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Is Green Energy Credible

Commodities / Renewable Energy Apr 11, 2010 - 09:28 AM GMT

By: Andrew_McKillop


Best Financial Markets Analysis ArticleTHE CONFUSED BACKGROUND
Since about 2005, political leaderships and corporate deciders in the big oil importer countries, mainly but not exclusively the OECD group, have continually raised the scale for energy transition away from fossil fuels. This is usually set by targets for cutting CO2 emissions from fossil fuels, rather than targets for substitution or replacement, or reduction of current or future commercial energy consumption.

Partial targets for energy transition, for example percentage targets for wind energy or other renewables replacing fossil-based electric power production, or for biofuels replacing petroleum based transport fuels, are however regularly set by political leaderships in many OECD countries (see for example: ). The presently largest, most global version of this approach, this time including targets for fossil fuel replacement, CO2 emissions reduction, and energy conservation is the EU's so-called "20-20-20" climate-energy package, for the year 2020. This plan requires renewable energy to supply 20% of total EU27 energy consumed in 2020, against 9.2% in 2006. See:

Financing and funding of the European plan, and other large outline national targets and plans for cutting CO2 emissions, replacing fossil fuels and economizing energy utilization, are presently hesitant and subject to radical change (see eg.:  In the European case, it is supposed that the ETS (CO2 credits trading and derivatives) system, carbon taxes, and other various financing methods will be sufficient after "ramping up", or creation and launching, but no formal structure exists at present (see for example: ).

Back of envelope calculations show low income countries have a fantastic potential for raising their oil consumption, oil imports, and competition with the OECD countries for tight world export supplies, inevitably raising prices. Concern over climate change in low income countries due to fossil fuel burning is however and effectively a future problem, given their present tiny per capita oil consumption and CO2 emissions, compared with OECD consumers. This potential future problem is nevertheless treated as a major and urgent theme by several powerful OECD leaderships. One example concerns proposals made by them, before the Copenhagen climate summit (COP15, Dec 2009), for accelerated and massive funding of energy transition in low income developing countries.

A fund for "fighting" climate change and cutting dependence on fossil fuels in low income countries, despite their tiny current per capita consumption, which would mobilize up to US$ 100 billion a year by 2020, was mooted and rejected at COP15. The same "green energy plan", this time proposed by the IMF's director, was rejected as recently as March 25, 2010 . For comparison, we can compare this enormous funding proposal, with real world institutional funding of renewable energy in low income countries. For the period 2005-2007 the World Bank's total funding in this domain was approximately US$ 1.8 billion over 2 years. (

To be sure, the basic policy objective of limiting oil consumption growth in poor countries can be defended many different ways, but once a policy is set it must be programmed and financed. When or if such a large amount as US$ 100 billion a year was mobilized on a long-term annual basis, the control, coordination and technical or industrial linkage would set major challenges for programme management, requiring robust and sufficient staffing and management right through the programme.

Lack of clear and concise policy, adequate financing, and large programme management structures, and sudden reversals or major change of apparently set and defined policies, apply  across the climate change-energy transition spectrum. This hesitation, possibly due to doubt, certainly driven by lack of finance, and surely intensified by ignorance of the technical and industrial implications of massive long-term changes to world energy is however not shared by climate change disaster theorists. Through 2008 as oil prices maintained their march upwards to their most recent extreme peak in 2008, this was tracked by extremes in climate change disaster theory advocacy. The setback dealt by COP15 failure has not moderated the urge to exaggerate of some leading disaster theorists, who most recently heavily focus oil import dependence and oil prices (see for example: and .

By 2007-2008 numerous government agencies in certain OECD countries, the carbon finance community, and well known NGOs regularly published ambitious scenarios for the "low  carbon future". These scenarios  typically stated or implied that world or global CO2 emissions could be reduced by as much as 50% to 80% relative to the recent past, by about 2040-2050. One example are publications by the Pew Center on Global Climate Change, including forecasts of massive but rational spending to achieve high and continually raised targets  for energy transition (see eg.: ).

The hoped-for impact of "low carbon tech" extends across a wide domain. This includes lower oil prices, national energy security, employment creation, business activity, industrial primacy or technology leadership, and more diffuse social and cultural goals. This is very clear in many official publications. One example is a 2003 UK government policy paper on technology options "for the low carbon future", where oil prices below US$ 30 a barrel in 2020 are confidently forecast (see page 25 in ). Equally important, by about 2003 and especially in the more recent past, the outlook for natural gas prices is imagined to be one of very low prices, with supply presenting no security dangers, enabling gas to provide large amounts of total energy needs. In scenarios for the UK, gas is imagined to supply about 70% of UK total energy needs around 2030-2040. If we take the present, however, UK dependence on cheap imported coal is very clear, with the UK now one of the world's leading coal importers (see for example:  and ).

This belief in cheap but clean gas, albeit a fossil fuel but useful as a "bridging resource" is currently receiving large support, especially in the USA where water-intensive, chemicals-based shale and fracture gas supply raising may weigh on gas prices for some while. Several major international energy corporations share this optimism, particularly those oriented to developing LNG supply, pipeline supply, shale and fracture gas, pyrolysis gas, and coal bed methane supply (see for example: or ).

Several energy import dependent OECD countries with governments active in climate change advocacy have built-in an expected surge of cheap natural gas supply to their now very large range of "low carbon scenarios". See for example , or the UK 2003 white paper

Supposed policies, but without clear targets, nor clear funding, nor programming and without  fixed target dates underline the confused policy rationale, or in fact multitude of rationales in the climate-energy domain.

This however has in no way prevented political grandstanding on this fuzzy-edged theme. By the time of the Copenhagen climate summit, December 2009, several OECD leaders went so far as to say that energy transition to low carbon green energy, was urgently needed "to avoid planetary catastrophe and to save humanity".  President Sarkozy of France, for example regularly appeared on prime time TV to inform French citizens, voters and taxpayers that his proposed carbon tax, abandoned in March 2010, was needed "to save the planet", no more and no less !

Fighting climate change apocalypse  through energy saving, "decarbonized" fossil energy, and green renewable energy development, plus governmental 'fiscal vanity projects' like carbon taxes, was described as the packaged response to the biggest challenge ever facing mankind. If this challenge was ignored, the catastrophe described in lurid terms with scant regard to scientific credibility and with ever more exaggerated shock forecasts by Global Warming conference circuit speakers, would threaten civilization as we know it.

Without urgent action, tens of millions of climate change refugees would be displaced and tens or hundreds of millions of people could die, before 2099. This is now "genre" raw material for militant action, advertising, pulp publishing, films, TV docu-dramas and stump politics. (See: , or ,
Backed by green energy billionaire Richard Branson, the doomster extremist James Lovelock can be guaranteed to always go one or ten miles further in his junk science claims that climate catastrophe is coming (see: )

 In the run-up to the COP15 farce, and pumping key phrases from junk science catastrophe theorists, some OECD leaders including Obama, Merkel, Sarkozy and Brown made  impassioned and very exaggerated claims for how much, and how quickly brown energy can be phased out - and replaced by green energy. Figures bandied around by these leaders, based on scenario drawing by NGOs, study groups and advocacy groups implied an 80% or 90% shift away from CO2 emitting fossil fuels by 2040. There would be linked energy transition in the low income countries, where a US$ 100 billion a year green energy fund would be quickly mobilized and operated, at least by about 2020, through controversial and flimsy funding mechanisms.

To be sure, government-friendly media in the OECD countries with leaderships peddling climate change catastrophe theory treated COP15 failure as a grave insult to these leaderships, but their flimsy and confused outline plans in fact received little support even among other OECD oil importing countries. By March 2010 the "IMF-version" of this semi-virtual or outline indicative plan was itself abandoned. (see: )

Estimates given in the press and media for the costs of energy transition in the developed, oil-intensive OECD countries, and in emerging China, India, Brazil, Indonesia and other big population countries, as well as low income countries, range up to as much as US$ 15 to 30 trillion, for the 25 years to 2035. This very large, and very wide ranging cost estimate, or guesstimate, can be compiled from different components, including renewable energy development, carbon capture, and energy conservation in several different ways.
Various examples of the procedure for generating "clean energy" transition cost estimates include:, ,

Many difficulties face any attempt to closely analyse and forecast costs for energy transition. These start with the wide range of apparent targets for energy supply and system change based on quantitative targets for cutting CO2 emissions, but without quantitative targets for substituting or reducing fossil energy consumption.

These difficulties are intensified by the many differences between renewable energy and fossil energy, as well as intrinsically variable forecasts for world population growth and economic growth, energy intensity of GDP, and other energy economic variables over a quarter-century.

Backcasting to 1980 is however useful, for underlining the extreme challenge set by "50% to 80% replacement of fossil fuels" by about 2040. As the climate change militants like to point out, approximately 50% of anthropogenic CO2 emissions in all recorded history have been emitted only in the 50 years since 1960. The reason is simple: since 1980 about 750 billion barrels of oil have been extracted and mostly burned, world natural gas burning has doubled, and also since 1980 coal burning has nearly doubled. Today's prosperity, however defined, is tributary to completely unsustainable production and consumption of "one shot" fossil fuels.

Using any rational scenario for costs of energy transition, given the quantities to be substituted or economized, very large amounts are needed. Methods for raising these gigantic amount were, and are at all times controversial, shadowy and unclear. This again was a cause of COP15 failure.

Spending on energy system development and energy system restructuring, both of which would be needed, is very different from financial bail outs to failed trading operations in the bank, finance, and insurance sector, as well as stimulus spending for lead sectors of the "real economy", notably property and oil-fuelled car buying. Taking "stimulus and recovery spending" in the OECD countries, China and India since late 2008, including bank and insurance company bail outs, and aid to carmakers, this may have attained about US$ 2.25 trillion. Actual spending, versus engagements and guarantees confuses the amounts in play, shown by US-only engagements in 2010 for national "stimulus and bailout spending" being estimated at about US$ 2.25 trillion (see: )

It may however appear to some political leaders, or their speechwriters, that the same funding and financing methods can apply to energy transition. Proposals, or political initiatives accompanied by keyword slogans for mobilizing vast amounts in a short period have included the concept of a new world reserve currency called Carbon Money. This would replace all other moneys while also supporting the financial burden of global energy transition. As noted above, the IMF green energy fund for low income countries has been rejected, but the Carbon Money "trial balloon", rejected at COP15, is a close related theme. This notion concerns the utilisation of the IMF's "currently unutilised 200 billion SDRs" as the basis for "creating a new world reserve currency" as well as funding and financing energy transition (see eg.:

We can note that if we took a cost estimate of around US$ 20 trillion as needed over 25 years to replace about 33% of current world fossil energy consumption, this would necessitate mobilizing and sustaining spending of close to US$ 1000 billion a year. Thus figures as apparently massive as "US$ 250 billion a year" are rather small, relative to the gigantic funding that would be needed to finance the publicly announced energy transition proposals of several OECD leaderships. To be sure, this is based on believing these plans or proposals may be technically and industrially feasible, and could be compressed into a timeframe of 25 to 30 years.

Current annual real world investment spending on renewable energy was around US$ 65 to 85 billion in 2009. Actual amounts spent are difficult to estimate and certain sources, including UN agencies, green energy hedge funds, and advocacy groups tend to exaggerate this amount (see for example: ; ). A favoured method for exaggerating investment spending is to add revenues from existing renewable energy operations, to new capital expenditure, to upstream R&D spending, and to revenues from downstream derived financial operations linked to building and installing green energy systems. The last category can for example include leveraged buy-outs, asset refinancing, derivatives trading and so on.

Financing and funding of energy transition is most surely the major stumbling block for the extremely ambitious, extremely low credibility initiatives of the most outspokenly alarmist OECD leaderships on the subject of climate change. Carbon taxes for example would, or could become global irrespective of the economic development stage of each country., but are currently very low yield. The now abandoned French carbon tax plan of President Sarkozy, for example, was forecast as producing about 3 or 4 billion Euro a year. This can be compared with the French national budget deficit for 2010 of about 150 billion Euro, or the US national budget deficit for 2010 of about US$ 1.3 to 1.6 trillion. 

Carbon finance and the trading of carbon emissions credits and derived and related financial instruments, such as Clean Development Mechanism offsets, could of course be radically expanded from current levels. Carbon finance and trading is estimated by the World Bank as attaining about US$ 126 billion a year in gross turnover value, in 2009, but 'trickle down' or 'leakage' from this global turnover on financial exchanges, to concrete and physical green energy spending on the ground, is very low. Annual 'leakage' from financial exchange plays by brokers and operators, to on-the-ground renewable energy investment is probably well below US$ 10 billion from the US$ 126 billion reported by the IBRD. Some estimates suggest this typical 12:1 dilution ratio may apply for 'leakage' amounts (see eg.: )

Carbon Money was rejected at COP15 for the simple reason it did not appeal to the few remaining creditor nations of the planet. The concept was openly rejected by the Chinese and Indians, Saudis and Russians at the Copenhagen farce. Climate summit failure was without doubt perceived as a deep humiliation for the most extreme advocates of a forced march to green energy among OECD leaders, headed by Obama, Merkel, Sarkozy and Brown. Speaking shortly before resigning, the UN FCC chairman Yvo de Boer however expressed little hope that COP16 in Mexico, December 2010, would deliver what extremist OECD leaderships publicly hoped for at COP15 (see:

Speaking on March 11, 2010, Chinese vice minister for Industry and IT, Miao Wei, described
massive wind farms in China as essentially "vanity projects". Reasons he gave were that wind
electricity costs more than coal or nuclear, windfarms have large land needs, the better locations
have already been utilised, and siting wind mega projects on cheap land in China's dusty deserts
would likely accelerate wear and tear of the mills, cutting their useful lifetimes to 20 years or less.

Financing the shift to green energy remains the key limit on achieving the extreme high, publicly stated ambitions of OECD leaderships for global CO2 emissions cuts. However, when or if a global plan for energy transition was set up, with initial financing perhaps equal to present world oil & gas sector capital spending (about US$ 350 to 400 billion a year, but forecast by the IEA to rise to US$ 1 trillion a year by 2016), this plan would immediately face severe technological and industrial, as well as financing or programme related constraints. Official-source scenarios and studies for the cost and financing of energy transition, are both extremely variable as we have seen, but are also ideologically-bound to the 'free play of market forces' to both raise and distribute the massive capital investment spending. While mobilizing capital might perhaps be thought as easy as 'writing checks for finance sector gamblers', who played and lost in 2008-2009, control and coordination of a uniquely massive long-term world energy transition plan would be entirely different and vastly more challenging.

Comparisons with the world oil & gas industry may be useful, from several angles. These can include the capital cost and spending needs to develop incremental capacity, and maintain present large capacity. This can be estimated, for world oil and gas (excluding coal) using IEA data for 2008 at about 190 million barrels a day oil equivalent. Targets for "the low carbon future", for example 33% non-fossil by 2035, would require well over 85 million barrels a day oil equivalent energy supply from the non-fossil energy sources and systems, including replaced coal, and allowing small annual average growth in world commercial energy demand in the period 2010-2035. At zero growth, the target would still be very large, at about 70 mbd oil equivalent from non-fossil sources.

The higher of these targets (>85 mbd oil equivalent, 2035) is almost exactly present 2010 world oil production capacity, we can note, this industry being one of the most capital intensive and highly structured economic sectors that exist. Any comparison between the tightly controlled and organized decision making applied by the world's leading energy corporations on their capital expenditure, and a free-for-all uncontrolled small-player market for green energy that would 'rationally distribute' investment amounts of  US$ 400 billion a year, is  very difficult.

Free market exuberance in the green energy sector since 2005 has already delivered a financial and economic boom-and-bust sequence for maize-based fuel ethanol, rapeseed and jatropha-based biodiesel. Current overcapacity in windmill manufacturing and solar photovoltaics threatens a boom-bust in these two sectors. The future for a 'massive take-off' in electric car and lithium-based battery production is very unsure.

Doubt on the financial, as well as economic and technical feasibility of 'ramping up green energy' is now widespread, not only in OECD countries. Given what we have briefly covered, above, there is no doubt that doubt is needed on the presently unreal and impossible, so-called "targets for energy transition" so confidently announced by many OECD leaderships, as well as the directors of major international agencies and private corporations
(See eg.: , , , )

By Andrew McKillop

Project Director, GSO Consulting Associates

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

© 2010 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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