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.”