Time of greatest energy uncertainty

Posted on 23 September 2015

bubble mapIn a presentation to insurance company Swiss Re, Christoph Frei talked about his concerns for the future with a warning of dramatic consequences if no action was taken.  The following are extracts from his talk:

“The World Energy Council is issuing a warning that we are living in times of great energy uncertainty.  More than half of the world’s GDP must be invested over the next two decades to secure a sustainable energy supply and to manage the risks arising from the growing uncertainty in the energy market place.

“The rise in uncertainty is the result of a combination of increasing complexity, speed of change and ‘unpredicted’ events such as Fukushima, which changed the nuclear outlook in a number of countries.  For example, solar prices have collapsed from 4.7 to 0.6 $/Watt-peak in the last five years. It is against this background that governments are looking at new technologies that will meet their requirements.

“Whilst the oil price remains very important, gas prices and their divergence across regions are affecting investment decisions. Also uncertainty over CO₂ and solar prices, together with possible future increases in water prices are influencing investment decisions.  20 years ago there really was only one driver of investment, namely the price of oil, but that no longer is the case.

“Furthermore, current commitments on greenhouse gas emissions run out in 2020, and as we approach COP21 in December it is imperative that decisions are reached that will ensure sustainable energy for future generations and avoid the threat of irreversible consequences of global climate changes.

“The difference between now and the last Ice Age was just 5°C, and on current predictions we are heading above 5ºC. It seems a small temperature change, but history says it can have dramatic consequences.

“More needs to be done in the areas of global co-operation, regional integration and innovation if we are to achieve the 2°C rise target set by the UN Framework on Convention on Climate Change.  Missing this target will have major consequences for generations to come.”

What keeps world energy leaders awake at night?

“The World Energy Council has surveyed over a thousand energy leaders around the world who say that price volatility is the number one issue keeping them awake at night. Climate framework uncertainty is also high on the agenda as it drives CO₂ price uncertainty, which is linked to the first issue.

“Energy leaders are looking at areas such as renewables, energy efficiency and subsidies and how the growth in the biggest markets such as China and India will affect energy markets globally.

“The World Energy Council estimates that energy efficiency investment of £1.7 trillion will be needed, in addition to existing requirements on the energy infrastructure side, in order to achieve a sustainable supply for the future, but this is at a time when capital markets have fallen.

“There is a divergence of opinion on how geopolitical developments and regional issues in countries such as Russia, China, India and in the Middle East will affect the top critical issues of uncertainty: energy prices, climate framework, commodity prices and electric storage which is the single technology that could most fundamentally change the outlook of the energy sector.

“Cyber attacks represent another critical risk area. It is already high on the OECD agenda, particularly in regions such as North America and the UK where there are developed infrastructures which are heavily dependent on information technology for operations.”

Better Risk Management is needed

“The World Energy Council has developed the Energy Trilemma challenge which balances three dimensions of energy – energy security, energy equity and environmental sustainability.

“The Trilemma index which measures risk in 129 countries clearly identifies which countries and what risks they potentially face. With better understanding of these risk factors, countries can develop policymaking, management of risk and create a better national energy programme.  Neglect any one of the dimensions and you create the breeding ground.”

The presentation came about prior to the launch of the World Energy Council Perspective Report “The road to resilience – managing and financing extreme weather risks’ published on 1 October 2015.