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The clean energy transition requires action on electricity demand

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Authors: WEO Energy Analysts Stéphanie Bouckaert, Timothy Goodson and Brent Wanner

As a fundamental rule, electricity supply and demand must be balanced at all times. Traditionally, this has been achieved by adjusting electricity supply to match demand that varies at different times of the day. But this poses a problem as the share of power generation from variable renewables such as wind and solar PV rises. Demand-side response is one of several measures that can help integrate higher shares of variable renewables, including electricity storage, greater interconnection and more flexible power plants.

When the sun is shining and the wind blowing, electricity generation from these sources may exceed demand, leading to the curtailment of otherwise low-cost and carbon-free electricity. Inversely, when the wind doesn’t blow or on cloudy days, power systems may need to rely on flexible yet expensive and carbon-intensive sources of generation. Both of these outcomes are economically and environmentally undesirable.

Demand-side response can significantly reduce such outcomes by shifting and shaping electricity demand to match the availability of renewables-based electricity generation.

Traditionally demand-side response has been confined to large-scale industrial consumers manually shedding demand in times of system stress. But over 75% of the global potential in demand-side response lies in buildings, with space heating, water heating and air conditioning loads contributing the most. The thermal inertia of buildings and hot-water storage allows electricity demand from heating and cooling equipment to be shifted in time to suit the needs of the grid at low cost without compromising user comfort. Loads from appliances such as refrigerators and washing machines can also become demand-side response resources, facilitated by the growing market share of smart appliances.

Expanding demand-side response – beyond manual shedding of large loads – is a relatively recent phenomenon, with Europe and the United States currently leading growth. In several markets consumers can receive payment for various forms of short-duration “fast frequency response” to keep the grid in balance, larger volumes of “load shifting” to respond to changeable weather, or contracts for guaranteed changes to future consumption patterns.

In addition to balancing loads, demand-side response measures can provide benefits to the grid by mitigating congestion in transmission and distribution systems and delaying or avoiding network upgrades, resulting in important savings. Power systems with greater flexibility are also better able to respond to short-term variations in electricity supply or demand that can be created by sudden changes in output from variable renewables-based generators.

The flexibility provided by demand-side response is therefore both a valuable resource facilitating the integration of a high share of variable renewables, and a symbol of the shift away from the traditional paradigm of supply following demand.

Identifying demand-side response potential

Globally, the theoretical potential of demand-side response today is estimated to be nearly 4,000 TWh per year, or more than 15% of total electricity demand (WEO 2017). Based on IEA modelling of electricity consumption profiles by end-use, this potential represents the sum of all loads than can be shifted for every hour of the year.

In the central scenario of the World Energy Outlook 2017, annual demand-side response potential is expected to increase to almost 7,000 TWh by 2040, the buildings sector leads future growth as demand for appliances and electric heating and cooling expands in Asia and Africa. Within developed economies, the electrification of heating and transport are major drivers of future growth. Smart charging of electric vehicles (EVs) uses charging (and discharging) of EV batteries to facilitate balancing of the power grid.

The IEA estimates that by 2040 almost 1 billion households and 11 billion appliances could participate in demand response programmes. While the majority of potential may lie in buildings, this potential can also be the most difficult to tap. This is especially the case in residential buildings, where participating in demand-side response programs may require behaviour change while offering limited economic benefits to households due to the small size of residential loads. As such, aggregation and automation of small scale demand-side response resources is often the most viable path to market for the residential sector.

The demand-side response potential in industry and large commercial buildings can be more accessible, as energy management systems optimize decisions to consume electricity or offer demand-side response services to the market. 

Connectivity as a key enabler

Digital connectivity is the key to expanding demand-side response into new sectors and realising a greater share of its total theoretical potential. By enabling the linking, monitoring, aggregation and control of large numbers of individual pieces of electricity consuming equipment, connectivity allows for matching demand to the needs of the overall system in real time (Digitalization & Energy, 2017). Smart meters, smart appliances, electric vehicles and load management software are therefore central to efforts to increase demand-side response resources.

Capitalizing on demand-side response potential also requires appropriate price signals and regulatory frameworks to incentivize participation. Retail tariff structures such as time-of-use pricing or real-time pricing can deliver the necessary price signals to consumers, while enabling aggregators and other demand-side resources to participate in wholesale energy, capacity and ancillary services markets can create the necessary environment to stimulate investment.

Demand-side resources active in markets today represent only the tip of the iceberg in terms of the total potential. Digitalisation presents an opportunity to unlock this enormous potential and significantly enhance grid flexibility. As prices for digital technologies continue to fall and electricity consuming equipment is increasingly connected and controllable, expansion of demand-side response becomes technically feasible and economically attractive.

Electricity consumers benefit from reduced electricity bills by providing demand response services, but even larger savings are realised on a system level. Digitally enabled demand response is often a more cost-effective and climate-friendly measure facilitating the integration of variable renewables than building new power plants or electricity storage. Rapid expansion will act as a key accelerator for the clean energy transition. Moving forward, government policy will need to provide clear rules and a long-term vision for increasing demand-side response resources.

First published in International Energy Agency

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Energy

“Oil for development” budget, challenges and opportunities

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Iran has recently announced that its next fiscal year’s budget is going to be set with less reliance on oil revenues.

Last week, Head of the Country’s Budget and Planning Organization (BPO) Mohammad Baqer Nobakht said “In the next year’s budget – it starts on March 19, 2020 – oil revenues will be only spent for development projects and acquisition of capital asset, and not even one rial is going to go to government expenditures and other areas.”

At first glance, the idea is very appealing and it seems if the government manages to pull it off, it will be a significant step for Iran in its movement toward an oil-independent economy. However, it seems that cutting oil revenues from the budget and allocating them only to a specific part of the country’s expenditures is not going to be an easy task.

Although, BPO has already suggested various substitute sources of revenue to replace those of oil, some experts believe that the offered alternatives are not practical in the short-term.

So, how successful will the government be in executing this plan? What are the challenges in the way of this program? What are the chances for it to become fully practical next year?

To answer such questions and to have a clearer idea of the notion, let’s take a more detailed look into this [so called] ambitious program. 

The history of “oil for development”

It is not the first time that such a program is being offered in Iran. Removing oil revenues from the budget and allocating it to development projects goes way back in Iran’s modern history.

In 1927, the Iranian government at the time, decided to go through with a plan for removing oil revenues from the budget, so a bill was approved based on which oil incomes were merely allocated to the country’s development projects.

This law was executed until the year 1939 in which the plan was once again overruled due to what was claimed to be “financial difficulties”.

Since then up until recently, Iran has been heavily reliant on its oil revenues for managing the country’s expenses. However, in the past few years, and in the face of the U.S. sanctions, the issue of oil being used as a political weapon, made the Iranian authorities to, once again, think about reducing the country’s reliance on oil revenues.

In the past few years, Iran’s Supreme Leader Ayatollah Seyed Ali Khamenei has repeatedly emphasized the need for reducing reliance on oil and has tasked the government to find ways to move toward an oil-independent economy.

Now that Iran has once again decided to try the “oil for development” plan, the question is, what can be changed in a program that was aborted 80 years ago to make it more compatible with the country’s current economic needs and conditions.

The substitute sources of income

Shortly after BPO announced its decision for cutting the oil revenues from the next year’s budget, the Head of the organization Mohammad-Baqer Nobakht listed three alternative sources of income to offset oil revenues in the budget planning.

According to the official, elimination of hidden energy subsidies, using government assets to generate revenue and increasing tax incomes would be the main sources of revenues to compensate for the cut oil incomes.

In theory, the mentioned replacements for oil revenues, not only can generate a significant amount of income, but they could, in fact, be huge contributors to the stability of the country’s economy in the long run. 

For instance, considering the energy subsidies, it is obvious that allocating huge amounts of energy and fuel subsidies is not a good strategy to follow.

In 2018, Iran ranked first among the world’s top countries in terms of the number of subsidies which is allocated to energy consumption with $69 billion of subsidies allocated for various types of energy consumption including oil, natural gas, and electricity.

Based on data from the International Energy Agency (IEA), the total amount of allocated subsidies in Iran equals 15 percent of the country’s total GDP.

The budget that is allocated for subsidies every year could be spent in a variety of more purposeful, more fruitful areas. The country’s industry should compete in order to grow, people must learn to use more wisely and to protect the environment.

However, practically speaking, all the above-mentioned alternatives are in fact long term programs that take time to become fully operational. A huge step like eliminating hidden subsidiaries cannot be taken over a one or event two-year period.

The development aspect

One big aspect of the government’s current decision is the “development” part of the equation.

A big chunk of the country’s revenues is going to be spent on this part and so the government is obliged to make sure to choose such “development” projects very wisely.

Deciding to allocate a huge part of the country’s income on a specific sector, makes it more prone to corruption, and therefore, a plan which is aimed to help the country’s economy could become a deteriorating factor in itself if not wisely executed.

The question here is, “Is the government going to spend oil money on all the projects which are labeled as ‘development’ even if they lack the technical, economic and environmental justification?”

So, the government needs to screen development projects meticulously and eliminate the less vital ones and then plan according to the remaining truly-important projects.

Final thoughts

Even if the “oil-free” budget is a notion that seems a little ambitious at the moment, and even if there are great challenges in the way of its realization, but the decision itself is a huge step toward a better future for Iran’s economy. Although realizing this plan seems fairly impossible in the short-term, it surely can be realized with proper planning and consideration in the long term.

Sooner or later Iran has to cut off the ties of reliance on oil incomes and start moving toward a vibrant, dynamic and oil-free economy; a journey of which the first step has been already taken.

From our partner Tehran Times

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Growing preference for SUVs challenges emissions reductions in passenger car market

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Authors: Laura Cozzi and Apostolos Petropoulos*

With major automakers announcing new electric car models at a regular pace, there has been growing interest in recent years about the impact of electric vehicles on the overall car market, as well as global oil demand, carbon emissions, and air pollution.

Carmakers plan more than 350 electric models by 2025, mostly small-to-medium variants. Plans from the top 20 car manufacturers suggest a tenfold increase in annual electric car sales, to 20 million vehicles a year by 2030, from 2 million in 2018. Starting from a low base, less than 0.5% of the total car stock, this growth in electric vehicles means that nearly 7% of the car fleet will be electric by 2030.

Meanwhile, the conventional car market has been showing signs of fatigue, with sales declining in 2018 and 2019, due to slowing economies. Global sales of internal combustion engine (ICE) cars fell by around 2% to under 87 million in 2018, the first drop since the 2008 recession. Data for 2019 points to a continuation of this trend, led by China, where sales in the first half of the year fell nearly 14%, and India where they declined by 10%.

These trends have created a narrative of an imminent peak in passenger car oil demand, and related CO2 emissions, and the beginning of the end for the “ICE age.” As passenger cars consume nearly one-quarter of global oil demand today, does this signal the approaching erosion of a pillar of global oil consumption?

A more silent structural change may put this conclusion into question: consumers are buying ever larger and less fuel-efficient cars, known as Sport Utility Vehicles (SUVs).

This dramatic shift towards bigger and heavier cars has led to a doubling of the share of SUVs over the last decade. As a result, there are now over 200 million SUVs around the world, up from about 35 million in 2010, accounting for 60% of the increase in the global car fleet since 2010. Around 40% of annual car sales today are SUVs, compared with less than 20% a decade ago.

This trend is universal. Today, almost half of all cars sold in the United States and one-third of the cars sold in Europe are SUVs. In China, SUVs are considered symbols of wealth and status. In India, sales are currently lower, but consumer preferences are changing as more and more people can afford SUVs. Similarly, in Africa, the rapid pace of urbanisation and economic development means that demand for premium and luxury vehicles is relatively strong.

The impact of its rise on global emissions is nothing short of surprising. The global fleet of SUVs has seen its emissions growing by nearly 0.55 Gt CO2 during the last decade to roughly 0.7 Gt CO2. As a consequence, SUVs were the second-largest contributor to the increase in global CO2 emissions since 2010 after the power sector, but ahead of heavy industry (including iron & steel, cement, aluminium), as well as trucks and aviation.

On average, SUVs consume about a quarter more energy than medium-size cars. As a result, global fuel economy worsened caused in part by the rising SUV demand since the beginning of the decade, even though efficiency improvements in smaller cars saved over 2 million barrels a day, and electric cars displaced less than 100,000 barrels a day.

In fact, SUVs were responsible for all of the 3.3 million barrels a day growth in oil demand from passenger cars between 2010 and 2018, while oil use from other type of cars (excluding SUVs) declined slightly. If consumers’ appetite for SUVs continues to grow at a similar pace seen in the last decade, SUVs would add nearly 2 million barrels a day in global oil demand by 2040, offsetting the savings from nearly 150 million electric cars.

The upcoming World Energy Outlook will focus on this under-appreciated area in the energy debate today, and examines the possible evolution of the global car market, electrification trends, and consumer preferences and provides insights for policy makers.

While discussions today see significant focus on electric vehicles and fuel economy improvements, the analysis highlights the role of the average size of car fleet. Bigger and heavier cars, like SUVs, are harder to electrify and growth in their rising demand may slow down the development of clean and efficient car fleets. The development of SUV sales given its substantial role in oil demand and CO2 emissions would affect the outlook for passenger cars and the evolution of future oil demand and carbon emissions.

*Apostolos Petropoulos, Energy Modeler.

This commentary is derived from analysis that will be published on 13 November 2019 in the forthcoming World Energy Outlook 2019. IEA

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A Century of Russia’s Weaponization of Energy

Todd Royal

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In 1985 a joint meeting between U.S. President Ronald Reagan, and former Soviet leader, Mikhail Gorbachev conveyed this enduring sentiment during the height of the Cold War, “a nuclear war cannot be won and must never be fought.” This sentiment began moving both countries, and the world away from Mutually Assured Destruction (M.A.D.); and soon thereafter the Cold War ended. With the rise of Vladimir Putin, and the return of the Russian strongman based on the Stalin-model of leadership, Russia now uses and wields Russian energy assets, as geopolitical pawns (Syrian and Crimean invasions) the way they once terrorized the world with their nuclear arsenal.

Russia will remain a global force – even with an economy over reliant on energy – and Putin being the political force that controls the country. What makes the Russian weaponization of energy a force multiplier is “its vast geography, permanent membership in the UN Security Council, rebuilt military, and immense nuclear forces,” while having the ability to disrupt global prosperity, and sway political ideologies in the United States, Europe, Middle East, Asia, and the entire Artic Circle.

Putin understands that whoever controls energy controls the world – mainly fossil fuels – oil, petroleum, natural gas, coal, and nuclear energy to electricity is now added to this dominating mix. Now that Stalin has taken on mythological status under Putin’s tutelage, Joseph Stalin once said“The war (WWII) was decided by engines and octane.”Winston Churchill agreed with Stalin on the critical importance of fuel: “Above all, petrol governed every movement.”

The most devastating war in human history, and one that killed millions of Russians continues driving Putin’s choice to make energy the focal point of their economy, military, and forward-projecting foreign policy. This began the modern, energy-industrial complex that mechanized and industrialized energy as a war-making tool that still affects people-groups, countries, and entire regions of the world.

Russia, then the U.S.S.R. (former Soviet Union), and now current Russia have always thought of energy as a way for their government to dominate their countrymen, traditional spheres of influence (Ukraine, Georgia, Moldova, Ukraine, Estonia, Latvia, Lithuania, Belarus, Central Asia), and a strategic buffer zone against land-based attacks that came from Napoleon and Hitler’s armies that still haunts the Russian psyche.

The timeline of Russia from the 1917, violence-fueled Russian Revolution that brought the Bolsheviks to power, the rise and death of Stalin in 1953, World War II in-between, the Cold War that began March 5, 1946 in Winston Churchill’s famous speech declaring “an Iron Curtain has descended across the Continent,” has been powered by energy.

This kicked off the Cold War until the collapse of the Soviet Union in 1991. During this epoch in history the Soviets promoted global revolution using their economy and military that ran on fossil fuels and nuclear weaponry. In 1999 Vladimir Putin becomes Prime Minister after Boris Yeltsin resigns office, and the rebirth of the Soviet Union, and weaponization of energy continues until today under Putin’s regime.

What Russia now promotes foremost over all objectives: “undermining the U.S.-led liberal international order and the cohesion of the West.”Russia’s principal adversaries in this geopolitical tug-of-war over energy and influence are the U.S., the European Union (EU), and North Atlantic Treaty Organization (NATO). All of these variables are meant to bolster Russia and Putin’s “commercial, military, and energy interests.”

This geopolitical struggle doesn’t take place without abundant, reliable, affordable, scalable, and flexible oil, and natural gas. This is likely why Russia has begun a massive coal exploration and production (E&P) program that has grown exponentially since 2017 according to Russia’s Federal State Statistics Service.

The entire Russian economy is now based on rewarding Putin’s oligarchical cronies, and ensuring Russian energy giants Rosneft and Gazprom can fill the Kremlin’s coffers to annex Crimea and gain a strategic foothold in the Middle East via the Syrian invasion. This economic system is now referred to as “Putinomics.” Using energy resources to fund global chaos, and wars while rewarding his favorite oligarchs and agencies that do the Kremlin’s bidding.

Russia is now in a full-fledged battle with western powers, and its affiliated allies over the fossil fuel industry. While the rest of the world is attempting to incorporate renewable energy to electricity onto its electrical grids, and pouring government monies into building momentum for a carbon-free society, Russia is going the opposite direction.

Moscow’s energy intentions are clear, and have been for over one hundred years. Currently, there Syrian foothold has allowed them to entrench themselves back into the Middle East. This time they aren’t spreading revolutionary communism, instead it is Putin-driven oil and natural gas supplies through pipelines and E&P rights acquired in “Turkey, Iraq, Lebanon, and Syria.”

Russia has a clear pathway to block U.S. liquid natural gas (LNG) into Europe, and a land bridge from the Middle East to Europe almost guarantees Russian natural gas is cheaper, more accessible, and maintains that Europe looks to Russia first for its energy needs. By cementing their role as the “primary gas supplier and expands its influence in the Middle East,” the U.S., EU, and NATO’s military dominance are overtaken by natural gas that Europe desperately needs to power their economies, and heat their homes in brutal, winter months.

To counter Russian energy influence bordering on a monopoly over European energy needs, the current U.S. administration should make exporting natural gas into LNG a top “priority.” Work with European allies in Paris, Berlin, and NATO headquarters to operationally thwart Moscow’s “Middle East energy land bridge.” Global energy security is too important by allowing Russian influence to continue spreading.

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