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Making Green Energy Credible

Commodities / Renewable Energy Jan 21, 2012 - 12:34 PM GMT

By: Andrew_McKillop


Best Financial Markets Analysis ArticleCan we make green energy credible ? Not so much a victim of its own succees, but victim of its own failure, green energy still hangs on and hangs in among the mix-and-mingle of dominant government and elite ideologies in most OECD countries, and several G20 and Emerging economies led by China and India. One reason for this is really basic: there are no other ideas on the subject of "After we run out of cheap oil, what do we do ?"

We only have to ask - with no answer - what happens to oil supply and prices when or if China and India achieved the current OECD consumption average of more than 14 barrels per person, per year.
Currently on less than 3 barrels/person/year for China, and below 2 barrels/person/year for India, their combined demand, at today's OECD average rate, would be almost equal to world total oil demand in 2012, and would be around 85 million barrels/day. Their current combined demand is 12.5 Mbd. Other Emerging countries would also raise their oil burn with economic growth, but nobody serious, starting with the IEA and EIA says world oil supply can be raised by 70 Mbd in the next 35 years to 2045.

Conversely or alternatively, we could play with the idea of King Coal saving the planet: if the world's 7 billion consumers used coal at the Chinese rate of about 1.75 tons/person/year (or the US rate of 3 tons) world coal demand would spiral up from its current 6 bn tons per year, to reserve-threatening heights, let alone climate change threatening heights !

So the "missing energy" has to come from somewhere else. Oil is the shortest-fuze resources, making it possible to ask if the Chinese and Indians will be content to own and use 10 or 12 times fewer cars per thousand population, than the "postindustrial" countries of the OECD group ? We can keep on dreaming, while they keep on trucking !

For at least the past 5 years, talk about Energy Transition to Green Energy as a critical challenge to civilization was standard teleprompter material for high profile persons like Obama, Merkel, Sarkozy, plus a certain number of "great statesmen" of the retired, failed or thrown out variety, such as Gorbachev, Al Gore or Tony Blair. These days Obama, Merkel and Sarkozy are more concerned about keeping their place atop the greasy pole and fending off international bankruptcy than talking about what Obama called "the Sputnik Moment", when green energy starts to Save The Planet. Daily proof rolls in that weaning consumer society off oil (cheap or otherwise) is a hopeless quest, the process takes too long, the real alternatives like coal are not easy to ramp up, and expecting the market to handle an epic and massive Green Energy Transition is like trying to save Lehman Bros or MF Global.

This in no way stops the highest possible level of ex-deciders and great statesmen, such as Gorbachev, Gore and Blair, and the Club of Madrid Worldshift Network's team of former presidents and PMs, former NATO chiefs, and a gaggle of present billionaires, advised by a star-studded lineup of experts, from predicting dire things for the human race unless fossil energy is completely abandoned.

The storyline has not changed with shale gas or anything else. The Network goes on forecasting very dire things.

Their material does not cut around the corners. They say fossil energy (oil, coal, gas) has to be not just shaded down, or blended into green energy, but radically and totally phased out. Mikhail Gorbachev, heading the Club of Madrid's 2009 climate initiative has plenty of times gone on record, saying the world needs a 50% cut in fossil energy consumption by 2020 - 2025. This would be a cut of 45 Mbd simply for oil, and a cut of over 3 billion tons a year for coal. The European Union's climate-energy policy and its national programmes, for as long as they last, has targets that are not far behind Gorbachev Goals, with a 20% cut being set for the 8-year period to 2020. For Germany, the target is a 40% cut on 2005 levels of CO2 emissions (ie levels of fossil energy consumption) by 2020.

Are these goals achievable ? Since they probably are not feasible, why are they being touted by persons who (normally speaking) try to stay credible ? Are they suffering from elite collective hysteria ?

Or schizophrenia: what has to be the most "dirigiste" possible plan or programme - to totally phase out fossil energy - is also and supposedly market friendly for creating the industrial capacity and deploying the new/alternate energy eqipment and infrastructures. Practically unaided, the hedge fund fraternity can lever this massive transition, we are told. There is no need for clumsy, complex and unproductive bureaucratic meddling in energy. To make this clear the world's one and only, bureaucratic and clumsy, mandatory carbon emissions market system, the ETS in Europe, which shuffled about $40 billion of tradable carbon paper in 2011, is set for a hefty fall in turnover in 2012. Among the reasons for this is simple loss of credibility. ETS ran out of luck and tolerance. The strange mix-and-mingle of ideologies on offer for achieving Energy Transition (or instead, experiencing Apocalypse Now) then shifts to the other extreme of the spectrum. This features Silicon Valley-type feel good investing - in failed start ups - as a nice way to burn up cash and waste economic resources, producing little or nothing.

We might imagine Gorbachev will give us a break from telling the world to abandon fossil energy, and go back to telling us to buy Pizza Hut food products, but we have no answers to our questions.

Due to media brainwashing, most persons think "green energy" equals windmills, solar power plants and perhaps biofuels. In fact at least one-half of all current non-fossil energy is hydropower and biomass fuel buring for power plants, but this brings up one critical point. The basic pillar of green energy development is that electricity dominates what comes out of the projects which actually get built. Wind, solar, hydro and most biomass fuels used in developed countries (eg Europe and USA) are used to produce electricity.

Biofuels able to save oil sound nice, to be sure, but production has peaked out already at around 60 billion litres/year split between Brazil and the USA. This is at most 4% of world automobile and truck fuel demand, which is growing, while biofuels output is not. The US EIA, obediently reflecting White House feeling on the subject forecasts mindboggling volumes of future biofuels production in the USA, "about 2035", especially non-food cellulose ethanol and other biofuels. Today however, green energy "as we know it" means electricity. At least two-thirds of all the coal burned, today, is also used to produce electricity, and over one-half of all gas consumption is to produce electricity, so green energy is a semi-rational alternative and substitute for coal and gas, if not oil.

Lenin's, and then Stalin's GOELRO plans were founded in the 1920s with the same urgency as Gorbachev's call for total Energy Transition in 2009, if not his calls for Pizza Hut eat-outs around 2000, and featured the same magic one size fits all answer to future energy: electricity.

Later called Five Year Plans, the GOELRO all-electric energy plan of the early Soviet Union was at least as unsuccessful as an average Silicon Valley green energy start-up, or European ETS carbon trading, in producing real world on-the-ground new energy supplies. What counted for the Soviets, and counts for hand-on-heart modern capitalist Market Libs is an overlay of ideological euphoria, covering government handouts to the Happy Few - who then throw it away.

Just like GOELRO, whipping the media into a frenzy of Apocalypse Now, the Low Carbon hysteria of about 2006-2010 is totally unproductive: there is no change on the ground, and nothing happens. However, in GOELRO times, the USSR was set way back on the curve of oil reserve discovery, development and depletion, with at least 225 billion barrels of future low cost conventional oil reserves to extract and consume: today's Russian conventional oil reserves remaining to extract are anywhere from 60 to 130 - 140 bn barrels, and current production, called a record at about 10.25 Mbd (3.75 bn barrels per year) is in fact far behind the 1988 peak of 12.5 Mbd.

Russia will have to find a lot more oil, fast, to keep its output at more than 10 Mbd, meaning that oil saving either already interests Russia, or will soon interest Russia.

Exactly the same applies to No. 2 world producer Saudi Arabia. The next stage on from this stage for both of them is simple: Russian and Saudi production will be capped to conserve national reserves. This can be presented as a political decision, or a technical decision driven by geological realities, or decided to bolster and maintain oil prices and national revenues at a high level, but any potential for regime change through military invasion - to "tweak up production" - is an unlikely sequel. Certainly for Russia, although maybe not impossible for Saudi Arabia if it unilaterally declared it was downsizing its oil production to say 7.5 or 8 Mbd and capping it there, right now, to conserve national oil reserves.

What we face is a likely stagnation of world fossil energy supply - stagnation then decline for oil, slow growth and possible stagnation of coal supply, but growth of gas thanks to shale gas. We also can fear there will be low rates of replacement of fossil energy with green energy, because investment performance was, and is so bad. For China, this is now open policy. China Briefing for 21 Jan 2012 reports: while the country originally had plans to invest up to US$1.5 trillion over the next five years in seven strategic sectors (including) high-end equipment manufacturing, alternative energy, biotechnology, alternative fuel cars, energy-saving and environmentally friendly technology, China is now more worried about the return on such investments.

According to Bloomberg New Energy Finance, total investment and spending (the two being far apart !) in green energy and cleantech through 2006-2011 surpassed a total of $1 trillion. The problem was that energy results on the ground are so small we do not even have to talk about them.

Announced on 9 January by Germany's economics minister Roesler, the former poster child of German green energy - solar photovoltaic power - is set for serious and sombre shrinkage. Cuts in subsidies to the industry as feed-in tariffs, grants, tax breaks, employee training, factory facilities, raw materials discounts, even exchange rate risk cover for exports, and other state support, may be so deep and so far that in Roesler's view annual German installations could fall from 7.5 GW in 2011, to around 3.5 GW in 2012 and as little as 1 GW per year in 2013-14. Chinese plans for downsizing their solar PV industry are at least as radical: cuts mulled by the state energy planning bureau are for reducing annual production capacity of 70 GW that China would have achieved in 2013-14, on current fast rates of growth, to as little as 20 GW of annual production capacity.

These are cuts of 70% - 85% in 3 years, and a similar if not-so-steep decline of capacity for world windpower production is almost certain. Early signs of trouble are centred on the world's No. 1 windmill producer Vestas of Denmark, and another overlevered European producer, Gamesa of Spain. Showing this is worldwide industry retrenchment and shrinkage, Suzlon of India, Goldwind, Sinovel and Dongfang of China, and GE of the USA are also experiencing major falls in windpower sales and profitability. The only real hope of world windpower is offshore windfarms - if somebody pays.

The read out is simple: fossil energy investment is now high cost and low return except in highly specific niches and sectors, possibly but not certainly including stranded gas and shale gas - but green energy investing is even worse: the industry grew too fast on the back of government subsidies and lack of international planning, coordination and control. Its credibility fell as its many limits have become clear, including its financing. The only advantage of the Market Lib model, if it is one, is that the fragile boom of 2006-2010 is changing fast to bust -  and not need Stalin-type show trials to kick whipping boys into the grave. The end result for consumers, taxpayers and voters is exactly the same: no energy transition, sure and certain higher energy prices, wasted resources and wasted time. The clock ticks on.

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2012 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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