IEA chief economist: fossil giants risk ‘major strategic mistake’, by Leigh Collins, Recharge News, 27 June 2017, Updated 06 July 2017

IN DEPTH | Oil & gas companies need to rethink their corporate strategies as the world moves towards greener transport and heating, Laszlo Varro tells Leigh Collins

For most of its 43-year existence, the International Energy Agency (IEA) has been primarily concerned with the security of fossil-fuel supplies. Now it seems that its core task is helping the world wean itself off fossil fuels.

In a keynote speech at the Eurelectric convention in Estoril, Portugal, last week — which was followed by an exclusive interview with Recharge — the organisation’s chief economist Laszlo Varro was critical about the inertia of the leading oil & gas companies, and highlighted the need for electrification of transport, heating and cooling to the climate effort, as well as the necessity for political action on carbon pricing and fossil-fuel subsidies.

Clearly, increased electrification of the transport, heating and cooling sector would require the generation of huge amounts of clean wind and solar power.

“We have been quite outspoken… that it is a major strategic mistake by energy [ie, fossil-fuel] companies not to incorporate climate change and climate policy into its corporate strategy,” Varro told Recharge. “In fact, several major energy companies, like Total, are on the record as stating that they are assessing the resilience of their investment strategy to the [keeping climate change below] 2C pathway [as laid out in the Paris Agreement].

“Certainly, the future of fossil fuels under climate constraint is a topic that is very much part of our discussions with these companies.

“The large internationally active oil & gas companies are not climate sceptic, they have full awareness of the problems ahead,” he adds, pointing to Total’s purchase of solar manufacturer Sunpower and battery giant Saft, as well as the likes of Shell and Statoil investing in offshore wind projects.

Transport

Transport is one of the areas where oil & gas companies could lose out the most.

“There’s a reasonably clear understanding that in order to get to 2C, the two big pillars that we need to hit really hard are improving energy efficiency and vehicles,” Varro said. “Two thirds of the emissions reductions [needed]… are coming from energy efficiency and vehicles.

“By the middle of the century, the dominant propulsion source will have to be electric. Electrification of the vehicle sector will have to be more rapid than [what carmakers are promising]. We have to overachieve.

“I should warn that personal vehicles represent only less than one quarter of total global oil demand. Today oil demand is so rapid in the other parts of the transportation sector, like aviation, that if the market share of electric cars suddenly magically jumped to 50% — so every second car sold is electric, which will be easier said than done — global oil demand would still increase, driven by heavy-duty transport and other sectors.”

The current fleet of batteries simply do not provide enough power or range for trucks, trains, buses and planes, Varro explained. So what are the options?

“Some people promote the idea of biofuels, but we don’t really believe in that, because there are some hard biological constraints on how much sustainable biofuel you can have. And in fact, the amount of biofuels we have in our scenarios is already pretty high.”

Hydrogen-powered fuel-cell vehicles are more likely to be the long-term answer, he said. “We think that fuel cells have missed the boat for personal transport. So we don’t think that fuel cells will play a meaningful role in personal vehicles, but the high-energy density of hydrogen can come into the game for heavy-duty transport where you need much more energy stored in the vehicle.”

With some estimates saying that there will be as many as 18 million electric vehicles on the road by 2020, this segment will be able to offer more than just low-carbon travel — their batteries can help balance the grid.

“We see a really large-scale acceleration of the electrification of transport,” said Varro. “It’s a very interesting situation that the question is not going to be whether we have enough batteries — we will have enough batteries. We will have roughly ten times as much battery capacity as what we would conceivably need, even in the very worst case scenario to integrate a very high share of wind and solar into the power system.

“The question is, how will we use that very large battery capacity, which will be locked into the vehicle fleet? In our view, electric cars can be a fantastic variable asset to the power system, but they can also become part of the problem.

"Uncoordinated non-smart charging — Mr Smith running home and plugging his EV into his house at 7 o’clock in the evening — is part of the problem"

“Uncoordinated non-smart charging — basically Mr Smith running home and plugging [his electric car] into his house at 7 o’clock in the evening — that is part of the problem. A lot of electric car users do that today.

“At the same time, if you have optimised smart charging of electric vehicles, then you can do very, very interesting things, such as charge them during the day when solar output peaks.

“The inherent flexibility of electric cars will enable you to reduce capital investment into substations, it can bypass network bottlenecks and it can [reduce] the investment need into both [static] battery storage and PV generation.

“Our analysis is that investment in electric car chargers pays for itself. So if you roll out the dense electric-car charging network and you operate it smartly, then the net investment need is negative.”

Heating and cooling

Electrification of the heating and cooling sectors is another area that would contribute massively to the climate change effort — and be a huge boost to the renewables sector.

“Today, the buildings on Planet Earth consume 123 exajoules [34,166TWh] of energy [annually] — a lot of gas in the form of natural gas heating and electricity for air conditioning and so on,” said Varro.

“In our 2C pathway, total buildings-sector energy use declines somewhat. This is actually an incredibly radical assumption for energy efficiency, because we are talking about a planet where you would have two billion more people living in the world by the middle of the century.

“Urbanisation right now is running at the speed of a city of London every month — you take the people who leave their villages and move to Lagos, move to Mumbai, move to Jakarta, or move to Chongqing, that’s the equivalent of building a city of London every month.

 “Specifically in India, we’ve seen that around three quarters of the buildings that will stand in India in the middle of the century are yet to be built. So having this massive expansion of the building sector and a slight decline in buildings energy use means that we really, really have to get out of our comfort zone.

“It is not simply that we have to use energy more efficiently in buildings, the structure of the energy use is also completely changing. So the share of electricity in buildings’ energy use is 31% today, and this has to go to almost two thirds. So the majority of the energy use in buildings becomes electricity, that is both heat-pump heating and air-conditioning. This requires reconstruction of millions of building systems, but it also offers a major opportunity to integrate this potentially flexible electricity use into the power system.”

Carbon pricing

Another vital method for reducing climate change is to ensure that the price of fossil fuels includes its costs to the environment, and is not subsidised in any way.

But as Varro says, this will be far from easy.

“We are true believers in carbon pricing, so by all means use every political opportunity that you can get to reinforce carbon pricing,” he told Recharge. “Having said that, under realistic assumptions we are not going to have a situation where we have can have just one carbon price guiding the entire world.”

This means there would have to be several carbon prices in different parts of the world. But wouldn’t that mean that regions with a relatively high carbon price would be at a disadvantage in a global economy?

“This is a major issue for the energy-intensive heavy industry… and something policymakers must pay attention to,” he admitted. “But for a large measure of the European economy, I think that it is not a problem. The energy-intensive heavy industry is only around 2% of European GDP.”

"There has never been a single year for 100 years where fossil fuels did not receive more subsidies than renewables"

Varro said he wouldn’t expect that a higher carbon price in Europe would have a huge impact on the continent’s competitiveness. As he pointed out, BMW has already outsourced its energy-intensive aluminium forging to a company in Canada, due to the cheaper electricity prices there. “So if you buy a BMW, your BMW will contain around €50 worth of Canadian electricity — but it’s a €50,000 car.”

In terms of fossil-fuel subsidies, Varro is clear. “There has never been a single year for 100 years where fossil fuels did not receive more subsidies than renewables.”

Solving this problem will require “a lot of hard work”, as there is “no short-term magic solution”.

However, he says that some countries have already made considerable progress. Indonesia, Mexico and India have taken politically unpopular decisions to reform their fossil-fuel subsidy schemes, which resulted in higher prices for consumers’ petrol and diesel.

“We are very strongly contributing to the G20 in this respect and if you go to our website, you will see our recent work on fossil-fuel subsidy reform, for which we worked together with the Mexican and Indonesian governments, so there is a lot of knowledge-sharing and experience-sharing ongoing. And also there is a lot of work on reinforcing the political momentum behind this. It’s an ongoing programme. Progress is being made.”