THE ENERGY TRANSITION OPPORTUNITIES AND CHALLENGES

Università della Calabria, 21 October 2019

Margherita Bianchi

Istituto Affari Internazionali (IAI)

CONTENTS

ENERGY, A FUNDAMENTAL RESOURCE

WHAT CHALLENGES?

CURRENT CHANGES AND TRENDS

ANSWERS FOR A SUSTAINABLE GROWTH

FUTURE GEOPOLITICAL SCENARIOS

2

ENERGY, A CRUCIAL RESOURCE

3

Energy = Development

4

25 September 2015: the United Nations approve the Global

Agenda for sustainable development and its related 17 “SDGs”,

expressed in 169 targets to be reached by 2030.

“No-one left behind”

Goal n. 7

seeks to ensure everyone an affordable, sustainable and

modern access to energy.

5

SDGs

6

A "bridge" between countries and regions/ 1

Physical interconnections and economic relations

between states and regions

Interconnections (gas + electricity) in the

Mediterranean

(Sources: ENTSO-E, ENTSO-G, 2017, 2018)

7

The Arab Gas Pipeline

(Source: Observatoire Méditerranéen de l’

ènergie (2011)

A "bridge" between countries and regions/ 2

Physical interconnections and economic relations

Between states and regions

8

United Kingdom, Interconnections (gas + electricity)

(Source: English Parliament, 2018)

A "bridge" between countries and regions/ 3

9

The Association of Energy Regulators, MedReg, includes Israel and Palestine

working together for gas exchanges between Gaza and Israel.

Egypt, Cyprus, Greece, Italy, Israel, Jordan, Palestinian National Authority

discuss how to bring Eastern Mediterranean Gas (EMGF) to market

RU-UKR-EU Dialogue Table

A platform for dialogue…

10

A key to read crises

The energy production in the country

has dropped to almost zero. Direct +

indirect losses in the energy sector are

calculated in 58 billion dollars. Now, in

2019, way worse.

The amount of damages caused by the

war and aerial bombings in Syria is

noticeable from lighting across the

country after 2011, which has registered a

83% reduction in four years.

Lighting in Syria, 2011-2015)

(Source: The Telegraph, 2015

Electricity connections in the Levant

through Syria have been interrupted by

the civil war

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In synthesis:

the energy trilemma

12

Balancing the three dimensions of the energy trilemma is

considered crucial for the competitiveness and the prosperity of

every country.

Sustainability/ 1 Energy is the main source of CO2 emissions (+0,4% annually until 2040).

…we are heading towards +2,7 C° by 2100, risking the irreversibility of the consequences of global warming and disastrous environmental, economic and social costs.

13

Growth of CO2 emissions related to

energy (Source: IEA, WEO - NPS 2017)

Fluctuations in the level of CO2 in the atmosphere (Source:

NASA, 2018). Glacial age: CO2 levels were about 200 parts

per million (ppm). Interglacial periods: 280 ppm. In 2013,

CO2 levels exceeded 400 ppm. This unstoppable increase

shows a constant relationship with the combustion of fossil

fuels

Sustainability/ 2

14

Coal intensity and CO2 emissions for

energy generation - by region (Source:

IEA, WEO - 2018)

China: its levels of consumption per capita

are much lower than other states that

consume less electricity in total.

Energy poverty/ 1

15

(Source: IEA, WEO 2017)

2014: In Sub-Saharan Africa 28 gigawatts are available to generate electricity…

…as in Arizona (USA) alone. But the two population differ widely: 860 million people vs. 6.5

China has used carbon for electricity taking 600.000.000 people out of poverty.

It is also a European concern: EU Energy Poverty Observatory, launched in 2018.

Risk: population growth overcomes electrification efforts

Energy poverty/ 2

16

(Source IEA, WEO 2018)

The 2017 was the first year in which people without access to electricity fell below one billion

Population without access to electricity, 2017

17

Energy poverty/ 3

Earth at night.

Source: NASA,

2016

Security/ 1

18

Traditionally limited and geographically localized (oil

and gas), energy has strong strategic and security

components: it could be a source of instability and

hostility, of vulnerability for producers, for importers

and for many consumers,

of volatility and speculation.

“Uninterrupted phisical availability of energy products on the market at an affordable price for all

consumers.” (European Commission)

A condition in which a nation […] has access to sufficient energy resources at reasonable prices for

the foreseeable future free from serious risks of major disruption of service. (Barton)

Security/ 2

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OECD – Consuming countries

• 47.5% of oil consumes; 15% of reserves

• 46.5% of gas consumes; 10% of reserves

China & India

• Energy is fundamental to guarantee

economic growth and the relative

international status.

• Drivers of the increase in demand

Producers

• Revenues generated by exports are

fundamental

• Also for their welfare system: subsidies

• Predictable and consistent export levels help

the economic and social planning of these

governments

• Key factor in maintaining national security

apparatus and internal order

OPEC Statute, Art. 2:

• "The organization must devise ways and

means to ensure the stabilization of

[energy] prices on international markets, in

order to eliminate harmful and unnecessary

fluctuations".

Two-way dependency, "security of demand". Russia's dependence on oil and gas exports amounts to

360 billion dollars in 2013, 68% of total exports, 52% of the Russian federal budget.

Countries of transit: Ukrainian case, Turkish case. RU-UK-EU table to solve the Ukrainian case.

Security/ 3

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Cyprus Exclusive Economic Zone (EEZ)

21

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How to read scenarios?

Today changes are occuring at an

unprecedented pace:

In international relations

In global trends

In the role of major emitters

In the development of technologies

Evolution of the energy mix, 1800 – 2040 (Source: Vaclav Smil, Energy Transitions)

How is the energy sector evolving?

In international relations/ 1

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Trade balances: exporting countries are becoming importers; importers

exporters; producers are dealing with momentous changes

The routes: new strategies are develop to “diversify” suppliers

and transit countries

Foreign policy: cooperation is or could be strenghtened in new

regions

MENA, with the Arab Spring

The United States, with the shale gas revolution

Saudi Arabia, with the drop of oil prices

Russia & Ukraine, post 2006, 2009, 2014

Conflicting or coinciding interests in Eastern Mediterranean

In international relations/ 2

Gas market: end of regional prices, beginning of a global market.

From «pipeline war» to sea control

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Rise in the Liquefied Natural Gas (LNG) trade, today around 30-35% of the

entire global gas exchange.

The fight against climate change: turnabout of main powers

United States, Trump announces the withdrawal from the Paris Agreements…

But this turnabout also applies, in the opposite direction, to China.

Focus China /1

25

China has launched its national carbon trading scheme in December 2017. The system

aims to cover more than 3 billion tons of GHG emissions and 1700 power companies

(Source: UNFCCC).

Sales of electric vehicles in China have risen

by 53% in 2017. The government is

committed to ban internal-combustion

engine vehicles by 2040. (Source: Forbes,

2018)

In China, the production of electricity from

coal is decreasing. A different trend is

registred in India.

(Source: World Bank, 2017)

Focus China /2

26

Chinese energy intensity is decreasing faster compared to other countries.

By 2040, China’s economic growth will be among the less energy-intensive in the world.

(Source: IEA, WEO 2017)

In global trends/ 1 How does the energy demand change? The main determinants of its

increase are, in addition to energy policies, the rates at which economic activity and population grow

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Overall GDP will grow at an average rate of 3.4% per year

and the population will increase from 7.4 billion in 2016 to 9.1 billion in

2040 (WEO 2017).

Important factor: urbanization

=

A 30% growth in the global energy demand is foreseen by 2040.

28

In global trends/ 2 Where does it change? Non-OECD countries lead the rise in energy demand:

in the next twenty years demand will stabilize in industrialized countries, but not in India or China, and

it will considerably rise also in Eastern and Southern Mediterranean countries.

Change in primary energy demand, 2016-

2040, Mtoe

(Source: IEA, WEO 2017) • 1/3 of energy demand comes from India

• Oil: China, India and the ME responsible for its d. growth (moderate)

• Gas: Asia overcomes Europe as n.1 importing region

• New areas in the game: Arctic, South China Sea…

ANSWERS

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Joining forces:

institutions, politics

International commitments: keep the rise in temperature (well) below 2°C. COP21: 184

countries responsible for around 96% of CO2 emissions: INDC.

Regional goals:

Targets: UE 2050 Roadmap, decarbonisation goal at 80-85%

Comprehensive legislative and regulatory frameworks: Clean Energy Package –

European Union)

Infrastructures & interconnections: gas, electricity

Cooperational frameworks: North-South Mediterranean shores

Dialogue platforms: MedReg, MedTSO, China – Europe on ETS.

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Assuring technological transfer, access to credit

Supporting investments in renewables from different actors to increase their competitiveness

Economic instruments: carbon pricing

R&D: Carbon Capture & Storage, batteries, development of new technologies

Nuclear Energy: a way to decarbonise, but has controversial aspects and high costs

Sustainable mobility: electric vehicles, but also gas and hydrogen

“Bottom up” inclusion in the energy transition: role of the cities, of local actors, of women;

Circular economy

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Joining forces:

finance, technology, civil society

Tools/ 1 In the short and medium term

The role of gas

The less polluting among

fossil fuels (many try to

switch from coal to gas)

National plans, as the

italian SEN, to phase out

coal

32 We expect gas consumption to grow faster than other sources in

the medium term (Source: IEA, 2017)

gas as a “back up”, as a

“bridging fuel” in the energy

transition;

Gas is central in the“Energy

Union” stategy

The priority: decarbonising the economy by fostering inclusive growth

The tools:

The most convenient? Energy efficiency

New opportunities: digitalization, decentralization, “smart grids”, new technologies, R&D;

33

Tools/ 2

The revolution of renewables, their development, lower costs and accessibility:

Democratic aspect of renewables: they allow to overcome energy

dependency. They remove the limits to growth we are used to since the

industrial revolution. …but there’s a gap to fill before clean energy can completely overtake fossil

fuels: storage, distribution, flexibility, security (capacity≠ electricity produced).

THE ENERGY TRANSITION

REDRAWS THE GEOPOLITICAL

MAP

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1. They are available in one way or another in most countries;

2. Most of them take the form of streams, while fossil fuels are reserves.

1. They allow the decentralization of energy production and consumption. “Democratic" aspect of renewables;

2. They have almost no marginal costs

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RES Revolution

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A huge opportunity to ensure access to

(sustainable) energy

Historically, national electrification programmes have been based on large-scale power

plants and in line extensions powered by fossil fuels. Things are changing. Estimates

indicate that off-grid solutions could provide about 60% of the additional generation needed

to reach the universal energy access target by 2030 (IRENA, 2019).

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Drivers of change Costs of RES technologies are falling. Since 2010 the average cost of electricity

produced from solar PV and wind power has decreased by 73% and 22%. The cost of lithium-ion batteries used in electric vehicles has decreased by 80% since 2010;

Pollution and climate change. The first one kills 7 million people a year. Given that the energy sector accounts for two thirds of global emissions, RES+energy efficiency are the answers (90% of the answer to achieve the Paris Agreement);

Renewable Targets. 57 countries have developed plans to decarbonise their electricity sector and 179 have set national or state targets for renewable energy;

Technological innovation will allow renewable energies to penetrate a growing share of sectors that are difficult to electrify, such as aviation, maritime transport and heavy industry. Also digitisation and storage;

Investments at "COP24", a group of 415 investors ($32 billion) reiterated their full support for the Paris Agreement. State sovereign funds and private companies start disinvesting infossils;

Public opinion

Everything changes (again!)

For two centuries, the geographical concentration of oil, natural gas and coal has defined the international geopolitical landscape.

Coal and steam have defined the industrial revolution which, in turn, shaped geopolitics in the 19th century.

Since then, control of oil production and trade has been a key feature in the 20th century.

A transition from fossil fuels to renewable energy could transform everything again.

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Scenarios in areas of the world/ 1

The United States are close to energy self-sufficiency. "Shale revolution”. Net exporter of natural gas in 2017 + expected to become a net exporter of oil in 2020. Strong in new technologies, including robotics, artificial intelligence and electric vehicles.

China Currently remains heavily dependent on oil imports. Will benefit from the energy transition for its energy security. It has a leading position in manufacturing, but also in innovation and the use of renewable energy technologies. 45% of the global investments in RES in 2017 were in China.

Europe and Japan depend heavily on imported fossil fuels. Japan is the most dependent; its net imports of fossil fuels amount to 5% of GDP. Well placed in renewable technologies. In Europe, Germany is at the forefront with nearly 31,000 patents on renewable energy.

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Scenarios in areas of the world/ 2

India is one of the fastest growing economies in the world in recent years,

lifting millions out of poverty. It is ready to overtake China as the largest

growing energy market in the world by the end of the 2020s. It has set a

target of 175 GW of renewable energy by 2022.

Russia, the world's largest gas exporter and second largest oil exporter,

has a wider and more diversified economy than any oil producer in the

Middle East. Oil and gas profits are a vital component of the state budget

(40% of tax revenues). The spread of renewable energy is now more

intense and the country invests in R&D, but is lagging behind China and the

US on patents for RES technologies.

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Scenarios in areas of the world/ 3

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MENA area exposed to a reduction in fossil fuel revenues. On average, these regions have net fossil fuel exports corresponding to a quarter of their GDP. The decline in export revenues will negatively affect their economic growth prospects and national budgets. But incredible potential for RES;

Sub-Saharan Africa (SSA) will benefit from reduced fossil fuel imports and renewable energy generation at the national level, as this will foster job creation and economic growth. Exceptions: Nigeria and Angola;

South Asia spends more than 3% of its GDP on fossil fuel imports and will benefit from energy transformation;

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The new leaders?/ 1

Three types of countries have the potential to emerge as new leaders:

1. Countries with high technical potential for renewable energy

generation. Australia's solar and wind energy resources are estimated

to be 75% greater than its combined coal, gas, oil and uranium

resources. In the Atacama Desert, Chile has some of the largest solar

resources in the world, as well as wind, hydro, geothermal and ocean

energy potential. Bhutan already exports hydropower to India.

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The new leaders?/ 2

2. Mineral-rich countries. Bolivia, Mongolia and the Democratic Republic of Congo are rich in resources that are crucial for renewable technologies; eight countries produce lithium, four of which manage more than 93% of the global production (Australia placed fist with around 45%, followed by Chile, China and Argentina). Congo manages 50% of the reserves and 55% of the cobalt production. China is responsible for more than 72% of global production of rare earths.

3. Leaders in technological innovation. No one does better than China. Overall, it is now the largest producer and exporter of solar panels, wind turbines, batteries and electric vehicles. The race for clean energy technology could however result into a dominant situation. This situstion could become similar to what already happens in the sector of mobile technology.

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Geopolitical impacts/ 1

The current governance mechanisms in the energy sector - essentially

based on the dualism between groups of consumer and producer

countries - appear inadequate to deal with the changes taking place

and will continue to do so, making it clear that there is an urgent need

to define new stable and inclusive architectures of international

governance.

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Geopolitical impacts/ 2

1. Need to change alliances and foreign policy. Ex. Italy: our

foreign policy, being a major importing country, has in recent

decades favored strong relationships with exporting countries,

supporting continuity with traditional energy partners and foreign

action in strategic areas for conventional sources. This will partly

change. This applies to many areas of the world.

2. More strategic regional networks of global markets. Electricity

becomes a protagonist. Unlike oil and LNG, electricity is traded

regionally. Control over the grid infrastructure will become vital to

national security.

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Geopolitical impacts/ 3

3. Reconsidering new forms of dependency: States have long used

energy resources as foreign policy instruments. In a world powered

mainly by RES, many energy resources will lose much of their value as

geopolitical tools. Dependence on biofuels, emerging fuels such as

hydrogen or critical materials, could create new forms of dependence

and vulnerability.

Thank You!

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Margherita Bianchi m.bianchi@iai.it @marghebianchi