1
http://pesd.stanford.edu/
Climate Change: Climate Change: Designing an Effective Designing an Effective
ResponseResponse
Thomas C. HellerProgram on Energy & Sustainable
DevelopmentStanford University
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 2
OutlineOutline
•Five Myths Meet their Maker•Toward an effective Climate Strategy
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 3
Five MythsFive Myths
1. Climate Change isn’t a problem
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 4
Five MythsFive Myths
1. Climate Change isn’t a problem2. Fossil Fuels will Run Out Shortly
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 5
Tapping the WorldTapping the World’’s s ““InfiniteInfinite”” Gas ResourcesGas Resources
White: where the lights are on, satellite imageryBlue Red : Gas resources, with increasing size (USGS)
Source: Baker Institute (Rice) and PESD (Stanford) Joint Study on the Geopolitics of Gas (CUP, forthcoming
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 6
Five MythsFive Myths
1. Climate Change isn’t a problem2. Fossil Fuels will Run Out Shortly3. The “Engineer’s Myth”
• Technological Solutions, once identified, can spring forth and multiply
• The question is the speed, scale and price paths of varied technical possibilities
• Past experience– Rand study found average 150% cost overruns on estimated
costs of first of a kind demonstration plants– Commercial scale and diffusion not studied by labs or other
initiators– Time for substitution effects (and fight back by incumbents)
• Questions about the capacity of the state to induce technological change over endogenous (BAU) behavior– Portfolio values (Japan and US returns)
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 7
Rapid Evolution: Rapid Evolution: DRAMsDRAMs
0%
20%
40%
60%
80%
100%
1970 1975 1980 1985 1990 1995 2000 2005
Shar
e of
DR
AM g
ener
atio
n in
tota
l mar
ket
(%)
4K16K64K256K1M4M16M64M256M128M
Source: Ausubel and N. Victor
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 8
Learning CurvesLearning Curves
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 9
When does Learning Stop?When does Learning Stop?The experience with gas turbinesThe experience with gas turbines
Source: Colpier and Cornland. 2002. “The Economics of the Combined Cycle Gas Turbine – An Experience Curve Analysis.”Energy Policy 30: 309-316.
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 10
Slow Evolution: Primary Energy SystemsSlow Evolution: Primary Energy Systems
0%
20%
40%
60%
80%
100%
1800 1850 1900 1950 2000
Wood
Nuclear
Gas
Oil
Coal
Hydro elec.
Source: Nakicenovic and Grubler; IIASA
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 11
Five MythsFive Myths
1. Climate Change isn’t a problem2. Fossil Fuels will Run Out Shortly3. The “Engineer’s Myth”4. The “Planning (Economists’) Myth”
• Governments and firms optimize with full information and leverage• The primacy of economics
– Cost-benefit analysis – Policy as marginal, linear change– No theory of the firm or organizational behavior
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 12
The architectural priority of economics The architectural priority of economics in climate changein climate change
•Climate is a global collective good– inclusive membership
•Cost-benefit analysis to set the level of stable concentrations
•Property rights for efficient implementation: – Cap and trade system – A single global price
•Hard law compliance•Graduation as differentiated responsibility
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 13
Difficulties in implementing the Difficulties in implementing the architecturearchitecture
• Asymmetrical information on demand and supply: strategic behavior
• Uncertainty on cost functions: escape clauses and no regrets pools
• Property rights distribution and equity claims• Trading (financial markets) requires sound institutions• Single price signal for disparate goals
– Gasoline demand at $100/ton CO2 ($40 increase per barrel oil)?
– Fuel shifting at $22/ton CO2?– Marginal shifting to renewables at low price signal?– Ratcheting up the signal?– Benefits?
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 14
Political economyPolitical economy
• Local resources will be used: nationalism and energy security
•Climate change priorities are low relative to development and local pollution
•Politics are less barriers than constraints – (Perceptions of) corruption and political
commodification in electricity reform• (Effective) policy usually follows technology or price shocks, but rarely leads them– Compare telecommunications to energy
reform
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 15
Political economyPolitical economy
• Competitive markets vs. regulated sectors– First best policies for second best contexts– Who benefits from climate: subsidies and rents?
• Energy examples– Long term gas contracts in the rate base? IGCC?– Bio-fuels and corn based ethanol?– Renewable portfolio standards
• Sunsets and learning curves– De-linking gas prices from oil?– Mandated fuel supplies at administered prices?– Generation tariff subsidies and power distribution
in New Delhi?
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 16
Organization theoryOrganization theory
• Organizations do what they do– Flexibility is limited– Resistance and fight back
• Capacity to integrate across departments and agencies is scarce – Optimization across sectors is weak
• Government agencies are fragmented and reproduce their routinized political cultures– Environmental ministries vs. finance and energy– Political constitution, cultures and instrument preferences
• Margins change little – Economists think marginally; financiers use step-functions
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 17
Five MythsFive Myths
1. Climate Change isn’t a problem2. Fossil Fuels will Run Out Shortly3. The “Engineer’s Myth”4. The “Planning Myth”5. The “Diplomats’ Myth”
• Policy Planning can be extended to the global level
• All countries should be involved in the most effective solutions
• Enforcement is based on sovereign state model
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 18
Trends in Fossil Carbon EmissionsTrends in Fossil Carbon Emissions(Trajectories and Kyoto Commitments)(Trajectories and Kyoto Commitments)
0
1000
2000
3000
4000
5000
6000
7000
1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020
MtC
O2
BPAmoco_HHV
IIASA/WEC
Oak Ridge
EIA
IEA_LHV
Official FCCC baseyear
USA
EU15
Japan
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 19
Trends in Fossil Carbon EmissionsTrends in Fossil Carbon Emissions(Trajectories and Kyoto Commitments)(Trajectories and Kyoto Commitments)
0
1000
2000
3000
4000
5000
6000
7000
1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020
MtC
O2
BPAmoco_HHV
IIASA/WEC
Oak Ridge
EIA
IEA_LHV
Official FCCC baseyear
USA
EU15
Japan
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 20
Allocation of World Emissions: Allocation of World Emissions: Only a Few Countries Really MatterOnly a Few Countries Really Matter
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 21
Toward and Effective Climate StrategyToward and Effective Climate Strategy
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 22
Building Blocks: SectorsBuilding Blocks: Sectors
•Climate is a derivative problem of three economic sectors central to growth and development–Energy–Transportation–Land Use
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 23
Building Blocks: SectorsBuilding Blocks: Sectors
•Government actors from these sectors make decisions on the development paths their economies will follow– Line ministries– Finance ministries
•Political priorities of these actors are nowhere focused on climate, especially in developing countries– Environmental constraints on emitting sectors are
resisted unless they advance higher priority goals• Actors from key emitting sectors are rarely represented in climate negotiations
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 24
Building Blocks: ProblemsBuilding Blocks: Problems
• Climate change can be broken down into three separate problems – The immediate need for a low level carbon price signal
• Incentives to look for mitigation opportunities that save costs and carbon (no regrets pools)
• Incentives to adopt options to mitigate carbon whose incremental costs are only marginal (below price signal)
– The mid-term need to diffuse more rapidly than business as usual existing commercial technologies that are relatively less climate damaging• Cooperative measures to engage leading developing
countries with rapidly growing carbon emissions– The long-term need to develop energy, transport and land
use technologies that are currently across the commercial horizon
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 25
Building Blocks: PillarsBuilding Blocks: Pillars
• Each separate climate problem is best approached through separate institutional pillars that are tailored to the specificproblem
• The climate regime should be composed of multiple pillarsdifferentiated from one another according to:– The nations involved– The actors from each nation with policy authority– The timelines demanded– The instruments and measures to be used
• The Kyoto Protocol, particularly tailored to low level price signals, should be maintained in the UNFCCC framework, but should also be supplemented by new pillars tailored to the diffusion and technology development problems
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 26
Building Blocks: International Building Blocks: International RegimesRegimes
•Multiple clubs with members sharing local cooperative solutions are more likely to support international regime growth than comprehensive multilateral arrangements– The more closely agreements are built around non-
cooperative solutions, the more likely they will be implemented
– Most international environmental regimes in the past half century have less than 7 members
– Trading across fragmented international regimes is limited, reducing the value of wide and diverse membership in each regime
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 27
Building Blocks: International Building Blocks: International RegimesRegimes
•Non-mandatory regimes may be more effective in setting and encouraging ambitious behavioral targets– Effectiveness is not equal to compliance– Compliance with international regimes is high
because:• Formal obligations are bargained down ex ante to what
nations can and will do • Ambiguities in norms allow ex post claimed compliance
through shifting interpretations of compliance behavior
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 28
Antarctic Whaling: Perfect complianceAntarctic Whaling: Perfect compliance
Antarctic Whaling:catch by species and compliance with IWC quotas
0
10,000
20,000
30,000
40,000
50,000
60,000
1920 1930 1940 1950 1960 1970
Year
Num
ber o
f wha
les
0
5000
10000
15000
20000
Blu
e W
hale
Uni
ts
(tota
l cat
ch a
nd q
uota
)
Blue Fin Humpback Sei-Bryde's Minke Sperm Total Catch IWC Quota
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 29
Building Blocks: International Building Blocks: International RegimesRegimes
• International system shift– 1950-2000 international system composed of negotiating
blocs of developed (OECD or Annex I) countries, socialist countries, developing countries G-77 and China
– International system responsibilities (market stability and regimes) largely devolved on the OECD (Annex I) nations
– Shift after 1990 in growth rates, principally in India and China, raises issues of increased dependency on international markets with commodified products
– Unclear whether the economic position of emerging market large nations moves their international interest away from G-77 toward OECD and strategy toward support of markets and regimes or towards mercantilism
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 30
Building Blocks: International Building Blocks: International RegimesRegimes
•Shift context for market behavior rather than regulation
•Price signals that adequately address three different dimensions of climate change not politically feasible
•Take political constraints and the actors who represent them seriously
•Climate is a derivative problem of politically regulated sectors
•Pillars and political cultures (instrument choice)
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 31
Low Level Price Signals in the EULow Level Price Signals in the EU
•Salience of the EU regime– Of the nations that have signed the Kyoto
Protocol, only (some) EU member states have taken on positive cost obligations• Canada?• Japan?
– All former Soviet bloc nations and developing countries are permit sellers
– US and Australia have withdrawn
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 32
Low Level Price Signals in the EULow Level Price Signals in the EU
•Structure of the EU regime– Internal burden sharing agreement– European Trading System vs. EU and member state
policies and measures– ETS linkage to CDM and JI when accession nations file
their allocation plans• Market is thin in first period while rules are uncertain and
second period allocations are not politically decided•Compliance?
– Expected behavior on current track?– Article 17 purchases if ETS trading prices rise and supply
of CDM/accession country permits is not adequate– Sanctions and soft law in the EU
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 33
A A MadisonianMadisonian Perspective:Perspective:Emerging Carbon CurrenciesEmerging Carbon Currencies
(10)
(5)
-
5
10
15
20
25
30
35
40
45
Oct-00 Apr-01 Nov-01 May-02 Dec-02 Jun-03 Jan-04 Aug-04 Feb-05 Sep-05 Mar-06
$/M
etric
Ton
ne C
O2
Volume (MTCO2)
1.5 million
500,000
125,000
50,000
EU
PCF CCX
CDM
NSW
UK
Sources: PointCarbon, International Emissions Trading AssociationReprinted from Victor, House & Joy (2005)
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 34
Low Level Price Signals: USLow Level Price Signals: USPlan Details
Bush Administration
Voluntary target of 18% reduction in GHG intensity between 2002 and 2012.
McCain-Lieberman Cap 2010 emissions at 2000 levels for electricity, transportation, industrial and commercial sectors.
Hewlett Foundation Economy-wide cap and trade beginning in 2010 targeting 2.4% annual reduction in GHG intensity. $7/ton safety valve.
Hagel Bill(s) Investment incentives for advanced climate technologies; assistance for developing countries; R&D incentives.
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 35
“Carbon Intensity” of the U.S. Economy (1800-1998)
0
100
200
300
400
500
600
700
800
900
1800 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000
CO
2/G
DP
USFranceJapanUnited KingdomUnited StatesGermany
Intensity: grams C per 1990 USD(mer)
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 36
U.S. Climate Change Policy: U.S. Climate Change Policy: StateState--driven processdriven process
Source: Pew Center on Global Climate Change
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 37
Climate Architecture and DevelopmentClimate Architecture and Development
Regime architecture is climate-centric and flows from output (constraint) to input (development)
CDM holds only limited prospect of increased or redirected flows
No assurance of stable assistance from developed to developing countries
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 38
Limitations of the CDM ModelLimitations of the CDM Model
• Tropical “hot air”: currency devaluation– CH4: land fill and flaring
• Rising natural gas prices• Local environmental controls
– HFC23: industrial processes gases– Renewable Portfolio standards withdrawal
• High transaction costs– Small Scale Projects– No methodologies for large-scale energy efficiency
and fuel switching• Baseline identification
– Baselines feasible only for marginal activities
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 39
Engaging Developing Countries:Engaging Developing Countries:The Clean Development Mechanism (CDM)The Clean Development Mechanism (CDM)
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
In Development Project Design Document Commented Registered Credits Issued
Num
ber o
f Pro
ject
s
0
100
200
300
400
500
600
700
MtC
O2 R
educ
tions
Number of Projects (March 8) Number of Projects (July 12) MtCO2e Reductions (March 8) MtCO2e Reductions (July 12)
Source: PointCarbon
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 40
ClimateClimate--Friendly Development Friendly Development PathwaysPathways
• Example: CO2 Savings from Natural Gas• IEA forecast for China in 2020:
– 560GW (coal) – 67GW (gas)
• What happens if you switch 80GW from coal to natural gas combined cycle?
– Saves 105 Million Tonnes CO2 per year beginning in 2020
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 41
COCO22 Savings in PerspectiveSavings in Perspective
0
100
200
300
400
500
600
Year 2000 UKEmissions
Year 2000 Emissionsfrom California Cars
Reductions under"High Gas" Scenario
Reductions from 100Large CDM Projects
Mill
ion
Tonn
es C
O2
(Ann
ual)
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 42
Chinese total energy Chinese total energy consumption: IEAconsumption: IEA
•2000
–Coal 69%–Oil * 25%–Gas 3%–Nucl./hydro 2%
*imports 37% Imports 63-70%
•2030
–Coal 60%–Oil* 27%–Gas 7%–Nucl./hydro 6%
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 43
Overview Overview -- capacitycapacity
Generation capacity (1970 - 2020)
0
200
400
600
800
1,000
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
GW
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 44
Supply growth in China Supply growth in China (national)(national)
• 2004 installed capacity about 440 GW; 900 in 2020
• Portfolio managed mainly at provincial level during high growth
• Market reform is slow in high growth• Energy intensity estimates key to demand
estimates– Energy intensities rise recently over 1990-2003
period– Electricity grows faster than energy
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 45
Overview Overview ---- 2004 Boom2004 Boom2004 2003 Growth % Structure %
Installed capacity (GW) 441 391 13 100Hydro 108 95 14 25
Thermal 325 290 12 74Nuclear 7 6 11 2
Generation (TWh) 2187 1905 15 100Hydro 328 281 17 15
Thermal 1807 1579 15 83Nuclear 50 44 14 2
Operating hours 5460 5245 4Hydro 3374 3239 4
Thermal 5988 5767 4
Consumption (TWh) 2174 1892 15 100Agriculture 61 60 3 3Industries 1626 1396 16 75Services 244 211 15 11
Residential 243 225 8 11 Urban 147 136 8 7 Rural 96 88 9 4
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 46
Central Government Plan to 2020Central Government Plan to 2020
• Real GDP grows 7-8% per year; GDP p.c. reaches $10,000 (PPP basis)
• Primary energy consumption grows 4.5-5% per year
• 520 GW (30 GW per year) generation capacity will be added
• Natural gas to provide new and clean sources of energy
– Over 7% annual growth rate– Consumption to increase from 40 bcm to between 140
and 160 bcm under various policy scenarios
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 47
Overview Overview –– fuel structurefuel structure
2000
Hydro24.9%
Oil4.7%
Nuclear0.7%
Wind0.1%
Coal69.7%
2020
Hydro27.1%
Oil1.6%
Nuclear4.2%
Gas7.5%
Wind1.0%
Coal58.6%
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 48
Central Government PlanCentral Government Plan• Demand Uncertainty
–Domestic (Chinese) gas forecast driven by higher price for gas than coal, driven by
–Higher gas costsSecurity requirement – 2/3 domestic production, 1/3 imports Domestic production costs Infrastructure development costs
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 49
2. Potential Markets: Beijing,2. Potential Markets: Beijing, Shanghai,Shanghai,GuangdongGuangdong
Beijing(pipeline)
Shanghai(pipeline, LNG)
Pearl River Delta(LNG)
Three regions may account for ~ 50% of total gas consumption
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 50
Beijing Beijing –– Energy consumptionEnergy consumption
Coal
Oil
Gas
Imported power
0
5
10
15
20
25
30
35
40
45
2000
mill
ion
tons
SE
C
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 51
Beijing -- NG Consumption Structure (2003)
Residential22%
Industrial3%
Commercial14%
Transprt.1%
Space heating60%
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 52
Beijing Seasonal NG Load CurveBeijing Seasonal NG Load Curve
0.02.04.06.08.0
10.012.014.016.018.0
1/1/
03
2/1/
03
3/1/
03
4/1/
03
5/1/
03
6/1/
03
7/1/
03
8/1/
03
9/1/
03
10/1
/03
11/1
/03
12/1
/03
mill
ion
cubi
c m
eter
s
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 53
Beijing Beijing ---- Gas Demand ProjectionGas Demand Projection
6
10.8
13.5
16
2.52
7
11.8
02468
1012141618
2004 2010 2020 2030
bcm
Low
High
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 54
Shanghai Shanghai –– Energy consumptionEnergy consumption
Coal
Oil
Imported power
0
10
20
30
40
50
60
70
2002
millio
n ton
s sce
Gas; 0.6
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 55
Shanghai Shanghai –– Future NG ApplicationsFuture NG Applications
• CCGT• Industrial boilers• Distributed
generation• Heating/cooling
2 X 350 MW CCGT under construction
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 56
Guangdong Guangdong –– Energy consumptionEnergy consumption
Coal
Oil
Gas
Imported power
0
20
40
60
80
100
2002
mill
ion
tons
SC
E
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 57
Guangdong Guangdong –– Natural gas Natural gas aapplicationpplication
• Electricity sector will be the largest off-taker– Current (end 2004) 40 GW projected to 100 GW (2020)– 9 units nuclear @ 1 GW per
– 7 or 8 (4x600) MW coal plants being built (17-20+GW)
– 11 gas units (online 2006) or 3.3 GW of planned 30-40 units (10 GW gas fired power total) by 2020
– Hydro contracts from West and Three Gorges (11-18GW)
• Residential and commercial sector
• Other industrial uses
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Plans and prices: is the standard story about Plans and prices: is the standard story about to change?to change?
Relative Electricity Costs: Guangdong, August 2004• Hydro: 32-34 cents/kwh (fen in levelized costs);• Coal without FGD: 37 cents/kwh; • Coal with FGD: 40 cents/kwh;• LNG (all in): 43 cents/kwh; • Nuclear: 47-50 cents/kwh• $4/mbtu gas = $70/ton coal
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 59
Source: IEA, World Energy Outlook 2004
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 60
Relative prices: Coal, gas ,oilRelative prices: Coal, gas ,oil
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 61
Mine mouth coal priceMine mouth coal price
0.0
10.0
20.0
30.0
1996 1998 2000 2002 2004
$/to
n
power sector price
market price
• 2004: Jan – Sept.• Actual price for power
generation is higher ($22/ton) due to sellers’ resistance against planned price
• End-user prices are much higher, reaching $60 – $70/ton ($50 -$60 for power generation).
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 62
Supply Chains in ComparisonSupply Chains in Comparison
• Coal
Mine mouth
• Natural Gas
State-Owned Shipping
State-Owned Railroads
Plant
Well Liquefaction Shipping Pipe PlantRe-gas
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 63
NonNon--price drivers of gasprice drivers of gasdevelopmentdevelopment
Local autonomy (federalism)Chinese oil majorsEnvironmental concernsPeak pricingExchange ratesCapital Market reformsReliability and distributed power
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 64
Electricity Reform Electricity Reform ExperienceExperience
OligopolyIndustrial
Organization
ImperfectMarket
Competition
Quasi-privatizedSOE
PoliticalPrivate Firms
Hybrid plannedSystem
(Uncertain)Regulation
Central or lower level
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 65
Regulatory Instabilities:Regulatory Instabilities:
PoliticalRegulation
High cost resistance
Hybrid FirmsFuel Cost
Administration
Laggingretail tariffs
Squeezedutility
margins
State bank financing reforms?Higher
capital costsRising totalfuel costs
Inter-regional transfers
Administered fuel prices receding?
Grid exit;Distributedgeneration
Low qualitygrid power;Poor grid
investment
Independent generatorsresist tariffreductions
Central orProvincial
Government
Local autonomy for energy security
and differentialdemand
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 66
Incremental North American LNGIncremental North American LNG
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 67
US Gas Supply and Demand (1970US Gas Supply and Demand (1970--2025)2025)EIAEIA--AEO 2005AEO 2005
0
5
10
15
20
25
30
35
1970 1980 1990 2000 2010 2020
Trill
ion
cubi
c fe
et
Consumption
Net Imports
Domestic
Production
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 68
# of Wells vs. Avg. Productivity# of Wells vs. Avg. Productivity
Source: US EIA
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 69
Net US Gas Imports, 1970 Net US Gas Imports, 1970 –– 20252025EIAEIA--AEO 2005AEO 2005
-2
0
2
4
6
8
1970 1980 1990 2000 2010 2020
Trill
ion
cubi
c fe
et
LNG
Canada
Mexico
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 70
European Gas Consumption by Sector to 2030European Gas Consumption by Sector to 2030IEAIEA--WEO, 2002WEO, 2002
0
5
10
15
20
25
30
2000 2010 2020 2030
Tcf /
yea
r
Power GenerationRes / CommIndustry
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 71
7 Tcf 22 TcfDomestic gas production: Y2000 = 8 Tcf Y2030 = 5 Tcf
EU Consumption Y2000 = 15 Tcf Y2030 = 27 TcfSource: IEA-WEO, 2002
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 72
Sources of European LNG Sources of European LNG 1980 1980 -- 2003 (million 2003 (million tonnestonnes per annum, per annum, mtpamtpa))
0
5
10
15
20
25
30
35
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
Algeria Libya Nigeria Trinidad Middle East Pacific BasinSource: Alphatania
mtp
a
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 73
US LNG Imports by Source US LNG Imports by Source 19711971--20032003
02468
1012
19711976
19811986
19911996
2001
Algeria Trinidad Nigeria M. East Pacific Basin
Source: Alphatania
mtp
a
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 74
Revolution in Global LNG Markets (1)Revolution in Global LNG Markets (1)
• Shift from “old world” defined by:
Few importers Rigid long-term, take-or-pay contracts with destination clausesMuted price incentives to divert cargoes“Buyer takes the volume risk and seller takes the price risk”Captive customers of regulated utilities ultimately backed contracts
Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 75
Revolution in Global LNG Markets (2)Revolution in Global LNG Markets (2)
• Toward a “new world” defined by more flexible LNG trade and driven by:
Liberalization of gas and electricity marketsDeclining LNG costs (esp. liquefaction and regas)Growth of new markets (Spain, US, UK) Entry of energy super-majors to gas trade
• Flexible LNG trade will integrate US and European gas (and electric power) markets
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TrinidadTrinidad’’s ATLANTIC LNG Cargoes Already Follow s ATLANTIC LNG Cargoes Already Follow USUS--Spain Price Differential:Spain Price Differential:
+
0
100
200
300
400
500
600
700
800
900
1,000 and over
AMJJASONDJFMAMJJASONDJFMAMJJASONDJFMAMJ JASONDJFMAMJJASO
1999 2000 2001 2002 2003
1,00
0 cu
bic
met
ers
LNG
-2.00
-1.00
0.00
1.00
2.00
3.00
4.00
5.00
$/M
MB
tuUSA Spain
Henry Hub - Spain Price Differential
Volume
Gas Strategies Consulting Ltd.
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US Spot, Japanese & European LNG Prices US Spot, Japanese & European LNG Prices ($/($/MMbtuMMbtu))
$0.0
$1.0
$2.0
$3.0
$4.0
$5.0
$6.0
$7.0
$8.0
$9.0
Jan-00Jul-00
Jan-01Jul-01
Jan-02Jul-02
Jan-03Jul-03
Jan-04
USJapanEurope
*Henry Hub for U.S. data, average of Japanese & European landed LNG prices
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US LNG Import Capacity UtilizationUS LNG Import Capacity Utilization
0
10
20
30
40
50
60
70
80
90
Jan-00Jul-00
Jan-01Jul-01
Jan-02Jul-02
Jan-03Jul-03
Jan-04Jul-04
Bcf /
mon
th
Spare Capacity
Imports
US EIA
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Forward Prices in Key LNG MarketsForward Prices in Key LNG Markets(US$/(US$/MMbtuMMbtu; 20 July 2005); 20 July 2005)
$0.0
$2.0
$4.0
$6.0
$8.0
$10.0
$12.0
$14.0
$16.0
Jul-05Aug-05
Sep-05Oct-05
Nov-05Dec-05
Jan-06
UK NBP
Henry Hub
Japanese Import
Spanish Import
NW Europe
Source: Heren LNG Markets
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US Gas Prices Linked to Oil ProductsUS Gas Prices Linked to Oil Products
0123456789
1011
Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05
$ pe
r mm
btu
GasoilHeavy Fuel OilGas
Purvin & Gertz 2005
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Atlantic Basin PlayersAtlantic Basin Players
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Figure 6HISTORY AND FORECAST [1] OF FIRM, "PROBABLE" AND "POSSIBLE"
LNG LIQUEFACTION CAPACITY BY REGIONMILLION TONS OF LNG
Jensen
1990
1995
2000
2005
2012
050
100150200250300350400450MMT
MIDDLE EAST POSSIBLE [2]MIDDLE EAST PROBABLEMIDDLE EAST FIRMPACIFIC BASIN POSSIBLE [2]PACIFIC BASIN PROBABLEPACIFIC BASIN FIRMATLANTIC BASIN POSSIBLE [2]ATLANTIC BASIN PROBABLEATLANTIC BASIN FIRM
[1] Jensen Estimates[2] Placing Unscheduled Possibles in 2012
Average Annual Capacity Increase - 4.2 MMTPY
Average Annual Capacity Increase - 7.9 MMTPY
Average Annual Capacity Increase - Firm - 9.0 MMTPY+ Probable - 14.8 MMTPY + Possible - 31.3 MMTPY
Global LNG SuppliesGlobal LNG Supplies
Source: James Jensen
mtp
a
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Key Factors Shaping Atlantic Basin MarketKey Factors Shaping Atlantic Basin Market
1. Market fundamentalsFixed and variable costs for each segment of LNG supply chain
2. Seasonal, stochastic variations in gas demand in Atlantic Basin markets
3. Market rules in gas and electricity for US & EuropeContract provisions (oil-linked, regulatory constraints on term and pricing provisions?)Contracting strategies of buyers and sellers
4. Price elasticity of demand for Atlantic Basin marketscomposition of demand (electric power, industrial, residential)market rules (see above)
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Monthly Demand Index: US vs. OECD EuropeMonthly Demand Index: US vs. OECD EuropeAverage 2001Average 2001--20042004
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
Jan Feb MarApr
May Jun JulAug Sep Oct
Nov Dec
OECD EuropeUS
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Monthly Consumption Deviations from 4Monthly Consumption Deviations from 4--Yr Avg. Yr Avg. ((20012001--2004); US vs. OECD Europe2004); US vs. OECD Europe
(0.15)
(0.10)
(0.05)
-
0.05
0.10
0.15
(0.15) (0.10) (0.05) - 0.05 0.10 0.15
US Deviation
Eur
Dev
iatio
n
2001200220032004
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Key Issues Key Issues
– Do LNG terminals get built? If so, where?– What are the access provisions to regasification
terminals?• FERC’s Hackberry decision• “Use it or Lose it”—the UK model• Open access, ala US interstate pipelines
– LNG procurement contracts and regulatory approval?• Pricing structure (fixed price, Henry Hub-linked, $/MWh
linked?)• Term-length• Availability of cargoes?
– “Security of Supply” concerns and regulatory oversight
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Factors Driving U.S. Natural Gas DemandFactors Driving U.S. Natural Gas Demand
% ∆ Gas Demand =
+ 1.000 x % ∆ Real GDP
+ 0.250 x % ∆ Heating Degree Days
+ 0.075 x % ∆ Cooling Degree Days
+ 0.075 x % ∆ Real Oil Price
- 1.000 x % ∆ Real Gas Price (lag)
- 0.300 (constant)
Source: Deutsche Bank
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Volume, distances determine transit modeVolume, distances determine transit mode
Distance to Market (Nautical Miles x 103)
Vol
ume
(tonn
es/y
r x 1
06)
1 2 3 4 5
PipelineLNG
CNG
1
2
3
4
5
Stranded
Transmed (15 mtpa)
Transgas (60 mpta)
Algeria – Lake Charles
CE Tech
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Spot Imports by RegionSpot Imports by Region
0
1
2
3
4
5
6
7
8
9
1995 1996 1997 1998 1999 2000 2001 2002 20030%
10%
20%
30%
40%
50%
60%
70%
% Asian Spot % European Spot % NA SpotAsia Europe North America
BCM Spot as % of total imports
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Henry Hub Gas Henry Hub Gas vsvs West Texas Crude pricesWest Texas Crude prices
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Henry Hub gas prices vs. storage, fuel oil, Henry Hub gas prices vs. storage, fuel oil, distillatesdistillates
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Predicted Atlantic LNG prices: 2015Predicted Atlantic LNG prices: 2015
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LNG vs. other North American gas supplies LNG vs. other North American gas supplies
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Impacts on Climate ChangeImpacts on Climate Change
• IEA forecast for electricity capacity in China in 2020– Coal: 560 GW– Gas: 67 GW
• What are CO2 savings if:– 480 GW of coal and 147 GW of gas?– 460 GW of coal and 167 GW of gas?More?
• Can this be accomplished using CDM?
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Source: IEA, World Energy Outlook 2004
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Source: IEA, World Energy Outlook 2004
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Full Range of Published ScenariosFull Range of Published Scenarios
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Percent of World Total
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0%
Arab StatesAfricaSE Asia
C & E EuropeOceania
Latin America
India & C. AsiaCIS
China
Japan and NICsWestern Europe
North America
Gross Expenditure on R&D(1994)Scientific Output (SCIPublications, 1995)Carbon Dioxide Emissions(1998)
Top Innovators and Emitters by World Top Innovators and Emitters by World RegionRegion
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Elements of a Technology StrategyElements of a Technology Strategy
• Diverse Country-Based Initiatives– Loose international coordination among nations with diverse national
cultures of innovation• Price and technology progress are not either/or
– Politically acceptable price signals tend to operate at margins, while vintage shifts may require dedicated policy programs
• Technology development involves a long pipeline from scientific conceptualization through diffusion of commercial production– Common pitfall: premature selection of winners– The pace of development along a pathway is affected by predictable
and diverse problems that will crop up along the pipeline, which may be subject to diverse policy influence
– Infrastructure development, finance (risk allocation) and law may dominate engineering in much of the pipeline
– The feasible technology portfolio may be limited with search space more diverse within a particular pipeline than between technologies in the portfolio
– Industries with experience in R&D in particular pipelines more likely than governments to explore successfully this internal search space
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Future Gen Power Plant
•Design, build, and operate a nominal 275 MW prototype plantthatproduces electricity and hydrogen with near-zero emissions
•Sequester 90 percent of CO2emissions with the future potential to capture/ sequester nearly 100 percent
•Validate CO2sequestrationeffectiveness, safety, & permanence
•Confirm standardized technologies and protocols for CO2measuring, monitoring, and verification
•Confirm the engineering, economic, and environmental viability ofadvanced coal-based, near-zero emission technologiesthat by 2020
will
-Generate electricity with less than 10% cost increase compared to nonsequestered systems
-Make hydrogen at $4.00/million Btu(wholesale)
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Future Gen Summary PlanFuture Gen Summary Plan
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Clean Coal Technology ProgramsClean Coal Technology Programs
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