Long Term Scenarios for Energy Markets Ton Manders and Machiel Mulder 1
CPB Netherlands Bureau for Economic Policy Analysis
June 2003
Paper prepared for the 26th Annual International Conference of the International Association of Energy Economics (IAEE), Prague, Czech Republic, June 4-7, 2003
1
Corresponding address:
CPB Netherlands’ Bureau for Economic Policy Analysis, P.O. Box 80510, 2508 GM The Hague, The Netherlands; e-mail:
[email protected], and:
[email protected]; phone: +31 70 3383380. The authors thank several colleagues within the CPB, Johannes Bollen and Detlef van Vuuren of RIVM, National institute for Health and the Environment, The Netherlands, and Dale Rothman of ICIS, The Netherlands, for their contribution.
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Abstract Which factors will determine the future development of energy consumption, production and prices? In order to answer questions like this one, we developed four long-term scenarios for the international energy markets. Three leading issues determine our thinking about energy in the future: a) economic growth, b) environmental policies and c) security of supply. The scenarios explore the possible developments in these key driving forces behind energy markets.
The scenarios are called ‘European Leadership’, ‘Transatlantic Market’, ‘Domestic Orientation’ and ‘Global Economy’. The first and the last one show a globalized world while regional fragmentation is characteristic of the other two scenarios. Environment and equity are main issues in ‘European Leadership’ and ‘Domestic Orientation’ while in ‘Transatlantic Market’ and ‘Global Economy’ government policies are primarily directed to improve economic efficiency.
The scenarios can be linked to long term scenarios developed by IPCC SRES. ‘European Leadership’ fits in the B1-scenario of IPCC, ‘Domestic Orientation’ in the B2-scenario and ‘Global Economy’ in the A1-scenario. Close relations exists also with scenarios developed by other international institutions. The scenarios differ however in regional detail and time horizon. We focus on Europe and end in 2040.
Although the reserves of oil in the Middle-East could near their depletion before 2040, the supply of oil will be secured by non-conventional sources. Hence, the real, structural price of oil will be rather stable.
Europe will become more and more dependent on foreign sources of natural gas. In all scenarios, the import dependency grows to at least 70%. Due to an abundant supply of natural gas in Russia and the Middle East, the supply of this energy carrier will be mainly determined by geopolitical factors.
Electricity demand in Europe could triplicate in the period up to 2040 in case of high economic growth. The price of electricity could however be rather stable due to technological innovations and increasing competition.
The overall effect of climate policy is that the use of energy declines, not only in relative terms, but also in absolute terms. In Europe, the use of coal and oil will decrease significantly while the consumption of natural gas shows only a modest decline.
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1
Introduction
1.1
Background and definition Energy is a key factor of production in modern economies. Physical disruptions within the supply of energy and large variations of the price of energy affect economic growth significantly. In order to explore the future of these economies, a profound analysis of energy markets is therefore necessary.
Looking at energy markets, several questions come to the fore, like: •
When will the reserves of oil and natural gas be depleted, both on global level and regional level?
•
Which changes will occur in the regional composition of the supply of the various energy carriers?
•
Will we see a ‘Hubbert peak’ in global oil production with sharp rising prices as result?
•
What will be the impact of technological change on demand and supply of energy?
•
What are conceivable future levels of emissions of carbon dioxide?
•
How large should a carbon tax be in order to reach stabilisation of the atmospheric concentration of this greenhouse gas?
The many uncertainties related to the long term future make that questions like these only can be answered by using scenarios, which can be seen as conceivable and consistent stories of the future. Those scenarios refer only to long-term, structural developments driven by fundamental changes. Developments in the short term, like fluctuations of the price of oil, are not taken into account. Although those developments are not the subject of this analysis, we realise that short term fluctuations in production or consumption can have major effects on prices and hence on the economy.
The paper focuses on total use of energy, and the markets of oil, natural gas, and electricity. Products made of oil (and natural gas) are not taken into account. The coal market has not been subject to a profound analysis because this market does not face structural uncertainties in the long term (see IEA, 2002). Energy use, emissions and the oil market are analysed on global level, while the analysis of the natural gas market and the electricity market refer to the situation in Europe. Finally, the analysis is done at a high level of aggregation. Technology improvements for instance are described in terms of use of energy per unit of product, and production costs per unit of output.
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1.2
Structure of the paper Section 2 describes the story lines of each scenario. First, the general characteristics are depicted in terms of globalization – regionalisation and efficiency – equity. Afterwards, we describe how the driving forces behind energy markets develop in each scenario. In order to translate the story lines into quantitative time paths of e.g. production and prices of energy, models are very useful. Section 3 offers a short description of the models we used. Section 4 presents the results of the analysis with these models. For each scenario, we depict the total use of primary energy, the emissions of carbon dioxide, and the production and the prices of oil, natural gas and electricity. Section 5 concludes.
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Four long term scenarios
2.1
General characteristics The long-term scenarios for the international energy markets form a part of CPB’s scenarios on international economy, demography, technology and institutional settings (CPB, 2003). These scenarios are developed to explore the future economic development of Europe in general and the Netherlands in particular. The scenarios are called European Leadership (EL), Transatlantic Market’(TM), Domestic Orientation (DO) and Global Economy (GE). Both European Leadership and Global Economy show a globalized world while regional fragmentation is characteristic of both Domestic Orientation and Transatlantic Market. Environmental and equity issues are main issues in European Leadership and Domestic Orientation while in Transatlantic Market and Global Economy government policies are primarily directed to improve economic efficiency.
Figure 2.1 depicts the four long-term scenarios in a two-axis diagram. European Leadership combines a global orientation with equity and environmental concerns, while in Global Economy global orientation coincides with orientation on efficiency. Domestic Orientation and Transatlantic Market have regional orientations with governments more focused on national sovereignty. In Domestic Orientation, equity is valued above efficiency, while in Transatlantic Market it is the other way round.
These scenarios are linked to those of the IPCC (2001). European Leadership resembles the B1scenario of IPCC, Domestic Orientation the B2-scenario and Global Economy the A1FIscenario. Transatlantic Market can be compared with IPCC’s A2, although there remain significant differences between these scenarios. The characteristics of the IPCC scenarios are used to determine some elements of these scenarios.
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Figure 2.1
Overview of scenarios of CPB and some other institutions
Legend: PF(un)
= Policies First (United Nations, 2002); MF(un) = Markets First (United Nations, 2002);
SecF(un) = Security First (United Nations, 2002); SusF(un) = Sustainability First (United Nations, 2002) B1(ipcc) = B1 (IPCC, 2000); A1F(ipcc) = A1F(IPCC, 2000) A2(ipcc) = A2(IPCC, 2000); B2(ipcc) = B2(IPCC, 2000) GS(uk)
= Global Sustainability (UK, 2001); WM(uk) = World Markets (UK, 2001)
PE(uk)
= Provincial Enterprise (UK, 2001); LS(uk)
= Local Stewardship (UK, 2001)
EL(cpb) = European Leadership (CPB, 2003); GE(cpb) = Global Economy (CPB, 2003) TM(cpb) = Transatlantic Markets (CPB, 2003); DO(cpb) = Domestic Orientation (CPB, 2003)
More scenarios recently published fit this conceptual framework. In its Global Environmental Outlook 3 the United Nations published four scenarios with a comparable distinction between scenarios. Their scenarios are called Markets First, Policies First, Security First and Sustainability First. The British Department of Trade and Industry developed scenarios for Britain which are closely related to the IPCC-scenarios: Global Sustainability (related to our EL), World Markets (related to our GE), Provincial Enterprise (related to our TM) and Local Stewardship (comparable with our DO).
Reasons why we developed new long term scenarios are the need for more focus on institutional developments within Europe and to aim to have a scenario period up to 2040. We will use these international scenarios for making scenarios for the Netherlands, exploring developments within the Dutch economy, use of space, and environment.
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Our scenarios are, just as the other mentioned, of an exploratory character. The scenarios aim at exploring possible future developments. Consequently, the scenarios do not extrapolate developments from historical trends as is done in so-called Business-as-Usual scenarios. Examples of the latter type are the IEA-reference scenario (IEA, 2002) and the EU Baseline Scenario (EU, 2002).
Exploring the future starts with identifying the driving forces between future developments. The next section therefore gives a short overview of the driving forces behind energy markets.
2.2
Driving forces behind energy markets Several factors determine the development of energy markets. In general, the driving forces can be distinguished in economic growth, geopolitical factors, environmental policies, competition policies and policies regarding security of energy supply. Table 2.1 offers an overview of the development of these driving forces within each scenario.
Table 2.1
Driving forces behind energy markets in four long-term scenarios European
Transatlantic
Domestic
Global
Leadership
Market
Orientation
Economy
rather high
rather high
low
high
Economy - macroeconomic growth - industrial structure
rather strong shift towards services
Geopolitical situation - relation EU – Russia
excellent
difficult
moderate
excellent
- relation EU – Middle-East
moderate
difficult
moderate
excellent
- relation EU and USA with developing countries
excellent
difficult
difficult
excellent
- relation EU – USA
moderate
excellent
moderate
excellent
- global climate change policy
solid
no
no
no
- national environmental policies
solid
no
solid
no
- competition at energy markets
moderate
fierce
moderate
fierce
- international transportation capacity
excellent
moderate
moderate
excellent
- regulation of storage of oil and natural gas
moderate
solid
solid
moderate
- regulation of electricity generation capacity
solid
moderate
solid
moderate
Environmental policy
Competition policy
Policies regarding security of supply
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Changes in the size of population and in productivity determine economic growth. Transatlantic Markets shows the highest growth of global population (1.3% per year), while annual growth in the other scenarios is about 0.8%. Productivity growth is highest in Global Economy (2.2% per year). As a consequence, economic growth is high in Global Economy and low in Domestic Orientation, while European Leadership and Transatlantic Market face a moderate growth of the world economy.
Differences in growth among regions are however rather high (Table 2.2). Non-OECD countries show a relatively high economic growth in all scenarios. The scenarios differ also regarding sectoral shifts. Global Economy for instance, shows a strong service oriented economy. Table 2.2
GDP per region per scenario (average annual % change in 2000-2040) 1980-2000
European
Transatlantic
Leadership
Market
Orientation
Domestic Global Economy
Europe
2.2
1.5
1.9
0.7
2.5
USA
2.9
2.0
2.5
1.4
2.6
non-OECD
2.3
3.8
3.0
3.6
4.4
World
2.7
2.3
2.3
1.9
3.0
Source: CPB
Geopolitical situations are rather harmonious in European Leadership and Global Economy due to the global orientation in these scenarios. As a consequence, good relations exist between the Western countries as large energy consumers and the Eastern countries, especially Russia and the Middle-East region. In European Leadership however, climate policy affects negatively relations between countries which are highly dependent on exports of oil and the developed world. As climate policy results in a decline in global oil consumption, oil producing countries face a deterioration of their government budget and hence their opportunities for economic development.
In Transatlantic Market, Europe and the United States prefer their mutual cooperation above cooperation with other regions. Consequently, political relations between energy consuming and energy producing regions are rather unstable. Governments in the Western countries, therefore, aim at reduction of dependency on oil and natural gas. Alternative sources of energy, like nuclear power generation and fuel cells, become rather important within the supply of energy.
A solid global climate policy is only conceivable in European Leadership, as this is the only scenario which combines global cooperation with environmental orientation. In this scenario, we assume climate policy in accordance with the EU long-term climate objective. This target is translated in emission profiles resulting into a stabilisation of CO2-equivalent concentration at 7
550 particles per metric volume (ppmv) target in 2100. This asks for swift and global action. To assure lowest global costs, a cap-and-trade system can be seen as an efficient instrument. Crucial for the distribution of costs is the allocation of emission permits over regions (burden sharing). We assume that after the first budget period of the Kyoto Protocol (2012) a global agreement is reached in which all regions accept assigned amounts of emission rights.
Environmental policies in Domestic Orientation consist mainly of domestic and regional measures directed to non-climate environmental issues (acidification, emissions of small participles, and depletion of the ozone layer). The other two scenarios do not show any significant environmental policy. These scenarios show however fierce competition policies, leaving production, transport and trade of energy entirely for private firms. The role of governments in energy markets is restricted to regulation of competition.
On the contrary, European Leadership and Domestic Orientation face rather strong governmental influences in the supply of energy. In addition, due to the absence of fierce competition policy private firms will obtain significant market power in these scenarios by means of explicit (mergers) or tacit forms of collusion. Competition in Transatlantic Market is however not perfect, as it is in Global Economy, because of (geopolitical) restrictions on capacity (pipelines and so on) for international transport of energy.
The issue of security of supply is important in Domestic Orientation, due to the restricted opportunities for international trade and the political distrust in the ability of market forces to arrange a secure supply of energy. Policies in this field consist of regulations regarding storage of oil and natural gas and regarding (spare) capacity for the generation of electricity. On the contrary, in Global Economy hardly any attention is paid to this issue since the excellent international relations and efficient organized markets are believed to secure supply of energy.
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Method of quantification In order to quantify the energy and climate scenarios, we use several models. Those models are a general equilibrium model of the global economy called WORLDSCAN, a bottom-up model of global energy demand called TIMER, a model of the global oil market and a model of the European electricity and natural gas markets.
WORLDSCAN is a dynamic general equilibrium model for the world economy (CPB, 1999). Different world regions and production sectors are distinguished. The model is used to construct long-term scenarios and to perform policy analysis. WorldScan models both the demand and the supply side of the energy markets, however, in a rather aggregated way. The model enables to assess the effects of economic growth, technological change and (climate) policy on regions and sectors. 8
TIMER is used to determine the demand of energy at sector and regional level by using rather specific information regarding technological opportunities to reduce energy use. It is a global system-dynamic energy model which has been developed to study the long-term dynamics of the energy system, in particular, transitions to systems with low carbon emissions (Image-team, 2001). Within the model, a combination of bottom-up engineering information and specific rules and mechanisms about investment behaviour and technology are used to simulate the structural dynamics of the energy system.
The energy markets are analysed in detail by a partial-equilibrium model of the global oil market and a partial-equilibrium model of the European natural gas and electricity market (see ‘www.cpb.nl/goto/energy’ for more information about these models). In these models, prices of all these energy carriers are endogenous. Special features of both models are the analysis of the structure of the market and factors on the supply side. These models pay explicitly attention to the imperfect competition on the markets which are due to constraints on networks, and concentration and collusion on the supply side. In addition, the modelling of the supply of natural gas and oil includes relations, although rather simple, between commodity prices and activities in exploration. This dynamic characteristic of the models enables us to explore the effect of resource scarcity on prices and consumption.
By using these models simultaneously, the story lines of the scenarios are transferred into quantitative time paths of production, consumption, and prices of energy, and of emissions of carbon-dioxide.
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Energy markets in 2000-2040
4.1
Use of energy Energy use is driven by economic growth and changes in energy intensity. The energyintensity2, for its part, depends on the price of energy, relative to other inputs in production, and on (exogenous) technological change. Structural effects are important. An economy with a strong shift towards services, sees a large drop in energy-intensity and a corresponding moderate growth in energy use. In general, a positive relation exists between economic growth and structural shifts towards the service sector. Consequently, economic growth decreases energy intensity by means of structural changes. In addition, economic growth coincides with a higher level of investments raising the level of energy efficiency.
2
defined as the use of energy per unit of product 9
In European Leadership, the use of energy grows annually with only 0.2 percent (table 4.1). In the first two decades of this scenario, consumption of energy rises due to economic growth. However, the introduction of a fierce climate policy results in a decreasing use of energy. After the first budget period of the Kyoto Protocol, emission targets are becoming more and more binding. Taxes on the use of carbon rise from 5 dollars per ton carbon in 2010 to 450 dollars per ton carbon in 2040. As a consequence, there is a strong substitution away from energy. Global Economy, on the contrary, shows an annual increase in the use of primary energy of 2.3% on global level. Table 4.1
Use of primary energy per region per scenario (average annual % change in 2000-2040) 1980-2000
European
Transatlantic
Domestic
Leadership
Market
Orientation
Global Economy
Europe
0.9
0.3
1.1
-0.2
1.5
USA
1.1
-1.0
1.3
0.2
1.1
non-OECD
1.5
0.8
2.2
2.0
2.9
World
1.3
0.2
1.8
1.2
2.3
Source: CPB
The growth of primary energy use in Global Economy is tempered by a decrease in energyintensity, as is explained above (Table 4.2). This decline results from structural changes within the economy and technological improvements leading to higher energy productivity. Those developments follow partly from the rising energy prices (see hereafter). Transatlantic Market and Domestic Orientation are characterized by a more moderate growth than Global Economy. Accordingly energy-intensities fall less; there is a less pronounced shift towards services. Energy-intensity in Domestic Orientation is however somewhat lower than in Transatlantic Market, despite the lower growth. This is caused by the assumed orientation on local environment in this scenario. There is a strong link between local air pollution and energy use. Efforts to reduce ozone and particles concentrations have a downward pressure on the use of energy
Table 4.2 also shows historical developments in energy intensity in the period 1980-2000. It should be noted that the strong decreases in energy-intensity in the past are biased by the very high energy prices in the eighties and government policies to increase savings in the use of energy.
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Table 4.2
Energy intensity per region per scenario (average annual % change in 2000-2040) 1980-2000
European
Transatlantic
Domestic
Leadership
Market
Orientation
-1.4
-1.2
-0.8
-0.9
-1.0
USA
-1.8
-3.0
-1.2
-1.2
-1.5
non-OECD
-0.8
-2.9
-0.8
-1.6
-1.5
World
-1.5
-2.1
-0.5
-0.7
-0.7
Europe
Global Economy
Source: CPB
Figure 4.1
Global use of primary energy by carrier in the four scenarios
1200
1000
800 EJ
Other Gas
600
Oil Coal
400
200
0 2000
European Leadership
Transatlantic Markets
Domestic Orientation
Global Economy
Source: 2000: IEA; 2001-2040: CPB
The decrease in energy-intensity in the USA is stronger then in Europe in all scenarios. This result follows from the differences between these two regions at the beginning of the scenario period. In 2000, energy-intensity in USA is much higher then energy-intensity in Europe; hence, the scope for improvements is higher in the USA. In Europe, the decrease in energyintensity in European Leadership is low compared to other regions. The main reason is that Europe buys its way out. On the emission permit market, Europe pays other regions to comply with its targets. In return, the sellers of emission permits reduce emissions below their targets.
All scenarios show a rising share of natural gas in total primary energy demand (figure 4.1). European Leadership shows the largest changes within the composition of energy demand. The
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high level of carbon tax minimizes the role of coal and, consequently, raises the significance of natural gas and other energy sources like biomass.
4.2
Emissions All scenarios, except European Leadership, show rising emissions of energy-related carbon dioxide at a global level. In Global Economy for instance, these emissions grow with an annual rate of 2.4% (table 4.3 and figure 4.2). Global emissions decline with 0.5% in European Leadership due to the fierce climate policy.
Table 4.3
Emissions of carbon dioxide per region per scenario (average annual % change in 2000-2040) 80-00
European
Transatlantic
Domestic
Global
Leadership
Market
Orientation
Economy
Europe
0.4
-1.2
0.9
-0.4
1.4
USA
1.1
-1.9
0.9
-0.1
0.9
non-OECD
1.2
0.3
2.3
2.0
3.2
World
1.0
-0.5
1.7
1.1
2.4
Source: CPB/RIVM
The decline of the emissions in European Leadership results from the world-wide implementation of emissions trading. This trading scheme is targeted on a stabilisation of the carbon-dioxide concentration at 550 ppmv in 2010 (see section 2.2). Figure 4.2
Energy related emissions of carbon dioxide in the four scenarios
Emissions (GtC)
15
10
European Leadership Transatlantic Market Domestic Orientation
5
Global Economy
0 2000
2010
2020
2030
2040
Source: CPB/RIVM
In order to reach that target, the price of carbon permits will rise to approximately 450 dollars per ton carbon. Consequently, the prices of energy carriers will rise. The gross price of oil for instance will double (figure 4.3). Currently, the gross price of oil is twice as high as the net price due to taxes on oil products. The fierce climate policy in European Leadership will 12
triplicate the tax from about 20 dollars to about 60 dollars per barrel. Since the net oil price will remain at the current structural level of approximately 20 dollars (see section 4.3), the gross oil price will rise to 80 dollars per barrel in 2040. Figure 4.3
Net and gross price of oil in European Leadership, 2000 – 2040
100
dollar / barrel
75 net price gros price tax
50 25 0 2000
2010
2020
2030
2040
Source: 2000: IEA; 2001-2040: CPB
The dramatic shift in energy use and emissions in European Leadership has only limited effects on GDP and National Income. Climate policy decreases the level of real income in 2040 by 1.5%. A global market for emissions permit is however crucial to reach this efficient outcome. A global scheme of emissions trading ensures that abatement is taken place at the lowest cost options, e.g. in developing regions.
It should be noted that there is a difference between GDP and (real) income on regional scale. Abatement has a downward pressure on GDP. However, negative GDP-effects are partially offset by permit transfers from industrialized regions. Hence for developing countries with strong negative GDP effects, income effects are less severe and even may become positive due to the sale of permits. To assess the effects in real terms it is important to note that term-of-trade effects play a role. If prices of imports increase relative to prices of exports, income in real terms decreases. For energy exporting countries and energy-intensive sectors this effect can be quite severe. Negative term-of-trade effects decrease real income considerably in these regions.
The GDP-effect of the fierce climate policy in Asia and Africa in 2040 together is -2.5%, while real National Income is 0.8% higher in this region in 2040. In the OECD-region on the contrary, the effect on real National Income is larger (-2.2%) then the effect on GDP (-1.0%). This latter result follows from the fact that OECD-countries do not take all the abatement measures by themselves, but buy permits from developing countries. In the Middle-East region, however, both GDP-effect and effect on real National Income are approximately -7%.
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Table 4.4 shows developments in carbon intensities3. The largest decline takes place as a consequence of climate policy in European Leadership. The decline in the carbon intensity results mainly from changes within the power sector. The share of electricity generated with biomass, natural gas or nuclear power grows while the share of coal fired electricity declines (see section 4.5).
In Domestic Orientation there is also a downward pressure on carbon intensities, due to local environmental policies. In Europe, carbon intensity declines only slowly compared to historical shifts. The fading out of nuclear energy, makes economies more dependent on fossil fuels; this puts an upward pressure on carbon intensity. In the USA the ‘dash for gas’ dominates and leads to increased fuel switching.
The increase in carbon intensity in non-OECD in three scenarios is somewhat confusing; the increase is caused by structural effects. Within this highly aggregated region, China, still very dependent on coal, grows relatively hard. Table 4.4
Carbon intensity per region per scenario (average annual % change in 2000-2040) 80-00
European
Transatlantic
Domestic
Global
Leadership
Market
Orientation
Economy
Europe
-0.4
-1.5
-0.2
-0.2
-0.1
USA
-0.0
-0.9
-0.4
-0.4
-0.2
non-OECD
-0.3
-0.6
0.1
0.0
0.3
World
-0.2
-0.8
-0.1
-0.1
0.1
Source: CPB
4.3
Oil market The key question regarding the oil market is to which extent the average price of oil in the next decades will be affected by economic growth, environmental policies and resource scarcity. Will a high level of economic growth increase the depletion of the oil resources and hence raise the price of oil significantly? Or, on the contrary, will a fierce climate policy cut down the demand for oil and hence lower the (net) price?
Figure 4.4 shows the global production of oil in 2000 and in 2040. The current level of global production of oil is approximately 77 million barrels a day. In Global Economy, strong economic growth spurs the demand for all types of energy including oil. Global demand for oil reaches the level of 140 million barrels a day in 2040 (which is an annual growth of 1.5%) Transatlantic Market, with a lower annual economic growth (see table 2.1) shows a global production of oil in 2040 of almost 120 million barrels a day (1.1 % per year), while production in Domestic Orientation will be a little less than 100 million barrels (0.6% per year). Oil 3
defined as emissions of carbon per unit of primary energy consumed
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production in European Leadership increases in the first part of the period, but decreases later on to 80 million barrels in 2040 (zero growth after 40 years).
The relatively low level of production in Domestic Orientation stems mainly from the low economic growth. The zero-growth in European Leadership is the result of the fierce environmental policy leading to high carbon taxes at the end of the scenario period (see figure 4.1). In the first half of this period, oil production in European Leadership is growing due to the economic growth, but afterwards production (and consumption of course) declines due the high end user prices. Figure 4.4
Production of oil in 2000 and in 2040 for each scenario
160
140
120 million barrels / day
Non-Conventional Asia
100
Africa Europe
80
Russia South America
60
North America Middle East
40
20
0 2000
European Leadership
Transatlantic Market
Domestic Orientation
Global Economy
Source: 2000: IEA; 2001-2040: CPB
Production and exploration determine the size of the discovered reserves. In the first decade the depletion of oil fields is compensated by new additions following from exploration activities. Afterwards, several oil fields, among others in Europe and the USA, will be depleted, while the size of new additions will become insignificant. Consequently, the share of the Middle-East region in global oil production rises. In Global Economy, reserves in the Middle-East reach however their bottom at the end of the period due to the high production in the years before (figure 4.5). As a result, the market share of the Middle-East region in Global Economy in 2040 is low. In the second part of the scenario period, non-conventional fields will become a major source of oil, especially in Global Economy, as investments will be more and more directed to the development of production from tar sand fields and other non-conventional fields in 15
Canada, Venezuela and Russia. This development is enhanced by technological improvements decreasing the costs of production at these fields significantly.
Although levels of production differ significantly among the scenarios, the structural levels of the price do not differ much. High growth of oil demand in Global Economy affects prices and hence supply. Oil producing countries will invest more in exploration and production capacity when prices rise. Although conventional oil reserves near their depletion in this scenario, nonconventional oil reserves will be still abundant and sufficient to satisfy the demand for oil. Technological developments and market incentives will prevent a ‘Hubbert peak’ in global oil production with a rather stable price as result (see also Ryan, 2003). Figure 4.5
Proven reserves of oil in Global Economy, 2000 – 2040
2000000
Middle East non-conv. South America South America
million barrels
1500000
Russia non-conv. Russia non-conv. North America North America
1000000
500000
Europe Asia Africa
0 2000
2010
2020
2030
2040
Source: 2000: IEA; 2001-2040: CPB
The price of oil (in real terms, 2000-$) rises from about 20 dollars per barrel in 2000 to around 25 dollars in 2040 in Transatlantic Market and Global Economy (figure 4.5).4 In European Leadership and Domestic Orientation the price in 2040 will be below 25 dollar per barrel. The relatively high price in Transatlantic Market and Global Economy follows from the combination of high economic growth and absence of environmental policy measures. In European Leadership, demand for oil is pushed down by environmental restrictions. European Leadership shows a slightly rising price of oil in the first part of the scenario period due to the 4
The price of oil in 2000 is set at the average level of the last decades (see also IEA, 2002).
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impact of the economic growth, but a declining price in the second part due to the strongly increasing tax on carbon. Figure 4.5
Price of oil in 2000 - 2040
30
dollar / barrel
25 20
Global Economy Domestic Orientation Transatlantic Market European Leadership
15 10 5 0 2000
2010
2020
2030
2040
Source: 2000: IEA; 2001-2040: CPB
Although the long term price of oil is expected to be rather flat, large short term fluctuations are conceivable and probable. Disruptions within supply, caused for instance by geopolitical factors, are able to cause significant changes in the prices. In the medium and long term, supply will however restore, supplemented sometimes by demand responses, bringing the price back to the long-term path.
4.4
Natural gas market in Europe Demand for natural gas grows substantially in all scenarios. Environmental policies in European Leadership and Domestic Orientation leads to the substitution within energy demand towards this rather clean energy carrier. In Global Economy, the strong growth in demand for gas follows from the high economic growth; gas supply is abundant in this scenario due to a successful globalisation. In Domestic Orientation and Transatlantic Market however, supply of gas is restricted due to unfavourable political and economic relations between gas consuming countries, i.e. the European Union, and gas producing countries, i.e. Russia and the MiddleEast. In both scenarios, the main origin of gas in the first decades is the North Sea region. The Global Economy scenario is the only one with a fairly competitive natural gas market, with suppliers from the North Sea region, Russia and Iran.
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Around 2020, gas fields in the Netherlands and the UK are depleted, but Norway has still huge amounts of gas. Production in Norway is almost equal to the new discoveries, resulting in a stable volume of discovered reserves. Norway’s gas supplies are however fairly expensive, due to the remote off shore position of the fields. Consequently, Europe’s internal production declines in the first part of the scenario and stabilizes afterwards. The growing gas consumption and the decreasing production within the EU imply that Europe’s dependence on natural gas import is going to increase (figure 4.6). Imports mainly originate from Russia, but also from Algeria and Iran. In Global Economy, Western Europe imports approximately 85% of its consumption in 2040.
Figure 4.6
Consumption of natural gas in Europe by origin, in 2000 and in 2040 for each scenario
1000 900 800
billion m3
700 600 Import
500
Production
400 300 200 100 0 2000
European Leadership
Transatlantic Market
Domestic Orientation
Global Economy
Source: 2000: IEA; 2001-2040: CPB
The price of natural gas in Europe will decline in the first decade of the scenario period, due to the high price level at the beginning of the period and the liberalisation of the market. This is supposed to occur in all four scenarios (figure 4.7).5 Increasing competition between the former monopolists will transfer a part of the resource rent to consumers. However, when fields in Europe will become depleted, the price will rise again. This holds especially for Global 5
The prices at the beginning of the scenario period are set on the level in 2000. Structural levels make not much sense
because of the dramatic structural changes within the European gas market. The presented price refers to an average price. The commodity prices for large users are significantly lower (approximately 0.15 euro/m3 or 4 dollar/mbtu) and for small users higher (approximately 0.25 euro/m3 or 7 dollar/mbtu).
18
Economy. Price development remains however rather flat in this scenario as technological improvements and fierce competition between producers and traders decrease costs of supply. In European Leadership, prices will decline at the end of the period due to declining energy consumption caused by the high carbon taxes. Figure 4.7
Price of natural gas in Europe in 2000-2040 (average of all consumer groups, excl. vat, incl. existing environmental taxes)
0,3
0,2 euro/m3
European Leadership Transatlantic Market Domestic Orientation Global Economy 0,1
0 2000
2010
2020
2030
2040
Source: 2000: Eurostat; 2001-2040: CPB
4.5
Electricity market in Europe In the past, consumption of electricity followed GDP-growth fairly closely as improvements in efficiency of appliances were compensated by an increasing use of appliances driven by electricity (a process called ‘electrification’). Future consumption of electricity will also be strongly related to the level of economic growth. Global Economy therefore shows the highest growth in consumption. This growth is also fuelled by the strong sectoral shift towards services.
The European electricity market becomes and stays highly competitive in Transatlantic Market and Global Economy. Anti-competitive tendencies, like increasing concentration of suppliers, are adequately opposed by regulation measures of governments. In European Leadership, competitiveness develops less since governments are largely directed to environmental and
19
equity issues. Competition increases also in Domestic Orientation, due to the current regulation measures, but is hampered by insufficient international coordination of competition policies.
The fierce global climate policy in European Leadership has significant effects on the generation of electricity (figure 4.8). Coal fired production fades away, while the production by gas fired plants and sustainable techniques (wind, solar) increase strongly. It is supposed in this scenario that nuclear power production is partly phaced out in Europe. Although nuclear power is a relatively expensive technique when all costs are taken into account, this technique will conquer a significant position in Global Economy. In that scenario, the costs of storage of nuclear waste are not fully taken into account making nuclear power a competitive source of electricity. Figure 4.8
Production of electricity by technique in Western Europe, in 2000 and in 2040 for each scenario
3500
3000
2500
mil. kWh
Renewables 2000
Nuclear Coal fired Hydro
1500
Gas & oil fired 1000
500
0 2000
European Leadership
Transatlantic Market
Domestic Orientation
Global Economy
Source: CPB
Renewable generation techniques play a role of increasing importance in Transatlantic Market and European Leadership. In the former scenario, the growing importance of renewables (wind, solar, biomass, etc.) follows from several factors, notably restricted supply of fossil energy carriers, high economic growth and hence large energy demand and strong technological growth. The latter two factors are absent in Domestic Orientation, which leads to a limited role of these renewable techniques in this scenario.
In Global Economy, supply of gas and oil is abundant, causing a growing role of techniques fired by these energy carriers. The increase in demand in Transatlantic Markets is mainly 20
accounted for by coal-fired and nuclear electricity generation. The decrease in the average marginal cost level, combined with a high level of competition in the integrated European electricity market, keeps prices more or less stable, despite the surge in demand.
Increasing concentration in the market causes the small price peak around 2010. In later years, further integration into a single European electricity market offsets this effect.
Although European Leadership shows also plenty supply of oil and gas, environmental policies lead to substitutions within energy production towards sustainable techniques. Figure 4.9
Price of electricity in 2000 – 2040 (in Netherlands, peak price)
5
euro cent/kWh
4
3
European Leadership Transatlantic Market Domestic Orientation
2
Global Economy
1
0 2000
2010
2020
2030
2040
Source: CPB
5
Conclusions •
Economic growth and environmental policies have significant effects on production, consumption and prices of energy. Restrictions on the supply side, amongst which resource scarcity, on the contrary, do not have a major influence on energy markets in the long term. Depletion of conventional oil fields will however affect the regional composition of supply of oil and the structure of the market.
•
Like in the past, variation in energy-intensity (or its reciprocal energy productivity) can vary considerably. In high growth scenarios a prolonged change of 1 to 1.5 percent is possible. Depending on scenario and region, an annual improvement of energy productivity of 3% seems possible. Crucial for the decrease in energy-intensity is the growth in GDP and the
21
corresponding structural changes in the economy. Besides price changes, environmental policies and technology spill-overs can influence this development. •
Although the reserves of oil in the Middle-East could near their depletion before 2040, the supply of oil will be secured by non-conventional sources. Hence, the real price of oil will be rather stable. Significant chances will however occur in the regional structure of the supply of oil. The current main suppliers will lose their dominant position while regions with huge amounts of non-conventional oil will become the new leaders on the oil market.
•
Europe will become more and more dependent on foreign sources of natural gas. In all scenarios, the import dependency grows to at least 70%. Due to an abundant supply of natural gas in Russia and the Middle East, the supply of this energy carrier will be mainly determined by geopolitical factors.
•
Electricity demand in Europe could triplicate in the period up to 2040 in case of high economic growth. The price of electricity could however be rather stable due to technological innovations and increasing competition.
•
Stabilization of the concentration of greenhouse gases can be reached at relatively low cost. Crucial is the assumption that abatement takes place where options are cheapest. A worldwide cap-and-trade system qualifies as a cost-effective policy. Due to taxation of ‘dirty’ fuels, energy prices boost. Hence, negative effects for energy-exporting regions and energy-intensive industries can be considerable in 2040.
•
The overall effect of climate policy is that the use of energy declines, not only in relative terms, but also in absolute terms. In Europe, the use of coal and oil will decrease significantly while the consumption of natural gas shows only a modest decline.
•
A further drop in carbon intensity can be expected. The demand for cleaner energies, partially driven by concern for local environmental issues, leads to further fuel switching.
References CPB (1999), WorldScan; the Core version, The Hague CPB (2003), Four Futures for Europe, The Hague EU (2002), Energy in Europe – European Energy to 2020; a scenario approach, Luxembourg, Office for Official Publications of the European Communities IMAGE-team, TIMER, 2001 IEA (2002), World Energy Outlook 2002, Paris, OECD/IEA IPCC (2000), Emissions Scenarios, Cambridge, Cambridge University Press Ryan, John (2003), Hubbert’s Peak: Déjà vu All over again, Newsletter of the IAEE, second quarter UK (2001), Energy for Tomorrow: Powering the 21st century, UK Department of Trade and Industry (DTI), Foresight Energy and Natural Environment Panel 32, London. United Nations (2002), Global Environmental Outlook 3: Past, present and future perspectives, London, Earthscan Publications Ltd. 22
