IEEJ: April 2006

Energy Security and Climate
Change in the 21st Century – whohas the answers?
7 April 2006
JOAN MACNAUGHTON CB
DIRECTOR GENERALINTERNATIONAL ENERGY SECURITY
DEPARTMENT OF TRADE AND INDUSTRYIEEJ: April 2006

Challenges in 21st Century Energy Markets.
• Maintaining and enhancing security of long-term
energy supply to developed economies.
• Squaring the energy-environment circle:– Development and deployment of clean
technologies.
– ..and remaining competitive.
• Meeting the growing demand from developing
economies (India, China)• Dealing with cartelisation and concentration of naturalresources.

IEEJ: April 2006

Plenty of Hydrocarbons• But concentrated in a few countries/regions:• MENA– 45%-65% of proven oil reserves– 45% of proven gas reserves• Russia– 6 % of proven oil reserves (7th largest)– 26 % of proven gas reserves

IEEJ: April 2006

Investment• Both regions need huge investment:– MENA $56bn/yr to 2030
• Russia– $935bn over the period 2003 – 2030

¾ Will that investment occur?

IEEJ: April 2006

The challenge for governments• Making markets work better:– Creating the right frameworks:• For rational economic investment throughout the supplychain• For transition to a cleaner future– Balancing Government and Market roles– Data transparency and information provision• Emergency Response:– Managing small probability/large impact events

IEEJ: April 2006

Data Transparency and Information• Joint Oil Data Initiative (JODI)– Monthly oil production, oil stocks and oildemand.
– Fundamental technical work undertaken byIEA¾Need to improve data quality and scope.

IEEJ: April 2006

Frameworks for rational investment• Supply capacity is important. For oil– When spare capacity is large:¾ Strong relationship between inventories and price– When spare capacity is low:
¾ Relationship breaks down; risk premium “fear” determines market price.

• Clear role for Government in setting framework:– Whole supply chain approach• Open investment regimes with clear property rights.
• Transparent and stable regulatory regimes.

IEEJ: April 2006

Investment keeps markets sane!
Chart a: US crude stock cover v real oil prices
Spare capacity > 3% (of world supply)Chart b: US crude stock cover v real oil prices
Spare capacity < 3% (of world supply)1921

US crude stock cover (days of demand)

20

18

Correlation -0.69

Correlation = -0.06

1917
18
16

17
1615

15
14
14
13

13
12

12
10

15

20

25

Illustrative analysis

30

35

40

1020

Real (Jan 05) oil prices: US$ a barrel

30

40

50

60

70

IEEJ: April 2006

Government Versus Market: getting thebalance right• Governments set domestic frameworks• Governments set international frameworks:– Energy Charter Treaty– Kyoto Protocol and ETS– European Union single markets– External EU energy policy: Hampton Ct– G8/G7 finance – wider influencing,enabling

IEEJ: April 2006

The Energy White Paper set ambitious,
complementary goals for the UK•

Getting on a path to cut the UK’s CO2 emissions by 60% by2050•

Maintaining the reliability of energy supplies•

Promoting competitive markets in the UK and beyond•

Ensuring that every home is adequately and affordably heated

Aim is to achieve these together

IEEJ: April 2006

Energy Review launched• Progress against 2003 Energy White Papergoals• Look at energy security of supply given:– Growing oil and gas import dependency– Generation capacity replace 30% over next
15 years• What more do we need to do on climatechange?
• How to step up progress on energy efficiency• Dealing with rising and volatile prices

IEEJ: April 2006

Climate Change Programme Review
Published• EU Emissions Trading scheme• Promoting Renewables• Microgeneration• Carbon Abatement Technology strategy

IEEJ: April 2006

EU Emissions Trading Scheme• Commenced in January 2005 – a World Leader• Covers around 50% of total UK CO2 emissions• A trading scheme is economically efficient andflexible:– Allows economically rational choices:• buy additional allowances or invest to cut emissions.

– Sell excess allowances• Businesses prefer trading schemes toinflexible environmental taxation.

IEEJ: April 2006

Promoting Renewables• Renewables Obligation (RO) is primarymechanism to promote renewable energy:– market-based mechanism– Technologically neutral• Governments don’t pick winners!

IEEJ: April 2006

Microgeneration Strategy• Long-term Government commitment tomicrogeneration• Vision of the energy system in 2020:• “there will be much more local generation ….
specifically, much more microgeneration”• Important roles for:– Combined Head and Power (CHP)– fuel cells or photovoltaics in buildings.

IEEJ: April 2006

Carbon Abatement Technology Strategy• “CAT” strategy: published in 2005
• R&D support to encourage:– more efficient coal-fired plants– coal with bio-mass– carbon capture and storage technologies.
• Government funding of £55m:– £35m for demonstration projects– £20m for R&D.

IEEJ: April 2006

Emissions have declined, but reaching the 2010 goal may be achallenge
Current ‘with measures’projections indicate a15-18% reduction by2010

Historical and projected CO2 emissions in the UK
MtC, MtCO2
MtC
180

MtCO2
640

170590

160
150

540

140490130120440
1990

1992

1994

1996

1998

2000

2002

UK Carbon Dioxide Emissions
Source: 1990-2004 NETCEN, 2005-2010 DTI Projection

2004

2006

2008

2010

National Goal

IEEJ: April 2006

Carbon dioxide levels over the last 60,000 years

IEEJ: April 2006

The forward international agenda• Convention process – long term co-operative action (allcountries)• Kyoto protocol – post 2012 commitments (Kyoto countries todiscuss)• G8 Gleneagles Dialogue – Mexico Ministerial• G8 Summit – St Petersburg, July 2006
• EU – Energy Green Paper• UK Stern Review, Energy Review, Climate Change
Programme Review• Tackling climate change can be a win-win

IEEJ: April 2006

G8 Gleneagles Summit• The Prime Minister made Climate Change one of his
two key priorities•

Invited the five recently industrialised countries –Mexico, Brazil, India, South Africa and China•

Produced agreement on the science, a dialogue anda programme of actionIEEJ: April 2006

Programme of Action• Energy efficiency of coal fired power plant – bestpractice• Most cost effective and efficient plant• Work on potential of clean coal and carbon captureand storage technologies• Work on definitions, costs, scope for ‘capture readyplant and economic incentives with IEA/CSLF

IEEJ: April 2006

Squaring the energy, environment andsecurity triangle
50

dollars (2004) per barrel

40

Reference Scenario

30

20

100
Deferred Investment Scenario

Alternative Policy Scenario

Average IEA crude oil import priceNet energy-efficiency investments

IEEJ: April 2006Alternative Scenario: Role of Energy Efficiency• 12.8mb/d reduced demand by 2030
• 60% of C02 emission reductions• Energy Efficiency – important contribution– ½ of global savings from developing
countries alone– 13% saving from power generation– 11% saving from residential use• Saving Energy enhances energy security.

IEEJ: April 2006

• Who has the answers: Government, Markets,Environmentalists?

¾ All of the themContact: report@tky.ieej.or.jp