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The status of Chinese–Russian energy cooperation in the Arctic

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Authors: Ekaterina Klimenko & Camilla T.N. Sørensen

[yt_dropcap type=”square” font=”” size=”14″ color=”#000″ background=”#fff” ] T [/yt_dropcap]he Arctic is estimated to contain 30 per cent of the world’s undiscovered oil and gas reserves. Climate change has accelerated the melting of the Arctic ice, making these resources more available. This backgrounder looks at the status of Chinese–Russian energy cooperation in the Arctic.

In the past decade, Russia has been actively developing Arctic resources and shipping routes, while boosting its military presence in the region. While Russia has primarily worked with European countries to develop its energy resources, including in the Arctic, a number of factors have led Russia to reconsider and look even more to Asia for potential investors and technology partners, and as a key consumer market. China is increasingly highlighted as an important partner for Russia in developing the Russian Arctic.

China has increased its focus on and engagement in the Arctic over the past decade. From a Chinese perspective, cooperation with Russia on Arctic resources and shipping routes also helps facilitate a greater Chinese role and influence in the region and gradually gain respect and acceptance for China as a legitimate Arctic stakeholder.

Interests in the Arctic

Russia’s Arctic strategy identifies the following core national interests: (a) use of the Arctic Zone of the Russian Federation as a strategic resource base; (b) safe-guarding the Arctic as a zone of peace and cooperation; and (c) use of the Northern Sea Route as a national integrated transport-communication system for Russia in the Arctic. Among these goals, the development of offshore and onshore oil and gas resources is a top priority.

The Russian economy is largely dependent on revenues from oil and gas. At least 50 per cent of federal budget revenue is generated from exports of energy resources. Most of Russia’s oil and gas production is concentrated in the traditional areas of western Siberia. However, their depletion over the past decade means that the geography of production has been shifting to new regions to the north of western Siberia, including the Yamal Peninsula and the Arctic seas.

To date, China’s focus and activities in the Arctic region have been primarily concentrated on its scientific interests, particularly those that relate to how the melting ice and changing climate in the Arctic will affect China. However, over the past decade, China’s activities have begun to concentrate more on economic interests and concerns about securing and diversifying China’s supply of energy resources and minerals. China has also developed a growing interest in the Arctic shipping routes, which could provide it with alternatives to the longer and strategically vulnerable routes currently in use. Furthermore, China is interested in securing a voice in the evolving Arctic governance regime, which is related to its importance and potential implications for wider global and regional governance.

As a result, China seeks to diversify and strengthen its bilateral relations with all the Arctic states by establishing stronger diplomatic ties, scientific cooperation, and economic partnerships.

Drivers of Chinese–Russian energy cooperation in the Arctic

Russia

Major shifts in world energy markets have significantly affected the development of Russia’s Arctic shelf resources and the expansion of the current onshore resources of the Yamal Peninsula. At least three key factors have led to a significant overproduction of natural gas in Russia and hence delayed the development of gas resources on the Arctic shelf: (a) EU plans to prioritize the diversification of gas suppliers in the European market; (b) difficult relations with Ukraine, which is the third largest consumer of Russian gas; and (c) shale gas revolution has also resulted in the loss of other potential markets.

In relation to oil, estimates suggest that the fall in oil prices has made the development of the Arctic shelf oilfields unprofitable. This will continue to be the case while the price of oil stays below USD $100 per barrel. However, the decisive factor in the need for Russian companies to diversify their partnerships has been the geopolitical tensions between Russia and the West in the wake of the crisis in Ukraine.

The USA and the EU introduced sanctions against Russia in 2014 after Russia’s annexation of Crimea. Among these sanctions, the third package, which was introduced in July 2014, has had significant implications because it concerns the transfer of technologies. The USA and EU sanctions include a ban on the transfer of equipment and technology for deep drilling below 150–152 metres, as well as on exploration and development of Arctic shelf shale oil reserves.

These sanctions forced ExxonMobil, Statoil and other Western companies to suspend their cooperation with Russia in the Arctic. The third package of sanctions also introduced strict financial restrictions, applied to loans of longer than 30 days. The largest Russian banks and corporations in Russia, such as Rosneft, Transneft, Gazpromneft, Gazprom, Novatek, Lukoil and Surgutneftegaz, remain under sanctions. This has made it difficult to seek financing for Arctic projects in Western financial markets.

China

Seen from Beijing, Russia, as the biggest Arctic state, stands as an important gatekeeper and ‘necessary partner’ for non-Arctic states such as China. China knows that in many ways it is dependent on Russia—for example, for Russian goodwill and support—if China is to increase its activities and consolidate its role as a legitimate stakeholder in the region. Consequently, in a Chinese analysis, there is no way to avoid dealing and getting along with Russia in the Arctic.

Despite the lower growth rate of the Chinese economy in recent years, its demand for energy and resources continues to grow and its state-owned enterprises are continuously encouraged to identify and establish new areas for exploration and extraction. China sees the Russian Far East, Siberia and the Russian Arctic as increasingly important due to their potential in relation to energy resources, export markets and new shipping and trading routes. It also sees these regions as recipients of and partners in Chinese-led infrastructure and other development projects.

These activities have synergies with China’s high-profile ‘One Belt, One Road’ initiative, through which China is seeking access to vital European markets through Central Asia and Russia. China also seeks to take advantage of current Russian geostrategic and geo-economic vulnerabilities and of Russia’s need for China as a partner to gradually strengthen its presence and relationships in the Arctic.

Concrete steps towards Chinese-Russian cooperation on the development of the Arctic shelf

In February and March 2013, during a round of oil delivery negotiations, Rosneft and the China National Petroleum Corporation (CNPC) discussed opportunities for cooperation on shelf projects in the Arctic Barents Sea and Pechora Sea, with a particular focus on the Zapadno-Prinovozemelsky, Yuzhno Russky, Medyskoe Sea and Varandeyskoe Sea deposits. Among these, the Medyskoe Sea and Varandeyskoe Sea are the most promising, containing an estimated 3.9 million and 5.5 million tonnes of oil per year, respectively. Although the head of Rosneft, Igor Sechin, confirmed a commitment to work with China on the Arctic shelf early in 2014, however, no official confirmation or details have yet to emerge.

In late 2015, Russia’s Deputy Energy Minister reiterated that Rosneft was still ‘negotiating’ and ‘discussing’ its participation in Arctic shelf energy and extraction projects with China. The relative lack of progress over nearly two years could indicate that China is either reluctant to invest or trying to get a better deal. Moreover, the fact that China did not invest in the Vankor deposit in East Siberia and did not buy Rosneft’s shares could demonstrate that its interest in the Russian upstream has decreased, or that it cannot accept Rosneft’s conditions. It could also be argued that the Russian oil and gas delivery deals that China secured in 2013 and 2014 have reduced its overall interest in the Russian upstream, including in the Arctic. Nonetheless, analysts continue to claim that China wants not just to be part of, but to have a managerial stake, in these Arctic projects.

Another unanswered question is the extent to which Chinese companies can replace the work of Western partners on the Arctic shelf, particularly their technological assistance. Despite such concerns, Russia and China have increased their technological cooperation in the oil and gas sectors since the imposition of sanctions. In September 2015, for example, China Oilfield Services Limited (COSL) signed deals with Rosneft and Norwegian Statoil to drill two exploration wells in the Sea of Okhotsk, which has similar conditions to the Arctic. Igor Sechin noted that the agreements unlocked new potential for cooperation on oil and gas resource exploration by industry leaders in Russia, Norway and China. The extent to which this potential will affect the Arctic remains to be seen.

Emerging Chinese-Russian cooperation on the Yamal Peninsula

If offshore projects remain a question for the future, onshore cooperation in the Arctic is already advancing. In February 2013, the head of Novatek visited China as part of an official Russian delegation to discuss opportunities for cooperation on its main Arctic project, Yamal liquefied natural gas (LNG). As a result of this visit and several subsequent rounds of negotiations, on 5 September 2013, Novatek and CNPC signed a contract for the sale of a 20 per cent stake in Yamal LNG. The agreement includes a long-term contract for the supply of not less than 3 million tonnes of LNG per year to China, which is 18 per cent of total capacity. The deal was approved by the Russian Government in November 2013 and signed in January 2014.

Following the breakout of the crisis in Ukraine, Novatek became the target of sanctions and Yamal LNG faced further financial difficulties. Novatek was forced to seek further engagement with foreign partners and China was among the few remaining alternatives. In September 2015, Novatek sold the Silk Road Fund, a Chinese sovereign fund, a further 9.9 per cent of Yamal LNG for approximately EUR €1.09 billion. In December 2015, as part of the deal, Novatek received a loan from the Silk Road Fund of EUR €730 million for a period of 15 years to finance the project.

As a follow-up to these advances, on 29 April 2016 Yamal LNG announced the signing of agreements with the Export-Import Bank of China and the China Development Bank on two 15-year credit facilities of a total amount of EUR €9.3 billion to finance the project. China will therefore provide up to 60 per cent of the necessary capital to implement the project.

Despite this impressive track record of cooperation on Yamal LNG, two problems reveal the limits of possible Chinese-Russian energy cooperation. First, Novatek had serious difficulties in securing Chinese financing for the project. The deal was only concluded after numerous delays and negotiations. Second, China also received huge benefits from the deal, since up to 80 per cent of the equipment for Yamal LNG will be produced in Chinese shipyards.

This shows that, despite China’s interest in energy projects in the Arctic and Russia’s eagerness to obtain Chinese partnerships, there are a lot of difficulties ahead. Chinese companies will work on projects that they are interested in only under conditions that they find acceptable. Thus, Russia will have to offer good conditions to attract the Chinese and develop Chinese–Russian energy cooperation.

Looking forward

Despite the stream of positive adjectives flowing from both Russia and China in recent months about partnership and friendship, cooperation in the Arctic has not progressed much. Except for cooperation on the Yamal Peninsula, Russian and Chinese companies have not yet found further mutual ground for energy cooperation in the Arctic.

On the one hand, Russian companies need and welcome Chinese investments and loans; on the other hand, they are not entirely comfortable allowing Chinese companies to play too big a role in Russian energy projects, including those in the Arctic. Chinese companies, in contrast, are in a very strong position at the moment and would not agree to anything less than a significant controlling and management role.

As a result, there is a degree of disappointment in Russia that energy cooperation with China has not developed as anticipated and thus has not mitigated the crisis with the West to the desired degree. Seen from Russia, China has taken advantage of the situation, for example to extract especially favourable terms on energy deals and to insist on high interest rates on major Chinese loans. That is, China has not shown the expected goodwill, which is why using the Chinese–Russian partnership as leverage against the West has not worked.

This topical backgrounder is based on the upcoming policy paper ‘Emerging Chinese–Russian Cooperation in the Arctic: Possibilities and Constraints’ by Camilla T. N. Sørensen and Ekaterina Klimenko. First published at SIPRI.org

(*) Camilla T. N. Sørensen is Assistant Professor at the Department of Political Science at the University of Copenhagen.

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Energy investment in emerging economies: Transforming Southeast Asia’s power sector

Michael Waldron

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Experts discuss risks, policies and investment opportunities for renewables in Southeast Asia during an IEA roundtable at Singapore International Energy Week (Photograph: IEA)

Authors: Michael Waldron and Lucila Arboleya*

The new IEA Southeast Asia Energy Outlook 2019 (SEAO) provides a comprehensive overview of energy prospects in an increasingly influential region for global energy trends. Alongside the scenario projections and analysis, the report contains three “deep dives” – on the future of cooling, on regional electricity trade and renewables integration, and on investment – that reflect priorities for cooperation agreed between Southeast Asia energy ministers and the IEA.

Bolstering investment in more efficient and cleaner energy technologies in Southeast Asia’s power sector is a particularly urgent challenge. Policy makers in many countries of the region are stepping up their efforts to support deployment of renewables across the region, but investment has lagged well behind the levels reached in China and India. Electricity demand in Southeast Asia is rising rapidly, and many parts of the power sector are showing signs of financial strain.

Whichever pathway the region follows, it will need a sizeable increase in investment flows and a reallocation of capital, particularly under a sustainable  pathway (in the Sustainable Development Scenario) where renewables spending more than quadruples. 

What can be done to put the region on a more sustainable pathway, from both a financial and environmental perspective? This was the question that we addressed in the new IEA report  and also at a major IEA Roundtable featuring the insights of financial, legal, industry and policy experts from across Asia, which was held in Singapore on 1 November as part of the Singapore International Energy Week.

Bridging investment gaps with more private finance

To date, public actors – including state-owned enterprises and public financial institutions – have provided the bulk of funding for the power sector, particularly in thermal generation. By contrast, wind and solar PV projects have relied much more on private finance, spurred by specific policy incentives.

In addition, funding for over three-quarters of generation investment has come from within the region. This landscape reflects prevailing decision-making frameworks, which have largely revolved around state-owned utilities and the distortionary impact of energy subsidies, but also the ability and willingness of private players to navigate perceived country, regulatory and market risks that have inhibited much higher levels of investment in the power sector across Southeast Asia. 

However, public sources alone cannot cover the sizeable investment needs ahead. Sustained and balanced access to international and regional sources of private finance, complemented by public sources, would better help Southeast Asia fund its energy goals. More robust private financing conditions would help governments to use public capital more effectively, especially in countries with limited fiscal capacity.

Realising this requires reforms and greater policy focus on tackling the risks facing investments, especially in renewables, flexibility assets and efficiency. With the dramatically improved economics of renewables in many parts of the world, the region now has a compelling opportunity to transform its power sector.

While recognizing that market conditions and underlying risks differ starkly by country, the SEAO points to efforts needed across four priority areas:

  • enhancing the financial sustainability of the region’s utilities;
  • improving procurement frameworks and contracting mechanisms, especially for renewables;
  • creating a supportive financial system that brings in a range of financing sources and
  • promoting integrated approaches that take the demand-side into account.

Priority 1: Enhancing the financial sustainability of the region’s utilities

The region’s utilities, mostly state-owned, function as the primary counterparty to private generators and are the main investors in electricity networks (which as highlighted in the SEAO, are also crucial for supporting regional trade and integration). Their financial sustainability depends on their ability to recover costs, which is influenced by customer connections, operational performance and regulatory frameworks. Cost-recovery varies across Southeast Asian markets, with particular challenges related to setting retail tariffs in a way that balances system needs and affordability for consumers.

For example, despite improved borrowing conditions for Vietnam Electricity (EVN), financial performance is tenuous and tied to government decisions on electricity prices, which remain low by international standards. By contrast, in Malaysia, a combination of improved operations, better financing and regulations for cost-pass-through supports a relatively high level of per capita investment for grids. 

Underperformance can put pressure on government budgets, as in the case of Indonesia. Following several years of improvement, increased financial pressure on PLN, due to rising power purchase and fuel costs in the face of frozen retail tariffs, prompted a year-on-year boost in government subsidies in 2018 (equivalent to over 3% of total state spending). Looking ahead, PLN’s subsidy burden could be sizeably reduced through more cost reflective electricity tariffs. Moreover, changes to retail prices could be tempered through better utilisation of existing generation, more focus on efficiency measures to help slow Indonesia’s demand growth and less dramatic expansion of capacity with contractually onerous terms.

Priority 2: Improving procurement frameworks and contracting mechanisms, especially for renewables

Investment frameworks for power generation have evolved considerably, but further reform could help improve private financing prospects. While independent power producer (IPP) investments are playing an increased role, these have come mostly through administrative mechanisms, such as direct negotiation with utilities, which are often not transparent in terms of price formulation. Price incentives (e.g. feed-in tariffs) under licensing schemes have driven most investment in renewables, but their design is not always effective; in some cases (e.g. Indonesia) tariffs have been set too low to attract investment at current project costs.

Competitive auctions, which can provide price discovery and clear risk allocation through contracts, have helped drive down renewable purchase prices around the world. Most Southeast Asian countries have been slow to adopt them, but implementing such transparent mechanisms for orderly market entry, with a commitment to sustain their use over time, would go a long way to reassure investors.

The case of Viet Nam illustrates challenges and opportunities in terms of policy design and bankability. Attractive feed-in tariffs spurred a boom in solar PV deployment in the first half of 2019, financed mostly by regional players. Yet, perceived risks and financing costs are relatively high and international banks remain reluctant to lend to renewables projects. This stems from risks associated with the standard power purchase agreement offered to IPPs, including areas related to dispatch and payments, as well as concerns over the adequacy of local grids to accommodate a rapid increase in variable generation. Clearer regulations, better policy design, and measures to address system integration and contractual concerns could help to improve the affordability of investments. With financing terms equivalent to those found in more mature markets, generation costs for solar PV and onshore wind could be around one-third lower.

Priority 3: Creating a supportive financial system that brings in a range of financing sources

As changing financing conditions make investing in some legacy parts of the power system more difficult, more effort is needed to cultivate a supportive financing environment for newer technologies while ensuring security of supply. To illustrate, final investment decisions for coal power in the region have fallen to their lowest level in over a decade in 2019 (reflecting a mixture of increased financial scrutiny by banks and overcapacity concerns). There has been a reduction in the number of financiers involved in transactions in the past three years, while IPP projects that have gone ahead continue to rely on a high share of international public finance. 

At the same time, mobilising capital in newer areas requires improving the cost and availability of finance. The average loan duration in Southeast Asia is just over six years, far less than the lifetimes of energy and infrastructure assets. The cost of capital for an indicative IPP varies widely – with estimates in Singapore, Thailand and Malaysia at 3-5% (nominal, after-tax), while those for Philippines, Viet Nam and Indonesia are much higher (7-10%). Investors cite limited availability of early stage project development equity and long-term construction debt for renewables and storage, though some dedicated funds, such as the Southeast Asia Clean Energy Facility, are emerging to fill the gap.

Priority 4: Promoting integrated approaches to investment that address the demand side

Integrated approaches to investment, which take into account the demand side, could help to address rising consumption needs more cost-effectively. This is particularly true in fast-growing areas, such as demand for cooling, which is a major driver of supply requirements during peak hours but where more efficient air conditioner units, including those manufactured locally, are available at affordable prices. Efficiency investments can face barriers due to the small transaction sizes (from the perspective of banks), high upfront capital requirements (from the perspective of consumers), challenges in evaluating creditworthiness, and lack of clear labelling to support purchase choices. Low and subsidised retail power tariffs can also distort the investment case. 

Addressing information barriers, enhancing financing models and reducing subsidies would better support investment. Energy service companies are addressing the scale and upfront financing challenge of investment. They are well established in markets with long-term energy savings targets and supporting regulations, such as in Malaysia, Thailand and Singapore. Targeted use of public funds, insurance and capacity building can help reduce performance-related risks, as in Indonesia’s Energy Efficiency Project Finance Program. Progress in aggregating and securitising projects, through green bonds for example, could also help attract lower cost finance from a bigger pool of investors. Despite picking up in 2018, with over 40% targeting low-carbon buildings, Southeast Asia accounts for only 1% of global green bonds issuance to date.

Higher investments would yield multiple benefits

Overall, achieving Southeast Asia’s energy goals will call upon stronger policy ambitions across a range of energy sources and significant new capital commitments in the years ahead. As international experiences have demonstrated, where governments provide frameworks that allow for the efficient allocation and management of investment risks, the private sector responds and the cost of capital is reduced. 

These efforts would also yield multiple benefits – in the Sustainable Development Scenario, average annual capital spending across the entire energy sector of more than $140 billion over 2019-40 (higher than the $110 billion under the State Policies Scenario), is offset by the nearly $200 billion that Southeast Asian economies would save annually on fossil fuel imports by 2040. Such financial savings would come in addition to improved local air quality and universal energy access, as well as a reduced contribution to global climate change.

There is now an opportunity for investors and companies in Southeast Asian countries to engage with governments in order to encourage financial decisions and policy making that are better aligned with sustainability goals. This includes not just traditional utilities, developers and banks, but also the crucial perspectives of development finance institutions and the institutional investors, whose participation will be critical to funding the region’s energy goals.

As the world’s “All-fuels and All-technologies” energy authority, the IEA will continue to assist ASEAN Member States to tackle their energy policy challenges, including through good data and analysis, training and capacity building and enhanced engagement.

*Lucila Arboleya, Energy Economics and Financial Analyst.

IEA

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Understanding the World Energy Outlook scenarios

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Authors: Laura Cozzi and Tim Gould

Today’s energy choices and their consequences

Today’s energy choices will shape the future of energy, but how should we assess their impact and adequacy? This is the task the World Energy Outlook takes on. It aims to inform the thinking of decision makers as they design new policies or consider new investments. It does so by exploring possible futures, the ways they come about and some of the main uncertainties – and it lays out the consequences of different choices for our energy use, energy security and environment.

One key element of this is to assess where the global energy system is heading, based on the policy plans and investment choices we see today. A second is to assess what would need to be done differently in order to reach the climate, energy access, pollution and other goals that policy makers have set themselves.

As ever, this year’s World Energy Outlook, to be released on 13 November, brings many changes from the 2018 edition. In this commentary, we wanted to highlight two in particular.

Introducing the Stated Policies Scenario

In this year’s Outlook, the New Policies Scenario is renamed as the Stated Policies Scenario (the acronym is STEPS – STated Energy Policies Scenario). As with its predecessor, this scenario is designed to reflect the impact not just of existing policy frameworks, but also of today’s stated policy plans. The name change underlines that this scenario considers only those policy initiatives that have already been announced. The aim is to hold up a mirror to the plans of today’s policy makers and illustrate their consequences, not to guess how these policy preferences may change in the future.

The planned policies analysed in this scenario cover a wide spectrum. For example, a country might state that it intends to remove fossil-fuel consumption subsidies or, alternatively, that it will walk back a previous reform. Another might say that it will tighten future fuel efficiency standards or step up support for electric vehicles. One might open up new resource developments in oil and gas while another might limit them.

Many countries today are raising their ambitions for clean energy deployment, as reflected by the rising interest in offshore wind that we explored in depth in a special focus from this year’s World Energy Outlook that was released separately in Copenhagen last week. Countries may also announce new rural electrification targets or ambitions to bring clean fuels to parts of their population that rely on firewood or other solid biomass for cooking.

All of these stated policies are assessed individually and their impacts are modelled. In our updated and expanded online explainer on the World Energy Model, the large-scale simulation model that is used to generate all our projections, we have made all the key policy assumptions available for all scenarios, along with all the underlying assumptions on population, economic growth and energy resources (which are held constant across the scenarios) and information on prices and technology costs (which vary by scenario depending on the market and policy context).

There is one type of policy announcement that deserves special attention: the growing number of long-term decarbonisation targets, including “net zero” commitments. After the UN Climate Summit in September, there were at least 65 jurisdictions, including the European Union, that had set or were actively considering long-term net-zero carbon targets. These economies together accounted for 21% of global gross domestic product and nearly 13% of energy-related CO2 emissions in 2018.

Are these “net zero” targets all incorporated into the Stated Policies Scenario? It depends. The target has to be announced or adopted officially, but the crucial variable is how visible the pathway is to reach it. As always with the World Energy Outlook, the details matter. Is there a strategy to decarbonise heat? What about heavy industry? What about trucks or aviation? To the extent that these pathways are laid out, then the overall ambition is also reflected in this scenario.

And it’s not only about national governments: other commitments are becoming increasingly important, whether from sub-national authorities, cities, companies or investors. We also keep a close eye on changing public attitudes and preferences, as these can be very significant in shaping energy use (as, for example, with the rising popularity of SUVs).

In aggregate, these commitments are enough to make a significant difference. The comparison with the Current Policies Scenario, which only looks only at policies in place but from which the effects of announced policies are excluded, makes this clear. However, there is still a large gap between the projections in the Stated Policies Scenario and an energy system that meets global sustainable energy goals.

Extending the Sustainable Development Scenario to 2050

What should policy makers do? What pathways might help meet these targets? What technologies need a boost? Where should innovation, research and investment be directed? How can we balance growing energy demand with the need to reduce air pollution and carbon emissions? How can millions of people gain access to critical energy services while also meeting climate goals?

The IEA seeks to help policy makers in government and industry shape a more secure and sustainable energy future. This is why the World Energy Outlook has been providing detailed climate mitigation scenarios for more than a decade. Two years ago, we introduced a new scenario, the Sustainable Development Scenario, which also incorporates two other crucial elements of the Sustainable Development agenda: cleaner air and universal access to energy, in addition to climate targets.

In the IEA’s view, these elements are profoundly interconnected aspects of global energy transitions. The Sustainable Development Scenario is one of the very few deep decarbonisation scenarios that considers all of them in detail and provides a pathway that achieves them simultaneously, along with detailed attention to the security and affordability of energy supply. In our view, no vision of a sustainable energy world can be considered complete if parts of the global population do not have access to modern energy.

Another new feature of this year’s WEO is that the horizon for the Sustainable Development Scenario is extended by a decade to 2050. This has little impact on achieving modern energy for all, both for electricity and clean cooking. That goal is reached by 2030 in this scenario. But it provides a clearer view on how dramatic improvements in air quality reduce pollution-related premature deaths. And it gives considerable additional clarity on how the scenario meets the Paris Agreement goal of holding the rise in global temperatures to “well below 2°C … and pursuing efforts to limit [it] to 1.5°C.”

The Sustainable Development Scenario models a rapid and deep transformation of the global energy sector. It is consistent with all the “net zero” goals contemplated today being reached on schedule and in full. The technology learning and policy momentum that they generate means that they become the leading edge of a much broader worldwide effort, bringing global energy-related CO2 emissions down sharply to less than 10 billion tonnes by 2050, on track for global net zero by 2070.

This means that the Sustainable Development Scenario is “likely” (with 66% probability) to limit the rise in the average global temperature to 1.8 °C, which is broadly equivalent to a 50% probability of 1.65 °C stabilisation. These outcomes are achieved without any recourse to net negative emissions.

How does this scenario relate to the pursuit of a 1.5 °C outcome? For one answer to this question, we turned to the IPCC Special Report on 1.5 °C. Almost all the 1.5 °C scenarios assessed by the IPCC (88 out of 90) assume some level of net negative emissions. A level of net negative emissions significantly smaller than that used in most scenarios assessed by the IPCC would provide the Sustainable Development Scenario with a 50% probability of limiting the rise in global temperatures to 1.5°C.

However, as we have pointed out in the past, there are reasons to limit reliance on early-stage technologies for which future rates of deployment are highly uncertain. That is why the Outlook has always emphasised the importance of early policy action. That is also why, in the WEO-2019, we explore what it would take to achieve stabilisation at 1.5 °C with a 50% probability without net negative emissions.

Two different types of scenario make a powerful mix

The World Energy Outlook incorporates two different approaches to scenario design. The first defines a set of starting conditions and sees where they lead; the Stated Policies Scenario and the Current Policies Scenario are of this type.

The second approach does the opposite, defining a set of ambitious future outcomes and then working out how they can be achieved: this is the principle underlying the Sustainable Development Scenario.

Each of these approaches, on its own, offers powerful insights. In combination, they provide a broad perspective not just on the energy and climate challenges that we face today, but on what can be done to address them.

*Tim Gould, Head of Division for Energy Supply Outlooks and Investment.

IEA

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Understanding users is key to the evolution of the world’s energy systems

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Authors: Brian Motherway and David Shipworth

The choices made by individuals are having a significant effect on the evolution of the global energy system. Thanks to distributed renewables, users are no longer only consuming energy – they are also producing it. Shifts in consumer behaviour, such as a move toward electric vehicles, are also creating stresses and opportunities for power systems. Yet in addition to distributed renewables and electrification, one of the most significant, cross-cutting and user-centred trends transforming today’s global energy system is digitalisation.

By joining together all components of the energy system via high-speed digital communications networks, digitalisation provides new opportunities to accelerate the growth of low-carbon and energy efficient energy systems. For example, as the share of variable renewable generation increases, homes and businesses with electric cars and heating and cooling systems can offer flexibility services to ensure the security of our power supply. By facilitating higher levels of automation, digitalisation also promises efficiency gains across the energy system: from individual appliances to buildings and power plants.

For consumers, digitalisation is changing expectations of service and value. People no longer need only to be passive energy consumers; digital technologies are already supporting people to more actively participate in energy markets, and will soon allow users to produce, consume, store and trade an even wider range of energy services.

The IEA is at the forefront of research on each of these trends, tracking technology change and supporting its member governments understand how to leverage the digital revolution for greater energy efficiency, and how infrastructure, markets and institutions can adapt to the evolving challenges of electricity security in the 21st century, amongst other topics.

One of the key takeaways from this research is that energy users are now more central to the energy system than ever before, with consumer purchasing decisions and behaviour determining the pace of technological change, whether digitalisation becomes a force for greater efficiency or just more energy use, and how much distributed storage and flexible load resources become available to balance variable renewables.

Yet paradoxically, a major unknown factor in future energy transitions is the human element. For example, research has consistently revealed mismatches between how technology providers, techno-economic models, and policy makers expect technologies to be adopted and used, and reality. These discrepancies play out in contrasts between the expected and actual impacts of policy measures and observed uptake of technologies – through to the ‘performance gap’ between designed and in-use efficiency of vehicles and buildings.

A failure to properly understand the role of energy users in the energy transition is worrying in a world where governments have set ambitious climate goals that depend on a rapid increase in demand-side energy efficiency, alongside an acceleration in the growth of intermittent renewable generation. If the world is to succeed in this mission, it is imperative that policy makers and technology providers properly understand how and why people adopt and use new energy technologies.

With this in mind, 16 members of the IEA family and three sponsors launched a new collaboration under the IEA’s Technology Collaboration Programme (TCP) in October 2019: User-Centred Energy Systems, or UsersTCP. This initiative brings together the world’s leading socio-technical researchers and policy makers to provide the evidence base needed to make better energy policy decisions that place energy users at the heart of the policy process.

UsersTCP was created with the recognition that people use technologies to convert energy into the services they want. To do this, technologies must be useable, and their services must satisfy user needs. This ‘socio-technical’ approach is becoming more and more central to policy making and lies at the heart of the work of the collaboration.

Announced at the All-Energy Australia Conference in Melbourne, UsersTCP has adopted a systems perspective in which people, such as technology designers, policy makers, intermediaries and end users, are as integral as hardware and software to delivering an energy system that meets our wider social, environmental and economic goals. As such, the work programme focuses on business models, peer-to-peer energy trading, hard-to-reach energy users and the social licence to automate, with new work to begin shortly on the application of behavioural insights in energy policy making , in collaboration with the IEA’s Energy Efficiency Division.

To help disseminate the outputs of the UsersTCP and connected work, the User-Centred Energy Systems Academy has begun holding monthly webinars on key topics. Building on the success of the DSM University, the first webinar looked at on the grid integration of electric vehicles.

The IEA will be working closely with this new research collaboration, and looks forward to using the results of its research to inform its modelling capacity and policy guidance. 

* David Shipworth, Chair of UsersTCP.

IEA

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The United Nations Industrial Development Organization (UNIDO) and the Moroccan Agency for Sustainable Energy of the Kingdom of Morocco (MASEN)...

Defense8 hours ago

Strategic Instability in the Era of Information and Communication Technologies: Crisis or the New Norm?

Strategic stability is once again becoming a primary concern in international relations. The topic has received a great deal of...

Reports9 hours ago

Health spending set to outpace GDP growth to 2030

Health expenditure will outpace GDP growth over the next 15 years in almost every OECD country, according to new OECD...

EU Politics11 hours ago

EU delivers on stronger European Border and Coast Guard to support Member States

Today, the Council has officially adopted the Commission’s proposal to reinforce the European Border and Coast Guard. The European Border...

Middle East13 hours ago

The narrative approach of Lebanon’s uprising

In Social Politics, intellectuals and scholars are surely defined political protestation as new concept of a social group that operates...

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