Energy Transition and Energy Efficiency


DN: The present Statistical Review also highlights the stalling in the growth of carbon emissions in 2015, but at the same time reminds us about the IEA 450 scenario – which is used by many as a benchmark scenario for the progress we need to make to achieve the goals agreed at Paris – that suggests that the carbon intensity of GDP has to fall at an average rate of close to 5.5% per annum on a sustained basis for the next 20 years. So almost double the rate of decline achieved last year, each year for the next 20 years. We also know that shifting the share from coal to gas in the power sector by 1% has the same impact on carbon emissions as 10% growth in renewables.

However, EU is currently sending rather mixed signals to the industry and to that end, the Energy Security Package released by the Commission this year with Proposal for a review of the Regulation on Security of Gas Supply and Communication on an LNG and Storage Strategy on the one hand highlighting the role of natural gas in EU’s energy mix and the Communication on the Heating and Cooling Strategy – being a real wake up call for the industry as it targets the key sector for the natural gas industry in Europe. What would be your comments regarding policy signals that are required to facilitate such transition in Europe?

Spencer Dale: Achieving the targets that politicians have signed up to in Paris less than a year ago requires a very fundamental change in terms of carbon emissions, energy efficiency and fuel mix relative to anything seen in history before. So this 5,5% decline in carbon intensity of the GDP on average p.a. over the next 20 years is indeed the required challenge. You can look at individual countries which may have achieved that decline in 10 years, but they tend to be the economies coming from the Soviet Union with a fundamental shift in their energy structure.

Policymakers indeed have to do something to facilitate the decline in carbon intensity of the international economies. For instance, one could encourage the switch from coal to gas and renewable energy sources (RES) in the power sector. UK did that last year with the introduction of the carbon cap. This is not magic - this is economics and it works. Carbon price in the power sector therefore seems to be a very sensible place to start.

I had a chart in my presentation, which looked at the growth of renewable energy through time. RES energy (in particularly wind and solar) is expected to grow in the next 20 years faster than any fuel has grown in the similar stages of development in history ever. But even if that growth happens, it will provide some 10% of primary energy. Do I think the RES will grow strongly? Yes, faster than any fuel in the history. Do I think it can solve the fuel mix question on its own? No. Just because history tells us that it takes a long time to do that.

The other point is on energy efficiency. There are so many debates on carbon, when people focus only on the fuel mix and they don’t focus on energy efficiency. It is easy to point to the carbon emissions issue, as it is always some by else’s fault.

If one of us would have lit up a cigarette in this room now it would have been very inappropriate and very rude, but we’ve got air conditioning on. I was in Washington last week, where it was really baking my house – people were cold inside. You should be embarrassed of that. This is such a wasteful use of energy – it should be equally unacceptable in our society as smoking indoors. So I would say to policymakers that I would like them to turn it up on energy efficiency, pointing that if we want to achieve the goals set by the Paris agreement, it is not just the job of governments or oil companies: everybody has to change their behaviour and start using energy efficiently. Hopefully, in 5-10 years time wasting energy will be as socially unacceptable as smoking indoors is today.

DN: Moving to the shipping sector, do you think the industry is coping well with the on-going changes in regulations (both on the UN level and EU level) designed to place stringent caps on SOx and NOx emission emissions from ship exhausts? What impact does it currently have on the refining industry and what is the current scope for the growing role of LNG as marine fuel? [1]

Emmanuel Haton: These regulatory developments indeed have an impact on the refining industry, meaning that heavy fuel oil (HFO) - which is by definition high in sulphur emissions - would need to be switched to middle distillate, which is the low-sulphur diesel. There are plenty of moving elements in this case. The first one is the future demand for diesel and middle distillate in the EU. We are seeing a shift towards slightly less diesel and more gasoline in the transport sector, which could free some volumes of distillate that could in turn be used in shipping.

Another way of complying with the regulatory requirements is investing in cocking and hydrocracking refineries, allowing for breaking heavy fuel into the middle distillate. Next option for shipping is the use of scrubbers. BP has done plenty of tests with scrubbers and it has to be admitted that these tests were not really conclusive, meaning that it is not easy to predict whether the shipping industry will invest heavily in this technology. For technical reasons, you need a lot of space to have the scrubbers on board of the ship; hence, the space for scrubbers has to be foreseen at the stage of boat manufacturing.

The shippers may use low-sulphur fuel in the protected areas and then switch to HFO when they enter to international waters. In this case the demand for low-sulphur fuel will be quite low.

Regarding the question, whether at the end we will move to a system whereby we will use middle distillate across all waters, we are tempted to say that the possibility of implementing the IMO regulation at this stage is unlikely to result into immediate huge demand in the middle distillate. Therefore perhaps the refining industry will be able to cope with the demand levels. Not all refineries, but we may be able to cope. At the same time, we are still quite far form switching to LNG on the global scale. This requires immense investments in infrastructure and adoption of common international standards, hence LNG is not an obvious choice for shipping industry, especially as soon as 2020.

1. Note: The International Maritime Organization (IMO) is currently conducting a fuel availability study (that should be completed in 2018), on the basis of which the decision on introducing 0.5% global sulphur cap will be taken. This regulation is supposed to come into force either as of 1 January 2020, otherwise could be postponed till 2025.

Image: Air conditioners.