November 28, 2009

Decoding Copenhagen: The Swiss Perspective

Prof. Martin Beniston, Chair for Climate Research at the Institute of Environmental Sciences, University of Geneva and Dr. Jurgen Weiss, leader of climate/carbon practice at the Brattle Group in Boston, spoke recently at the Swiss consulate in Boston. Their talks provided insight into the Swiss, as well as their personal, perspectives on climate change and the upcoming meeting in Copenhagen. You can find more info about the event, as well as copies of the presentations at:

http://www.swissnexboston.org/activities/blog

November 21, 2009

Nuclear Renaissance

In a recent Financial Times interview, Hans-Holger Rogner, Head of Planning and Economic Studies for the International Atomic Energy Agency, stated, ”If we want to curb greenhouse gas emissions by 50 per cent to 80 per cent by 2050, and we don’t use nuclear power for base load electricity generation, what can we use instead? It is not a quick fix: it depends on public acceptance and government support. It is not the whole solution to the problem. But it can make a contribution.” Many nations around the world are starting to agree; witness the more than 50 countries developing ambitious plans for nuclear fleet build-out. Here again China, as in solar and wind technology, is leading the way. Of the 50 nuclear plants are under construction around the world at this time, 16 are in China, as are 126 of the 430 plants that in the proposal stage. But, China is not alone in its ambition. The U.K. has made a dramatic policy turnaround and begun a construction program, while Italy has at least 4 new plants on the drawing board. Countries such as Spain and Germany who once had plans to decommission their fleets, have puts those plans on hold although have not moved ahead with new plant designs as yet. The U.A.E. wants to get into the game with support from the United States bringing the highly politicized nature of nuclear issue in Iran into sharp focus. To this point, emerging countries can by and large can sidestep issues with the nuclear non-proliferation treaty by staying out of the fuel production cycle, namely the uranium enrichment and waste reprocessing stages.

Meanwhile, support for nuclear is just beginning to build in the U.S. vis-à-vis the Kerry-Boxer energy bill in the Senate but up until now federal support has been minimal with only 4 new plants, serving to take over as older first generation plants are decommissioned.

While passive safety and waste reprocessing technologies will continue to improve over time, two major issues loom over the industry: cost and fuel sourcing. On the cost side, perhaps the industry could take a lesson in strategy from one of our favorite examples, Southwest Airlines. Standardizing the fleet would go a long way to lower costs and reduce risk in future plant build outs. Given there are only a handful of firms qualified build such plants and no need to pursue competitive advantages at the plant level through proprietary designs, I’m not the first to suggest that there would great economic benefits in developing a standardized platform or sets of platforms.

Strategic sourcing is perhaps the trickier issue, particularly for the U.S. where about 30% of operating plants have are fueled in recent years by materials sourced from a one-time windfall, decommissioned Soviet warheads. Looking at the figure below we see Australia becoming the “Saudi Arabia of Uranium” and a potentially interesting realignment of geopolitical interest in the future.

We certainly do live in interesting times.



SOURCE: Source: Energy Statistics Database | United Nations Statistics Division via NationMaster

November 18, 2009

Are We Laying the Groundwork for Another Oil Crisis?

Despite the environmental concerns and energy security issues, oil will continue to play a critical and central role in our energy portfolio through the transition to a clean energy economy and beyond. At the same time, let’s not forget, that oil is an important industrial feedstock with over 20% of production going into products such as plastics and fertilizer. (IEA 2008). Thus, it important to continue to invest in oil exploration and production to maintain future supplies. The concern is this is not happening.

The financial crisis has reduced demand for oil and depressed prices to as low as $30/bbl at the turn of the year। Some analysts, Veronique Lashinski of Newedge, being the leading proponent, believes that oil demand peaked in the U.S. in 2007 and will remain depressed through out the economic recovery and beyond. Peter Jackson of IHS Cambridge Energy Research Associates, cites global oil demand reached an “undulating plateau” in 2005 which will continue our to at least 2025-2030. While, Mark Cooper, a research fellow and energy expert at the Vermont Law Schoo states, "This might be an “inflection point” in the American economy." Thus, one might conclude that there is no eminent crisis.

At the same time, signs of a coming crisis are recently highlighted by IEA warnings: oil & gas investment budgets were slashed by over 20% in 2009 taking over $100B out of the new investment cycle. This follows a similar trend n 2008 where over $170B (20 planned projects) were canceled or postponed indefinitely. While OPEC in helping this situation by constraining production and driving prices higher, the concerns are based on historical precedent. Economic recoveries tend to spur sharp upticks in energy/oil demand and while speculative markets drive sharp spikes on pricing based on short term constrained supply and longer term delays discovery/production. The IEA and others foresee a potential oil crisis looming on the horizon in 2012-2014 (depending on economic recovery and growth rates) with demand outpacing production capacity and prices easily exceeding last year’s historic level of $147/bbl. While these high oil prices will spur investments in renewables, they drive up CPI for all and siphon capital away from investments.

Developing a diversified energy portfolio and investing in clean & renewable sources is essential to energy security and sustainable, long-term economic growth. At the same time, we need to continue to invest in oil (as well as natural gas for base/peak load generating and heating) as part of a coherent and comprehensive energy strategy.

Today the creation of this strategy is hampered by great uncertainties, uncertainties that weaken commitment and postpone needed investment. To move forward, cap & trade agreements (the currently preferred solution) will help to establish a markets for carbon credits that will produce pricing signals that will clarify the economics of the energy/environment trade-off and create of capital flows. The COP15 agreement will establish the second critical element; a framework for establishing quotas and managing the flow of funds.

November 16, 2009

“Copenhagen is already a success!”, declares Jeff Immelt, GE’s Chairman and CEO

Speaking before a record audience last Friday at Net Impact’s 2009 Conference at Cornell University, Jeff Immelt turned his attention to COP15 and declared, “Copenhagen is already a success! Just look at the number of countries that have committed to voluntary GHG reductions prior to the meeting.”

Here's a brief summary of some recent announcements:

Nov 16 - The Australian government will commit to reductions of between five and 15 percent below 2000 levels by 2020 and if other nations agree to a 450 parts per million global target at the international climate negotiations at Copenhagen in December it will agree to more aggressive 25% reduction.

Nov 15 - High-level Turkish officials from the Ministry of Environment and Forestry said last week that they would likely reduce emission by 11 percent by 2020.

Nov 13 - Brazil on Friday became the first emerging giant to make a nonbinding promise of this kind, saying it would make a voluntary pledge to reduce its emissions by between 36 and 39 percent by 2020 as compared to anticipated trends.

Nov 10 - Seoul's presidential office announced South Korea has decided on a 30-percent reduction of greenhouse gas emissions from levels predicted for 2020, setting one of the most aggressive voluntary goals to roll back climate change.

Nov 6 - President Susilo Bambang Yudhoyono pledged that Indonesia would cut its emissions by 26 percent by 2020 on a voluntary basis.

Oct 24 - Pressure on China and India to do their share in emissions reductions has resulted in the announcement of a memorandum of understanding for regional cooperation emission reductions, renewable energy and energy efficiency programs. While no specific targets have been set, China for example has committed to derive at least 15 percent of all its energy from renewable sources by 2020. (The government since has talked of a more informal target of 20 percent.) The second is to reduce energy intensity per unit of GDP by 20 percent over a five-year period.

And the list goes on, with the notable absence of the EU and the US.

While achieving a binding agreement at Cop15 is now unlikely, voluntary initiatives such as these are gaining momentum. Perhaps Jeff Immelt is right, Copenhagen is already a success.

November 15, 2009

Welcome

The United Nations conference on climate change in Copenhagen (COP15) this coming December will be the most important such meeting since Kyoto 1997. Over 190 nations will gather together to create a framework for a new global climate agreement. The challenge lies in addressing two seemingly irreconcilable goals; getting new commitments for carbon emission reductions in industrialized countries in order to safeguard society while addressing developing economy's needs to grow to raise standards of living and eradicate poverty.

The goal of COP15 is ambitious; to achieve a binding global agreement on greenhouse gas emissions. The issues of the impact of greenhouse gas emissions on climate change garner most of the attention, but is only one piece of the puzzle. Energy security and foreign policy are also top-of-mind issues for delegates, as dependence on foreign-sourced and speculatively-priced energy supplies will not be the best solution for energy and national security in the 21st century. To that end, a binding global agreement which puts a price on carbon, will ultimately reduce market uncertainties and spur investments in clean energy technologies and foster energy independence.

Thus, COP15 is not just about cutting carbon emissions to save the planet, or even about reducing the impact of highly volatile and speculative pricing of critical energy resources, it is most importantly about a nation’s strategic positioning in a future of carbon-constrained growth.

As the date of the conference opening draws near, many nations are jockeying for the leadership position. Japan announced a goal to reduce emissions by 25% of 1990 levels by 2020. Australia and Brazil have also set aggressive new targets. India has softened its position and declared it will not be a deal breaker in Copenhagen. Perhaps the most watched is China.

Having learned its lesson from the Beijing Olympics, China is burnishing its international reputation, while going through rapid and major transformation. It is aggressively investing its economic stimulus funds in renewable technologies and recently became the leading exporter in clean energy technology. Additionally in September, it announced aggressive goals to both reduce carbon emissions and vastly expand its own renewable energy resources. Some would argue China appears to be poised to establish a firm position as the global leader renewable energy technologies and reap the most benefits from the economic recovery and a future of carbon-constrained growth.

Signs in the U.S. are also positive for a better outcome in Copenhagen than in Kyoto. the U.S, enters the negotiations with a strong world position (often referred to as one member the G2 of Climate) along with much stronger and broader base of support from industry and its citizenry. At the same time, our position would be much stronger if we were see signs of a stronger economic recovery and climate legislation is passed in time for Copenhagen. Needless to say there in much work yet to be done on our economic recovery and climate legislation is unlikely to be on the President's desk in time.

In closing, I paraphrase Bill Clinton, “The challenge is whether the 21st century is marred by terrorism, environmental degradation and economic deprivation of all kinds or whether it becomes the most peaceful and prosperous time the world has ever known.”

We face seemingly insurmountable challenges, but as a participant in the COP15, I see great opportunity. Stay tuned.