How Will We Meet the Growing Energy Demand?
>> Tuesday, May 1, 2012
Tony Hayward
We need to bring the best brains from a range of disciplines to bear on the complex issues of energy and the environment. And we need to do it in a logical, methodical, and realistic way. That's what should happen at the international level. And it's already happening here at MIT. What you're doing provides a great role model.
Let me explain how I see the challenges involved in energy. From my perspective, there are three distinct strands:
First, how to meet the world's growing demand for energy—€”in particular, how to satisfy the aspirations of people in emerging economies to achieve the living standards that we regard as commonplace in the mature economies of the west.
Second, how to meet this demand in a way that is environmentally sustainable.
Third, how to provide energy reliably in a world where there is a mismatch between where energy is produced and where it is consumed, and supplies are increasingly concentrated in a few key regions—€¦.
First, how to meet the world's growing demand for energy—€”in particular, how to satisfy the aspirations of people in emerging economies to achieve the living standards that we regard as commonplace in the mature economies of the west.
Second, how to meet this demand in a way that is environmentally sustainable.
Third, how to provide energy reliably in a world where there is a mismatch between where energy is produced and where it is consumed, and supplies are increasingly concentrated in a few key regions—€¦.
But advances only come about if the people involved adopt the right approach. Part of that approach is to be completely realistic about the "givens" that you start with—€”-and the tools you can use. If you are realistic about what can and can't be done, then the possibilities start to emerge.
The energy challenge is just like that. We have to accept the harsh realities of the situation in order to identify workable solutions.
The First Harsh Reality—€”
the Facts of Demand and Supply
the Facts of Demand and Supply
The starting point for any analysis of energy has to be the scale of demand. For the next several decades we are looking at strong, rising demand, driven by the extraordinary economic transformation of China, India and other developing countries.
Demand for energy is projected to rise by around 45 percent between now and 2030. That is roughly equivalent to adding two more United States to the world's consumption. Meeting that demand growth will require between $25 and $30 trillion of investment—€”or $1 trillion a year.
In terms of oil supply alone, the current production of around 85 million barrels a day will need to increase to around 100 million a day by 2030. Over half of that total will need to come from new sources as existing fields decline and demand grows. That's equivalent to adding four more Saudi Arabias to the world's production capacity.
Some may question whether so much of the growth needs to come from fossil fuels. But here it is vital that we face up to the harsh reality. These projections assume that current policies to promote emissions reduction are not only continued but tightened. And yet we still foresee up to 80 percent of energy coming from fossil fuels in 2030. This is because of the sheer scale of the world's energy industry—€”and the slow turnover in capital stock such as power stations and long lead times required to build assets such as nuclear facilities or renewable power at scale—€¦.
Renewable energy is an essential part of the future energy mix. We support that aim as a company with major investments in wind, solar and biofuels. But the harsh reality is that as of today, all of the world's wind, solar, wave, tide and geothermal energy accounts for only around 1 percent of total consumption. And looking ahead, on the most radical scenario put forward by the International Energy Agency, these forms of energy will only meet 5 percent of the total demand in 2030—€¦.
The Second Harsh Reality—€”
Tools and Technologies
Tools and Technologies
The answer cannot be the wholesale replacement of hydrocarbons with renewables. But neither can it be nuclear alone, carbon capture alone, biofuels alone or electric cars alone. All of these technologies are from time to time promoted in a way that suggests they are "the future." But there is no one miracle solution. The future of energy will not come from a quick fix but a broad mix. It will contain a range of energy types, for fuel, power and heat. At the moment the spotlight tends to lurch from one new technology to another and we risk overlooking some basic, commonsense solutions.
First, in almost any analysis of greenhouse gas mitigation, the greatest source of emissions cuts is energy efficiency. It is the least glamorous answer, but the down-to-earth solutions are frequently the best ones. The McKinsey Global Institute suggests that energy use could be cut by more than a fifth by 2020 and 8 billion tons of greenhouse gases avoided through energy efficiency investments that would more than pay for themselves.
This is borne out by BP's own analysis. In transport, for example, increasing the efficiency of the internal combustion engine can remove some 25 percent of CO2 emissions. Using full hybrid cars can remove a further 25 percent—€¦
Biofuels create tailpipe emissions, but avoid them upstream because their feedstock absorbs carbon. Electric cars avoid tailpipe emissions but create them upstream because they depend on power stations. Electric vehicles have promise but they will only reduce the carbon footprint of transport significantly if the source of power itself is decarbonized.
Biofuels present another instance where public debate is in danger of becoming derailed. There is naturally concern over the sustainability of biofuels. Do they compete with food? Are they produced in ways that damage ecosystems? The answer is "it depends on the biofuel." There is a vast range of biofuels, some good, some bad. In BP we are investing in biofuels that provide high energy and real environmental benefits without damaging nutrition or biodiversity. These are Brazilian ethanol made from sugar cane, the most efficient biofuel available today; biobutanol, which is a more advanced molecule than ethanol; and ligno-cellulosic fuels such as ethanol from energy grasses—€¦
We believe that biofuels will become very significant businesses in the coming years and that they could make up almost 10 percent of global transport fuel by 2030 and potentially as much as 20 percent of the U.S. gasoline pool. But of course transport is only part of the picture. Whereas transport has millions of small, moving units with lives of a decade or two, power involves relatively few large, static assets with lifetimes of 40 or 50 years.
The average coal-fired power station in the U.S. was built in 1964 and coal remains by far the biggest source of American electricity. Yet the harsh reality is that coal is the most carbon-intensive form of energy in widespread use. Coal generates 50 percent of America's power, but 80 percent of the resulting CO2 emissions. If we are to have any chance of transitioning to a lower-carbon world, coal will either have to be cleaned up or phased out.
So what are the alternatives?
Renewables will play an important role. Wind power for example can be cost-competitive in certain locations. In the U.S. it's been the fastest growing of all energy sources over the last couple of years. But the technology, infrastructure and regulatory framework for such alternative energies are expected to take decades to be deployed at scale.
Nuclear power supplies about 5 percent of global energy and it will take at least 10 years for its share to start rising. Even then it is debatable how far it will go, given issues of permitting, cost and security.
Coal plants can be fitted with carbon capture and storage, but the operative word is "can." There is still no commercial scale power plant with CCS in the world and its deployment is mainly limited to upstream energy projects. BP operates one of the world's largest existing CCS projects-fired project in California. But the challenges of CCS are such that I don't believe we'll see it used at commercial scale for at least another decade or more—€” and if and when it is established, it will give rise to very substantial costs.
There is of course another option—€”the cleanest burning fossil fuel and a source of energy that is plentiful in the U.S. And that's natural gas. Combined-cycle turbines powered by natural gas are quick and relatively inexpensive to build and can generate power at 60 percent efficiency. They emit less than half the greenhouse gases of a conventional coal plant per unit of power generated. Gas plants can be quickly switched on and off and therefore act as an ideal flexible back-up for renewables, such as wind and solar power which by their nature are intermittent.
But is there enough gas available? Absolutely yes. America has seen a quiet revolution in its gas fields in the last few years as new technologies have been introduced—€¦. By our estimates, the U.S. is now sitting on between 50 and 100 years of gas resources at current rates of consumption.
Globally the world is estimated to have around 60 years of gas. But new technologies could add many decades to that number. In 2008, gas was the only fossil fuel which saw its consumption increase in both OECD and non-OECD countries. If we could ramp up natural gas use we could retire the oldest and dirtiest coal plants. In fact BP has calculated that for a fraction of the costs of other options as much as 30 percent of the Waxman-Markey reduction target could be rapidly achieved through expanded use of natural gas.
The third harsh reality—€”policies
Let me be clear. The transition to a lower-carbon world will not take place without significant government intervention.
By far the most powerful policy intervention on energy would be establishing a price for carbon. For the market to meet the world's growing demand for energy in a sustainable way, governments need to set a stable and enduring framework—€”starting with a uniform price for carbon. A price that treats all carbon as equal—€” whether it comes out of a smoke stack or a tail pipe. Carbon pricing will make energy conservation more attractive and alternative energy more cost competitive. It will allow informed investment in fossil fuels and will encourage investment in the technology necessary to reduce the carbon they produce. This is already starting to happen in Europe where we have the EU's emissions trading system, and I believe it will happen in the U.S. —€¦
Once we can agree on a clear goal, then we need to face a further reality, which is that a carbon price alone will not be enough to reach the goal. Politically, the carbon price could never be set high enough to change some aspects of consumer behavior. The reality is that to make the kind of difference we're talking about, carbon pricing will need to be supported both by economic incentives and by regulation. Recent experience in the U.S. shows where regulation can help. Here fuel standards have helped improve energy efficiency in vehicles.
Thanks to federal CAFÉ requirements and technological breakthroughs by car manufacturers, America's transport fleet is much more fuel efficient than it used to be. And now the Obama administration is going further by demanding even tougher CAFÉ standards. Similar policies can and are being applied to energy efficiency in buildings. Here too, a combination of government regulation and incentives is in my view the way to go.
You may be wondering why a businessman is standing here advocating greater government intervention. But I don't think there's a contradiction. Adam Smith himself taught that the market works best when it is properly regulated by government.
And the scale and complexity of this particular challenge is different from the usual workings of a market economy. To mitigate climate change and secure reliable energy supplies, we need governments to create a roadmap and set the framework within which markets can deliver.
I would like to make one further point. These are not issues on which we have endless time to deliberate. It matters what we do over the next 25 years. There is real benefit to deciding on the most cost-effective remedies now—€”such as promoting energy efficiency, using gas in power and biofuels in transport. These options make economic sense today and will not cost the world more than it can afford.
As I indicated when I began, the problem is a complex one and the solution will have many elements. An international agreement. National policies. Mechanisms for transfer of technology and funds. A carbon price. New regulations. A mix of technologies. Changes in behaviours. And ongoing research into new possibilities.
[Some conclusions:]
—€ We need to be absolutely honest with ourselves about the harsh realities of energy. We must not put our faith in unrealistic solutions and overlook real possibilities for progress.
—€ The overall problem may be complex but there are some simple things that can be done right now to help solve it. Exploiting natural gas and promoting energy efficiency are two that stand out. We have not yet picked all the low-hanging fruit.
—€ Looking at innovation for the future, the really interesting things happen at the borders where different disciplines meet—€¦In particular there is real scope to apply some of the enabling technologies that have made such dramatic progress over the past decade—€” such as nanotechnology, superconducting and IT to the energy challenge—€¦.
—€ All of this depends on people. I'll wait a long time for an oil rig or a wind turbine to walk into my office with a bright idea. Human capabilities are needed to create the technological, commercial and political solutions to the energy challenge. That is why we need to invest in people and to focus on investing in the most important skills.
Our industry and its people are central to the way that civilization develops. This is not a sunset industry. This is a growth industry, one that has to provide continued access to energy at the same time as sustainable energy and secure energy.
