energy: current situation and trends. from global to local

1

ENERGY: CURRENT SITUATION AND TRENDS. FROM GLOBAL TO LOCAL

71st WORLD FOUNDRY CONGRESSBilbao, 19th – 21st May, 2014

Eloy Álvarez PelegryDirector de la Cátedra de Energía.Orkestra – Basque Institute of CompetitivenessF. Deusto

2

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


3

1. AN OVERVIEW OF CURRENT SITUATION


4

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

5


WORLDWIDE


• Continuous growth in energy consumption.

• Growth below ten years average.

• Major share of hydrocarbons and fossil fuels.

Source: BP (2013)

World consumption

6

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.


Source: BP (2013)

Regional consumption patterns. 2012 (%)

7

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)

Gross Inland Consumption by Fuel. EU-27 (Mtoe)

8

EUROPE



• Increase in gas and renewables.

• Decrease in oil products.

• “Slow” decrease in solid fuels that maintain a high share.

Source: European Commission (2013)

Gross electricity generation by fuel. EU-27 (TWh)

9

SPAIN

Renewables7.0%

Gas16.9%

Coal1.4%Gases derived

from coal0.3%

Electricity23.1%

Petroleum products51.3%



• Final energy consumption in 2012 (89 Mtoe).

• 4% lower than in 2011.

• Highest share of petroleum products.

• Followed by electricity and gas.

Source: Own elaboration based on La energía en España (2012)

Final energy consumption in 2012

10



• Balanced mix.

• Important growth in gas since 2000.

• Very high growth in renewable energies since 2000. 32% of production.

SPAIN

Source: Díaz, A.C.; Mosácula, C; Larrea, M;Álvarez, E. (2013) a partir de REENote: Peninsular system

Installed capacity by technology 2000-2012.

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

0

15,000

30,000

45,000

60,000

75,000

90,000

105,000 Térmica renovableTérmica no renovableSolar ter-moeléct.Solar fo-tovoltaicaHidráulica R.EEólicaCiclo combi-nadoFuel/gasCarbónNuclearHidráulica

MW

BASQUE COUNTRY



Industry42.3%

Transport35.5%

Primary sector1.6%

Services8.9%

Residential11.7%

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

12

2. ENERGY SCENARIOS AND TRENDS


13


ENERGY SCENARIOS AND TRENDS

• 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

14



Primary energy demand in selected regions and share of global growth (Mtoe)

• 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

15



World primary energy demand by fuel

• Continuous growth in all types of energy.

• Greater growth in gas.

Source: WEO, (2013)Note: Refer to the New Scenario

SCENARIOS

16



Changes in energy demand by sector and fuel, 2011-2035

• 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

17



Electricity production by fuel typem • 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

18



TECHNOLOGY

• Drivers

Flexibility.Efficiency.Reduction of unit costs.

19



TECHNOLOGY

Efficiency ranges for OCGTs and CCGTs • Higher efficiencies.

• Higher temperatures and various pressure stages.

• Increase in size.

Source: ETP, (2013)

20



TECHNOLOGY

State of the art steam conditions in PC plants

Source: ETP, (2012)

• Trend to higher temperatures and pressures.

• Ultra-supercritical plants, already in commercial operation in various countries.

• Importance of CCS.

21

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.



22

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.



23

• Ensuring competition in integrated markets.

• Competitive and affordable energy for all consumers.

• Promoting security of energy supply.


EUROPEAN UNION. Key elements 2020 - 2030


24

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 deficit annual payment

Competence transition costs/ELCOGÁS since 2007

Outside Peninsula compensation

Permanent costs (CNE, OS and OMEL)

Energy efficiency and energy saving plan

Renewable energies premium

Commercial management

Diversification and security of supply costs

Distribution

Transport

Source: CNE (2012b)Source: CNE (2012b)

Source: CNE (2012b)

EUROPE. Spain


25

3. COMPETITIVENESS AND ENERGY COSTS


26

COMPETITIVENESS AND ENERGY COSTS


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.

27

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 »).



MANUFACTURING. Energy intensive industries

Industries R&D Labor Capital Energy Trade ValueWood products 1 31 35 7 13 0,5

Refined petroleum, coke, nuclear 1 6 56 10 21 0,4Paper and pulp 2 18 37 10 24 1

Mineral-based products 3 20 39 11 14 0,1Basic metals 1 14 41 14 26 1

28

Structure of adquisitions (%) for the manufacturing Industry

Source: Own elaboration based on Mas M. et al, (2010)



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.

29

Share of energy-related cost among the production costs

Source: European Commission, (2014)Note: C2451 and C2452 casting of iron and steel.



MANUFACTURING. Shares of energy and services

• Iron and steel 3 – 23%

• Casting of iron and steel 3 – 17%

30

Real unit Energy costs as % of VA. Manufacturing sector (1995-2011)

Source: European Commission, (2014)



MANUFACTURING. Unit energy costs

• Unit energy cost/VA, increase in most of the regions since 2004.

• EU in line with USA but above Japan.

31

Economic intensity of energy for industry. (Energy expenditure/Industrial VA)

Source: Díaz Mendoza; Arocena, (2012)



MANUFACTURING. Industry in the Basque Country


Average price of energy (€/toe)

32

Breakdown of economic intensity of energy




Economic intensity of energy (IEE) Price effect Quantity effect

• Energy efficiency does not offset price increases.

MANUFACTURING. Energy in the Basque Country

33

International fossil fuel prices in the Reference GEM-E3 scenario (2010 index)




ENERGY PRICES. Effects on industry

Electricity and Gas price EU28


• EU forecast increasing prices of oil, gas and electricity.

34

Impacts of taxation on trade of energy intensive products




EU28% change of exports % change of imports

2020 2050 2020 2050Ferrous metals -7.85 -9.05 6.42 7.49Non 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 1.56Non metallic minerals

-0.81 -1.02 0.42 0.48

Entire economy -0.22 -0.25 0.00 0.00


35

Impacts of taxation and generation mix on production of energy-intensive industries




(% 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


36

4. ON ENERGY PRICES


37

Oil price and oil demand trajectories

Source: WEO, (2013)Note: Low Oil-Price case compared with the New Policies Scenario

ON ENERGY PRICES


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.

38

Overview of global spot gas prices for LNG in the first half of 2013 (USD/mmbtu)


ON ENERGY PRICES


GAS. Three main characteristics

• Prices are determined at regional level.

39

Wholesale gas price formation mechanisms in Europe

Source: International Gas Union, (2013)

ON ENERGY PRICES



• Close relation with oil in a greater percentage of gas prices.

40

Traded volumes an European gas hubs

Source: Quarterly Report Energy on European Gas Markets, (2013)

ON ENERGY PRICES



• Hubs de gas

Major differences USA vs Continental Europe.

Development of gas hubs in Europe mainly in UK.

41

Henry Hub natural gas spot prices

Source: EIA

ON ENERGY PRICES


GAS. The Shale gas revolution

• Gas prices in the 4$/MMBtu level

42

Estimated Breakeven Gas Price with Varying Condensate Ratio

Source: MIT, (2013)

ON ENERGY PRICES



• Tight oil and condensates key to lower the gas prices.

• Trend is to increase.

43

Natural gas prices by region in the New Policies Scenario

Source: WEO, (2013)

ON ENERGY PRICES



• Differences USA, Europe, Japan will remain.

• USA improves competitiveness, in chemical and manufacturing.

• Shale gas exploration in Europe should be very positive.

44

Evolution of prices in different organized markets

Source: BCG & Orkestra, (2013)

ON ENERGY PRICES


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.

45

ON ENERGY PRICES


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.

46

ON ENERGY PRICES


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.

47

5. SOME CONCLUSIONS AND SUGGESTIONS


48


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.

49



• 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.

50



• 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”.



• 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

52

THANK YOU VERY MUCH!

ESKERRIK ASKO

Eloy Álvarez PelegryDirector de la Cátedra de Energía.Orkestra – Basque Institute of CompetitivenessF. Deusto

energy: current situation and trends. from global to local

Economy & Finance

trends energy

energy growth

local energy scenarios

world of energy

europe energy

worldwide energy

energy mix

energy efficiency