Caspian Energy Grid

Iran - Towards a Resilience Economy

Mehdi Moslehi & Chris Cook

Resilience: Beyond the Resistance Economy

"It is not the strongest of the species that survives, nor the most intelligent. It is the one that's most adaptable to change.” Charles Darwin

Resilience is the ability to adapt to change

Resistance Economy protects Iran from dollar system crisis as in 2008

Lack of dollar access prevents Iran from financing and funding new energy infrastructure

Alternative pathways are the Euro to the West & the Silk Road to the East

- Euro & China debt-based systems are supported by Iran's oil

- Iran's use of EU and China technology & services reduces resilience

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Resilience: Beyond the Resistance Economy

Petro Scotland proposes a new strategic organising principle for Iran's energy policy – Least Carbon Fuel Cost

This is the principle that Iran should minimise the use of carbon fuel for any given output of electricity, heat/cooling & power

Application of this principle extends Resistance Economy to Resilience Economy and from Dollar Economy to Energy Economy

The Least Carbon Fuel Cost principle has been successfully demonstrated in action by Denmark for 40 years

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Oil Market Outlook

• In Tehran in 2012 – when the oil price was over $110/barrel - our prediction based on our market analysis was that the oil price would fall to $45 to $50/bbl

• Our prediction today based on the same analysis:

– Short Term – market is over supplied and in the absence of coordinated production cuts the oil market price will fall and test new lows during the second half of 2016

– Medium Term - Producers will cut production as in 2008 & the oil price will clear & rebound

– Long Term – Oil Price not exceed $50/barrel again for more than a short time

• Why? Because above $50/barrel

– High cost production enters the market eg US shale oil

– Renewable energy substitutes for oil products (Dubai solar energy is now < $23/bbl equivalent)

– Investment in energy efficiency (Nega Barrels) becomes extremely profitable4

Oil Producers – the Squeeze

Oil Producers are squeezed between

- Immovable Object – Oil Price Cap

- Irresistible Force – rising Exploration & Production (E&P) costsIOC Options:- Consolidate (does not solve the problem)- Switch to Gas (eg Shell)- Vertical Integration (eg BP & also major traders)

NOC Vertical Integration (eg Saudi Motiva refinery) carries

- political (eg nationalisation), environmental, industrial relations risks

Petro Scotland Energy Swap (Oil for Products) solution enables Iran to secure oil demand (& product supply) while Refiner secures oil supply

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Transition through Gas

Natural Gas is the bridging fuel to a Low Carbon Economy and Iran has the greatest global natural gas reserves

Shipping natural gas internationally whether via pipeline or LNG is extremely inefficient, costly and potentially risky

Electricity is at the end of the Energy Value Chain “From Well to Wall.”

While the oil price fell 74% pa, and the gas price fell by 42% pa, the wholesale electricity price fell by only 2 to 3% pa and the retail price fell by even less.

Cheapest energy of all is energy saved – “Nega Watts” - every Kilo Watt Hour of domestic electricity saves 5 to 10 times as much energy in production, generation & distribution

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Power Generation Technology

Power Generation & Electricity Transmission efficiency has improved dramatically in the last two years

Combined Cycle Gas Turbines (CCGT) generation is now 60% efficient

High Voltage Direct Current (HVDC) links are much more efficient than Alternating Current (AC) links over long distances

HVDC is particularly suited to marine links eg Caspian Sea

Examples: UK North Sea BritNed, NorNed links; numerous China links.

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Caspian Energy Grid – a Natural Grid

Iran’s Grid – current domestic supply remains mainly carbon fuelled

Iran has considerable scope to increase the efficiency of natural gas use and to take advantage of Iranian solar and wind resources

In this way, Iran may transform from a centralised National Grid to a distributed and resilient Natural Grid

Caspian Energy Grid will also address the crucial environmental combination of Iran's Water & Electricity

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Energy Swaps

Energy SwapAn Energy Swap is an exchange of an energy flow for another flow

Location SwapA flow of energy into one location is exchanged for a flow of energy out ofanother. eg the Caspian Oil Swap

Category SwapA flow of energy of one type is exchanged for a flow of energy or value ofanother type eg Iran gas for Armenian power

Hybrid SwapA combination of Location & Category Swap eg international Oil for ProductSwap Iranian oil exchanged for Scottish oil products

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Technology Swaps – Energy as a Service

Pumping-as-a-Service – from 1778 the great Scottish engineer &inventor James Watt supplied new & efficient steam powered waterpumps to Tin mines in exchange for 33% of their coal savings.

Turbines-as-a-Service – Mitsubishi/Siemens/GE provide 60% efficientCCGT generators to replace 35% efficient generators and receive anagreed %age of gas savings

Solar-as-a-Service – a young rural Iranian farmer with no capital mayshare the electricity production of solar PV installed on his land by asolar energy service provider.

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Energy Credits

An Energy Credit is a Promise issued by an energy producer in exchange forvalue received and which he will accept in payment for energy production

An Energy Credit is notDebt Contract - the holder may not demand moneyForward (Derivative) Contract– the holder may not demand deliveryEquity Share – the holder has no asset ownership or dividend

An Energy Credit holder may simply use the credit to pay for energy suppliedby the Promissor or by another energy producer who will accept it

Investors & Consumers trust producers to supply energy for which they maypay using Energy Credits – this requires a “Trust Framework”.

Petro Scotland has developed an “Energy Clearing Union” Trust Framework

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Energy Financing and Funding

Financing- short term medium risk development investment- Energy Loans - energy credits sold at a discount reflecting

development risk

Funding- long term low risk investment in completed project- Energy Loans – low risk investment in existing energy flow- Technology/Energy Swap – technology supplier receives an

agreed proportion of energy credits

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Funding the Grid

Cost Sharing - Capital PartnershipProducers & Consumers allocate an agreed % age of Grid energy flow to:

- Technology (eg HVDC ) Costs - Technology/Energy Swap- Operating (People) Costs

Risk Sharing - Clearing UnionGrid Investment through Prepay Energy Credits - “Energy Loans”

Energy Credits issued by one producer are accepted in payment by another

Producers, Consumers, Investors share risk by mutual guarantee (P & I Club)

Administration, Accounting & Risk Management by Service Provider/GridOperator

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Outcome - Smart Market

Caspian Energy Grid – Physical Network'Smart' Grid optimising energy production and use

Clearing Union – Financial NetworkCaspian Energy Clearing Union connects producers directly to consumersthrough Energy Swaps and Energy Credits

Smart MarketMost efficiently produced power is always despatched first – Smart Market

ExampleRural Iranian producer of solar electricity exchanges energy credits forDanish goods & services directly from Danish energy consumers

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Energy Credits - Examples

Renewable EnergyWind Turbine owner sells 100,000 electricity credits each returnable inpayment for 10 kWh of production

Credits are returned in payment for electricity supply when the wind blows

Gas/PowerGas fuelled generator sells 100,000 electricity credits each returnable inpayment for 10 kWh of production

Problem: If the generator's gas purchase price rises he may make a loss

Solution: Generator agrees a Gas/Power Swap and the gas supplier receivesan entitlement to electricity credits

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Marketing the Grid - Producers

Education ProgrammeWherever the sun shines and the wind blows in Iran the Caspian Energy Grid

will enable Iranians to access this renewable energy.

The value of local renewable electricity production will drive sustainablelocal economic development throughout Iran.

This education programme will demonstrate how Iranians may become“Energy Producers” with no capital requirement.

The benefits to local and rural economies will qualify the programme fordevelopment funding from institutions such as the World Bank.

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Strategy – Organic International Expansion

Caspian Energy Grid integrates physical and financial energy networks

Caspian Energy Grid avoids single points of failure and through flexible power routing increases system Resilience

Iran currently exports physical electricity to seven nations & energy swaps enable electricity to be supplied beyond these neighbours in all directions

Marine links via the Black Sea connect Caspian Grid to European Grid andPersian Gulf links access Arab nations

Outcome - Eurasian Energy Grid and Eurasian Clearing Union (Network ofNetworks) will extend North to Russia, West to Europe & East to China

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Petro Scotland – Our Innovation

Petro Scotland has worked with research teams in two different ScottishUniversities and the pre-eminent London University

Petro Scotland's unique innovation is not the physical Caspian Energy Gridbut is the legal framework, financial instruments & algorithms which fund it

Petro Scotland proposes an Energy Clearing Union agreement within whichenergy swaps take place & energy credits are issued, exchanged & returned

Petro Scotland's energy market solution resolves the most crucial questionfaced today by Iran and international partners

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Next Steps – Starting Now

Step 1/ FoundationSign Interim Agreement to create the Caspian Energy Grid initiative as astart-up project.

Step 2/ Concept Research & DevelopmentCreate Outline Caspian Energy Grid Proposal

Milestone: Report to feed into World Energy Council meeting October 2016

Step 3/ Pre-PlanningCreate a programme of Proof of Concept projects across themes, withdiverse Public/Private participation

Milestone: Formal Launch of Caspian Energy Grid at major regional event

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