Energy and the Environment

A chilling presentation on the connections between energy and the economy was discussed.

The current context of the energy in the world was the first debated subject. Despite the 22 trillion dollars of investment in global energy, a supply crunch took place on 6th July 2007. Actually, the investment banking capacity has been greatly reduced because of the credit crisis. It is now to be assessed if the commercial banks alone can satisfy the demand for credit. The transactions being funded are only for the strongest companies or on shorter durations. Companies normally post cash to their counterparts to offset the credit risk, but given the credit crisis, they are not posting adequate cash margins. Therefore, there is no long-term price hedging being done and banks and firms that trade are decreasing their activity. Trading and lending is becoming short-term. Hence the volatility in energy prices and, more precisely, in the oil prices: Brent crude oil prices have undergone a rapid rise in early 2008. This trend culminated in the middle of 2008 and abruptly changed thereafter (from $92 per barrel in January 2008 to $145 per barrel in July 2008). The price is now $110. These unprecedented market turbulences force businesses to be very careful in their risk management. They could go bankrupt if their strategy is wrong but smart ones could take advantage of the juncture.

After that, we looked closer at China’s development. By 2015, the Chinese economy could be the same size as the USA. This giant in the global economy is undergoing changes at such an unprecedented speed that we cannot legislate for geopolitics and Chinese urbanisation.

Concerning China’s use of energy, its primary energy use will double in the next few years. In 2007, China consumed 1920 million tons of coal (by comparison with the US that consumed 50% less) and it is expected that this consumption is going to increase 3.5 times by 2030. The soaring use of this source of energy will be accompanied by harmful environmental effects (despite China’s target of reducing CO2 emissions by 2% a year, the increase in the use of coal brings huge emissions): China’s expansion is the largest modernisation project in human history but the environmental consequences are severe.

Another greatly debated discussion was about gas. 75% of the world’s gas flows through pipelines which is very important since it is a long term commodity that can flow forever. However, the International Energy Agency (IEA) insists that we now have to consider gas security very seriously which concurs with Mrs Armour-Biggs. It is said that Europe will have gas security until 2015 but it is not very long and we discussed about the implications that this insecurity can bring to the British economy.

Currently the UK power mix is roughly 40% gas, 40% coal with the 20% balance from nuclear and a small amount of renewable generation. By 2018 Global Energy Advisory estimates that the power mix will be approximately 60% gas, 20% coal, 10% nuclear and 10% renewable.

The UK’s increase on gas use may represent a risk to the UK energy security of supply. The current issue at stake with this commodity is about flow, not about reserves. Actually, 67% of the UK’s gas came from the UK Continental Shelf in 2007. However this source is depleting and it is forecast that by 2015 the UK will rely at 70% on gas imports (40% on pipeline gas, 30% on Liquefied National Gas (LNG). This dependence may fully expose the UK to international gas prices with their volatile dynamics into the longer-term and takes place in a global trend of increasing gas demand for power generation (in 2007 demand increased globally by 10%).
There are two main ways that gas is delivered: through pipeline or in the form of LNG.

As for the pipelines, Europe (and the UK) need to secure this way of importing gas: one of the most important ones is the one that goes from Russia to Europe through Ukraine. However, Russia and Ukraine have lived several disputes about the gas. The last one led Gazprom to constrain the gas supply in Europe in the winter of 2008 (the price rocketed up to $400 per 1000 cm3 which is twice the price it was in September 2008). That is the reason why Europe needs the Nordstream and the Southstream pipelines. The first one is due to be in place by 2011. Any delay or cancellation could significantly decrease the expected gas flow into parts of Europe. There would be an increased gas competition and hence potentially higher gas and power prices as well as increasing the UK’s reliance on more LNG supplies. Those delays will also put considerable pressure on the Atlantic and Pacific LNG markets.

Europe, UK, USA and developing countries are increasing their dependence on gas for power generation. By increasing its reliance on imported gas and LNG, the UK is increasing its risk of not being able to secure enough energy supplies and is potentially increasing the costs to end consumers.

In addition to that, 60% of the increase in the supply of gas is going to come through LNG. That is why the IEA signals that if there is a delay in the development of the liquefactions plants that are currently being built, supply could become “quite tight”.

The last debated issue was UK’s renewable energy strategy. The EU Renewable Targets require that the UK uses renewable energy sources for 15% of total power by 2020 (most likely wind power). To achieve this aim, the UK is going to reduce its coal production: there are currently 13 GW of new gas power stations being built. These stations are needed to replace the coal plants that have a closure deadline of the end of 2015. In addition to that, it will require around 35% of generation to come, most likely from wind power. However, we must cast on doubt the projected level of investment due to the financial crisis. Besides, with limited coal the dynamics of variable wind and vulnerable gas can lead to moments of very high prices (high gas prices and low wind generation). There is a need for consumers to prepare for potentially large energy price increases.
Concerning nuclear energy, four power stations are being built by France and UK in the UK but there is no strategy on the search of skilled specialists in this field.

Key Outcomes & Findings

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