EMA's Chief Executive Chee Hong Tat, seated on right, says the LNG market is likely to tighten. (Photo credit: Energy Market Authority)

March 26, 2012--THE LNG market is likely to tighten in the coming years, as strong demand from Asia's growing economies outstrips short-term supply, said the Chief Executive of Singapore's Energy Market Authority, Mr Chee Hong Tat, earlier this month.

Speaking at the annual LNG Supplies for Asian Markets conference held in Singapore, Mr Chee pointed to China and India's rising LNG demand alongside Japan's increased LNG imports, a by-product of the Fukushima nuclear power plant disaster last March. For the rest of last year, Japan's LNG imports shot up 12 percent by volume as the country ramped up its gas-fired power generation.

However, there was some positive news ahead for LNG buyers from the supply front, noted Mr Chee.

LNG supply is expected to expand after 2016 due to a variety of factors.
Australia, for one, has ongoing projects which are set to add about 33 million tonnes per annum (Mtpa) of LNG to the current supply from 2016.

Increasingly, LNG cargoes initially meant for the United States have also been diverted to Asia and Europe--in line with unconventional gas discoveries in the US that have turned it into a major exporter, instead of a net importer, of gas.

In parallel, he added that other regions in the world including China, Australia and Europe could tap on their unconventional gas reserves. Some analysts, he said, had even predicted that China's unconventional gas output could hit 1.3Mtpa in 2015, and 21.9Mtpa in 2020.

He cited another interesting development--floating LNG production, where offshore gas fields could be accessed at a lower cost and a smaller environmental footprint. Some industry players like Shell have already invested in this development. Mentioning Shell's Prelude Floating LNG (FLNG) project in Australia, Mr Chee added: "The success of FLNG could bring even more LNG supply projects online, and open up more supplies and choices for LNG buyers."

EMA's CE then turned to Singapore's own LNG terminal project, which will be part of Singapore's diversification strategy to ensure energy security for the city-state. Built at a cost of about S$1.7 billion, the terminal is more than 80 percent complete and is scheduled to commence operations in the second quarter of next year.

BG Singapore Gas Marketing, the current LNG aggregator, has already sold close to 90 percent of its 3Mtpa franchise to buyers and EMA is actively studying alternative ways of procuring LNG for Singapore.

Mr Chee said a three-month-long public consultation exercise on possible LNG import frameworks would be launched later in March  on EMA's corporate Web site. He invited audiences at the event to offer their feedback.

This, he said, would "help EMA chart the way forward in our journey to secure reliable and competitively-priced LNG for Singapore".

(Credit:iStockphoto)

Japan is the world's fifth-largest energy consumer and a resource-poor country which imports close to all of its fossil fuel requirements. Large demand for energy and high import dependence have made energy security one of the top priorities of any government in Tokyo, particularly since the two oil crises in the 1970s. The 1973 and 1979 oil crises caused the Japanese economy to record negative growth rates for the first time in its post-war history. Their impact on the lives of ordinary Japanese remains deeply etched in people's minds. As a result, the Japanese government adopted policies aimed at improving energy efficiency and reducing demand for oil. These policies have resulted in unprecedented success. Overall, Japan's oil demand dropped from 5.4 million barrels per day (b/pd) in 1979 to 4.4 million b/pd in 2010. In terms of the share of oil in electricity generation, oil fuelled approximately 72 percent (340TWh) of electricity in 1973. This figure stood at 7 percent (68TWh) in 2009. Japan's oil demand by sector has also been transformed as a consequence, with the transportation sector replacing the industrial sector as the predominant user of oil.

Data Source: IEA

Today, after three decades, energy security is once again at the centre of attention among Japanese policymakers and the general public. However, unlike in the 1970s when the focus was on affordability and security of oil supplies, the current challenge is multidimensional. While the renewed interest in energy security issues was triggered by record oil prices in 2008, it was brought to the forefront of public discourse in the aftermath of 11 March 2011 (hitherto referred to as the 3/11) earthquake and tsunami, which caused a nuclear catastrophe at Tokyo's Electric Power Company's (TEPCO's) Fukushima Daiichi nuclear power plant. By October 2011, only 11 out of 54 of Japan's commercial nuclear reactors were operating.

Consequently, largely absent since the two oil crises in the 1970s, the energy security debate in Japan has been revived in the aftermath of the 3/11 disaster. Some analysts have suggested that the country should move away from nuclear energy, citing safety concerns in an earthquake-prone country which lies on several fault lines. For example, the Japanese government claims it is scrapping plans to build as many as 14 new nuclear reactors over the next two decades. It is worth recalling that the government-stated plans were to increase nuclear's share of total electricity generation from 24 percent in 2008 to 40-50 percent by 2030, according to the Ministry of Economy, Trade and Industry (METI).

Former Prime Minister Naoto Kan announced that the government would have to "start from scratch" in devising a new energy policy for the country. He has announced a major energy policy review that will promote solar and other alternative energies, stating that Japan should increase the share of renewable energy in power generation to 20 percent by the early 2020s. This is a considerable challenge given Japan's current electricity generation profile, in which renewable sources start from a low base.

Figure 2:

Data Source: The Federation of Electric Power Companies of Japan

This paper evaluates Japan's current energy security situation and places future energy policy options in the appropriate context. The paper adopts UNDP's definition of energy security as the availability of energy at all times in various forms, in sufficient quantities and at affordable prices, without unacceptable or irreversible impact on the economy and the environment. When this conceptualisation is applied in the present Japanese context, the analyses indicate that Japan is facing an energy security predicament. The country's energy policy has to address challenges related to the future availability of diverse energy sources, increasing cost of fuels, and adverse impacts of its energy and power trajectory on the economy and the environment.

In many ways, the scale of the Fukushima disaster is such that previous energy security thinking needs to be reassessed in lieu of a changed environment. While recognising the significance of 3/11, Japan's energy future is path-constrained. It is embedded in a specific political, economic and social context, constrained by Japan's existing energy system, but also affected by changes in the global energy system. For Japan, the challenge of moving away from the present pattern of energy use is constrained by a combination of four sources of path dependency: Historical trends; beliefs and perceptions; institutions and organisations; and relative prices and technology. These constraints make energy transitions slow. At the same time, a significant disruption to any of these sources of path dependency comes at an enormous cost to energy and economic security. In Japan's case, one such major disruption has been the 3/11 disaster. This event has shaken the foundations of Japan's energy system and affected its path dependency.

Historic trends

Scholarship on energy transitions suggests that they have been both gradual and complex. Decades are required for the diffusion of significant innovation, and even longer time spans are needed to develop infrastructure. Coal had been in use for thousands of years, but it was not until growing urbanisation led to a shortage of wood that the use of coal became more commonplace. Similarly, oil derivatives were used in lamps throughout the 19th century, decades before they became the world's dominant source of energy.

An examination of historical energy demand trends in Japan (Figure 1) and globally (Figure 2) reveals that substantial changes in proportions of energy use from various sources take decades. Having said this, the discovery of superior sources of energy has sometimes resulted in a relatively rapid transition to a new energy source, as in the case of coal and oil. Occasional supply shocks, such as the 1970s oil crises, only marginally affect the historical pattern, with return to pre-shock levels within two decades. Currently, fossil fuels make up 87 percent of the global and 82 percent of Japan's energy demand, with no serious competitors on the horizon.

Source: Full Report, BP Statistical Review of World Energy, 2011

Source: BP Statistical Review of World Energy 2011

Japan is the world's largest importer of liquefied natural gas (LNG) and coal, and the third-largest importer of oil. As Japan is heavily dependent on energy imports, the government has been promoting nuclear energy as a means to diversify its energy sources. The re-evaluation of its energy policy in the aftermath of the 1973 oil crisis resulted in diversification and, in particular, a major nuclear construction programme. High priority was given to reducing the country's dependence on oil imports and, more broadly, curbing oil demand. Consequently, with improvements in energy efficiency and substituting oil for natural gas and nuclear power in electricity generation, Japan's fuel oil demand dropped significantly by the mid-1980s, only to return to pre-crisis levels by the mid-1990s. The Japanese government has treated nuclear power as a semi-indigenous form of energy supply. As a country with virtually no natural resources, it perceived nuclear power as a central pillar in reducing dependence on imported fuel oil for power generation and enhancing energy security. Since the 1980s, nuclear energy has been an integral part of Japan's energy supply system (Figure 1). It provides 25-30 percent of electricity and 13 percent of primary energy supply.

The realities of energy transitions and the particularities of Japan's energy system hinder any quick move away from coal and oil. Japan has reduced its nuclear power output and this reduction is likely to remain for the foreseeable future. With Fukushima and other nuclear plants offline, industry analysts calculate that in order to replace lost nuclear capacity, Japanese oil imports (to be used as fuel oil by utilities) are likely to rise by at least 350,000b/pd (or 8 percent per annum), and imports of natural gas by approximately 1.2 billion cubic feet per day (or 13 percent per annum), mostly in the form of LNG. Regional suppliers, such as Australia, are already reaping the benefits of Japan's increased demand for coal and LNG. Yet, the issue is that fossil fuels, and particularly supplies of fuel oil, are constrained. Consequently, the nuclear crisis poses a serious challenge to the nation's energy security both in terms of supply security and affordability.

Similarly, and despite a significant policy commitment to renewable energy in Japan, it will take decades before renewable energy becomes competitive with fossil fuels in electricity generation and in the transportation sectors both in Japan and globally. A glance at past energy consumption trends (Figure 4) indicates that renewable energy is a newcomer. Renewable energy sources are a fraction of total output in the current global energy system. The same applies for Japan, where they start from a very small base (see Figure 3). While the share of renewable energy in global terms and in Japan's energy mix will grow, this will happen at a very slow pace due to relative higher costs and other limitations (discussed below) that inhibit a fast uptake of renewables. 

Beliefs and perceptions

There is a strong commitment in Japan that a move from nuclear power towards other sources of energy is desired, both in terms of public opinion and government policy. While public opposition to nuclear energy is not a new phenomenon, the change of government policy is. Driven by a high dependency on imported fossil fuels and the negative impact of two oil crises, the government has been committed to nuclear power as a preferable energy source because it is domestically-produced, and thereby more secure. As outlined in Japan's New National Energy Strategy of 2006, the aim was to increase the share of nuclear to at least 40 percent by 2030.

At the same time, the Japanese public has been opposed to nuclear power since a series of nuclear accidents occurred over the 1990s. The 3/11 nuclear disaster, although the most severe, has not been the only nuclear accident in the country. In fact, several reactor accidents occurred during the 1990s, the most serious of which was the 1999 accident in Tokaimura, which killed two workers. These accidents have contributed greatly to negative public confidence in government and corporate nuclear oversight. The share of Japanese people feeling "very uneasy" about nuclear power grew from 21 percent before the 1999 Tokaimura accident to 52 percent afterwards. In a survey released in March 2000, 64 percent of energy experts surveyed expressed strong concerns about the risk to energy security posed by limitations to securing sites for nuclear power plants; and 49 percent about risks posed by large accidents at nuclear power facilities. This survey data showed that both the public and experts did not accept the government's argument that nuclear power is safe even well before 3/11.

However, after 3/11, this opposition has become even more pronounced. In the Asahi Shimbun poll in June 2011, 74 percent of Japanese respondents favoured a gradual phase-out of nuclear energy and only 14 percent were against such a gradual reduction. The poll also showed 64 percent of respondents believe "natural energy" such as wind and solar power will replace nuclear power in the future. Mirroring public opinion, in early July 2011, Prime Minister Kan urged a nuclear-free future for Japan, stating that the country should aim to develop alternative energy sources such as solar-, wind- and biomass-fuelled electricity. This is a significant policy shift and a clear indication that the Japanese government and key policymakers are starting to judge the future of nuclear energy in Japan dispassionately, rather than primarily on supply security grounds.

Institutions and organisations

Japanese energy policy and its future direction are embedded in the country's institutional and organisational structure, in the METI, with the utility monopolies at the centre. However, as argued post-3/11 societal pressure to move away from nuclear power has translated into a significant force for change. Traditionally, energy policy has been the purview of the METI, which has close ties to the business community. Among METI's chief private-sector allies are the 10 regional utility monopolies. These utilities monopolise control over Japan's major electricity-usage regions and collectively produce more than 85 percent of the country's electricity. Given their regional monopoly status, these utilities charge much higher electricity prices than those in the US and Europe. Nuclear energy generation differs with each of the 10 utilities in Japan, but ranges between 21 percent and 45 percent. However, nuclear power is one of their preferred sources in the energy mix as it is relatively cheap (discussed below). Consequently, they are unlikely to simply give in to societal pressure to move away from nuclear power. These deep-pocketed monopolies and industrial energy users have cultivated salubrious ties with influential politicians through generous campaign contributions. Lobbyists from large power utilities have in the past opposed more ambitious renewable energy goals. They have substantial influence at the local and national governmental levels. The plan to downsize or eliminate nuclear energy is also certain to face considerable opposition from companies such as Toshiba Corp, which generates about 10 percent of its revenue from building and servicing reactors.

Japan's nuclear regulators are also not independent of industry influence. In the aftermath of 3/11, the government largely left the response up to the plant's operator, TEPCO, which demonstrates a cozy relationship between government and the utilities. TEPCO, the largest of the regional monopolies, supplies over one-third of Japan's electricity. Some of Japan's most densely-populated and economically-important regions get their power supply from TEPCO. Yet, the company has lost much credibility and trust from the Japanese public in its handling of the nuclear crises following the 3/11 disaster. It has a track record of safety cover-ups, helped by soft regulation from a government organisation tasked with promoting nuclear power. From autumn 2002 to the middle of 2003, TEPCO closed all 17 of its nuclear reactors as a consequence of falsified reports in which the company concealed scars on the shrouds or supporting devices of fuel rods inside the reactor. This situation suggested negligence in safety and security by TEPCO.

In fact, the string of nuclear accidents in Japan in the 1990s revealed a lack of regulatory oversight and preparedness. Over a decade ago, experts called for an adversarial regulatory culture with appropriate laws and institutions. They called for an effective nuclear safety and regulatory commission, which is independent, transparent and encourages public participation. Yet, the Nuclear & Industrial Safety Agency (NISA) within METI remained responsible for nuclear power regulation, licensing and safety. The fact that the Japanese government did not restructure its nuclear regulatory framework in the aftermath of accidents in the 1990s shows the strength of nuclear lobbying in the country.

As of October 2011, close to 80 percent of Japan's nuclear reactors were offline. In what mirrors public opinion, after 3/11, many local governments have been vehemently opposed to nuclear power. Before reactors can restart, METI needs agreements from local governments, even after routine inspections. In any case, and regardless of societal and local opposition to nuclear power, it is hard to imagine that the powerful nuclear lobby and its allies will relinquish their cause. The structural adjustment in the coal industry in Japan serves as an important precedent. In 1968, a decision was made to gradually phase out Japan's inefficient coal industry in response to the increased costs of domestic coal. Yet, two decades later, for its Eighth Coal Program (1986-91), the government had agreed only to some minor adjustments and decided to maintain price differentials and protect the industry more heavily with subsidies for domestic producers and tariffs on imported coal. It was only in 2002 that Japan stopped domestic coal mining because it was no longer economically viable.

Relative prices and technology

A glance at Table 1 reveals that nuclear power is the cheapest source of electricity in Japan, followed by coal and LNG. Renewable alternatives are considerably more expensive. This is a clear indication that there is little economic incentive for utilities to move away from traditional energy sources.

Sources: Craig Dale, 'Energy angst: Japan's Post-Tsunami Power Crisis', Ministry of Economy, Trade and Industry, Japan, Paul Scalise, 'Rethinking national energy policy: Japan's electricity crisis, nuclear power, and the fate of TEPCO

Besides high direct costs, renewable energy faces other significant hurdles in Japan, all of which add to indirect costs related with the uptake of these sources of energy. Geothermal power would appear to be an attractive option given that there are more than 100 active volcanoes and thousands of hotsprings. But some of the best locations are in national parks and hotsprings are attractive for tourists. Consequently, exploring that option could be problematic for the green lobby and tourism industry in particular. Offshore wind farms also seem worthy of consideration, but they are likely to draw the ire of fishermen. In addition, the most productive sites for wind power are located far from where the electricity is needed, necessitating the construction of new power lines often in the face of local resistance. In terms of solar power, the existing power system could accommodate enough photovoltaic-generating capacity to provide only about 6-8 percent of the electricity supply. Japan's hydroelectric potential is largely exploited. Finally, given the intermittent nature of many renewables, the amount of capacity that must be built to produce every kWh of electricity will be several times greater than for other sources, greatly reducing their cost effectiveness. According to one estimate, even 100GW of installed photovoltaic capacity, or the equivalent of nearly 40 percent of current power-generating capacity, would meet only 12 percent of Japan's electricity demand. For all these reasons, METI predicted in 2009 that the share of the primary energy supply provided by renewables in 2030 would reach only 11.6 percent, even with a "maximum introduction of technology".

The government has also been promoting energy efficiency since the 1970s oil crises. Further increases in energy efficiency in order to reduce dependence on fossil fuels are desirable, yet unrealistic. Japan is the most energy-efficient country in the world. The energy consumption per unit of output in the US and Europe is around twice that of Japan's, while China's is eight times as much. In fact, Japanese industry uses a similar amount of energy as it did during the oil shock of 1973. From the 1990s, Japan has also attained the highest level of efficiency in thermal power generation, a level it still maintains. Without a doubt, while minor efficiency gains are possible, any significant gains are highly unlikely in all sectors.

Consequences and future directions

If we are to define energy security as indicated earlier, Japan's is facing a serious predicament and a dilemma regarding the direction of its future nuclear energy policy. The Japanese people will be paying more for energy, the supply of which will be less secure and diversified. Moreover, the higher cost of the future electricity mix, which is likely to be heavier on the fossil fuel side, will have an adverse effect on both the economy and the environment.

During the coming decade, Japan will face supply shortages and higher electricity prices, and general political and economic uncertainties, particularly if the country decides to move away from nuclear power. On the one hand, the commitment to emissions-intensive fossil fuels in the electricity sector will result in an increase in greenhouse gas emissions, which may be difficult to accept for Japan's environmental interests groups. On the other hand, the commitment to prohibitively expensive renewable electricity will result in severe consequences for an already struggling economy. In any case, rising electricity prices are likely to make Japanese corporations less competitive and fuel the movement of jobs offshore.

When considering relative costs, the feasibility of increased production and availability of fuels, Japan is bound to increase consumption of fossil fuels to make up for lost nuclear power. The most feasible option for the country to remain economically competitive is that a significant part of any future short-to-medium term expansion in power production capacity comes from more imported fuel oil, coal and LNG. However, the increased use of thermal plants to make up for the loss of nuclear output will result in higher electricity and fuel import costs, negatively affecting the trade surplus. According to data from the Institute of Energy Economics, Japan (IEEJ), a regular household's electricity bill is likely to increase by ¥1,049 per month (US$13.44) on average due to a rise in fuel costs. Residential and industrial electricity prices are already considerably higher in Japan than in most G-20 economies. The economic burden associated with these higher electricity costs is increasing for Japan as the competitiveness of other countries is enhanced due to deregulation of their electricity sectors.

Early results of the impact of downscaled nuclear power generation is that Japan has been paying substantially more overall for fossil fuels. Consumption of LNG rose 31 percent in June 2011 from a year earlier, and imports rose to a record 4.46 million tons for the month. LNG prices have also risen as Japan buys more, with spot prices reaching US$14 per million Btu, up 40 percent from before 3/11. LNG use in FY2012 is likely to rise by over 10 percent of the nation's annual demand. Japanese demand for coal is expected to increase by 7 million tonnes (or close to 6 percent on an annual basis) in 2011 as the country adjusts its energy mix in response to the nuclear shutdown. According to Morgan Stanley, in order to make up for the loss in nuclear power, Japan will need to boost its fuel oil consumption to be used for power generation by 8 percent, or about 350,000bpd. Their assessment is for a total of 540,000bpd of oil demand for power generation between June and December in the worst case if all reactors are closed down, compared with an average of 192,000bpd in 2010.

The IEEJ estimates are less conservative. It reckons that if nuclear reactors shut for maintenance (2/3 of capacity) are not allowed to resume due to safety concerns, demand from utilities for fuel oil and crude oil would soar to 706,000bpd in 2011/12, over triple that for fiscal 2010/11. The price of fuel oil has risen as Japan boosted consumption by 25 percent in June 2011 from a year earlier. It is not difficult to imagine how additional demand would further boost prices, adding to the costs that must be borne by Japanese consumers and industries. The IEEJ estimated that the increase in use of thermal power to cover the loss of nuclear power would push up the nation's annual fuel costs by ¥3.5 trillion (US$44.8 billion) in FY2012.

It is unrealistic to expect that renewables take up nuclear's share of power generation. Renewables can contribute, but to make up for most of lost nuclear power would take massive investment, probably too much for a country where the government net debt is close to 200 percent of GDP. In fact, removing up to 30 percent of Japan's electricity-generating capacity is not possible without inflicting serious harm to the country's already vulnerable economy. If industries continue to be required to cut electricity, some Japanese companies might relocate their operations overseas, where electricity is in stable supply and cheaper, ushering in higher unemployment and further squeezing public funds. If nuclear power was scrapped altogether, Japan would face costs from changing its power generation mix, from buying more carbon pollution allowances, and from the inevitable movement of manufacturing offshore.

There are also severe consequences for Japan's environmental policy following a reduction in nuclear output. According to the EIA, nuclear power reduces Japan's CO2 emissions by 14 percent per year. Replacing nuclear power with fossil fuels will boost annual emissions by as much as 210 million tonnes, potentially costing as much as US$3.4 billion to buy permits. Moreover, this would make it virtually impossible for Japan to reach the Kyoto Protocol 2020 target of reducing CO2 emissions by 25 percent of 1990 levels. If Japan is to achieve its Kyoto targets, it would have to make even greater reductions in the future than it did before the earthquake. In the case where Japan achieves this target, the reduction cost would be US$239.3/tonne CO2, which is extremely expensive when compared with the current price of emissions rights in Europe (approximately US$20/tonne CO2).

Paying such high costs would result in Japan's GDP dropping by 1.9 percent. If Japan remains committed to its Kyoto targets and four-fifths of nuclear power plants remain shut down, this would severely damage Japan's post-3/11 economic recovery.

Where to from here for Japan?

There is now an energy policy rethink in Japan. Japanese policymakers are faced with the difficult task of building a new energy policy that can appease growing anti-nuclear public sentiment without adverse effects to the powerful nuclear lobby, regional utility monopolies and industry. Energy security, the environment and the economy have long been the three pillars of Japanese energy policy. The new energy policy cannot overlook any of these three pillars. Yet, there are significant challenges associated with each of the pillars, and the government is in an extremely difficult position of finding the best policy with which to tackle a multitude of interconnected challenges. Although former Prime Minister Kan spoke of replacing cancelled reactors with renewable energy systems such as wind and solar, this policy option will remain wishful thinking unless Japan is ready to forgo economic growth for the foreseeable future. This has been recognised by new Prime Minister Yoshihiko Noda, who just over six months after the earthquake, acknowledged that while public safety concerns will make it tough to build new reactors, decisions on operational reactors and those already under construction will be made on a "case-by-case" basis.

One of the origins of Japan's ambitious nuclear policy lies in the concerns of Japanese leaders who have interpreted history as a series of unreasonable assaults on an island nearly devoid of natural resources. They perceive Japan as exposed to inexplicable supply disruptions and argue that the country would be too weak without recourse to an independent energy supply. Nuclear energy has been an integral part of Japan's energy supply system. The benefits of nuclear energy for it have been manifold. Nuclear energy adds to energy diversification, reduces dependency on fuel oil, can be produced at a stable price, and is a clean fuel in terms of emissions. The future of nuclear energy must be weighted wisely if Japan is to remain an economic power.

The energy transition will be slow and needs to be managed with extreme caution in order to minimise economic dislocation. If any lessons are to be taken from previous energy transitions, as witnessed by economic depression in former major coalmining regions, severe socioeconomic dislocations are likely to occur in Japan and elsewhere. Consequently, energy policy is too salient to be relegated to swings in public opinion. Japan now needs an integrated energy policy that is grounded in a new post-Fukushima reality. Such an energy policy will require a reassessment of priorities for Japan. Even if public opposition to nuclear power could be overcome, the scale of the Fukushima crisis will undoubtedly delay the expansion of existing nuclear plant capacities and the construction of new plants. The 1999 Tokaimura nuclear accident slowed down the rate of subsequent nuclear development. Various projects were delayed or cancelled.

Yet, energy policy cannot be relegated to industry, either. A firewall needs to be created between regulators, government and industry. Only when regulators are independent from government and industry capture will Japan's nuclear industry receive proper oversight, which will likely prevent future accidents. The Japanese government should also reassess the value of preserving the country's regional state-regulated and privately-owned electricity monopolies, which some have blamed for relatively-high electricity prices. The government should engage in a comprehensive reassessment of the structure and the future operations of its power industry while developing its new energy policy.

(Picture credit: EMA)

The deal sealed at the recent Durban climate change talks to develop a legally binding climate agreement holds much promise, but more immediate policy action and collaboration is crucial to ensure the sustainable growth of the energy sector. This was one of the key messages from Dr Fatih Birol, Chief Economist of the International Energy Agency (IEA), who was in Singapore on 14 December 2011 to present the highlights from the recently launched World Energy Outlook (WEO) 2011.

Dr Birol was not optimistic about the prospects for the energy sector given the economic and geopolitical landscape, especially in the face of a looming threat of a second dip in the global economy.  Budget deficits, unemployment and social problems were diverting governments' attention and funding away from energy issues and clean technologies.  To make matters worse, the turmoil in Middle East and North Africa (MENA) had raised perceived risks of investment in the region. Should the production levels in MENA not be able to meet rising demand due to delays in capital investment, this could lead to a surge in oil prices and diversion of market share away from the region in the long run.

In the short to medium term, coal would continue to dominate the fuel mix, while natural gas and renewables were likely to be the key drivers of growth. However, more international collaboration and oversight was necessary to ensure sustainable growth of these sectors.  Turning to nuclear power post-Fukushima, Dr Birol said that a slowdown could increase the cost of energy imports, reduce diversity of the fuel mix and make it harder and more expensive to mitigate the effects of climate change.  The impact would especially be felt on countries that rely heavily on nuclear energy.

Dr Birol stressed that international policy debate must include the new players as the emerging economies were projected to account for more than 50% of increase in global energy demand.  According to Dr Birol, "Energy decisions in Beijing, Delhi and Moscow will impact the rest of the world".  He recommended reading China's five-year plan for anyone seeking to understand China's energy policies and how they would impact on the global market.

Before concluding his presentation, Dr Birol mentioned that based on IEA's projections, the window for action towards meeting the 2 degrees Celsius climate change goal is fast closing. Without further action, by 2017 all CO2 emissions permitted in the 450 Scenario will be "locked-in" by existing power plants, factories, buildings, etc. He called on governments to take affirmative action quickly as it would only be more challenging and expensive by the year.

The World Energy Outlook is the IEA's flagship publication and is widely recognised as the most authoritative source for global energy projections and analysis

(Credit:iStockphoto)

During most of the 20th century, the prices of natural resources such as energy, food, water, and materials such as steel all fell, supporting economic growth in the process. But that benign era appears to have come to an end. The past ten years have wiped out all of the price declines that occurred in the previous century. As the resource landscape shifts, many are asking whether an era of sustained high resource prices and increased economic, social, and environmental risk is likely to emerge.

Similar concerns have appeared many times in the past, but, with hindsight, the perceived risks have proved unfounded. In 1798, land was at the centre of popular worries. In his famous ‘An essay on the principle of population,’ Thomas Malthus expressed concern that the human population was growing too rapidly to be absorbed by available arable land and that this would lead to poverty and famine. But the dire vision he outlined did not come to fruition as the agro-industrial revolution swept across Britain and then the rest of Europe and North America, breaking the link between the availability of land and economic development. Malthusian theories have enjoyed brief revivals, notably in the Club of Rome’s report on the limits to growth in the early 1970s. But the dominant thesis of the 20th century was that the market would ride to the rescue by providing sufficient supply and productivity.

This thesis--and hope--has largely proved correct. Driven by a combination of technological progress and the discovery of, and expansion into, new, low-cost sources of supply, the McKinsey Global Institute’s (MGI) commodity price index fell by almost half during the 20th century when measured in real terms. This was astonishing given that the global population quadrupled in this century and that global economic output expanded roughly 20-fold, resulting in a jump in demand for different resources of anywhere between 600 and 2,000 percent.

The rise in resource prices over the past decade and the scale and pace of economic development sweeping across emerging markets have revived the debate about resources. The market and the innovation it sparks may once again ride to the rescue and will clearly be an important part of the answer. The ability to generate, communicate, share, and access data has been revolutionized by the increasing number of people, devices, and sensors that are now connected by digital networks. These networks can help to transform the productivity of resource systems, creating smarter electricity grids, supporting more intelligent building, and enabling 3D and 4D seismic technology for energy exploration. Digital networks could potentially have an impact on even small-scale farmers in sub-Saharan Africa. Techniques from the aerospace industry are transforming the performance of wind-turbine power generation. Developments in materials science are dramatically improving the performance of batteries, changing the potential for electricity storage, and, over time, will diversify energy choices for the transport sector. Organic chemistry and genetic engineering may help to foster the next green revolution, transforming agricultural productivity, bio-energy provision, and terrestrial carbon sequestration. In short, there is no shortage of resource technology, and higher resource prices are likely to accelerate the pace of innovation.

However, the size of today’s challenge should not be underestimated; nor should the obstacles to diffusing more resource-efficient technologies throughout the global economy. The next 20 years appear likely to be quite different from the resource-related shocks that have periodically erupted in history. Up to three billion new middle-class consumers will emerge in the next 20 years compared with 1.8 billion today, driving up demand for a range of different resources. This soaring demand will occur at a time when finding new sources of supply and extracting them is becoming increasingly challenging and expensive, notwithstanding technological improvement in the main resource sectors. Compounding the challenge are stronger links between resources, which increase the risk that shortages and price changes in one resource can rapidly spread to others. The deterioration in the environment, itself driven by growth in resource consumption, also appears to be increasing the vulnerability of resource supply systems. Food is the most obvious area of vulnerability, but there are others. For example, changes in rainfall patterns and greater water use could have a significant impact on the 17 percent of electricity supplied by hydropower. Finally, concern is growing that a large share of the global population lacks access to basic needs such as energy, water, and food, not least due to the rapid diffusion of technologies such as mobile phones to low-income consumers, which has increased their political voice and demonstrated the potential to provide universal access to basic services.

This research has established that both an increase in the supply of resources and a step change in the productivity of how resources are extracted, converted, and used would be required to head off potential resource constraints over the next 20 years. The good news is that this research has identified sufficient opportunities to expand supply and improve productivity to address the resource challenge. The open question is whether the private sector and governments can implement the steps needed to deliver these opportunities sufficiently quickly to avoid a period of even higher resource prices, increased volatility, and potentially irreversible environmental damage.

Our analysis shows that there are resource productivity improvements available that would meet nearly 30 percent of demand for resources in 2030. Successful implementation of these productivity opportunities could more than offset the expected increase in land demand over the next 20 years in our base case. Their implementation would also address more than 80 percent of expected growth in demand for energy, 60 percent of anticipated growth in demand for water, and one-quarter of expected growth in demand for steel. We estimate the total value to society associated with these productivity improvement opportunities—including the market value of resources saved--to be 2.9 trillion US dollars in 2030, at current prices before accounting for environmental benefits and subsidies. The value of the opportunity would increase to 3.7 trillion US dollars assuming a 30 US dollar per tonne price for carbon as well as the removal of energy, agriculture, and water subsidies, as well as the removal of energy taxes. Just 15 opportunity areas, from improving the energy efficiency of buildings to moving to more efficient irrigation, represent roughly 75 percent of this productivity prize. There is an opportunity to achieve a resource productivity revolution comparable with the progress made on labour productivity during the 20th century. However, capturing these productivity opportunities will not be easy. We estimate that only 20 percent are readily achievable and about 40 percent are difficult to capture, facing many barriers to their implementation. Of course, if resource prices were to increase significantly, market forces would naturally drive greater resource productivity.

Boosting productivity alone would not be enough to meet likely demand requirements over the next 20 years. Supply would also need to grow. In the case of energy, a sizable proportion of the supply increase could come from the rapid development of unconventional gas supplies, such as shale gas. However, growing the supply of other fossil-fuel energy sources is more challenging, and the overall supply of energy would still need to expand by 420 quadrillion British thermal units (QBTU) from 2010 to 2030, almost entirely to replace the decline in existing sources of supply. For example, many of the world’s giant oil fields, especially outside the Middle East, are mature and, absent a major improvement in recovery rates, are likely to experience significant declines over this period.

While increasing supply and resource productivity would meet projected global resource demand, it would likely not be sufficient to prevent further global warming above the two degrees Celsius that may already be inevitable, or to alleviate the resource poverty that affects so many citizens. Further changes in the mix of resource supply sources and additional investment would be required to meet the challenges of climate change and resource poverty. This investment could in itself result in a step change in cost. For example, our research suggests that a much more rapid scaling up of renewable energy technologies could lead to rapid declines in cost. Solar power capacity could become available at around 1 US dollar per watt by 2020, down from more than 8 US dollars per watt in 2007 and 4 US dollars per watt in 2010.

Delivering the required productivity improvements and supply growth required is a very large and complex agenda. Putting it into practice will be far from easy because there are hurdles to all the major opportunities. Overcoming these obstacles would require action at the local, national, regional, and global levels. Tackling the resource agenda must start with new institutional mind-sets and mechanisms that can develop more coordinated approaches to the challenge of resources, reflecting stronger interconnectedness of resource systems. Beyond this shift to a more integrated approach to resource management, policy makers might consider taking action on three broad fronts to address the resource challenge. First, they should look to history, which shows that stronger, sustained price signals are a key driver of improved performance in resource systems.

Governments need to consider unwinding the more than 1 trillion US dollars of subsidies on resources, including energy and water, that today keep prices artificially low, and encourage the inefficient use of these commodities. To address climate change, governments would also need to ensure, through mechanisms such as carbon pricing, that resource prices capture the cost of their impact on the environment.

Second, although getting prices right would go a long way toward addressing the resource challenge, action would also be necessary to ensure that sufficient capital is available and to address market failures associated with property rights, incentive issues, and innovation. Third, public policy can play a useful role in bolstering the long-term resilience of society in the face of the resource challenge, including taking measures to raise awareness about resource-related risks and opportunities, creating appropriate safety nets to mitigate the impact of these risks on the poorest members of society, educating consumers and businesses to adapt their behaviour to the realities of today’s resource-constrained world, and increasing access to modern energy, so improving the economic capacity of the most vulnerable communities.

This new era presents opportunities and risks for business. Companies in most sectors were able to benefit from declining resource prices over the past century. This allowed management to focus attention primarily on capital and labour productivity. But resource-related trends will shape the competitive dynamics of a range of sectors in the two decades ahead. Many companies need to pay greater attention to resource-related issues in their business strategies and adopt a more joined-up approach toward understanding how resources might shape their profits, produce new growth and disruptive innovation opportunities, create new risks to the supply of resources, generate competitive asymmetries, and change the regulatory context.