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Five Key Takeaways from COP24 for Energy

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Authors: Caroline Lee and Andrew Prag*

In the late evening of December 15 2018, the gavel came down on the 24th Conference of Parties (COP) in Katowice, Poland, with the President of the conference leaping over the dais in celebration. The outcome of COP24 was heralded by many as a success in multilateralism and diplomacy, and the adoption of the Paris Agreement “rulebook,” a set of rules and guidelines designed to bring the Agreement to life, was no small achievement.

But how does this achievement translate to energy systems in the real world? What signals does it transmit to domestic policymakers and energy sector investors? We outline five key takeaways of COP24 for the energy system and energy transitions.

  1. A positive step forward for multilateralism on a common path forward

Consensus agreement on the 133-page Paris Agreement rulebook by almost 197 Parties (196 countries and the EU) represents no small feat in multilateralism. One particular success was the emergence of a single set of transparency guidelines for all countries to report and review information, such as their latest greenhouse gas emissions and progress towards meeting their Nationally Determined Contributions (NDCs, representing national pledges to address climate change under the Paris Agreement).

This approach represents a notable shift away from the existing “bifurcated” approach whereby industrialized and developing countries have different reporting and review obligations, though it still provides flexibility for developing countries who lack capacity.

The collection, reporting, and review of energy and emissions data are fundamental to tracking and driving progress of energy transitions and are also at the core of IEA’s work. The new, enhanced transparency framework negotiated in Katowice reflects a positive step in bringing all countries under a single, robust system, while allowing flexibility to those who need it.

One element of the Rulebook that has yet to be agreed upon regards market mechanisms, covered by Article 6 of the Paris Agreement. Negotiations on this topic will continue through 2019.

  1. A call for ambition: energy transitions are underway but must be urgently accelerated

Inspiring stories of energy transitions from all corners of the globe were heard around COP24: Iceland now generates 100% of its electricity from renewable sources, China forges ahead with the world’s largest emissions trading scheme, and Costa Rica is advancing on its plan to become the first carbon-neutral country in the world.

But despite such signs of progress, the pace of global energy transitions is woefully off-track from what is needed to meet global climate targets, and the Paris Agreement has yet to prove itself up to the task of bending the curve. The IEA estimates that energy-related emissions rose in 2018, including in advanced economies for the first time in five years, signalling emissions are moving in the exact opposite direction in which they should. This stark reality was underscored even further by the release of the IPCC’s Special Report on 1.5 Degrees last October, shifting the goal post on the challenge of meeting Paris targets.

With the rulebook in place, the next big challenge for the Paris Agreement is to show that it can result in greater ambition.  Countries are expected to submit revised, more ambitious NDCs by next year, returning the spotlight firmly to policymakers in national capitals and subnational jurisdictions, in particular those responsible for energy policy development. But a delicate process of diplomacy, both inside and outside of the negotiations, is important so that no country feels as if it is acting alone.

  1. Rising fossil fuel consumption remains at odds with meeting climate and energy objectives

It was no coincidence that COP24 was held in the heart of Poland’s Silesia coal region. A priority of the COP Presidency was to highlight and spark discussion on the challenges of fossil fuel transition, including the just transition of workers in these sectors. Coal contributes to 80% of Poland’s electricity generation mix, one of the highest shares in the world and 5 million homes in Poland are heated with coal, a fact that could not escape COP24 participants as the smell of coal smoke lingered over the city centre each evening.

These challenges experienced in Poland, but also in many other countries, highlight opportunities for integrating the need to reduce greenhouse gas emissions with other priorities such as air pollution reduction, sustainable employment, and clean economic development.

Globally, fossil fuels continue to form the backbone of the economy, accounting for 81% of global energy supply, a figure that has remained stubbornly unchanged in the last three decades. IEA’s Coal 2018 report showed that despite the advance of renewables, coal remains the largest source of electricity globally and global coal demand is in fact forecast to rise. Yet the IEA’s Sustainable Development Scenario, describing an energy sector aligned with the Paris Agreement, points to a need for global coal use to peak and enter a rapid decline. The tension between objectives and reality is troublingly, still rising.

  1. Tracking the progress of energy transitions is fundamental to raising ambition, and IEA has a key role to play

COP24 also saw the culmination of the Talanoa Dialogue, an important process to assess global progress towards Paris goals. Tracking progress is a critical driver of raising ambition and enhancing energy transitions efforts. Not only does it highlight progress made, but it reveals areas of action moving forward as “that which is measured, improves.”

The Talanoa Dialogue drew political attention to the value of tracking progress to meet Paris goals. Looking ahead, collective progress will be assessed every five years starting in 2023 through a more comprehensive assessment process called the Global Stocktake, considering not only emissions reductions, but also adaptation to climate impacts and finance.

The IEA is at the heart of global efforts for tracking energy transitions through a range of analytical tools, including Tracking Clean Energy Progress, the Global Energy and CO2 Status Report, and tracking progress on Sustainable Development Goal 7.

  1. Beyond solar and wind: all low-carbon options are vital

Another welcome development from COP24 was growing acknowledgment for the need to explore the full range of options in accelerating energy transitions. While much attention in recent years has been justifiably paid to the impressive growth of variable renewable energy sources, low carbon energy as a whole still only comprises 19% of total energy supplied.  To make real progress in decarbonising the energy system, energy transitions must rely on more than just variable renewables but on all available options.

COP24 saw increasing recognition of the need for a range of technologies to be deployed at scale, including carbon capture, utilisation and storage, nuclear energy, sustainable bioenergy, hydrogen, and of course energy efficiency. All of these have a role to play in addition to, not in lieu of, the rapid scale-up of renewables.

Despite the lack of a final agreement on market mechanisms, the adoption of the Paris Agreement rulebook should be recognized as the multilateral success as it was. However, the pace of energy transitions is far from what is required to meet Paris Agreement goals, and translating intention to practice will require strong, well-coordinated policies that rely on the full array of low-carbon options.

*Andrew Prag, Head, Environment and Climate Change Unit.

IEA

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How ASEAN should step up to accelerate sustainable energy within the region

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ASEAN is favored to be the 4th largest economy in the world by 2030 after showing impressive economic growth in the last decade. However, to reach that goal, ASEAN member states need to make sure that they can provide reliable access to energy to support industrial development. Unfortunately, as the region still imports 40% of its primary energy supply with fossil fuels becoming the largest share, the promise of ASEAN economic growth is currently at stake.

Over the years, ASEAN has been known for its heavily reliant on fossil fuels to meet domestic demand. ASEAN Center for Energy has reported that more than 80% of ASEAN’s energy mix in 2017 was fueled by fossil energy with oil accounting for 38,2% of total share and followed by gas (23.2%), and coal (22.3%). Vietnam and Indonesia, as the largest oil and coal producers respectively, have become important players for energy-importing countries such as Thailand, Philippines, and Malaysia. This long historic record on fossil consumption has posed a threat for Southeast Asia to become the slowest region in the world to shift to renewables.

But even so, it doesn’t mean that the ASEAN member states haven’t made any efforts at all. Vietnam might have shown the greatest accomplishment in accelerating the energy transition compared to other countries. Between 2016-2020, Vietnam has successfully doubled its production of renewables from 17.000 to over 35.000 megawatts. The rapid growth of solar panels in just four years has even made Vietnam become the third-largest solar market globally by 2020. Furthermore, ASEAN has also witnessed promising growth in the use of hydropower. Lao PDR, as traversed by The Greater Mekong, has powered 98.8% of its national electricity with hydropower generators in 2017. It even exports its energy to Thailand, Vietnam, and Cambodia through the transmission lines and is looking for expansion to Malaysia and Singapore, aiming to become Southeast Asia’s battery.

Seeing these potentials for sustainable energy deployment, the next question would be whether it is enough to push ASEAN to phase out the fossil fuel industry. Unfortunately, the same report from ASEAN Center for Energy has estimated that fossil fuel would still provide the majority of energy supply in 2040 even if ASEAN member states adopt a progressive scheme such as APAEC Targets Scenario. This is because energy security still presents a sensitive issue for Southeast Asia, where fossil fuels are perceived to be more reliable and cheaper than renewables. In consequence, while ASEAN will witness an enchantment of renewables in the following years, it will also see the growing trend in the use of clean coal technology, especially in major producer countries like Indonesia and Malaysia. Even Vietnam, which is considered the most successful country in accelerating renewables, will continue to rely on coal due to such perception of fossil fuels. As long as fossil fuels are still reckoned to be the main asset  of energy security, ASEAN won’t go far with its transition.

The incapability of ASEAN member states to undertake adequate transition on their own, makes regional cooperation becomes crucial. So far, the two most noticeable cooperation that promotes energy interconnections within the region are ASEAN Power Grid (APG) and Greater Mekong Subregion (GMS) Program. APG has been run under APAEC since 1999 to facilitate cross-border electricity trade and enhance the integration of Member States’ power systems. To date, 7 of 16 power interconnection projects have been completed mainly in The Upper West System (or in the Greater Mekong Subregion) and The Lower West System which covered Thailand, Peninsular Malaysia, Singapore, and Indonesia. However, most interconnection projects are still based on bilateral agreements and thus have no integrated regional power architecture. One program conducted on a multilateral basis is Lao PDR-Thailand-Malaysia-Singapore Power Integration Project (LTMS-PIP), yet the trading is still limited to a unidirectional flow of electricity. The energy cooperation under GMS also presents a similar problem where all projects still occur on bilateral deals.

Although bilateral cooperation carried out under APG and GMS has helped the member states to fulfill their domestic demand, implementing a more integrated power grid with a multilateral trading system will enhance the region’s energy security. This is because a regional power transmission grid with multilateral exchange offers more alternative resources and geographic diversification that will lower the systemic risks on renewables infrastructure. For example, countries with abundant clean energy like Lao PDR can transfer their hydropower to areas of deficit such as Malaysia and Singapore. Whilst, at the same time, surplus energy from one country can be sold to another through the power grid. This is where the multilateral trading regime becomes relevant to improve the accessibility and stability of energy consumption. Additionally, an interconnected power grid can also attract more investment as large-scale renewables will become more profitable.

It is therefore very timely for ASEAN to step up the game by accelerating the construction of an integrated power grid across the region. Without a strong commitment and sufficient transition, Southeast Asia’s economy could plummet by 11% by the end of the century. An integrated power grid might be the best possible scenario to prolong ASEAN’s economic growth in the future.

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The Insane Energy Policies of the Biden Administration

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With the projected loss of over 5 million barrels of oil a day due to sanctions against Russia, as a result of Russia’s invasion of Ukraine, the world faces an artificial energy crisis.  This crisis will throw the world’s economy into turmoil, and possibly throw the world into a prolonged economic slump. 

With the United States now relaxing sanctions against Venezuela in order to increase oil flow into the world energy market, and going hat in hand to the right wing Saudi Arabian government, the past policies of the United States are in a state of disarray.  By appealing to right wing governments in Saudi Arabia and Venezuela, the Biden Administration is allowing these governments to benefit from the Russia-Ukraine War, and punishing the American people by refusing to develop the ample supplies of shale oil that is in the United States.

What is glaringly absent from the Biden Administration’s energy policies is ignoring, and refusing to allow oil companies to develop the massive oil shale deposits in the Green River Formation.   The Green River Formation contains up to 4.3 trillion barrels of shale oil, which could be easily developed, and at a cost far below the average cost of developing either the current shale oil fields or the normal method of extracting oil from other traditional oil fields.

With the Biden Administration freezing oil drilling on federal land, the energy policy by the Biden Administration is quite literally insane.

The Green River Formation

The Green River Formation is located at the Green River in western Colorado, eastern Utah, and southwestern Wyoming.

The energy resources of the Green River Formation are not a true oil, but a form of pre-oil called kerogen. Kerogen is insoluble in water and in other organic solvents such as benzene or alcohol. However, when the kerogen is heated under pressure it breaks down into recoverable gaseous and liquid substances resembling petroleum. It is possible to break down this substance into synthetic oil.

Unlike normal processes of extracting shale oil called fracking, a process called pyrolysis is used. Pyrolysis occurs in the absence or near absence of oxygen. The rate of pyrolysis increases with temperature. “Pyrolysis transforms organic materials into their gaseous components, a solid residue of carbon and ash, and a liquid called pyrolytic oil (or bio-oil). Pyrolysis has two primary methods for removing contaminants from a substance: destruction and removal.”

The Hydraulic Fracturing Method

Hydraulic fracturing is used to recover oil and natural gas in oil shale deposits, where traditional oil drilling methods are not capable of recovering the oil in the rock strata. Hydraulic fracturing is also known as “fracking.” In order to recover the oil using fracking, a well is drilled into the rock strata containing the recoverable oil and natural gas. Then water, sand, and chemicals are injected into the well under high water pressure to continue to fracture the rock strata.

This then forces the oil and natural gas out of the well and is recovered into holding containers for further processing.

A huge amount of water is used during the fracking process. This is called the water cost. In a normal fracking procedure, between 1.5 to 9.7 million gallons of water are used to complete the fracking process for just one well. The water used during fracking becomes too polluted to be able to be used for human consumption. While the water used in fracking can be treated to return it to a potable status, the cost of doing so is so high, that typically the contaminated water is pumped into an underground chamber and removed from the rainwater cycle.

The technology to develop the Green River Formation does not use typical fracturing methods, so the water cost for the extraction is minimal. Because of the dramatically lower water cost, the breakeven point for extracting the kerogen is much less than traditional fracking.

The Green River Formation is a national security issue

The economic and political consequences of Russia invading Ukraine are now becoming clear.

One of the more obvious consequences has been the rapid rise in the price of oil. As of June 13,  the spot price of oil was $121.60 a barrel. Despite pleas from the Biden administration to Saudi Arabia to increase oil production, the Saudis have refused to do so. The United Arab Emirates appears to be siding with the Saudis and have also declined to raise oil production.

The Saudis are unhappy with the Biden administration’s efforts to renegotiate the Iran nuclear deal. They are also convinced that they have more in common with Russia in the current international environment. The Saudis are also angered by the pullback of support by the United States for its war in Yemen. This would appear to be the death knell of the agreement between the United States and Saudi Arabia where the U.S. guaranteed the national security of Saudi Arabia, while the Saudis guaranteed a steady supply of oil.

With the world upended because of Russia’s invasion of Ukraine, and the need for Europe to have steady oil and natural gas supplies, it is essential that the United States tap its vast oil shale reserves in the Green River Formation. This would help stabilize the energy security of the United States and its European allies. It would also make the United States 100% energy secure and free the United States from the cauldron of Middle East politics.

It should be noted here that this type of action by the United States would not be adding to the use of fossil fuels in the world. The exploitation of the Green River Formation would simply be displacing the use of fossil fuels from other sources of oil.

The cost of extracting this energy source cannot be accurately estimated. However, since the current technology available consumes less water because of the volatilization of water effect, the water cost is minimal, and so the breakeven cost of extracting a barrel of oil is significantly less than conventional fracking methods.

Reuters has estimated that the breakeven point for shale oil produced by fracking is $50. As noted above, fracking has a high-water cost. Since the current technology has a much lower water cost, it can be safely estimated to have a breakeven point of between $25 to $35 per barrel. If economies of scale are used, the cost could fall to as low as $15 to $25 a barrel.

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Looking beyond the Energy Price Shock to China’s Low Carbon Transition

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Authors: Martin Raiser, Sebastian Eckardt

The conflict in Ukraine has caused a massive shock to the global economy. Crude oil prices in early March spiked to as high as $140 per barrel, levels that were last seen in 2008. While prices have since come down from these peaks, they remain elevated, fueling already high inflation and hurting consumers and economic growth worldwide. Faced with this shock, countries everywhere are reappraising priorities, putting resilience at front and center. A renewed emphasis on food and energy security has compelled governments to reintroduce fossil fuel subsidies and ramp up domestic oil, gas and coal production, seemingly placing efforts to curb climate change on the back burner.

These reactions are understandable. A tactical retreat in the short run may be the price to pay to maintain public support for the long-term goal. But the economic case for accelerated climate action remains as strong as ever. For a country such as China with the domestic policy space to act, there are three key reasons to stay the course on the low carbon transition and aim for an early peak in emissions.

First, accelerating the energy transition would strengthen Beijing’s resilience to the volatility of global fossil fuel prices by reducing its dependence on oil & gas imports. Last year alone, China imported fossil fuels – oil, gas, and coal – worth $ 365.7 billion – the equivalent of more than two percent of the country’s gross domestic product (GDP). This dependence on fuel imports is exposing the economy to global commodity price fluctuations. In contrast, renewable energy is essentially a domestic resource, especially for China, which is a major producer of key renewable energy technologies from wind turbines to battery storage.

Secondly, while higher energy prices may boost the short-term global supply of fossil fuels, in the longer-term outlook, higher and more volatile energy prices will push incentives for energy importers to diversify away from fossil fuels. This will likely catalyze individual and global efforts to decarbonize energy systems, boosting global demand for low carbon technologies and alternative sources of energy. China has the technological capabilities to benefit by anticipating and getting ahead of this all-important global shift.

Additionally, rising energy prices would challenge China’s investment and industry-led growth model, reinforcing the case for accelerated structural changes and rebalancing. High prices will increase pressures on China’s economy to diversify away from traditional investments and heavy industries, including iron, steel and cement production, which account for a disproportionate share of the country’s GDP but face diminishing returns and low productivity growth. The slowdown in the domestic real estate sector is already pointing in this direction. Higher energy prices could galvanize the shift toward an innovation- and services-based economic growth model.

Even as policymakers remain focused on mitigating the economic and social impact of recent sharp changes in relative prices, there are measures they can take today to prepare for the low carbon transition and reduce its costs. For example, rising energy prices will create incentives for more sustainable business models, but only if investors believe they are here to stay. This is why credible long-term guidance on the intended trajectory of carbon pricing and other policies to decarbonize China’s economy is so important. This would help investors anticipate future price increases and help bring clean energy investments forward without any immediate need to regulate or raise the price of carbon. The current period of high energy prices is the moment to provide such forward guidance, as market price incentives are already pointing in the right direction.

Fiscal policy can complement the role of price signals by supporting the necessary economic adjustment rather than trying to slow it down. The prospect of additional government stimulus to boost growth could provide the financing for a wave of green investments, including in the build-out and integration of more renewable energy capacity. In agriculture, rising fertilizer prices should provide incentives to reduce excessive usage. However, this shift would be thwarted if input-based subsidies remain in place. Instead, farmers could be compensated for higher input prices with subsidies that are tied to a shift toward resilient production methods. Field studies reveal that chemical fertilizers can be effectively substituted with animal manure, reducing agricultural greenhouse gas emissions at no cost to yields. To realize such a shift, greater investment in agricultural extension is required. 

Finally, rising energy and food prices would hurt the poor and more vulnerable households the most. But rather than providing subsidies across the board, a more robust and targeted social safety net could protect the vulnerable populations in urban and rural areas. Offering such targeted protection could ensure price signals are not diluted but the structural changes necessary for the transition to a greener and more innovative growth model don’t come at the expense of rising poverty and social inequality.

While adding headwinds to the near-term economic outlook, the current energy price shock reinforces the case for accelerating China’s energy transition. Policymakers should keep their eyes on the long-term target and use this opportunity to prepare the ground.

(first published on CGTN via World Bank)

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