*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations. By Karen Ward, Zoe Knight, Nick Robins, Paul Spedding and Charanjit Singh
Anyone who drives a car, heats a home, or runs a factory has every reason to be concerned about the strains on global energy resources in the next four decades. Either the world is going to deplete its supplies at an unacceptably fast rate – and overheat the planet in doing so – or it is going to have to make massive investments in energy efficiency, renewables and carbon capture. As things stand, the world simply doesn’t have the luxury of turning its back on nuclear power, despite the recent disaster in Japan We follow up our World in 2050 report by arguing that the rise of emerging markets will impose
new strains on energy supply. We conclude the world can grow and without excessive environmental damage – but it will need a change in human behaviour and massive collective government foresight
Disclosures and Disclaimer This report must be read with the disclosures and analyst
Global Economics & Climate Change
Zoe Knight Analyst HSBC Bank plc +44 20 7991 6715 zoe.knight@hsbcib.com
Zoe Knight joined HSBC in 2010 as a senior analyst. She has been an investment analyst at global financial institutions since 1997, initially focusing on Pan European small-cap strategy and subsequently moving into socially responsible investing, covering climate change issues. Throughout her career she has been ranked in Extel and II. She holds a BSc (Hons) Economics from the University of Bath.
Marc
h 20
Energy in 2050
Will fuel constraints thwart our growth projections?
Nick Robins
Head of HSBC Climate Change Centre of Excellence HSBC Bank plc
+44 20 7991 6778 nick.robins@hsbc.com
Nick Robins, head of the HSBC Climate Change Centre of Excellence, joined the bank in 2007. He has extensive experience in the policy, business and investment dimensions of climate change and sustainable development.
Karen Ward
Senior Global Economist HSBC Bank plc +44 20 7991 3692 karen.ward@hsbcib.com
Karen joined HSBC in 2006 as UK economist. In 2010 she was appointed Senior Global Economist with responsibility for monitoring challenges facing the global economy and their implications for financial markets. Before joining HSBC in 2006 Karen worked at the Bank of England where she provided supporting analysis for the Monetary Policy Committee. She has an MSc Economics from University College London.
Paul Spedding*
Global Head of Oil & Gas Research HSBC Bank plc
+44 20 7991 6787 paul.spedding@hsbcib.com
Paul Spedding is HSBC’s Global Head of Oil & Gas Research. He joined HSBC in early 2005 and has nearly 30 years of experience in oil research. Charanjit Singh* Analyst HSBC Bank plc +91 80 3001 3776 charanjit2singh@hsbc.co.in
Charanjit Singh joined HSBC in 2006 and is a member of the Alternative Energy team and Climate Change Centre of Excellence. He has been a financial and policy analyst since 2000. Prior to joining HSBC, he worked with an energy major and a top-notch rating company. Charanjit is a Chevening fellow from the University of Edinburgh. He holds a bachelor’s degree in engineering and a master’s degree in management.
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Even before the recent upheaval in the Middle East, oil prices were approaching USD100 a barrel. And now the future of nuclear energy is being questioned following the tragic earthquake and tsunami in Japan. Energy markets are under stress. So how would they cope with an emerging-market led trebling in world output as we highlighted in our recent research The World in 2050?
‘If only’ energy resources weren’t a constraint and we could continue using energy the way we use it today, our World in 2050 would require:
A 110% increase in oil demand to more than 190 million barrels a day to fuel the extra billion cars that are likely to be on the road as emerging world incomes increase.
A doubling in total energy demand as emerging market growth powers ahead.
A doubling in the amount of carbon in the atmosphere, more than three and a half times the amount recommended to keep temperatures at a safe level.
This can’t happen. In reality:
Energy resources are scarce. Even if demand doesn’t increase, there could be as little as 49 years of oil left. Gas is less of a constraint, but transporting it and using it to meet transport demand is a major issue. Coal is the most abundant with 176 years left, but this is the worst carbon culprit.
Energy security – defined in this instance as domestic energy production per head of population – will be an increasing concern. Diversifying to natural gas to ease the pressure on the oil market won’t overcome it since its supply is as geographically dense as oil. The most ‘energy insecure’ regions will be Europe, LATAM and India. However, LATAM and India are trying to address this issue. Europe’s situation gets worse. In our original report, Europe was the big loser with many countries falling down or out of the league table of economic size. They could be losing their influence on the world stage just at the time when they are most vulnerable.
The threat of global warming is not going away. If we fail to meet this challenge, the impact will fall disproportionately on the emerging world.
The ‘solution’ requires greater energy efficiency and a switch in the mix of energy as well as using ‘carbon capture’ technology to limit the damage of fossil fuel use.
We have become terribly complacent in the way in which we use energy. We highlight a number of channels where output could increase with significantly lower energy use. The lowest hanging fruit is in the transport sector. Smaller, more efficient cars will get you from A to B, just not as quickly. Similarly,
Powering 2050
buildings can be powered much more efficiently, with the cost of alterations coming down quickly as technology evolves.
To come anywhere near to meeting the climate change targets, non-fossil fuels must play a significantly greater role in energy use. Renewables are becoming more cost competitive but need to be even more so to make a significant contribution to total energy supply. New generation biofuels – using agricultural food waste – could ease the pressure on oil without passing the problem on to the food chain.
Many governments have been looking to nuclear as a significant alternative, although events in Japan may alter this course. To meet climate targets, we estimate that nuclear will have to play a bigger role. If Fukushima results in a two-decade freeze on plans, as we saw following the Chernobyl disaster in 1986, then renewables will have to play an even larger role, or efficiency improvements would have to accelerate further. A reduced role for nuclear energy would make meeting carbon limits even more challenging. We emphasise four key points:
A solution is possible, but further efficiency gains and the deployment of low-carbon energy sources
are unlikely to materialise without further upward pressure on fossil fuel prices.
The lead times we highlight on the measures in ‘the solution’ are often long. Therefore the squeeze
on fossil fuels in the interim could be both persistent and painful as oil prices are so sensitive to minor imbalances between energy demand and supply.
Meeting growth targets will be easier than meeting climate targets. It remains to be seen whether
growth targets and climate targets can be disentangled.
For the transition to our World in 2050 to be smooth, governments will have to work together and
be pre-emptive in driving change, before the commodity crunch really begins to bite.
We acknowledge the efforts of Jeff Davis, Niels Fehre, Andrew Keen and James Pomeroy (HSBC Bank plc) in the production of this report
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One billion more cars on the road Temptation will be to move to coal to meet higher energy demands 0 400 800 1200 1600 2000 Today 2050 0 400 800 1200 1600 2000 million million 0 50 100 150 200 250 Europe* North America South & Central America Middle East & Africa Asia-Pacific Yea rs
Coal Gas Oil
Source: HSBC estimates Source: BP Energy Review. * Europe and the FSU
Energy security will be a major issue if the way we use energy doesn’t change
0 1000 2000 3000 4000 5000 6000 7000 8000 Belgium Colombia Netherlands Venezuela Poland Argentina Italy Spain Thailand Australia Turkey Norw ay South Africa Malay sia Egy pt UK Iran South Korea France Germany Mex ico Japan Saudi Arabia Canada Brazil Indonesia Russia India US China
Today 2050 on the 'if only ' scenario'
Total energy use (Million tonnes of oil equiv alent)
Energy needs can be met with a little forward planning 0 5000 10000 15000 20000 25000
2010 2050 'If Only ' 2050 'Solution'
Coal Oil Gas Hy dro & other renew ables Nuclear Biomass and w aste
m
Source: HSBC estimates
Energy mix today Energy mix in 2050 required to meet growth and climate targets
28% 32% 21% 6% 10% 3% Coal Oil Gas Nuclear
Hy dro & other renew ables Biomass & Waste
Total Primary Energy Demand (Mtoe) 13% 16% 13% 23% 21% 14%
Coal incl. CCS Oil
Gas incl. CCS Nuclear
Hy dro & other renew ables Biomass and w aste
Total Primary Energy Demand (Mtoe)
I
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With the rapid growth of the emerging markets, the global economy is experiencing a seismic shift. In a recent report – The World in 2050:
Quantifying the change in the Global Economy, we provided a framework for understanding why this was happening and projecting it forward over the coming decades. Taking into account both the productivity and expected growth of the workforce we compiled a list of the Top 30 economies ranked by size of GDP in 2050 (Chart 1).
We concluded that world output could treble, as growth accelerates on the back of the strength of growth in the emerging economies (Chart 2). Indeed, by 2050, GDP in the emerging world will have increased five-fold and will be larger than the developed world. In this piece we consider the pressure these forecasts will place on global energy supply and the environment. We start in this chapter by mapping our GDP forecasts into demand for energy, for now
assuming there aren’t any resource constraints. We call this the ‘if only’ scenario.
In Chapter 2 we examine the constraints both in terms of physical resources, and the impact on the environment. This shows our ‘if only’ scenario is a dream. In reality we cannot reach
the world we envisage for 2050 in the way we are using energy today.
To get around this energy constraint – and it is possible – we need to start using natural resources more wisely. This has two elements:
The first is energy efficiency, which we tackle in Chapter 3. The second is changing the mix of energy inputs, which we discuss in Chapter 4. This includes a greater role for renewables and, if sticking with the old fossil fuels, ‘capturing the carbon’ to limit its harm.
The methodology in this report differs from many others which start with the fuel supply or climate constraint and work backwards to find the energy solution, imposing an ‘assumed’ energy price. By beginning with an ‘if only’ scenario we can get a true sense of the pressure on energy markets. We demonstrate how, even in a fossil-fuel constrained world, we can both treble world output, and meet carbon targets. There are two ways of facilitating the transition; governments could play a major role, making it smooth and pre-emptive. If instead it’s left to market forces, long lead times in delivering extra fossil fuel supply and more efficient technology will make the journey from A to B much more volatile.
1. Energy hungry
Emerging markets will power the global economy in next few
decades
This will lead to an enormous increase in energy demand
There will be intense pressure on oil because of the need to power
an extra billion cars
1. The Top 30 economies by GDP in 2050 Order in 2050 by size Size of economy in 2050 (constant 2000 USD in billions)
Rank change between now and 2050
_______Income per capita (Constant 2000 USD)_______ Population (Mn) 2050 2010 1 China 24617 2 17372 2396 1417 2 US 22270 -1 55134 36354 404 3 India 8165 5 5060 790 1614 4 Japan 6429 -2 63244 39435 102 5 Germany 3714 -1 52683 25083 71 6 UK 3576 -1 49412 27646 72 7 Brazil 2960 2 13547 4711 219 8 Mexico 2810 5 21793 6217 129 9 France 2750 -3 40643 23881 68 10 Canada 2287 0 51485 26335 44 11 Italy 2194 -4 38445 18703 57 12 Turkey 2149 6 22063 5088 97 13 S. Korea 2056 -2 46657 16463 44 14 Spain 1954 -2 38111 15699 51 15 Russia 1878 2 16174 2934 116 16 Indonesia 1502 5 5215 1178 288 17 Australia 1480 -3 51523 26244 29 18 Argentina 1477 -2 29001 10517 51 19 Egypt 1165 16 8996 3002 130 20 Malaysia 1160 17 29247 5224 40 21 Saudi Arabia 1128 2 25845 9833 44 22 Thailand 856 7 11674 2744 73 23 Netherlands 798 -8 45839 26376 17 24 Poland 786 0 24547 6563 32 25 Iran 732 9 7547 2138 97 26 Colombia 725 13 11530 3052 63 27 Switzerland 711 -7 83559 38739 9 28 Hong Kong 657 -3 76153 35203 9 29 Venezuela 558 7 13268 5438 42 30 South Africa 529 -2 9308 3710 57
Source World Bank, HSBC estimates
2. Growth in the emerging markets will boost global growth
0.0 1.0 2.0 3.0 4.0 1970s 1980 s 1990s 2000s 2010s 2020s 2030s 2040 s 0.0 1.0 2.0 3.0 4.0
Dev eloped Markets Emerging markets Globa l
% Contributions to global growth %
G lobal E c onomi c s & C lim a te C h a nge E n er g y in 20 50 22 Mar c h 2011 7
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3. The energy system
Source: IEA 38% 24% 29% 9% Industry Transport
Buildings & Agriculture Non Energy Use
Total final consumption 28% 32% 21% 6% 10% 3% Coal Oil Gas Nuclear
Hy dro & other renew ables Biomass & Waste
Total Primary Energy Demand (Mtoe)
Transformation
Power
Heat
Fuels
Energy inputs
Energy outputs
38%
24% 29% 9%
Industry Transport
Buildings & Agriculture Non Energy Use
Total final consumption 28% 32% 21% 6% 10% 3% Coal Oil Gas Nuclear
Hy dro & other renew ables Biomass & Waste
Total Primary Energy Demand (Mtoe)
Transformation
Power
Heat
Fuels
Energy inputs
38% 24% 29% 9% Industry TransportBuildings & Agriculture Non Energy Use
Total final consumption 28% 32% 21% 6% 10% 3% Coal Oil Gas Nuclear
Hy dro & other renew ables Biomass & Waste
Total Primary Energy Demand (Mtoe)
Transformation
Power
Heat
Fuels
Transformation
Power
Heat
Fuels
Changing needs
Let’s start by taking a look at the current energy system for which Chart 3 provides an illustration. Fossil fuels account for the majority of the energy consumed. This is decreasing but extremely slowly. In 1980 fossil fuels accounted for 85% of the total energy mix. This has fallen to 81%. Buildings are the main consumer of energy, taking up more than a third of energy, and the transport sector accounts for one quarter.
How will this change through time? Before we get going it’s worth pointing out that our forecasts for world energy demand and CO2 are based on our projections for the 40 countries we considered to reach our Top 30 in 2050. These countries represent 93% of world GDP today.
We can’t however take our forecasts for GDP for each country and map them one-for-one into energy demand because as economies develop their energy needs change.
Less industry intensive…
For a start, as economies become wealthier, and once the basic infrastructure has been built, additional units of output tend to be more service-sector orientated as incremental growth is focused on meeting the needs of an increasingly wealthy domestic population.
In addition, as each economy become wealthier, some of its manufacturing will be outsourced to some of the lower-cost countries further down our Top 30 list.
And so manufacturing as a share of GDP tends to decline as economies become wealthier (see Chart 4 as an example for the UK).
Manufacturing production uses much more energy to produce a unit of GDP, a concept we know as ‘energy intensity’ (Chart 5). So at higher levels of income, additional units of growth tend not to lead to such large increases in energy consumption. In addition, the existing manufacturing base tends to become more energy efficient. Chart 5 shows that Switzerland has a manufacturing sector that accounts for 20% of GDP yet its energy intensity, the amount of energy it needs to consume to produce its output, was just 0.09 (900,000 tonnes of oil equivalent to produce a million dollars of output) in 2007, considerably lower than that of India (0.84) where manufacturing is only 15% of GDP.
The result is that as economies become less manufacturing oriented and as more energy efficient technologies are adopted, the amount of energy required to produce an additional unit of GDP is be reduced.
4. As this UK example shows, as economies develop they tend to be less manufacturing intensive
5. And unsurprisingly, manufacturing production uses more energy than service production
10 15 20 25 30 35 10000 15000 200 00 25000 30000 GDP per C apita % G D P M a nu fa c tur in g A ust ralia China Germany India Italy Japan S. Korea Poland Spain Turkey Indonesia B razil France M exico Netherlands Switzerland US 0.0 0.2 0.4 0.6 0.8 1.0 10 15 20 25 30 35 % GDP Manufacturing E ne rg y Int en si ty
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…but demand for bigger, comfier
homes increases…
However, on the flip side, as economic wealth increases, so does demand for larger, more
comfortable homes and the appliances to go in them. Today buildings account for more than a third of total energy use so this will have a significant impact on final energy demand.
Chart 6 shows that more than half of China’s population still live in rural housing. This has fallen dramatically over the past two decades and will continue as the process of urbanisation proceeds.
7. Chart of average home size by region
0 50 100 150 200 250 US India 0 50 100 150 200 250
m2 Av erage home size (square metres ) m2
Source: World Business Council for Sustainable Development
Chart 7 shows that as countries become larger, average home size increases.
6. As the Chinese rural population moves to towns, energy demand will rise
Rural population as % of total
0 10 20 30 40 50 60 70 80 90 100 1840 1850 1860 18 70 1880 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2 000 2010f 1950 1960 1970 19 80 1990 2000 2010f
US China (upper scale)
%
and demand for cars increases
8. Higher per-capita income means more cars
0 100 200 300 400 500 600 700 0 20000 40000 GDP per C apita N um ber o f C a rs per 10 00
Source: World Bank, HSBC calculations
At present in China there are 22 cars per 1,000 people. This compares to 450 in the US which is the level that appears roughly the peak number per thousand people. Based on the relationship between cars and income per capita, our forecasts for income per capita suggest that the number of cars in China will increase to 350 per thousand by 2050 (Chart 8). This means that the total number of cars in China will rise from roughly 30 million passenger vehicles today to almost 500 million. In India we estimate there to be fewer than 50 cars per thousand people today. This is likely to rise to more than 200. This is an increase in cars on the road of almost 300mn (Chart 9).
Taking our top 30 countries together, the number of cars on the roads rises by 1 billion from 700mn cars to 1.7bn (Chart 10)!
10. The number of cars on the road looks set to rise by 1bn
0 400 800 1200 1600 2000 Today 2050 0 400 800 1200 1600 2000 million million Source: HSBC estimates
9. The emerging world will see a significant rise in car ownership
0 100 200 300 400 500 Ja pan US E u rope S ing apo re Ho n g S. K o re a Au st ra lia Gr e e ce Is rael P o land A rg ent in a M a la ys ia Sa u d i Tu rk e y M e xi co Ch in a Ru ss ia Br a zi l Eg yp t T h ai land V e nez uel a C o lo m b ia So u th Ir a n In don es ia In d ia 0 100 200 300 400 500 Today 2050 million
million Number of cars
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The rise in demand for consumer durables as the economies develop to some extent offsets the reduction in energy intensity from the changing ‘structure’ of the economy – but not entirely. Energy intensity – the amount of energy needed to deliver an additional increment of GDP – clearly declines as income levels rise (Chart 11). But we must also account for the fact that the changing structure will impact the type of energy input required. Charts 12 to 14 show how different types of energy demand are met by the fuels available. So moving from demand for industrial use towards transport use can lead to more oil being required and less coal.
12. The transport sector is still primarily dependent on oil inputs
93%
4% 3%
Oil Gas Bioma ss & Waste
Transportation (Mtoe)
Source: IEA and HSBC calculations
11. Energy intensity declines as economies develop, despite the extra demand for consumer durables
China Italy J apan M ex ic o Spain US Aus tralia Braz il C anada
F ranc eGerm any India S. Korea Netherlands Poland Sw itz erland T urk ey U K 0. 0 0. 1 0. 2 0. 3 0. 4 0. 5 0. 6 0. 7 0. 8 0. 9 1. 0 0 5000 10000 15000 20000 25000 30000 35000 40000 45000 GDP per capita E ner gy I nt ens ity
Source: World Bank, HSBC calculations
13. Buildings and agriculture use a variety of energy sources…
14. …as does industrial use
19.5 % 5.1% 3.1% 27.3% 28.4% 16.5% Coal Oil
Gas Biomas s & Waste
Other Renew ables Nuclear
Buildings & Agriculture (Mtoe) 42% 16% 26% 5% 2% 9% Coal Oil
Gas Biomass & Waste
Other Renew ables Nuclear
Industry (Mtoe)
Chart 15 shows how our forecasts for economic development in the Top 30 economies translate into energy demand in 2050 in this ‘if only’ world.
To be clear, here we assume that countries improve their efficiency, but no quicker than those that have developed before them. The increases in the demands from China and India are most eye-catching but there are significant gains in the demand of most the emerging economies.
15. ‘If only’ energy weren’t a constraint, the emerging markets would dominate energy demand in 2050…
0 1000 2000 3000 4000 5000 6000 7000 8000 Belgium Colombia Netherlands Venezuela Poland Argentina Italy Spain Thailand Australia Turkey Norw ay South Africa Malay sia Egy pt UK Iran South Korea France Germany Mex ico Japan Saudi Arabia Canada Brazil Indonesia Russia India US China
Today 2050 on the 'if only ' scenario'
Total energy use (Million tonnes of oil equiv alent)
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Chart 16 shows the forecasts for global energy broken down by sector. The biggest growth is in transport, as rising incomes lead to many more vehicles on the road. This explains why the largest rise in energy type is oil (Chart 17) because this, at present, is the main power behind cars. To put this into context, this increase in oil demand is equivalent to a rise from 90 million barrels a day to more than 190 million barrels a day. Coal demand rises by 72%, and natural gas demand increases by 87%. Biomass and waste grows by 103% and renewables and nuclear both grow by just under 90% but from low levels.
The growth in energy demand is not as large as the increase in GDP (Chart 18). GDP in real constant dollars trebles, whereas growth in energy demand doubles. We should highlight again that this is the ‘if only’ scenario where we assume present trends continue, ie there is no significant shift towards electric vehicles from the
combustion engine. This provides us with a benchmark for considering, at today’s norms, what pressure this will place on different energy sources if change doesn’t materialise.
16. As economies develop, more energy is required to power transport and heat buildings…
17. …which on today’s standard technologies leads to a big pick up in demand for oil
0 50 100 150 Total Transport Buildings Industry 0 50 100 150 % 'If only ' grow th in energy de mand 2010- 2050
0 20 40 60 80 100 120 To ta l en er gy u se Oil Bi oma ss & Wa st e Ot h er re ne wa bl es Ga s Nuc lea r Co al 0 20 40 60 80 100 120
% 'If only' growth in energy input 2010-2050 %
Source: HSBC Source: HSBC
18. In the ‘if only’ scenario, energy demand doubles
0 5000 10000 15000 20000 25000 2010 'If only ' 2050
Coal Oil Gas Renew ables Nuclear
m toe
Back to reality
Of course, our ‘if only’ scenario is merely a fantasy. In reality:
Fossil fuels aren’t abundant.
They aren’t evenly spread across the global population, which gives rise to issues of energy security and geopolitical tension. There are worrying signs of climate change.
In this chapter we consider how binding these constraints are, before we start to consider ways around them.
Fossil fuels – what’s left?
Estimates differ as to the size of the world’s remaining resources depending on how confident authorities are over their existence. ‘Proven reserves’ are just that, ‘resource’ is a high degree of certainty and potential is little more than a good guess. Table 19 shows all these figures. Most worryingly, we can only be confident that is 49 years of oil left even if we don’t demand more through time. The recent discovery of shale gas has significantly lifted the estimates of proven gas and again ‘potentially’ there is much more. Coal, which has seen lower demand since the arrival of the combustion engine, is now by far the most abundant resource.
2. The strain on global
energy resources
Oil is most scarce and set to see the biggest demand
Gas and coal, which are more abundant than oil, will feel the effects
of the oil market squeeze
Left to market forces, elevated fossil fuel prices seem inevitable
19. Fossil fuels – what’s left?
________________ Reserves _________________ ______ Years left at current production _______
Proven Resource Potential Proven Resource Potential
Oil (bn barrels)
Conventional 1333 1351 3322 43 44 108
Unconventional 143 150 6829 5 5 223
Total 1476 1500 10151 48 49 331
Gas (bn barrels of oil equivalent)
Conventional 942 942 1759 53 53 98
Unconventional 200 1007 5716 11 56 320
Total 1142 1949 7475 64 109 418
Coal (bn tonnes) 826 176
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20. Even as more is taken out of the ground, reserve estimates have been revised up through time
0 500 1000 1500 1989 199 9 2009 0 50 100 150 200 Oil (LHS) Gas (RHS)
thousand million barrelsReserv e estimates tn cubic metres
Source: BP Statistical Review
These reserve numbers are prone to revision (Chart 20). However, recently the world has been failing to deliver sufficient new discoveries to replace production. The IEA estimates that since 1990, each year new discoveries have only been sufficient to offset half of production (Chart 21). Equally worrying, the size of fields discovered has been falling and is currently around one tenth of the size of discoveries made in the 1960s. And of course, considerable doubt remains about the accuracy of reserve data from the Middle East. According to BP, the Middle East accounts for nearly 60% of remaining proven reserves and so any restatement would have a material impact on the global estimate.
21. New oil discoveries have been disappointing in size
0 20 40 60 1960-69 1970-79 1980-89 1990-99 2000-09 0 50 100 150 200 250
Disc ov eries Production Av g size (mb)
Source: IEA
Getting new supply on stream –
pinchpoints and prices
In theory, we simply need to work out the economic cost of getting this energy out of the ground to work out how demand pressures will impinge upon prices. Reality is complicated by two things: lead times and OPEC.
Let’s deal with the economics first. The economic cost of satisfying the next couple of decades with oil are low, much lower than today’s oil price (Chart 22). As we get beyond this oil is harder to reach and the cost of extraction is greater. At more than USD100 dollars per barrel, substitutes for crude such as tar sands and synthetic liquids become more viable. Towards USD150/barrel
22. Today’s estimate of the prices required to get new ‘oil’ supply on stream
0 50 100 150
52 103 155 206 258
Produced Middle East
Other conv
EOR
Deep w ater Heav y Oil
inc tar sands
Shale Sy nthetic liquids
(GTL, CTL, BTL -from gas & coal)
Ethano l (biofuels) USD/ barrel
Years of energy left at current demand of $85mn/ day Source: HSBC estimates based on IEA data, GTL = Gas to liquids, CTL = Coal to liquids, BTL = Biomass to liquids , EOR = Enhanced Oil Recovery
biofuels come into their own (we’ll discuss in more detail shortly).
OPEC therefore tries to manage oil prices to maximise revenue while at the same time keeping prices below the level that might encourage investment in long-term, unconventional supplies of liquid fuels (such as tar sands and biofuels) or promote efficiency improvements. After all, some members have many years of reserves left and need to ensure that oil has a long-term role in the energy equation.
Chart 22 doesn’t, however, provide us with a ceiling for oil prices. This is because high prices might spur the investment but it takes many years to get the supply on tap. For example, a deepwater field can take more than five years from discovery until it starts production. Large complex projects can take even longer. The huge Kashagan field in Kazakhstan, one of the largest recent discoveries in the world, was discovered in 2000 and is due to start production in late 2012 or early 2013.
The incremental cost increases needed to deliver additional gas and coal are not as extreme as they are for oil. Quite simply, they don’t get
progressively harder to find. Most conventional gas fields are commercial at gas prices over USD3-5/Mcf. This is the same as the US gas price in 2010 and half the contracted gas price in Europe and Asia.
Similarly, coal extraction prices have remained largely unchanged. Truck and shovel operations have improved in scale, but the basic technology of digging, washing, railing and shipping coal is, from a technology viewpoint, relatively static.
Underground mining via larger long-wall extraction technology is also a well-established technique. Therefore despite the fact coal and gas can be substituted for oil (for power generation if not transport needs) movements and pressures in the oil market don’t necessarily translate one for one into coal and gas prices (Chart 23).
23. There can be significant divergences in gas prices by region and the relationship with oil is not tight but nevertheless evident
0 30 60 90 120 150 1985 1990 1995 2000 2005 2010 0 30 60 90 120 150
Euro gas US Gas UK Gas Coal Brent
USD per barrel US D per barrel
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Energy security
So on aggregate, pressures in the oil market could be in part relieved by increased use of coal and gas. However, the supply of these alternatives isn’t necessarily in the right place.
Clearly the problem with gas is that most of it is in areas that are remote from market, including Siberia and the Middle East (Iran, Iraq and Qatar). Getting it to the final user is restricted by the ability to lay a pipe, or liquefy it and treat it like oil. Both are expensive and for this reason there can be marked differences in gas price across regions (Chart 23).
24. There is a lot more coal left than other fuel types, and it’s spread by region 0 50 100 150 200 250 Europe* North America South & Central America Middle East & Africa Asia-Pacific Yea rs
Coal Gas Oil
Source: World Energy Council and HSBC analysis * Europe and the FSU
Moreover, Chart 24 shows that the world’s gas supplies are almost as densely concentrated in Russia and the Middle East as oil is. Therefore substituting gas for oil may give you an alternative, perhaps cheaper, energy source but the problem of energy security still exists.
Coal is more widely distributed geographically, with strong reserve bases and existing production either close to end-demand or in politically stable regions. In the medium to longer term, therefore, coal is likely to be less volatile in price and under less upward pressure from a changing resource base in comparison to other hydrocarbons. Chart 25 shows how much of each energy type is available today, and how much per head of population. Looking on an energy production per person basis, the areas which look to be most ‘energy insecure’ are Europe, LATAM and India by 2035. However, LATAM and India are making strides in addressing this shortfall by increasing their energy production faster than their populations. Europe by contrast is doing the opposite; suggesting a large strain on energy security in the region by 2035. Africa has a similar problem, but energy demand in the region is far lower.
At the other end of the spectrum, Australia’s vast gas and coal reserves, coupled with a relatively small population, place it alongside Russia and the Middle East among those who are best placed. The appendix at the back of this report provides a more detailed analysis on the energy use of each individual country.
589 (1.55) 828 (2.61) COAL (Mtce) 606 (1.59) 575 (1.81) GAS (bcm) 7.1 (0.019) 7.4 (0.023) OIL (mb/d) 2035 2009 US 589 (1.55) 828 (2.61) COAL (Mtce) 606 (1.59) 575 (1.81) GAS (bcm) 7.1 (0.019) 7.4 (0.023) OIL (mb/d) 2035 2009 US 32 (0.19) 55 (0.38) COAL (Mtce) 240 (1.41) 223 (1.54) GAS (bcm) 7.8 (0.046) 6.2 (0.043) OIL (mb/d) 2035 2009
N. America (ex US)
32 (0.19) 55 (0.38) COAL (Mtce) 240 (1.41) 223 (1.54) GAS (bcm) 7.8 (0.046) 6.2 (0.043) OIL (mb/d) 2035 2009
N. America (ex US)
226 (0.14) 208 (0.18) COAL (Mtce) 435 (0.26) 207 (0.18) GAS (bcm) 10.3 (0.006) 10 (0.009) OIL (mb/d) 2035 2009 Africa 226 (0.14) 208 (0.18) COAL (Mtce) 435 (0.26) 207 (0.18) GAS (bcm) 10.3 (0.006) 10 (0.009) OIL (mb/d) 2035 2009 Africa 99 (0.40) 79 (0.40) COAL (Mtce) 195 (0.78) 134 (0.68) GAS (bcm) 5.2 (0.021) 4.8 (0.024) OIL (mb/d) 2035 2009
LATAM (ex Brazil)
99 (0.40) 79 (0.40) COAL (Mtce) 195 (0.78) 134 (0.68) GAS (bcm) 5.2 (0.021) 4.8 (0.024) OIL (mb/d) 2035 2009
LATAM (ex Brazil)
-COAL (Mtce) 85 (0.39) 14 (0.07) GAS (bcm) 5.2 (0.073) 2 (0.010) OIL (mb/d) 2035 2009 Brazil -COAL (Mtce) 85 (0.39) 14 (0.07) GAS (bcm) 5.2 (0.073) 2 (0.010) OIL (mb/d) 2035 2009 Brazil 221 (0.31) 420 (0.57) COAL (Mtce) 569 (0.79) 531 (0.72) GAS (bcm) 7.5 (0.010) 7.7 (0.011) OIL (mb/d) 2035 2009 Europe 221 (0.31) 420 (0.57) COAL (Mtce) 569 (0.79) 531 (0.72) GAS (bcm) 7.5 (0.010) 7.7 (0.011) OIL (mb/d) 2035 2009 Europe
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500 (0.33) 332 (0.27) COAL (Mtce) 101 (0.07) 32 (0.03) GAS (bcm) 0.8 (0.001) 0.8 (0.001) OIL (mb/d) 2035 2009 India 500 (0.33) 332 (0.27) COAL (Mtce) 101 (0.07) 32 (0.03) GAS (bcm) 0.8 (0.001) 0.8 (0.001) OIL (mb/d) 2035 2009 India 393 (14.82) 331 (15.39) COAL (Mtce) 134 (5.05) 45 (2.09) GAS (bcm) -OIL (mb/d) 2035 2009 Australia 393 (14.82) 331 (15.39) COAL (Mtce) 134 (5.05) 45 (2.09) GAS (bcm) -OIL (mb/d) 2035 2009 Australia 540 (0.26) 310 (0.19) COAL (Mtce) 369 (0.18) 272 (0.17) GAS (bcm) 2.3 (0.001) 3.5 (0.002) OIL (mb/d) 2035 2009Asia (ex China, India)
540 (0.26) 310 (0.19) COAL (Mtce) 369 (0.18) 272 (0.17) GAS (bcm) 2.3 (0.001) 3.5 (0.002) OIL (mb/d) 2035 2009
Asia (ex China, India)
2825 (1.93) 2076 (1.53) COAL (Mtce) 185 (0.13) 80 (0.06) GAS (bcm) 2.4 (0.002) 3.8 (0.003) OIL (mb/d) 2035 2009 China 2825 (1.93) 2076 (1.53) COAL (Mtce) 185 (0.13) 80 (0.06) GAS (bcm) 2.4 (0.002) 3.8 (0.003) OIL (mb/d) 2035 2009 China 193 (1.54) 239 (1.70) COAL (Mtce) 814 (6.49) 662 (4.72) GAS (bcm) 9.1 (0.073) 10.2 (0.073) OIL (mb/d) 2035 2009 Russia 193 (1.54) 239 (1.70) COAL (Mtce) 814 (6.49) 662 (4.72) GAS (bcm) 9.1 (0.073) 10.2 (0.073) OIL (mb/d) 2035 2009 Russia 2 (0.01) 2 (0.01) COAL (Mtce) 801 (3.10) 393 (2.26) GAS (bcm) 38.1 (0.147) 24.8 (0.142) OIL (mb/d) 2035 2009 Middle East 2 (0.01) 2 (0.01) COAL (Mtce) 801 (3.10) 393 (2.26) GAS (bcm) 38.1 (0.147) 24.8 (0.142) OIL (mb/d) 2035 2009 Middle East
Carbon constraints
So oil is too limited in supply and gas often too hard to transport, leaving coal as the natural option to meet all the increased demand. That takes us nicely to the other constraint we’re up against – climate change – since coal is by far the most polluting fuel.
26. Increasing carbon emissions….
0 1000 2000 3000 4000 5000 6000 7000 8000 9000 18 00 18 10 18 20 18 30 18 40 18 50 18 60 18 70 18 80 18 90 1 900 19 10 19 20 19 30 19 40 19 50 19 60 19 70 19 80 19 90 20 00 20 10 mt CO2
Source: Boden, T.A., G. Marland, and R.J. Andres, 2010. Global, Regional, and National Fossil-Fuel CO2 Emissions. Carbon Dioxide Information Analysis Center, Oak
Ridge National Laboratory, U.S. Department of Energy, Oak Ridge, Tenn., U.S.A. doi 10.3334/CDIAC/00001_V2010
After all, the scarcity of fossil fuels isn’t the only constraint we’re facing. Significant environmental damage has already been done. Carbon emissions have increased the carbon stock in the atmosphere
to 8.4 billion metric tonnes since the first recordings in 1751.
This has coincided with an alarming increase in global temperatures. Indeed 2010 was the warmest year since records began in 1880, with a global average temperature of 14.6˚C (Chart 27).
27. …are resulting in rising temperatures
13.0 13.2 13.4 13.6 13.8 14.0 14.2 14.4 14.6 1 880 1 890 1 900 1 910 1 920 1 930 1 940 1 950 1 960 1 970 1 980 1 990 20 0 0 2 010 º C
Global long run av erage temperature
Source: National Oceanic and Atmospheric Administration
The outcome of global climate negotiations in 2010 was that warming should be kept to less than 2°C. Temperature rises above this would result in a reduction in water availability of 20-30% in some areas, sharp declines in crop yields in tropical regions and increased incidence of wind
Food Food Atlantic Atlantic circulation circulation Greenland / Greenland / Antarctic Antarctic Sea Level Sea Level Atlantic thermohaline circulation starts to weaken3
Global temperature change (relative to 1900 baseline)
1º C 2º C 3º C 4º C 5º C
Sector Observed 0.7º C
Modest increases in cereal yields in temperate region11
Sharp declines in crop yield in tropical regions3 Ecosystem Ecosystem Health Health Permafrost
Permafrost 14-80% increase in thawed pockets of soils7
An excess of 1,13,000 diarrhoea,3,000 Malnutrition and 17,000 incidents of Malaria projected per year by 20306
Severe species loss over central Brazil projected if deforestation and fires are not controlled4
WHO attributes150,000 deaths per year to CC5
Melting of permafrost causes damage to Building & infrastructures3
Rising risk of the collapse of Atlantic thermohaline circulation3
Rising risk of Greenland melting irreversibly & collapse of West Antarctic Ice sheet3
Collapse of Greenland may lead to 7 m sea level riset3
Rate of sea level rise increased from 1.8 mm/yr to 3.5 mm/ yr (1993-2008)8
The global surface affected by drought doubled since 19709
Amazon might reach a tipping point10
<400 450 550 650 >750 CO2–eq. 430 Food Food Atlantic Atlantic circulation circulation Greenland / Greenland / Antarctic Antarctic Sea Level Sea Level Atlantic thermohaline circulation starts to weaken3
Global temperature change (relative to 1900 baseline)
1º C 2º C 3º C 4º C 5º C
Sector Observed 0.7º C
Modest increases in cereal yields in temperate region11
Sharp declines in crop yield in tropical regions3 Ecosystem Ecosystem Health Health Permafrost
Permafrost 14-80% increase in thawed pockets of soils7
An excess of 1,13,000 diarrhoea,3,000 Malnutrition and 17,000 incidents of Malaria projected per year by 20306
Severe species loss over central Brazil projected if deforestation and fires are not controlled4
WHO attributes150,000 deaths per year to CC5
Melting of permafrost causes damage to Building & infrastructures3
Rising risk of the collapse of Atlantic thermohaline circulation3
Rising risk of Greenland melting irreversibly & collapse of West Antarctic Ice sheet3
Collapse of Greenland may lead to 7 m sea level riset3
Rate of sea level rise increased from 1.8 mm/yr to 3.5 mm/ yr (1993-2008)8
The global surface affected by drought doubled since 19709
Amazon might reach a tipping point10
<400 450 550 650 >750 CO2–eq. 430
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borne disease such as malaria. Increasing resource shortages and productivity declines come against a growing, wealthier population whose changing demands also put pressure on the agricultural framework.
We also at this juncture need to consider water availability because water and energy are so entwined. The feedback loop of declining water availability also impacts the energy sector, which can be water intensive. Water is mainly used in two stages of the energy value chain process, during production of energy raw materials, and during the transformation of the raw source into a form useable by consumers.
Localised water stress has already resulted in power cuts. In 2003, Electricité de France had to shut down a quarter of its 58 nuclear plants due to inadequate water supplies for cooling caused by a record heat wave. More recently, in 2010, the Chandrapur thermal power plant in India was closed for a month as a result of water stress, and in Pakistan, the hydroelectic industry is suffering from lower levels of water in reservoirs; hydro power generation was 6000MW in 2009 and has now reduced to 2000MW.
In addition, new power sources are being built in areas of resource shortage. In India, 79% of new capacity plants will be built in areas that are already water scarce or stressed. The table below shows how much water is withdrawn during the production and transformation processes for different energy sources. Using these withdrawal rates 0.46% of water was withdrawn for electricity in 2010. This is forecast to increase to 1.61% by 2050. Currently in India, c90% of water use is for agriculture. As we progress through the coming decades we expect water considerations to play a greater role in power generation planning.
28. Water and energy are intrinsically entwined Gas and liquid fuels value chain-water consumption
Raw materials - Litres per GJ Transformation - Litres per GJ
Traditional Oil 3-7 25-65
Enhanced Oil Recovery 50-9,000 25-65
Oil sands* 70-1,800 25-65 Corn 9,000-100,000 47-50 Soy 50,000-270,000 Sugar N/A 14 Coal 5-70 Coal-to-liquids: 140-220 Gas
Traditional Gas Minimal Natural gas processing: 7
Shale Gas 36-54
Electricity industry value chain-water consumption – thermoelectric fuels
Raw Materials – litres per MWh
Transformation litres per MWh
Coal 20-270 Thermoelectric generation with closed-loop cooling: 720-2,700
Oil, Natural Gas Wide Variance
Uranium (nuclear) 170-570
Hydroelectric Evaporative loss:Averages:17,000
Geothermal 5,300
Solar Concentrating solar: 2,800-3,500
Photovoltaic: Minimal
Wind Minimal
An enormous challenge…
On our ‘if only’ forecasts of energy use, CO2 stock in the atmosphere would rise by 100% to 56Gt CO2 by 2050 (Chart 29). However, to contain global warming to below 2°C by 2050 the global consensus is that world emissions have to fall by 50% from 1990 levels, which implies a carbon stock from energy of just c10GtCO2. On this basis, we could only use the amount of fossil fuels that we used in 1969!
…which if we fail to meet will
impact the emerging world
disproportionately
Globally we face a major challenge. If we fail to meet that challenge the effects will fall
disproportionately on the emerging world. Chart 30 shows that the parts of the world that we estimate would be most affected by climate change in 2020 (whereby a scale of 1 represents most affected). China, India, South East Asia and Brazil – some of the economies for which we forecast the strongest energy demand – would be most affected. This suggests that as the energy hungry emerging world builds their economic infrastructure, it has every incentive to do so in a way which is least energy intensive, in order to minimise their carbon footprint. In other words, climate change will act as a ‘threat multiplier’ in reducing carbon damage. Of
course that is not to say that the developed world should not pull its weight given energy use per capita is so much higher in the US than China. Overall, it’s quite clear that on our current way of producing goods and services, trebling world output by 2050 would place too much pressure on both the global energy markets, and the environment. In what follows we consider how the constraints can be overcome. These are split into improving energy efficiency, using less energy to produce the goods and services (improving energy efficiency) and moving the mix of energy towards more abundant and less carbon polluting alternatives.
29. We’re way off target in meeting emissions promises
0 10,000 20,000 30,000 40,000 50,000 60,000 19 60 19 65 19 70 19 75 19 80 19 85 19 90 19 95 20 0 0 20 05 20 10 20 15 20 20 20 25 20 30 20 35 20 40 20 45 20 50
World BAU CO2 Emissions
World CO2 @ 50% reduction from 1990 mtCO2
G lobal E c onomi c s & C lim a te C h a nge E n er g y in 20 50 22 Mar c h 2011 23
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30. The economies most vulnerable to the impact of climate change (index where 1 equals most affected)
0.74 0.62 0.18 0.45 0.41 0.31 0.32 0.34 0.54 0.54 0.69 0.40 0.62
First quartile - Highly vulnerable
Third quartile - Less vulnerable Second Quartile - Moderately vulnerable
Fourth quartile - Marginally Vulnerable Not investigated 0.53 0.26 0.16 0.55 0.53 0.70 0.43 0.45 0.74 0.62 0.18 0.45 0.41 0.31 0.32 0.34 0.54 0.54 0.69 0.40 0.62
First quartile - Highly vulnerable
Third quartile - Less vulnerable Second Quartile - Moderately vulnerable
Fourth quartile - Marginally Vulnerable Not investigated 0.53 0.26 0.16 0.55 0.53 0.70 0.43 0.45 Source: HSBC
Getting more out of energy
Our forecasts for economic growth will not materialise if we continue with the way we use energy today and will place the energy resources under too much stress. The best way to bypass this constraint is to work out how to increase production without as much energy.
Transport
The lowest hanging fruit are in the transport sector. This is one of the few areas where the ‘less energy options’ are actually cheaper and therefore most likely to happen quickly without disrupting growth.
31. Cars account for more than half the demand for transport energy Road passenger 53% Road freight 23% Rail freight 3% Sea freight 10% -Air passenger 9% Source: HSBC, IEA
Passenger vehicles (which represent more than half of total transport – Chart 31) could be made significantly more efficient. For a start, engine sizes could be smaller. Cars will still get you from A to B
and having less acceleration at the traffic lights is unlikely to hinder economic growth (Chart 32).
32. Smaller engine sizes would make for a more efficient car fleet
0 10 20 30 40 2.0 3.0 M PG En gi ne Si z e (L ) BMW Z 4 Source: BMW
33. Consumers are already moving to smaller engine sizes as oil prices rise
1,500 1,600 1,700 1,800 1,900 2,000 2,100 19 96 19 98 20 00 20 02 20 04 20 06 20 08
Gasoline engine Diesel engine
Size of engine (cc)
Source: Global Insight, HSBC calculations
Indeed, Chart 33 shows that as oil prices have crept up in recent years, consumers are already
3. Solution: Efficiency
When energy was cheap, we were using it inefficiently
There are some easy, cheap ways to reduce energy use
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moving towards smaller engine sizes in response to higher oil prices.
And Chart 34 really drives home the point that energy use in transport is a ‘choice variable’. Areas of the developed world where the
population is just as widely spread as towns in the US still use considerable less energy for transport. Australia provides a clear example. It is entirely clear why this is the case although the social ‘acceptability’ of public transport probably plays an important role. It might be a little less comfortable, but it is absolutely possible.
There is also the possibility of moving away from the combustion engine and electrifying the car fleet. Electric vehicles (EVs) themselves are more energy efficient than traditional cars. Of 100 units of energy put into a car, only 14 of them are used to propel the car in motion. For electric vehicles this doubles to 28.
By using power rather than fuel in cars we could also switch from oil to other energy sources. So electrifying the car fleet actually spans our two solutions of efficiency and energy mix.
We expect EVs to play a major role in decarbonising the economy but at present there are two major problems with widespread implementation of EVs – cost and network infrastructure.
An EV costs twice as much as a car with a standard internal combustion engine. The cost of the battery – at 50% of the total cost of the vehicle – plays a significant role. For a significant drop in EV costs, manufacturers need to produce larger batches to benefit from economies of scale. And the life of the battery still means that the distance that can be travelled before topping up is too short for it not to be supported by a charging station network. Such investment requires a larger take-up of vehicles.
34. Transport energy consumption is a ‘choice’
T ra n sp o rt-r e lated en e rg y co n su m p ti o n g ig aj o u les p er cap it a p e r year 0 25 50 75 100 125 150 200 250 300 0 10 20 30 40 50 60 70 Houston Phoenix Detroit Denver Los Angeles San Francisco Boston Washington Chicago New York Toronto Perth Brisbane Melbourne Sydney Hamburg Stockholm Frankfurt Zurich Brussels Munich West Berlin Vienna Paris London Copenhagen Amsterdam Singapore Tokyo Moscow Hong Kong
Urban density inhabitants per hectare
80
North American cities Australian cities European cities Asian cities
T ra n sp o rt-r e lated en e rg y co n su m p ti o n g ig aj o u les p er cap it a p e r year 0 25 50 75 100 125 150 200 250 300 0 10 20 30 40 50 60 70 Houston Phoenix Detroit Denver Los Angeles San Francisco Boston Washington Chicago New York Toronto Perth Brisbane Melbourne Sydney Hamburg Stockholm Frankfurt Zurich Brussels Munich West Berlin Vienna Paris London Copenhagen Amsterdam Singapore Tokyo Moscow Hong Kong
Urban density inhabitants per hectare
80
North American cities Australian cities European cities Asian cities
North American cities Australian cities European cities Asian cities
As such the electric vehicle is somewhat stuck in a Catch 22. Governments could play a major role in resolving this.
In parts of the developed world, governments don’t have much incentive at present to make a major push in this direction. For example, in the UK, consumer incentives to encourage lower petrol consumption might eliminate GBP7bn of tax revenue by 2030. Indeed, the UK Treasury looks to have conceded to postponing fuel duty increases because of the pressure rising fuel prices are having on people’s discretionary income. This shows how difficult it is to push consumers to change habits.
But as we have already highlighted, the potential for oil prices and energy security to cause a more significant political disruption could change this. Governments have been increasingly
implementing exhaust CO2 legislation. Indeed, the CO2 emission target for passenger cars in Europe is 130g/km by 2015 and this will be reduced to 95g/km by 2020. Given the high cost of
implementing further significant emission cuts in the internal combustion engine (especially for larger cars); we believe that ongoing electrification of the car fleet (from micro hybrids to full electric vehicles) will be the only technology to reduce carbon emission at the right cost.
The emerging world, where the infrastructure is yet to be established, is making greater strides making the switch seem more likely and straight forward.
China, with a lot of coal and therefore potential electricity on its doorstep, is currently subsidising electric vehicles to increase the production line to the levels required to spur R&D and larger take up. Sales of electric vehicles and hybrids
increased by 30% in the US last year compared to 143% in China.
The Global Fuel Initiative, a consortium of international government regulators, has a target of increasing the efficiency of the global car fleet by 50% by 2050. Interestingly this doesn’t hinge on a complete roll-out of electric vehicles but on incremental change to the conventional internal combustion engines and drive systems, along with weight reductions and better aerodynamics. The move to electric vehicles, however, will make it easier to meet climate targets.
Industry
There are also significant efficiency
improvements that could be made in industry. The new power plants that are being established in the emerging world are 8-10% more efficient than the dinosaurs in the western world.
Significant progress has also been made in primary industry which is expected to continue. In the last 20 years steel has posted a 29% reduction in energy consumption per unit of product, cement a 23% reduction and paper a 12% reduction, and the implementation of best available technologies will accelerate efficiency gains. For example, in the cement industry alone, converting a ‘wet process’ cement plant to an ‘air dry’ process can cut energy use by almost 50%.
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Buildings
Buildings account for 38% of the total energy use and again there are significant improvements that can be made here since buildings are also
extremely energy inefficient. It is perfectly feasible to have zero energy homes, which is the direct target for homebuilders set by some European governments (Chart 35). Indeed, a new European directive1 has set that by 2020 all new buildings are almost zero-energy.
Again this comes at a cost. UK homebuilders estimate that meeting these criteria can increase the cost of building a house by around 12%. But these costs are falling quickly as builders are finding ways of meeting the standards more efficiently. Indeed by 2016 they estimate these costs will have roughly halved. Again this is another example whereby the solutions are there, it’s just while energy has been cheap, things haven’t been done.
Improving the existing stock is more of a challenge. After all, at current building rates it would take 140 years to replace these with new energy efficient homes. But the existing stock can still be made more energy efficient. Thermal 1
Directive 2010/31EU of the European Parliament on the Energy Performance of Buildings (May 2010)
renovation work can save the energy used in buildings by 78%. This can be quick and in the case of insulating the loft reasonably cheap. Governments can make a considerable difference to moving the system in the right direction. This might simply involve better regulation to ensure that consumers make rational choices about energy consumption. For example, a global shift to energy efficient lighting (CFLs) will cut global electricity demand by c409TWh per year equivalent, equivalent to the combined yearly electricity consumption of the United Kingdom and Denmark. The resulting cost saving would be cUSD47bn, paying back the CFL investment within one year. But the larger benefit would be the avoided energy infrastructure investment by cUSD112bn.
The World Business Council for Sustainable Development has put together a proposal to achieve the necessary transformation in a way that is realistic given cost and other economic
pressures. They look for a 60% reduction in energy use by buildings by 2050.
All in all, energy efficiency is the most effective way of reducing our dependence on energy. Higher fossil prices will speed up the transition but government regulation can and will continue to play a role.
35. Government emissions targets on new builds will make a difference but changing the efficiency of the existing stock is a problem
0 20 40 60 80 100 120
France Belgium Denmark Germany
kW h /Sq .m p er a n n um 2007 2010 2012 2014 2015 2016 2020 -50% -99% -77% -67% -30% -30% 0 20 40 60 80 100 120
France Belgium Denmark Germany
kW h /Sq .m p er a n n um 2007 2010 2012 2014 2015 2016 2020 -50% -99% -77% -67% -30% -30%
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Changing the mix
Efficiency will take us some of the way, but thinking about the type of energy we use is also important, particularly if pressures on one source – oil – become more intense.
36. Carbon culprits (gCO2e/kWh)
0 200 400 600 800 1000
Coal Oil Shale gas Nat Gas Nat Gas (CCS) IEA 2050* PV WindNuclear Indirect emissions Combistion emissions
Source: IEA, HSBC calculations
We have already talked about how moving to electric vehicles allows us to use other fuel sources to power vehicles, reducing our dependence on oil. However, if we move to the most abundant source – coal – this will have serious
implications for the environment since coal is by far the worst polluter (Chart 36).
We’ll start by thinking about the alternatives to fossil fuels. These are renewables, biomass, and nuclear. We’ll then turn to fossil fuels and how we can limit their damage to the environment.
Renewables
Renewables are the ultimate fix. They are almost endless in supply, remove problems of energy security, and have a limited impact on the environment.
Chart 37 shows who, given their geographic location, are best placed to generate renewable energy. Unsurprisingly, those nearest the equator – Africa, South America and Asia, have
significant potential for harnessing solar energy while Russia and North America can increase biomass production. As such, renewable energy is not so contingent on location, but instead ‘free’ land use.
4. Solution: changing
the mix
Low carbon sources of energy are more costly but prices of
renewables are falling
Second-generation biofuels will help meet transport demand without
damaging the food chain
If nuclear energy is avoided following recent events in Japan,
meeting climate targets will be even more difficult
31000 TWh N. America 31000 TWh N. America 42000 TWh Africa 42000 TWh Africa 25000 TWh South America 25000 TWh South America 11000 TWh Europe 11000 TWh Europe Source: WWF
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5000 TWh India 5000 TWh India 12000 TWh Pacific 12000 TWh Pacific 7000 TWh Rest of Asia 7000 TWh Rest of Asia 15000 TWh China 15000 TWh China 30000 TWh Russia 30000 TWh Russia 8000 TWh Middle East 8000 TWh Middle East38. Oil price requirement (USD/barrel) for cost competitiveness of renewable sources with gas and coal
Technology Breakeven with gas
Breakeven with coal
Wind Turbines on shore 192 136
Wind Turbines offshore 404 358
Solar PV 639 603 Solar Thermal 591 554 Fuel Cell 282 230 Biomass 198 142 Geothermal 73 11 Nuclear 101 41 Source: HSBC
The problem with many of the non-fossil fuel options is the price. Fossil fuel prices would have to rise significantly from here for many of these to be a better option (Chart 38). This would explain why renewables are currently just 1% of the total energy inputs at present.
39. Renewable energies have become considerably more cost competitive in recent years
0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 19 50 19 55 19 60 19 65 19 70 19 75 19 80 19 85 19 90 19 95 20 00 20 05 20 10 $ / kWh Coal cost Gas cost Nuclear cost Solar cost Wind cost
Source: US Energy Information Administration
However, as Chart 39 shows, costs have improved dramatically in the past decade. Electricity generated by hydropower will remain an important part of the renewables mix but there is limited scope for extra capacity as most feasible hydro sources are already exploited. We see more opportunities for the use of wind and solar.
Wind
Onshore wind is now reasonably cost compelling particularly when one considers the added benefits of energy security. It is also the most utility scale renewable technology with 100+MW
wind farms frequently being built onshore and 500+MW wind farms offshore.
So by mid-2020 wind could be a mainstream power generation technology. It is already the most popular new power generation choice in Europe, accounting for almost 40% of new installations in 2008 and 2009. Similarly, in the US in 2009, wind accounted for nearly 40% of new installations, only marginally beaten by gas, which accounted for 43%. China has quickly grown into the largest wind market in the world. It has championed a number of domestic wind turbine manufacturers, which are now looking to expand internationally. This is helping to push down the cost of wind energy. The EU is the birthplace of the wind industry and is still one of the most supportive regions. Member states have specific binding wind installation targets for 2020, which also give targets for other renewables. But government intervention has played a key role in this development.
Solar
Solar is attractive as a decentralised form of electricity generation on roof-tops, since distribution and grid connection costs as well as land-related expenses do not have to be
incorporated into electricity generation costs. Currently solar requires substantial government incentives to drive deployment. But prices are steadily falling. The pivotal point comes when the delivered cost of solar is the same for the
consumer as conventional alternatives – so-called ‘retail grid parity’. Some regions are already cost competitive for solar, ie those where there is a high rate of sun isolation, and where retail prices for electricity are high. This is already the case in California and Italy. This offers the potential for a more decentralised energy system avoiding the inefficiencies in centralised grid networks which waste large proportions of energy between generation and use.
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Biofuels
The first generation of biofuels were primarily produced from food crops such as grains, sugar, beets and oilseeds.
But this has two problems. The US drive for bio-ethanol earlier this decade led to a material increase in arable land dedicated to corn and a consequent reduction in wheat. As a result this merely shifted the ‘shortage’ problem onto the food chain leading to rising corn prices (Charts 40 and 41).
41. …and putting upward pressure on prices
-100 -50 0 50 100 150 200 96 00 04 08 -100 -50 0 50 100 150 200 Oil Corn %Yr %Yr
Source: Thomson Reuters Datastream
Moreover, biofuels weren’t even obviously better for the environment since they fell well below the minimum Green House Gas (GHG) emissions reductions required by the new EU biofuel rules. But as ‘food’ to power cars became a major, not to mention moral, issue technology has already started evolving.
Now the second generation of biofuels are evolving which are produced from agriculture and forestry residues, essentially the waste products from agriculture (the husks rather than the corn). These, in theory, do not affect the food chain. They do, however, need far more processing and costs need to be cut for the process to be
economic. However, prototype plants for this new generation of ‘cellulosic ethanol’ are already in operation and there are several large scale projects planned. For example, Novozyme of Denmark, a manufacturer of the enzymes needed for the process, believes that the first commercial scale plant could be in operation in 2013.
40. The first generation of biofuels were sucking resources away from the food market…
0 5 10 15 20 25 30 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Sh ar e ( % ) of G rai n us ed f o r f uel et ha no l i n U S
Nuclear
Currently nuclear energy contributes 6% to total energy production. For many economies nuclear energy has been the main way of improving energy security, and nowhere more so than in France. In 1974, France began an intensive programme to build nuclear power plants to limit its dependence on imported oil. It now relies on nuclear power for more than 75% of total electricity production (Chart 42). The same is also true of South Korea, although it has also diversified into renewables. Since 1980, the share of oil in South Korea’s electricity generation has fallen from c80% to c6% in 2008, while the share of nuclear power generation has increased to c40%.
Chart 43, which shows current proposals for new nuclear reactors, shows that many governments had been counting on nuclear to play a major role in meeting future energy needs. Recent events in Japan will undoubtedly cause a rethink of the role nuclear can play in the energy mix. The average age of the operating nuclear fleet is currently more than 25 years old. It’s perhaps no surprise then that many governments have ordered temporary closures of at least some of their nuclear plants (US, Switzerland, the UK, Spain, Germany).
42. Many countries see nuclear energy as a way of securing energy supply 0 20 40 60 80 100 China India Brazil Mex ico Netherlands South Africa Argentina Canada Russia UK Spain US Germany Japan S. Korea Sw itzerland France
% Energy production from nuclear sources Source: World Bank
Many are also reconsidering their plans for new installations. China has announced a suspension of new plant approvals, which was expected to account for 40% of new installations over the next decade. After the Chernobyl disaster, there was a two decade freeze in nuclear expansion. Given current energy needs, could the same occur again?
43. Nuclear plants are clearly playing a major role in governments plans to meet energy requirements
0 50 100 150 200 Ar ge nt in a B elg iu m Br az il Ca n a da Ch in a Eg y pt Fr a nce Ge rm an y In dia Indone s ia Ir an Italy Jap an So ut h Ko re a M exi co Pol and Ru s sia So ut h Af ric a Sp ai n T ha ila nd Tu rk e y UK US A W o rld (R H S ) 0 200 400 600 800 1000
Operable Under construction Planned Proposed
No No
