Low-cost oil is an opportunity to rethink corporate strategies and energy policy, RES4MED’s Vigotti says

Low-cost oil is an opportunity to rethink corporate strategies and energy policy, RES4MED’s Vigotti says

Roberto Vigotti speaks exclusively with Behind Energy to explains why the plunge in commodity prices should force a rethink in global energy polices and in already pushing utilities overhaul their business propositions.

When we talk about subsidies for different energy sources, the various sides (pro-renewables/pro-fossil fuels) accuse each other of being major beneficiaries of incentive systems. How do things stand in reality?

Fossil-fuel subsidies are considered one of the main barriers to investments and to economic competitiveness in MENA countries. The International Energy Agency underlines that fossil-fuel subsidies can make high energy-intensive industries more competitive, whereas they actually weaken the competitiveness of the global economy by creating market distortions and, as a consequence, poor allocation of resources.

The chain of negative effects extends to a loss of efficiency in economies and social welfare. Subsidies reduce the prospects for energy efficiency by provoking a distortion in how the investment amortization period is calculated. Local economies fall behind, lose their ability to innovate and to diversify into other sectors, such as renewable energies. In 2013, governments throughout the world spent 550 billion dollars in subsidies that encourage unrestrained energy consumption. Subsidies are seen as a guarantee for social peace, by protecting personal income, boost local industrialization and distribute economic benefits to citizens.

In reality, fossil-fuel subsidies are expensive, inefficient and unsustainable, and they do not reach their stated objectives, but on the contrary generate indirect negative effects. The supply of low-cost energy does not reach the intended target, because it is not neutral in terms of benefits.

The part of society that consumes the most subsidized good gets proportionally the most benefit from such subsidies and, in the case of energy, this share corresponds to families with the highest income. A recent study on the impact of fossil-fuel subsidies on a group of 20 developing economies discovered that on average 97 dollars out of 100 of petrol subsidies go to the highest quartile of the income brackets, whereas only 3 dollars are actually go to the lowest income group, the supposed beneficiary of such subsidies.

In the case of support for renewables, in a growing number of contexts some technologies are already competitive and do not need any incentives in relation to the bankability of projects. Let us not forget that at a global level, subsidies for renewables amount to less than a quarter of the total handed to fossil fuels.

The concept of externality is familiar to everyone who has studied economics since it is among the basic notions you need to learn. Why is it not taken into account when it comes to setting energy policies or taking strategic decisions?

Without a worldwide agreement to set a limit to CO2 emissions, countries are unlikely to prioritize the costs of externality in their government decision-making processes. This subject is getting a great deal of attention at the moment, as proved by the UN Climate Summit of late September in New York, where the World Bank announced the details of their appeal, launched to governments and entrepreneurs, to support the introduction of a carbon price: over 70 countries including China, Russia and South Africa, over 1,000 companies and institutional investors with more than 24,000 billion dollars of assets. Governments collectively represent 52% of the world’s GNP and 54% of greenhouse gas emissions. The private sector is absolutely certain that a future carbon price will notably exceed the current market prices.

Several big companies already adopt an internal carbon pricing in their decision-making processes, and deem carbon regulation to be a useful business opportunity. Carbon pricing has become a risk management tool in investment planning.

What impact will the sudden fall of oil prices have on the development of renewables?

The present low-price scenario for oil represents a unique occasion for governments to launch two important processes and accelerate the development of renewable energy. As suggested by Maria van der Hoeven and Fatih Birol, this circumstance will not last for long, since oil prices will certainly go up again. That is why governments should take action urgently.

Political decision makers have a great responsibility and should take advantage of this moment in order to change the way energy prices are set globally, removing fossil-fuel subsidies and introducing a carbon tax system. If such systems are properly planned and implemented in a context of lower energy prices, economic difficulties can be minimized.

In fact, many studies suggest they can produce a net economic benefit. The worst course of action for public decision makers would be showing complacency with regard to low oil prices.

From your privileged position, do you notice any substantial differences in the modus operandi of the big energy companies and governments between mature markets and emerging countries?

Governments and large utilities are facing many different challenges depending on market contexts. The global renewables scenario is changing rapidly, with notable differences between stable markets and more dynamic markets, although the increasing electrification of consumption represents a growing global trend across the board. IEA projections show that electricity demand will grow more than all the other form of final energy use, increasing by over two-thirds from 2011 and 2035, and this increase will be concentrated in emerging countries. At a global level, feeding the growing demand of electricity and, at the same time, replacing obsolete assets in industrialized OECD countries will require 17 trillion dollars of investments. In such a context, renewable energy will play a fundamental role in both stable markets such as Europe and dynamic markets, China above all.

Your work mainly focuses on developing renewable energy throughout the southern and eastern countries of the Mediterranean basin. How would you characterize this area from the point of view of energy?

The Mediterranean basin is a unique example at a global level of interaction and complementarity between stable markets and dynamic markets. In countries in the southern and eastern Mediterranean, energy demand is increasing 6% a year and many governments have launched renewable energy development programs. Their priority is to attract investment and achieve a goal of installing 75 GW of renewable energy by 2030. Governments have set these ambitious goals in order to meet the area’s growing need for energy, diversify its energy mix and capture the potential for new employment and economic/industrial development offered by rapid technological development into increasingly efficient solutions. Building up suitable generation assets will require a large flow of short-term investments. In this context, integrating the Euro-Mediterranean electricity markets for the exchange of renewable energy, with a role at a project level for the transit corridors between Europe and North Africa, which allows energy exchanges in both directions, still remains a long-term vision. In the MENA countries renewable energy has become a business standard, often representing the most competitive option. Therefore, the strong development of renewables in the MENA area can start without waiting for complex market reforms to be completed.

In the never-ending debate between fossil fuels and renewable sources, when will global energy demand be mainly satisfied by renewables?

IEA forecasts clearly indicate that, in order to avoid unaffordable consequences of climate change and maintain temperature increases under 2 degrees, the energy mix in 2050 will show a drastic reversal between fossil fuels and renewable sources. Today, fossil fuels account for 68% of the world’s energy mix, compared to a 20% covered by renewable energy.

In 2050, renewables should represent 65% of the world’s energy mix, and solar energy will play the most important role becoming the leading energy source. To make this happen, we need to break the last barriers to renewable development; and the strongest obstacles are cultural, not technological or economic.

What are the most popular myths about renewables?

There are several persistent myths about renewable energy, in particular related to their economic competitiveness. Unfortunately, such myths have percolated into public opinion and are affecting the political scene all over the world. It is fundamental to dispel false myths about the economic competitiveness of renewable technologies because they are most damaging to political decision-making. In many contexts, renewables represents the most competitive option. The high load factor of onshore wind plants (>2,500 – 3,000 hours) is already competitive compared to the full cost of a new combined cycle gas turbine (CCGT), even in the United States with its plentiful shale gas.

E.ON is exiting the fossil-fuel sector to focus on renewables and intelligent networks. Can we talk of a “conversion” of the energy system to low-impact electricity production systems, albeit a slow conversion?

An increasing number of companies will follow in E.ON’s footsteps. According to Maria van der Hoeven, IEA executive director, E.ON’s transition to renewable energy is a sure sign of what will be happening in the future. Energy demand in Europe is not growing so you have to do something if you want to stay in business. At the end of November renewable energy in Italy accounted for 37,4% of demand.

Large utilities know they must reinvent themselves around new competitive drivers of innovation, sustainability and efficiency.

Enel has decided to focus on innovation, intelligent networks and renewable energy, retiring 11 GW of thermoelectric power plants that have ceased to be competitive. Technological innovation and the consequent decrease in the costs of technologies, climate change and resource scarcity, population growth, a new balance among global economic powers and increasing urbanization represent the megatrends that will push companies to transform their mission all along the energy.

 

Roberto Vigotti

Vigotti

General Secretary of RES4Med the “Initiative for RE in the Mediterranean” , promoted by 16 international key energy stakeholders to facilitate dialogue between the various existing institutional and industrial initiatives; the association aims at the deployment of a broad range of renewable energy solutions and their integrations in the electricity market in the Mediterranean. www.res4med.org from 2012.

At the International Energy Agency (IEA):

– Deputy Chair of the Renewable Energy Working Party from 1998 until 2010 he has been  Chairman of the Group; from 1990;

– Coordinator of the RE Industry Advisory Board formed by the 34 world leading companies and association to support the Agency strategy and program of work of IEA; from 2012.


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