IEA’s Philibert discusses scenarios for the future of the global energy

A former science journalist, Cédric Philibert has over the past two decades become one of the world’s foremost experts on climate change, renewable energy and the scenarios with which the planet will likely deal with both.
IEA’s Philibert discusses scenarios for the future of the global energy

A senior analyst in the Internal Energy Agency’s Renewable Energy Division and a prolific writer, his forthcoming book on solar energy will be published by the IEA later this month.

But in a recent conversation, Philibert refrained from spilling the beans about its contents, politely saying, “You’ll have to wait until it comes out.”

Instead, he preferred to stay on topic, which happened to be the standing of renewables in a world where hydraulic fracking or fracturing is dramatically increasing the amount of natural gas that’s available in energy markets in transition like that in the United States, and therefore drastically reducing its cost and making it more competitive to solar, wind and other clean-energy technologies.

Part journalist, put public servant, and as this conversation will attest, part educator, Philibert became an advisor to the French environment minister in 1988, and two years later, he published two books on climate change and renewable energies.

Between 1992 and 1998, Philibert advised the CEO of the French Agency for the Environment and Energy Efficiency, and then joined United Nations Environment Programme (UNEP). He joined the IEA in 2000 as its principal administrator at the Energy Efficiency and Environment Division, and was charged with overseeing the “evolution of climate policy.”

In 2002 he published with Jonathan Pershing the IEA’s Beyond Kyoto book. In 2005 he co-authored with Richard Baron the IEA’s publication “Act Locally Trade Globally.” Qualified in political sciences, he studied economics and published numerous papers in peer-reviewed and other journals.

On climate change, his preferred papers explain why quantitative emission targets, as well as emission trading schemes, should include price caps and price floors.

“This is the only right manner to address the considerable uncertainties surrounding, on one side, the pace, extent and finally damages from climate changes, and on the other side the mitigation costs, which depend on technology evolutions that cannot be entirely forecast, but also on economic growth patterns largely unknown and fossil fuel prices even more volatile,” he says on his web site.

The study assesses the long-term economic and environmental effects of introducing price caps and price floors in hypothetical climate change mitigation architecture, which aims to reduce global energy-related CO2 emissions by 50% by 2050.

“Based on abatement costs in IPCC and IEA reports, this quantitative analysis confirms what qualitative analyses have already suggested: introducing price caps could significantly reduce economic uncertainty. This uncertainty stems primarily from unpredictable economic growth and energy prices, and ultimately unabated emission trends. In addition, the development of abatement technologies is uncertain,” he writes.

“With price caps, the expected costs could be reduced by about 50 percent, and the uncertainty on economic costs could be one order of magnitude lower,” Philibert continues. “Reducing economic uncertainties may spur the adoption of more ambitious policies by helping to alleviate policy makers’ concerns of economic risks. Meanwhile, price floors would reduce the level of emissions beyond the objective if the abatement costs ended up lower than forecasted.”

In addition to all of the above, Philibert is also a voluntary administrator of the Fondation "Energies pour le Monde".

This transatlantic interview took place via Skype.

As we sit here today (the interview takes place in early October, it seems like hydraulic fracking – the injection of huge quantities of chemically treated water into underground shale to free up natural gas – has created a situation where there’s now lots of natural gas available and the price of it is extraordinarily low…

Well, that’s a US situation, and you should not take the US as representative of the global situation – especially with gas. Gas is not globally traded, as oil is… Oil is readily consumed in countries other than those that are producing it, because it is so easy to transport.

With gas it is completely different. For gas to be transported you need either great pipelines or you need to have liquefaction and gasification facilities and then you need to transport it aboard LNG ships.

So, you have a global market for gas, but it certainly isn’t as integrated as the global market for oil. With respect to oil, you have different extraction costs, of course, but at the end of the day, it’s the last and the costliest crude extracted that gives the price to all oil traded throughout the world.

For gas, you have much more regional markets. The Middle East is a market. Russia is a market, although it is linked to Europe. Europe is a market. The US is a market. They are different, you know? In Europe – Spain, for example – it’s not the same market as Poland; Poland and Germany are linked to Russia with pipelines. France is linked to them, but also to Algeria with pipelines. Spain mostly uses LNG, although it also has a pipeline from Algeria through Morocco.

But Spain exchanges very little natural gas with other European countries. So it’s a very fragmented market.

Now, as you said, in the US, you have a lot of relatively cheap gas thanks to the excavation of shale gas, right? This is clearly the factor that brought costs down, but at the price of some environmental concerns.

There’s a real debate going on nowadays and it is unclear that the way shale gas has been exploited recently will continue forever – due to a number of concerns have been expressed relative to water table and the like. But again, this is mostly a US case because nowhere else is shale gas exploited on the same scale. You have some here and there. People are looking for it now and intending to possibly exploit it. But nowhere else but in the US has this expectation reached a wide scale.

In other words, don’t make assumptions about the impact natural gas will have on the overall, global renewables sector based on what’s occurring in the gas sector in any one country…

Right. Absolutely. There is one very good document that you can easily download from our web site. It’s called The Golden Age of Gas. It describes the situation and gives forecasts for gas, and also for electricity from gas, with some assumptions regarding capacity factors and the like.

Based on those assumptions, what you end up with is there being a huge disparity in the price of electricity from gas throughout the world.

From 2015 to 2035, for example, gas to run electricity producing turbines in the US, will be about $60 per MWh in 2009 dollars, which is very close to the project cost of coal during that period. In Europe, we believe the figure will be closer to between $90 and $100 per MWh in 2009 dollars, also the same for coal, by the way.

Now if you look at China, the cost per MWh is seen at between $70 and $80 per MWh, while coal will be about $40. Coal and gas is mostly consumed where it is produced. There is some international trade for high quality coals that are used in very specific situations, but basically the bulk of coal that is used for electricity generation is just not traded internationally. So coal, again, is a fragmented market, and for both coal and natural gas, there a big differences in costs depending on the market you are talking about.

In preparation for our conversation, I spoke to a few oil and gas industry analysts here in the US and I have to say, even as an American, I was taken aback by what I’d generously describe as their “chauvinistic” attitude in regard to the future of the US renewables market. In fact, I had one who told me that if there was any money to be made in renewables, “the big energy companies” would already deeply embedded in the market and pushing smaller companies aside. The consensus seemed to be that with natural gas prices so low in the US, renewables will likely never be a cost-effective alternative…

When you make comparisons, there are different ways of making comparisons. First of all, you have to look at new coal and new gas, not only coal and gas from existing plants. In the case of gas, the cost of the plant is about 25 percent of the cost per kilowatt hour. For coal, its really different… because it’s almost half is the cost you have to consider is the cost of the plant itself and the other half is the cost of the fuel.

So if you compare having one more KWh from an existing plant that is not currently operating at full capacity, it’s very different from having one more KWh from a newly built plant. Especially in countries where the operators of these plants now have to fulfill tougher environmental requirements than they did with their existing plants.

So if you look at wind power, for example, the costs associated with it are now very close to new coal, even in the US. In the best places, it is really competitive to new coal. Now, solar, is still considerably more expensive nowadays, but this is changing very rapidly. If you look at PV, for example, PV is going down very rapidly. Its cost has been halved in about three years, and we expect this will continue, although perhaps not at the same rate.

It’s what is known as the learning rates. Learning rates tell you that each time you double the existing capacity, you also have a cost reduction of 20 percent on the PV modules which translates to a 15 percent decrease on the PV systems.

So, PV systems will continue to be deployed throughout the world at an increasing rate, with help from supports for renewables in Europe, in China, and in Japan, where they now see renewables as the fastest way to replace lost nuclear capacity in the wake of the earthquake and tsunami last spring and the ensuing nuclear crisis.

At the same time, the Middle East countries are now beginning to show a strong interest in solar power technologies, and in the US, I believe as the government’s renewable energy initiatives begin to have teeth that will drive substantial growth there as well. In short, the expansion of PV will continue.

And we expect CSP will begin to take shape. We are at the very beginning of a new learning curve with CSP; a couple of years ago we used to say one of the advantages was that it was cheaper than PV, and we would in a situation today where it is more expensive than PV.

However, the key thing to remember is that CSP produces a different kind of kilowatt hour than PV because the generation of the electricity can be completely disconnected from the collection of the heat on the solar array. This is a big plus. But again, how it rolls out is entirely dependent on market and location. In places where the energy from PV neatly matches the peak use in a given area, PV will dominate. But in other places, where the peak energy use does not coincide with peak sunlight, CSP will be able to gain a foothold as it will be a better match.

In any country or region where the peak energy use is after sunset, any technology that allows you to collect energy and store is going to have an advantage.

At the same time, as I said, we are only at the very beginning of the learning curve when it comes to CSP. We had this 400 MW plant in the US for a long time, and then we have a renaissance of the industry in Spain and then, again, in the US… but even with that, we’ve only had about 1 GW of capacity built in recent years. That’s still small when compared to the 40 GW of capacity we currently have in PV… but, now, going forward, as we go to 2 GW, 3 GW, 4 GW and so on, we expect to see increased competition in the CSP arena, emerging technologies coming in, and finally, cost reductions will take place and more efficient technologies energy.

Given the context we established at the outset of this conversation, when will renewables and particularly the technologies you just mentioned, become cost-competitive with natural gas?

Of course, the situation is tougher now in the US with the low cost of gas. The competition gets more difficult for CSP in the short-run, that’s for sure. We have been saying for a few years now that we expect CSP to become competitive for peak loads by about 2020, and this is mostly based on assumption relative to there being a cost decrease for CSP and very moderate assumptions relative the increase in the cost of fossil fuels.

Now, if shale gas remains abundant and cheap, this might not happen in the timeframe we originally suggested; but remember this, comparisons between energy technologies often leave much to be desired. Most, for instance, do not distinguish between relative costs at peak, mid-peak, and base-load demand. If you look at most tables comparing generation costs, they always compare base-load conditions.

When in fact you have to cover peak and mid-peak then the low cost of natural gas that you’ve been talking about will be more expensive… and if you build a plant, there’s the cost of investment.

With CSP, you can increase capacity factor or you can simply shift production to cover the peak instead of whatever comes in during the day…. And so you can increase the value of the energy technology and that makes for a better comparison.

So it will still probably be difficult for CSP, at least, to be competitive in the US before 2020. That said, don’t discount the potential favorable effect of investment tax credits. That will help a lot.

Right now in the US, we have a situation where President Barack Obama has proposed removing subsidies from the oil and gas industry. It’s kind of a perennial, in terms of presidential proposals, but as we speak, they’re still out there, waiting to be acted upon by Congress or rejected. If those cuts happen, even in part, does that open the floodgates for renewables?

It would probably level the playing field, probably a lot. You can also find a big paper on our web site on subsidies. Again, this is one of those areas that is very country specific, and you also have to be very careful in making comparisons, because you need to account or depreciation credits and so on, things that can be more or less hidden subsidies.

Now, to your question, I am sure it will make a significant difference if it happens. Will it be enough to fill the gap? I don’t think so.

Now we have to consider something else, which when you do a comparison on the basis of single technologies, you are doing something wrong because this does not take into account the volatility of prices, especially fuel prices. This is the level of risk you have when you build comparison systems.

In fact, It is my belief that when we talk about renewables, we should do so from the perspective of the portfolio theory that is widely used in finance, where you have some assets that have high risk and high return and others that have lower risk and therefore lower returns. Renewables are very low risk.

The immediate and short-term value of renewables is to hedge against fossil fuel volatility. But to do so you have to not consider the competition at the margin between two single technologies in isolation; you have to consider a portfolio of generating means. Is that clear?

And if you look at the situation this way, you wouldn’t have to bring a single technology into parity with another. It may remain more expensive and still make the portfolio better. A portfolio will have a higher return, or the same return with lower risk – even if it incorporates some assets that are more expensive. That’s a bit counterintuitive maybe, but it has been shown.

The last point I’d make on this is there’s more than an “investment portfolio” reason to do this. Looking at our energy needs over the long term, even this massive amount of natural gas that’s come on line won’t be available forever. And with the rules and legislation regarding emissions being what they are in much of the world, that day is coming sooner than later.

Governments are pushing and investing in things like solar and other renewables because we need to make a big change within the next 30 years or so, and the electric system is so huge and so costly that the change has to start now. We have to move down the learning curve before we can expand things dramatically enough to make a real, significant change in emissions and how much we depend upon fossil fuels.

For additional information:

Cédric Philibert’s web site

The International Energy Agency web site

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