The global economic crisis is reshaping the energy system in a fundamental way, as extraordinary events have occurred in a very short time span. Six issues appear the most crucial in the current context: i) the discovery of shale gas, a transformational event which was also a consequence of high natural gas prices. According to a recent account, this discovery could potentially turn the US into a permanent net exporter, with dramatic implications on the market for liquefied natural gas (LNG) which now seeks markets when global demand is contracting. ii) the world demand continues to shift East – especially driven by China, which is increasing oil imports but also buying upstream assets and acquiring surplus capacity. iii) the promise of deepwater exploration is now unfolding, and – until recently – bound to continue its extraordinary rise. But the major tail-risk event of the BP oil spill is a game changer, and now deepwater development will be lower and more costly, public policies on conservation and environmental integrity will certainly come to the fore. iv) a consensus at all levels, while mainly from consumers and the policy sphere, is emerging that in the future the world should consume fewer hydrocarbons, even if the transitional dynamics are far from clear. v) the spectacular growth in oil-related financial instruments traded in exchanges and OTC markets, with the rise of two different sets of financial actors, active speculators and passive investors such as Exchange Traded Funds. The issue is what role do financial flows play in oil price determination and volatility, and how do they interact with fundamentals, geopolitics and player strategies, notably OPEC. vi) spare capacity is accumulating along several dimensions, including production and network capacity.
On the gas market, a consensus emerged that shale gas could be a real game changer, improving energy independence and thus security both in Europe and in the United States. However, there are also concerns about the marketability of the new resource and the environmental dangers posed to groundwater by the chemicals which are pumped to extract the shale gas. Another fundamental problem affecting the gas market today is the disconnect between the long-term price, which is mainly indexed to the price of oil and is rising, and the spot prices, which are affected primarily by the evolution of market fundamentals and are lowering under current supply and demand conditions.
In the current context of uncertainty about post-crisis global demand, unexpected discovery, and wrong price signals, planning long-term investing has become extremely difficult. On long-term trends in energy, a discussion took place about a new paradigm of growth without (or with much fewer) exhaustible resources in the context of increase in demand mainly by emerging countries. This transition, which will be slow but inescapable, will be driven by improvements in energy efficiency and large scale technological shifts. Interestingly, China appears in the frontline of this transition, given its huge investment in energy R&D. In the developed world, it is still unclear which players/countries will take a leading role. Sovereign states, albeit financially distressed, appear to be the most likely candidates.
Against the background of the most recent IEA energy scenarios and of the semi-failure of Copenhagen, the question is how to solve the big energy equation: how to make the system deliver abundant, cheap and sustainable (i.e. low carbon) energy for the long term. There was a wide agreement about the general objective and main strategy, namely pursuing a well-balanced and diversified energy mix and investing massively in technology and transports. However, the debate revolved around which policies and instruments are more appropriate especially in promoting renewables, which are obviously a fundamental part of the equation. The weak accord at Copenhagen set the scene. The objective of global emissions reduction by 2050 requests the development and dissemination of the new renewable and energy efficiency technologies, biofuels, hydrogen and carbon sequestration, such as nuclear power, both in the developed and emerging economies. The global financial gap in clean energy research, development and demonstration in order to reduce global emissions is about 16-20 billion dollars over the next 40 years. To close the gap, global energy policies and financial mechanisms have to be set up to support the technological transition of the emerging economies. And new rules should be adopted in the World Trade Organization to guarantee a level field in the global energy market, to support fair competitiveness in the deployment and dissemination of low carbon technologies.
At any rate, effective climate governance should hinge less upon binding international treaties, and more on other kinds of incentives still to be designed and implemented. The transition towards a low carbon energy system entails also a fundamental change in the structure of supply. Renewables tend to be associated with a distributed, small-scale generation. Pushing this model involves a downsizing of the traditional generation system based on utilities, in favor of decentralized production mainly from the industrial sectors combined with massive infrastructure deployment.
European and national policies to promote green business were also discussed. The EU has the most advanced system based on a carbon market with trading over the ETS. However, the carbon market is illiquid, highly volatile, and unable to provide the long-term signals needed in a real race for innovation. The incentive system, especially in Italy, is flawed, costly for the consumer, and ineffective in allocating investment to the most promising projects. Consensus emerged that private and public resources should be allocated to research for the development of breakthrough technologies.
On environmental impact, nuclear energy scores very well. It is not carbon free, but certainly less damaging for the climate than fossil fuels. Today’s third generation nuclear technology can operate at very high security levels. Also in terms of energy independence and security, nuclear seems like a good option, since uranium is widely available and represents only 6% of total operating costs. The main issue is cost: today nuclear energy is not competitive, the main reason being the huge fixed costs needed for the construction of the facilities, the consequent long-term horizon (40 years) of the required investment, and the strong exposure to regulatory risk. Italy faces an additional challenge in the deployment of nuclear energy – which is advancing spectacularly in China and other emerging countries – given the total ban on the industry established by a referendum which took place in 1987. While the business and current political climate could favor the resumption of nuclear activity, the industry will have to face a significant lag in terms of professional skills and human capital.