A New Portfolio for 21st Century Energy Markets
By Rick Adcock, Senior Vice President for Environmental Markets, World Energy Solutions, Inc.
Energy trends are influenced by numerous factors that are often difficult to predict. Public policy decisions, weather patterns, supply/demand imbalances, energy security concerns, economic prosperity, technological advances and social consciousness are just a few of the many interrelated and changing dynamics that impact energy markets. What's clear, however, is that the markets are evolving and will continue to change in response to several key influencers that are converging and, in doing so, leading the world down a path that's increasingly more focused on renewable energy.
Higher energy prices have been experienced globally since 2000. At the same time that demand is increasing, the number of suppliers is not, and the available resources remain concentrated in unstable regions, making energy security a key issue that has taken on a renewed focus in the last few years. Another interconnected dynamic revolves around the fact that emissions of carbon into the atmosphere are expected to grow by about 2% annually between 2001 and 2025, accompanied by mounting scientific evidence that the stability of the world's climate is at risk.
These and other trends are shaping an energy future which, while still nascent , is characterized by cleaner, renewable energy alternatives. As a result, energy portfolios are becoming increasingly more diverse and complex than in the past, and these changes are propelling us toward an era of inter-related economic, environmental and energy development. New technologies and systems that create greater opportunities for energy and cost efficiency, conservation and economic resourcefulness are on the rise. The underlying drivers merit further examination.
Energy Security
Energy security concerns emerged in the wake of t he Arab oil embargoes of the 1970s. In response , the US sought to protect itself by imposing “CAFE” (Corporate Average Fuel Economy) Standards, creat ing a Strategic Petroleum Reserve and launch ing the Solar Energy Research Institute (SERI, which was later renamed the National Renewable Energy Laboratory , NREL ).
At the 1978 inauguration of SERI, President Carter stated that the US should achieve 20% of its power through solar energy by 2000. At the same time, however, industries began investing in technologies to improve energy efficiencies, and new oil supplied by non-OPEC countries entered the energy equation, causing oil prices to once again fall and, as a result,interest in energy security to diminish.
The attacks of 9/11 brought the issue of energy security back into sharp focus as Western nations once again were forced to deal with the fact that muchof our oil is imported, and the vast majority of the world's proven oil reserves lay beneath the soil of unfriendly nations. Over the last five years, nothing has happened to significantly abate those concerns , and much of all traded oil continues to come from just three areas of the world – West Africa, Russia and the Middle East -- in particular, from Saudi Arabia, Iran and Iraq.
Never ha ve there been more reason s to invest in a future energy security policy that results in alternative fuel resources, particularly those that are not only more secure, but also renewable. This realization is gaining greater momentum and is affecting policies, people, pricing and production as we progress into the 21st century. Governments are encouraging and subsidizing wind, hydropower, geothermal and other “safer,” and cleaner alternatives , including biofuels . T oday , biofuels are derived economically from traditional feedstocks such as corn and sugarcane , but one day soon could be derived from cellulosic materials -- an advancement which would fundamentally alter the geopolitics of energy.
The 1980s saw another development rise to prominence . It began with concerns over urban and regional air quality – smog and acid rain . Later, s cientists and think tanks began producing reports and analyses about another emerging problem : the buildup of greenhouse gases (GHG) in the earth's lower atmosphere.
As early as 1988, a NASA scientist stated that we were beginning to see the impacts of global warming , and in 1992 t he Bush (Sr.) Administration participated in the Earth Summit , where a number of global environmental treaties were negotiated and finalized. These treaties included the Framework Convention on Climate Change, under which the Kyoto Protocol (KP) would later be negotiated during the Clinton Administration.
During these negotiations, “flexible mechanisms” – emissions trading and joint implementation – were included in the treaty for compliance purposes , drawing on the U.S. experience of controlling SOx- and NOx-related air pollution introduced in the Clean Air Act Amendments of 1990.A decade later, Europe would embrace these mechanisms in creating the world's largest emissions trading market, the EU's Emissions Trading Scheme (ETS).
The KP has now become a major force in shaping energy and environmental policy in much of the developed world, and the ETS is a market taken seriously by the world's leading industrial, energy and financial companies. Although the U.S. elected not to participate in the KP, domestic policies are nevertheless changing rapidly. Twenty-four states now have portfolio standards in place requiring electric power generators to rely increasingly on renewable energy. Renewable Energy Credit (REC) tracking systems are currently operating in Wisconsin , Iowa , Montana , Minnesota , North and South Dakota , New Jersey , New England , the Mid-Atlantic States , and Texas . In June of this year, t he California Energy Commission announced the launch of the Western Renewable Energy Generation Information System (WREGIS), a system available on a voluntary basis to member states of the Western Governors Association. In addition, the U.S. private sector continues to increase its already significant investments in positioning for a carbon-constrained world.
Developing and emerging market countries have great potential to use the Joint Implementation ( JI ) and Clean Development Mechanism ( CDM ) provisos of the KP to attract investment into their energy infrastructures, as public- and private-sector actors in advanced countries increasingly go there to capture emissions reduction cre dits. For the participating advanced countries, the motivation is two-fold: (1) theoretically, it is cheaper to produce credits in a less- energy- efficient economy, and (2) participation in such projects provides a means to become more leveraged into foreign markets.
All told, 49 countries have policies in place to promote clean energy, including China, Brazil, and India. Nuclear energy as a clean energy source plays a major role in some European countries and in Japan, and is also on the rise in the U.S. and China. Demand for biofuels to supplant fossil fuel-based transportation fuels is also growing. In Europe, clean energy demand is even greater: by 2010, the EU wants almost six percent of transport fuel to come from non-fossil sources, and 18 percent of power to come from renewable resources.
Capital investment is creating another powerful force driving the clean energy market. According to The Economist , over the last two years, venture capital and private equity investments in clean energy technology has quadrupled, from $500 million in 2004 to $2 billion in 2006. The London-based research and analysis firm, New Energy Finance, has much higher estimates, claiming that $18.5 billion was invested globally in renewable companies and projects in 2006. With venture capital and private equity investments quadrupling from 2004-06, total investment in clean energy has more than doubled in the same years, according to some analysts , who predict th at the clean energy business will grow by 20-30 percent per year for the next decade.
The New Portfolio
These and other trends are slowly but surely shifting our dependence from foreign fossil fuels to more diversified resources for clean, green and renewable energy. As we look into the future of the energy economy, new technologies in exploration, production and refining fossil fuels, as well as entirely new fuel sources and related technologies are also shaping the energy portfolio. Greater systems integration, through advances in both energy technologies and IT, are sure to continue impacting energy markets. In addition, there will be a rise in the trading of environmental commodities such as greenhouse gas emissions credits.
Green power transactions have developed directly out of the well-established markets for buying and selling conventional power. Except for the need to accommodate a few details specific to green power procurements, market actors are generally experienced and market structures are well-established.
Conversely, the green credit industry is still in its infancy, and as such remains subject to many of the flaws that characterize immature markets. Deals tend to be bilateral, one-off, highly structured, and inefficient for both buyer and seller, with brokers capturing much more value than in more mature commodity markets. At the core, these flaws converge on one of the most pressing issues that participants in green credit markets face: the lack of efficient and transparent mechanisms for credible price discovery. Economists agree that structured auction events are the most effective, transparent way to trade these commodities, and as the green credit industry evolves, buyers and sellers of these credits will increasingly rely on online auctions to enable economically efficient and process complaint trading in these commodities.
Conclusion
As we continue to increase our development of green, clean and renewable fuels, we can make headway toward energy diversification and independence. In a world that is increasingly interdependent on energy, environmental and economic progress, our energy portfolio will grow ever more diverse. The energy landscape will continue to change, as will the mix of energy sources, driven by the world's need for more energy, for secure energy and for responsible energy.
About the Author
Rick Adcock is Senior Vice President, Environmental Markets, for World Energy Solutions Inc., which operates leading online exchanges for the transacting of energy and energy-related products. This includes the World Green Exchange, a competitive source of credits for governments, federal agencies, brokers, utilities and commercial and industrial firms seeking to meet emissions reduction mandates or renewable portfolios. Rick has long been at the forefront of renewable energy initiatives and clean energy policy development. He has held energy and environmental posts at the Solar Energy Research Institute, the World Resources Institute and the Congressional Office of Technology Assessment. He served as legislative assistant for energy and climate change issues to (then) U.S. Senator Al Gore. He was an original co-founder and president of Econergy International Corporation, a company engaged in the clean energy, energy management and carbon emissions management businesses. Prior to joining World Energy, Rick served as vice president and global market segment director for CH2M Hill's Energy and Carbon Asset Management business.