Energy: Current Situation and Trends. From Global to Local

ENERGY: CURRENT SITUATION AND TRENDS.
FROM GLOBAL TO LOCAL
71st WORLD FOUNDRY CONGRESS
Bilbao, 19th – 21st May, 2014
1
Eloy Álvarez Pelegry
Director de la Cátedra de Energía.
Orkestra – Basque Institute of Competitiveness
F. Deusto

1. AN OVERVIEW OF CURRENT SITUATION
2. ENERGY SCENARIOS AND TRENDS
3. COMPETITIVENESS AND ENERGY COSTS
4. ON ENERGY PRICES
5. SOME CONCLUSIONS AND SUGGESTIONS
INDEX
ENERGY: CURRENT SITUATION AND TRENDS. FROM GLOBAL TO LOCAL
2

1. AN OVERVIEW OF
CURRENT SITUATION
3

 INTRODUCTION
• Some paradigms are beginning to change.
• Climate change continues to be a paramount issue but
other topics have come as priorities.
• Black swans in energy: shale gas developments in USA.
• Low economic growth, continuous emphasis in energy
efficiency.
• Complexity in the world of energy is increasing.
AN OVERVIEW OF CURRENT SITUATION
4

 WORLDWIDE
• Continuous
growth in energy
consumption.
• Growth below ten
years average.
• Major share of
hydrocarbons and
fossil fuels.
5
Source: BP (2013)
World consumption

 WORLDWIDE
• Major and substantial
differences among regions:
Middle East: Oil and gas.
Coal dominates in Asia
Pacific.
More balanced portfolio
in North America and
Europe.
• Low percentage of
renewable energies at
worldwide level.
6
Source: BP (2013)
Regional consumption patterns. 2012 (%)

 EUROPE
• Crude oil and petroleum
products continue to
dominate energy mix.
• Gradual decline in its
share.
• Decrease in solid fuels.
• Increase in the share of
renewable energy sources
(from 4% to nearly 10%).
• Natural gas rose, to
achieve around 25% of
consumption.
Source: European Commission (2013)
7
Gross Inland Consumption by Fuel. EU-27 (Mtoe)

 EUROPE
• Increase in gas and
renewables.
• Decrease in oil
products.
• “Slow” decrease in
solid fuels that
maintain a high
share.
8
Source: European Commission (2013)
Gross electricity generation by fuel. EU-27 (TWh)

 SPAIN
Renewables
7.0%
Gas
16.9%
Coal
1.4%
Gases derived
from coal
0.3%
Electricity
23.1%
Petroleum
products
51.3%
• Final energy
consumption in 2012
(89 Mtoe).
• 4% lower than in
2011.
• Highest share of
petroleum products.
• Followed by
electricity and gas.
9Source: Own elaboration based on La energía en España (2012)
Final energy consumption in 2012

• Balanced mix.
• Important growth in
gas since 2000.
• Very high growth in
renewable energies
since 2000. 32% of
production.
10
 SPAIN
Source: Díaz, A.C.; Mosácula, C; Larrea, M;Álvarez, E. (2013) a partir de REE
Note: Peninsular system
Installed capacity by technology 2000-2012.
0
15,000
30,000
45,000
60,000
75,000
90,000
105,000
MW
Térmica
renovable
Térmica no
renovable
Solar
termoeléct
.
Solar
fotovoltaic
a
Hidráulica
R.E
Eólica

 BASQUE COUNTRY
Industry
42.3%
Transport
35.5%
Primary
sector
1.6%
Services
8.9%
Residential
11.7%
11
• Industry is the main
final consumer.
• Transport sector is
roughly one third.
• Important share of gas
in power generation
and industry.
Source: Own elaboration based on Marqués, J. (2014)
Energy consumption by sectors

2. ENERGY SCENARIOS
AND TRENDS
12

ENERGY SCENARIOS AND TRENDS
13
• WEC. Scenarios “funnel” different range of options.
“Symphony & Jazz”.
• SHELL. Contribution to strategic thinking. “Mountains &
Oceans”.
• WEO, IEA. Emphasis on policies. Current, New and 450
Scenario.
 SCENARIOS

Primary energy demand in selected regions and share
of global growth (Mtoe)
14
• Population growth
to 9 billion in 2040.
• 75% of population
will live in cities in
2040.
• Shift in energy
growth.
Source: WEO, (2013)
Note: Refer to the New Scenario
 SCENARIOS

World primary energy demand by fuel
15
• Continuous growth
in all types of
energy.
• Greater growth in
gas.
Source: WEO, (2013)
Note: Refer to the New Scenario
 SCENARIOS

Changes in energy demand by sector and fuel,
2011-2035
16
• Great growth in
power generation.
• Electricity and heat,
increase in industry,
buildings, and to a
lesser extent in
transport.
Source: WEO, (2013)
Data corresponds to the New Policies Scenario.
 SCENARIOS

Electricity production by fuel typem
17
• Different outcomes
depending on the
role of goverment
and markets.
• Biggest impacts of
CCGT plants in
“Symphony” and
solar and CCS in
“Jazz”.
Source: WEC, (2013).
 SCENARIOS

 TECHNOLOGY
18
• Drivers
Flexibility.
Efficiency.
Reduction of unit costs.

 TECHNOLOGY
Efficiency ranges for OCGTs and CCGTs
19
• Higher
efficiencies.
• Higher
temperatures and
various pressure
stages.
• Increase in size.
Source: ETP, (2013)

 TECHNOLOGY
State of the art steam conditions in PC plants
20
Source: ETP, (2012)
• Trend to higher
temperatures and
pressures.
• Ultra-supercritical
plants, already in
commercial
operation in
various countries.
• Importance of CCS.

 EUROPE
• 2007: 20/20/20 targets.
• 2009: “Energy/Climate Change Package” to meet
2007´s targets.
• 2014: A policy framework for climate and energy 2020
to 2030.
21

 EUROPEAN UNION. Key elements 2020 - 2030
• Greenhouse gas emissions target: 40% reduction in
2030 relative to 1990.
• Renewable energy target: 27%. From 21% to 45% in
electricity.
• Energy efficiency target: 25% of energy savings by 2030.
22

• Ensuring competition in integrated markets.
• Competitive and affordable energy for all consumers.
• Promoting security of energy supply.
23
 EUROPEAN UNION. Key elements 2020 - 2030

Evolution of the regulated costs
• Key issue: Increase of the
regulated costs mainly by
high volume of FIT of some
renewables.
• Electricity reform to solve
among others the tariff
deficit.
• 40% of the final price
related to policies such as
environmental or social.
Regulated activities deficitannual payment
Competencetransition costs/ELCOGÁSsince2007
OutsidePeninsulacompensation
Permanentcosts (CNE, OSand OMEL)
Energy efficiency and energy savingplan
Renewableenergies premium
Commercial management
Diversification and security of supply costs
Distribution
Transport
Source: CNE (2012b)Source: CNE (2012b)
Source: CNE (2012b)
24
 EUROPE. Spain

3. COMPETITIVENESS AND
ENERGY COSTS
25

COMPETITIVENESS AND ENERGY COSTS
26
 COMPETITIVENESS AND COMPETITIVE ADVANTAGE
COUNTRY A COUNTRY B
Product I 2 10
Product II 1 2
• "Absolute" cost advantage.
• Relative advantage and
comparative advantage.
• "Being different"
• Ability to compete
internationally.

Industries Energy/resources intensive
Source: Own elaboration based on Mckinsey & Company, (2012)
Note: The darker blue as well as higher numbers reflects more intensity to percentages save n labor and in value (in this case « density »).
27
 MANUFACTURING. Energy intensive industries
Industries R&D Labor Capital Energy Trade Value
Wood products 1 31 35 7 13 0,5
Refined petroleum, coke, nuclear 1 6 56 10 21 0,4
Paper and pulp 2 18 37 10 24 1
Mineral-based products 3 20 39 11 14 0,1
Basic metals 1 14 41 14 26 1

Structure of adquisitions (%) for the
manufacturing Industry
Source: Own elaboration based on Mas M. et al, (2010)
28
 MANUFACTURING. Shares of energy and services
Year Energy Manufactures Services
1980 16 61 23
1995 7 56 37
2005 10 48 42
• Increase share of services.
• Significant variations in
share of energy.

Share of energy-related cost among the production costs
Source: European Commission, (2014)
Note: C2451 and C2452 casting of iron and steel.
29
 MANUFACTURING. Shares of energy and services
• Iron and steel
3 – 23%
• Casting of
iron and steel
3 – 17%

Real unit Energy costs as % of VA. Manufacturing
sector (1995-2011)
30
 MANUFACTURING. Unit energy costs
• Unit energy cost/VA,
increase in most of the
regions since 2004.
• EU in line with USA but
above Japan.

Economic intensity of energy for industry.
(Energy expenditure/Industrial VA)
Source: Díaz Mendoza; Arocena, (2012)
31
 MANUFACTURING. Industry in the Basque Country
Average price of energy (€/toe)

Breakdown of economic intensity of energy
32
Economic intensity of energy (IEE) Price effect Quantity effect
• Energy efficiency
does not offset
price increases.
 MANUFACTURING. Energy in the Basque Country

International fossil fuel prices in the
Reference GEM-E3 scenario (2010 index)
33
 ENERGY PRICES. Effects on industry
Electricity and Gas price EU28
• EU forecast increasing prices of oil, gas and electricity.

Impacts of taxation on trade of energy intensive products
34
EU28
% change of exports % change of imports
2020 2050 2020 2050
Ferrous metals -7.85 -9.05 6.42 7.49
Non ferrous
metals
-5.75 -6.66 5.12 5.87
Chemical
products
-1.96 -2.36 1.94 2.29
Paper products -1.57 -1.81 1.37 1.56
Non metallic
minerals
-0.81 -1.02 0.42 0.48
Entire economy -0.22 -0.25 0.00 0.00

Impacts of taxation and generation mix on production of energy-intensive industries
35
(% change from
reference cumulatively
over 2015-2050)
Ferrous
metals
Non
ferrous
metals
Chemical
products
Paper
products
Non
metallic
minerals
Taxation case -2.98 -1.73 -1.17 -0.59 -0.86
Generation Mix -1.34 -0.88 -0.67 -0.50 -0.41

4. ON ENERGY PRICES
36

Oil price and oil demand trajectories
Source: WEO, (2013)
Note: Low Oil-Price case compared with the New Policies Scenario
ON ENERGY PRICES
37
 OIL
• Oil prices will
continue to be a key
reference for the
energy business.
• Oil prices are
expected to
be/remain high.
• Prices determined
globally at
international level.

Overview of global spot gas prices for LNG in the first half of 2013
(USD/mmbtu)
ON ENERGY PRICES
38
 GAS. Three main characteristics
• Prices are
determined
at regional
level.

Wholesale gas price formation mechanisms in Europe
Source: International Gas Union, (2013)
ON ENERGY PRICES
39
• Close relation
with oil in a
greater
percentage of
gas prices.

Traded volumes an European gas hubs
Source: Quarterly Report Energy on European Gas Markets, (2013)
ON ENERGY PRICES
40
• Hubs de gas
 Major
differences
USA vs
Continental
Europe.
 Development
of gas hubs in
Europe mainly
in UK.

Henry Hub natural gas spot prices
Source: EIA
ON ENERGY PRICES
41
 GAS. The Shale gas revolution
• Gas prices in the
4$/MMBtu level

Estimated Breakeven Gas Price with Varying
Condensate Ratio
Source: MIT, (2013)
ON ENERGY PRICES
42
• Tight oil and
condensates key
to lower the gas
prices.
• Trend is to
increase.

Natural gas prices by region in the New Policies
Scenario
Source: WEO, (2013)
ON ENERGY PRICES
43
• Differences USA,
Europe, Japan will
remain.
• USA improves
competitiveness, in
chemical and
manufacturing.
• Shale gas exploration in
Europe should be very
positive.

Evolution of prices in different organized markets
Source: BCG & Orkestra, (2013)
ON ENERGY PRICES
44
 GAS. Hubs of gas
• Price differences. Trend
to convergence.
• Hubs are key to increase
competition.
Transparency and
decoupling oil/gas.
• Gas interconnections
are essential.
• Iberian gas, a very
positive and necessary
initiative.

ON ENERGY PRICES
45
 ELECTRICITY
• Geography, infrastructure and mix make markets
“regional”.
• Fragmented markets in Europe.
• Costs/prices more local dependent.
• Development of European Exchanges and the Organized
Electricity Markets.

ON ENERGY PRICES
46
 ELECTRICITY
• Generation prices competitive. Some differences in
Europe.
• Trends toward Price Coupling.
• But infrastructure are key. Spain a “case” (3% vs 10%
minimum)
• Final price. Not only generation, transmission, distribution.
Environmental and social costs key in certain cases, i.e.
mainly Europe.

5. SOME CONCLUSIONS AND
SUGGESTIONS
47

SOME CONCLUSIONS AND CONCLUSIONS
• Energy demand will continue to grow, driven
by population, urbanization and economic
growth.
• Major changes are expected. Major role of
emerging economies.
• Fossil fuels will continue to have a great share
and influence in the energy world.
• Natural gas and renewable energies are
expected to have the greater growth. 48

• Electrification will gain pace in the following
years.
• Electricity mix will experience profound
changes. The mix of technologies will be much
influenced by the role of government and
markets.
• Flexibility and improvement in efficiency will
be the main drivers to develop technologies
and to decrease specific costs.
49

• Competitive advantage goes further that cost.
• Energy cost is key in those energy intensive
industries, (commodity type) which compete
mainly in terms of cost.
• Operational and energy efficiency is a “must”.
50

• Gas prices differences between USA, Europe
and Japan will probably remain. Gas prices will
be high in Europe and Japan as long as oil
price are high.
• In Europe shale gas development and the gas
hubs (particularly in Iberia) can play a
significant role for improving gas to gas
competition.
• Electricity prices may continue to increase if
the cost of social and environmental policies
are not addressed in the right way. 51

THANK YOU VERY MUCH!
ESKERRIK ASKO
Eloy Álvarez Pelegry
Director de la Cátedra de Energía.
Orkestra – Basque Institute of Competitiveness
F. Deusto
52

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