Enviromnental damage ramains a growing concern. Despite rigorous energy efficiency programs and research and development (R&D) efforts on cleaner energy technologies in most developed countries, no developing country views these as priorities. And they have a case: Developed countries, which enjoyed high economic growth for decades by ignoring the environmental consequences, are hindering developing countries’ economic growth. On the other hand, representatives from developed countries say that we are all in the same boat and will sink together if developing countries do not pay attention to environmental consequences.
In December 1997, world leaders gathered in Kyoto to address the problem of global warming and to decide which countries should cut emissions and to what extent. Not surprisingly, developing countries objected to any restriction that might limit their economic growth. Such discussions will become more intense in the aftermath of the Kyoto Protocol.
This article will not address the issue of environmental reparations. Rather, it will discuss the energy markets’ current situation and short-term future trends.
Basic Properties of the Energy Systems
Present-day energy systems have several basic characteristics. All policy makers dealing with energy systems should know these basics by heart.
First, energy systems develop slowly because they require significant capital and infrastructure that can be replaced only gradually. There are two important consequences resulting from this fact:
•Intense capital requirements are a strong barrier to average-sized firms. Thus, energy systems are seldom run by private enterprises. In most countries they are constructed and run by the state, and a separate government body deals with energy issues. Energy systems have been dominated by heavy regulations even in most market-oriented economies. The recent trend of deregulation is an exception rather than the norm.
•Even if a state realizes that current energy systems can be improved significantly (e.g., switching to other fuel types or deregulating the market), making changes to a huge, functioning infrastructure is a slow and painful process. It is relatively easy to make changes during the initial stages of an energy system. But as time passes, this becomes more difficult.
As in most cases, good planning is essential. A state must be very careful when building its energy systems, and should pay attention to underlying energy market trends. Important lessons can be learned from the long history of mistakes committed by developing countries. And if a developing country fails to keep up with recent trends, it may find itself trapped by its own hands in an inherently inefficient system for decades.
Second, energy systems are heavily reliant on fossil fuels. Historically, coal has been a prominent energy resource in most countries. Despite its widely acknowledged negative impact on human health and the environment, it still dominates energy systems in such developing countries as India and China. In most countries, oil is the primary energy source.
Oil was one of the most influential key factors of the twentieth century. Just by looking at the traffic on our teeming highways or the modern political landscape, we can understand how profoundly oil has changed the way we live and handle international politics. In the light of the oil crises of 1973 and 1980, the reverse-shock of 1986, and another crisis during the Gulf War of 1990, the need to diversify away from oil becomes abundantly clear.
Environmental concerns also support the case against oil. This is how natural gas, a slightly cleaner fossil fuel, gradually entered the picture. Given the current energy systems’ dependence on these fossil fuels and the fact that energy systems change slowly, oil, coal and natural gas will continue to be dominant for years.
Third, the driving force behind the dynamic of switching from one fuel type to another is economics. Fuel types with smaller unit costs survive in the long run. Oil, for example, now has the lowest unit cost (cost per unit of energy) in most regions of the world.1
Given this, cleaner fuel (e.g., solar energy) still have a long way to go before becoming economically viable. Why would you pay $5 for what you can get for $3? Countries that use non-oil energy resources do this for a number of reasons, such as they do not have natural resources and so transporting oil ends up costing more, or they have abundant natural energy resources of other types. But, in general, economics is the most important issue here.
What trajectory does the unit cost follow when a new fuel is introduced? Consider photovoltaic (PV) cells. The term photovoltaic refers to a family of technologies that convert light directly into electricity. PV technology is an appealing alternative-it is a renewable, environmentally benign, and domestically secure energy source. It is modular and can be scaled up to meet demand.2 However, unit cost is currently high compared to fossil fuels.
A new technology’s unit cost is believed to follow a learning (or experience) curve as a function of installed capacity. As shown in Figure 1, technologies may experience declining costs due to their increasing adoption by society. This decline may be attributed to several factors:
• Technology innovation and manufacturing improvements: Costs may decline due to a better understanding of the underlying science, progress in related fields, or via learning by doing as well as learning by using.
• Economies of scale: Unit cost is a function of total production. Products produced in large quantities have lower unit costs. Most new fuel types have high unit costs, and demand is too low to encourage large-scale production. It almost seems paradoxical. But there are ways to break this cycle. Regulations encouraging usage of new fuel types may be enforced, consumers who have priorities other than cost may be targeted to expand the current market, or the cost may drop low enough for the technology to become attractive even for low production levels.
In achieving economies of scale, consumer demand should he
|World Energy Consumption|
by Fuel Type:1970-2020
Since 1960s, cooperative investments by manufacturers and governments have resulted in the accumulation of experience within the solar industry and the subsequent cost reduction of PV systems. Significant cost reductions have occurred in both the PV modules that house the solar cells, and the ancillary components (known as balance-of-system). Between 1968 and 1998, the global cumulative installed capacity of PV modules doubled more than thirteen times, from 95 kW to 950 MW, while costs ($/Wp) were reduced by an average of 20.2% for each doubling.4
Trends for Different Fuel Types After this overview of energy systems, let"s look at the trends for specific fuel types. Figure 2 is taken from International Energy Outlook 2000 (IEO2000), an annual report published by the U.S. Energy Information Administration (EIA).5 It displays projections of energy usage by fuel type up to 2020. The highlights following the figure are summarized from the report"s contents. Coal: Carbon dioxide is a very effective greenhouse gas and contributes significantly to global warming. Since coal is the most carbon-intensive fuel, global climate change debates focus on reducing its use. Coal use also has significant public health consequences, due to particulate matter emissions. Historically, coal has been a major source of energy. Although it has lost market share to petroleum products, natural gas, and nuclear power in the last decades, it remains a key source of energy, especially for generating electricity. In the IEO2000 reference case, coal"s share of total energy consumption falls only slightly, from 24 percent in 1997 to 22 percent in 2020 (Figure 3). Its historical share is nearly maintained, because large increases in energy use are projected for developing Asian countries, where coal continues to dominate many national fuel markets. China and India are projected to account for 97 percent of the world"s total increase in coal use. Oil: Oil use will grow in absolute terms, but even optimistic oil supply scenarios predict that its share in the fuel mix will decline gradually. Despite efforts to reduce reliance on Middle Eastern oil, as well as advances in technical capability, new oil reserves are not compensating for depleted ones. The experts" estimates of vast oil reserves in the Caspian and Tarim basins proved to be somewhat high, and the latest probes have been partially disappointing. According to EIA estimates, the share of the Persian Culf supplies is likely to increase in the coming years. Economic theory says that prices rise as supply declines. Oil prices have been quite volatile and can be expected to remain so in the future, principally as the result of unforeseen political and social circumstances. Without attempting to predict any crisis, the IEO2000 forecast shows a gradual rise in world oil prices. Oil currently provides a larger share of world energy consumption than any other energy source and is expected to remain in that position throughout the forecast period. Its share of total energy consumption declines slightly, however, from 39 percent in 1997 to 38 percent in 2020, as countries in many parts of the world switch to natural gas and other fuels, particularly for electricity generation. World oil consumption is projected to increase by 1.9 percent annually over projection period. Most of the growth in oil use is projected for the transportation sector, where few alternatives are currently economical. Natural Gas: Natural gas remains the fastest growing component of global energy consumption. Over the IEO2000 forecast period, its use is projected to more than double in the reference case, reaching 167 trillion cubic feet. The natural gas share of total energy consumption increases from 22 percent in 1997 to 29 percent in 2020. It also accounts for the largest increment in electricity generation. Combined-cycle gas turbine power plants offer some of the highest commercially available plant efficiencies, and natural gas is environmentally attractive because it emits less sulfur dioxide, carbon dioxide, and particulate matter than either oil or coal.
|World Energy Consumption Shares |