.  Money has been diverted into renewable energy in ever growing amounts mostly in an effort to cut carbon emissions, all of which has helped the nascent renewables industry grow from nothing to something. Where the economic powers have led, others will follow; renewables is where it is at.

However, this super subsidy-buoyed growth is not quite what it seems.  The growth is relative, all the more impressive against the reduced global energy demand as the world continues to shake off the hangover of the recent economic downturn.  Renewables are a bigger slice of a relatively smaller pie.  Renewable energy generation still only accounts for only 3% of total global primary energy consumption.

If you’re riding ahead of the herd, take a look back every now and then to make sure it’s still there

The ultimate barrier to the breakout of renewable electricity generation is broadly speaking its intermittency. Whilst certain technologies – the well-established hydro, the coming energy solar and the still be to be established wave and tidal – are more predictable, wind isn’t, and to date it is wind which has received the most significant subsidy boost.  In the UK, Ministers stopped the subsidy when it transpired that the cost would top £800 million per year by 2020.

In several countries, ever cheapening fossil fuels have filled the gap, playing the role of ‘swing fuel’, stepping in when renewables’ intermittency creates generation problems or when demand from industry and consumers spikes.  However in China, it is nuclear power which is performing this role. China is planning to build one new nuclear reactor every three months for the next twenty years.

So although renewable energy is travelling in the right direction, and seemingly doing so at speed, there is still a long way to go on the green odyssey, and we are still some way from unplugging the hydrocarbon nozzle from the tank, and all the while China plans for an atomic world.

People’s minds are changed through observation and not through argument

America’s oil shale revolution has been swift and mighty.  Seemingly untroubled by the protests that bedevil fracking in Europe, last year the US sank over 40,000 new oil wells (via 1,800 new rigs), compared with only 10,000 in the rest of the world combined.  Productivity has increased sevenfold in only five years as a result of some $120 billion in capital investment. The US is now the world’s number one producer of oil, wresting the crown from Saudi Arabia last year.  In the by-going the US has tempered its carbon emissions, which are at levels last seen in 1990 (even with the 2.5% increase in 2013).

The US has pioneered and profited from fracking.  Will other nations follow suite?  Energy strategists estimate that the global gas reserve constitutes 200 years-worth of energy at our current consumption levels.  To frack or not to frack, that is the question?

There are three kinds of men. The ones that learn by readin’. The few who learn by observation. The rest of them have to pee on the electric fence for themselves.

Saudi Arabia did not relinquish its oil producing crown without a fight. Arab oil drillers have turned on the oil taps in the hope that they will bankrupt the US frackers.  So far the plan has not worked, but it has driven the price of oil down to levels unprecedented in recent times. Mature oil fields such as the North Sea are feeling the pain, with 1500 job losses in Aberdeen this year alone, and the forecast of more to come.

A low oil price represents a serious challenge for renewables, as renewable energy risks becoming relatively more expensive than hydrocarbon-sourced generation. A further consequence of the low oil price has been a lowering of the coal price.  Several states, notably India, Belgium, and Spain have all increased their coal consumption, taking advantage of the low price, making climate change targets all the more difficult to achieve.

However, if you really want to understand the future of coal, look east. China alone consumes half of all the world’s coal.  Even with efficiency improvements in China’s energy intensive industries – steel, cement and iron – and the development of hydropower (a venture made all the easier in a state where the displacement of millions of folks can be achieved with the stroke of a pen) China’s coal consumption continues to grow at 0.4% a year.  China has declared its carbon emissions will peak in 2030.  A whole lot of coal to burn before then.

An ignorant person is one who doesn’t know what you have just found out

Interestingly it is not just coal that had a slow year last year; in the EU, gas consumption fell by 12% in 2014. This is all the more striking when compared with the US, which experienced a 13% increase in gas use over the same period, due mostly to the impact of fracking.

The reason for the fall in the EU: a warm winter.  Last winter was so mild that Europeans turned on the heating for the fewest number of days for 30 years.  As carbon continues to contribute to the global temperature rise, perhaps that state of affairs will become all the more common. A silver lining in a very, very dark cloud.

Everything is funny, as long as it’s happening to somebody else

Nothing ever stands still in the energy world.  Oil is predicted to experience what is technically known as the ‘norm of volatile pricing’ (meaning no one really knows what will happen next).  The US shale fields are expected to continue producing oil at significant levels for another five years before slowly beginning to decline, but importantly there is over 20 years or more of frackable gas.

The ability of the US to export gas will be crucial to American economic growth.  The US will frack more gas than it can use. Prices are already two to three times cheaper in the US than they are in Europe.  So the question is who wants US gas?

Europe would certainly be to the front of the queue. Presently the EU imports 909 thousand tonnes of oil equivalent, 39% of which comes from Russia.  It doesn’t take Henry Kissinger to recognise the geopolitical challenges of dependency on a bear with a sore head.  The US currently exports 100 million cubic metres of LNG to the EU (as opposed to Qatar’s 30 billion).  Scotland’s main petrochemical plant at Grangemouth will soon depend wholly upon imported US fracked gas.  The UK Department of Energy and Climate Change has stated that US gas imports to the UK could reduce fuel bills by some 12%. Not to be sneezed at at a time of recognised energy poverty. However, the prospect of Europe’s continuing love affair with fossil fuels would not be universally welcomed, especially if the gas is fracked.

Recently there has even been talk of adding an energy chapter to the Transatlantic Trade & Investment Package (TTIP), as if the proposed US-EU free trade agreement didn’t have enough challenges ahead.  Certainly, tackling non-tariff barriers such as the stringent licensing conditions for the export of US gas would ease gas exports to the EU.  Think what that TTIP debate would look like in the European Parliament…

However, it is not just the EU that is in the queue.  Right up there are the Asian economies, ready to suck up all the gas they can.  The emergence of a Middle class across Asia has fuelled (quite literally) a booming demand for energy. All those perking espresso machines, humming iPads and widescreen TVs don’t power themselves, you know.

Even if you’re on the right track, you’ll get run over if you just sit there

Last year will be remembered as the year that fracking changed the energy landscape, when OPEC flooded the market with oil, and the price of oil collapsed.  It was a year of modest growth in fossil fuel consumption, as the world pulled itself out of the shadow of the economic crisis.  It was also the year when renewables growth topped 12%.

So that is what Spencer Dale, BP’s Chief Economist, had to say.  You can read his remarks in BP’s Statistical Review of World Energy.

So what does next year hold?  Let me give the last word to Will Rogers, ‘An economist’s guess is liable to be as good as anybody else’s.