These are just some notes I jotted down while taking an online course, primarily to help me remember the key ideas and valuable takeaways. They’re not meant to cover everything or act as a full summary. If you find them interesting or helpful, maybe they’ll nudge you to check out the course too.
The “Politics and Economics of International Energy” course is offered by the Paris Institute of Political Studies (Sciences Po) on Coursera. The course is spread over 8 weeks. The course provides a background on the global trends in energy consumption and production, the various energy resources and energy technologies available and offers a broad global view of energy issues to better understand the social, economic and political impact of the current developments and policies in the energy industry. The course also provides excellent case studies of various energy projects including statistical information about global energy trade and distribution. This review is based on the course that contained course material prepared around 2013, so some of the projections may no longer reflect the latest data available, however, it should serve as a useful learning reference.
A few notes
- Note 1: Energy Sources and Global Consumption – There are 6 energy sources considered – Oil, Natural Gas, Coal, Nuclear Energy, Hydroelectric and Renewables. In 2014, Oil was the largest energy source for North America, South and Central America, Europe and the Middle East. Natural Gas is the largest energy source for Russia and Central Asia and Coal remains the largest energy source for the Asia Pacific region. Followed by the largest energy sources, Natural Gas is the second significant energy source in North America, Russia & Central Asia, while it is Hydroelectric energy in South and Central America and Nuclear energy in Europe.
- Note 2: Energy Poverty – In 2015, it was estimated that there are 1,250 million people that do not have access to electricity. In 2010, World Economic Forum defined Energy Poverty as the lack of access to sustainable modern energy services and products. Energy poverty exists primarily in rural areas like the countryside, where there is little access to commercial energy. In addition, the income per capita for these regions is very low and people rely primarily on traditional biomass to satisfy their energy consumption.
- Note 3: Oil formation and extraction – Oil is a mix of hydrocarbons that are liquid under atmospheric conditions. Being liquid under atmospheric allows for easier transportation and containment of oil in tanks making it one of the greatest advantages of oil as an energy source. There are three possible oil formations:
- First, oil rises towards the surface and accumulates in porous rocks which are capped by rocks which are not porous. This oil formation is found on land (onshore) or the sea bed (offshore). It is very easy to extract by drilling a well to perforate the cap rock, allowing the oil, which is under pressure and at higher temperature to rise to the surface.
- Second, oil reaches very close to the surface, at which point, the lighter hydrocarbon molecules evaporate into the atmosphere leaving behind heavier molecules, which are called extra-heavy oil and bitumen. This oil formation is solid and usually mixed with sands. The oil is extracted by methods like strip mining where hot water is used to separate the oil from the sand.
- Third, oil is formed but it remains trapped below the surface in a rock that is not porous. This is shale oil. The oil is extracted by hydraulic fracturing or fracking, where the rock around the well formation is fractured, causing veins to form in the rock that allows the trapped oil in the rock to flow into the well and come to the surface.
- Note 4: Oil exploration – Seismic technology is used to look for oil below the earth’s surface. A seismic survey involves creating small explosions below the earth’s surface that generate small shock waves. These shock waves penetrate the Earth and create an echo. The echo gives us an image of what is the formation below the surface of the earth, allowing us to identify areas where oil may be present.
- Note 5: Reserves – “Reserves are those quantities of petroleum which are anticipated to be commercially recovered from known accumulations from a given date forward.” There is no method to measure the exact amount of oil in a reserve and hence, all reserves are estimated with some degree of uncertainty. Depending on the relative degree of uncertainty, reserves are categorized into Proven, Probable and Possible. By analysis of geological and engineering data, when the quantities of oil from a known reservoir can be estimated to be commercially recoverable with at least a 90% probability or P90, these are called proven reserves. Probable reserves or P50 reserves have at least a 50% probability of being produced in commercial conditions from known reservoirs and possible reserves, also called P10, have at least a 10% probability of being produced in commercial conditions. In addition, there are also some resources that we may not have discovered yet and these are called speculative resources.
- Note 6: Natural Gas and its advantages – Burning gas generates half as much CO2 emissions as burning coal. The efficiency of gas to produce electricity can be much higher, up to 60 – 65% efficiency compared to oil, coal or nuclear which is around 40-45%. Gas also has a clean flame and is ideal for certain industrial processes where you need a clean flame. The drawbacks of gas are (a.) it has a low energy density and is therefore not a good medium to store energy (b.) there is a high cost associated with transportation and it is economical to consume gas close to the point of production.
- Note 7: Gas Networks and Transportation – Gas produced is used either to meet residential demand or for power generation. It is very convenient to have gas in the homes, provided there is a network in place. In countries where there is no network for residential distribution, the gas can be taken to large power plants to generate electricity for distribution. While pipelines can be used for short distances, as the size of the pipeline increases, the cost increases less rapidly, until you reach the largest size which is currently in use, the 56-inch pipeline. That allows you to transport gas over significant distances of close to 3000 miles. For distances exceeding 3000 miles, gas is transported as Liquified Natural Gas (LNG). LNG allows more flexibility in the transport of gas, for example, LNG is used for exporting gas from the Middle East to countries like Japan and South Korea using ships called LNG carriers.
- Note 8: Gas contracts – The high initial cost of both pipelines and LNG has implications for the kind of contracts that are signed for imports of gas. The sellers of gas must be guaranteed that there will be a market for gas before they engage in the investments necessary to take it to the market. On the other hand, if there are no investments to supply that market, the buyers will not resort to gas because they are not guaranteed that the supply will be there. Hence, supply and demand have to be sold simultaneously and this has normally been addressed through contracts that incorporate a “take or pay” clause. This is a contract where the buyer takes the market risk, while the seller takes the price risk. The buyer guarantees to pay for the gas even if there is not enough demand, taking the market risk and guaranteeing the existence of a market. The seller takes the price risk by signing long-term contracts of 30-35 years, where there is no certainty of the future price. Traditionally the sellers will resort to some kind of oil indexation to guarantee the competitiveness of their gas.
- Note 9: Geopolitics of Gas – There are three separate gas market regions in the world: East Asia, North America and Europe. The North American market is confined to the US, Canada and Mexico. The East Asian market is based on LNG and is more flexible as it doesn’t involve pipelines. The European market is based on pipelines and is mostly based on exports from Russia and North Africa, which are complicated due to the geopolitical issues along the route that the pipelines take through transit countries to reach Europe [1]. The European market also includes Norway, the Netherlands and the UK gas producers.
- Note 10: Carbon Tax – A carbon tax is a tax on all carbon emissions i.e greenhouse gases. The advantage of a carbon tax is that the price is fixed by the government but the tax may not be sufficient to guarantee the outcome to reduce carbon emissions. In contrast, a cap and trade system is based on establishing a ceiling, beyond which companies pledge not to emit carbon emissions. Companies buy the permit to emit up to the cap from the government and the price of that permit will depend on demand and supply. You can either have certainty of price with a carbon tax or certainty of outcome with cap and trade but cannot have both at the same time. Most economies are in favour of a carbon tax.
- Note 11: Renewal Energy Mix – Renewable energy sources can be divided into two broad categories depending on whether their generation can be fully controlled and those that cannot. For example, Hydro and Biomass are renewable energy sources that can be generated when required. On the other hand, we may be able to forecast but we cannot fully control the generation of Solar and Wind energy. Renewable energy sources are sometimes also distinguished based on whether the energy source is used for electricity generation or heat generation. It should be noted that heat generated above 400 degrees centigrade can be used to produce steam and generate electricity with steam turbines. At lower temperatures, heat generated can be used for heating water for domestic or industrial use. Heat production accounts for 71% of the total use of renewable energy sources, electricity generation is approximately 20% and the remaining is the utilization of biofuels and geothermal energy. Around 2013, hydroelectricity accounted for 75% of total electricity generated out of renewable sources. Future scenarios indicate that hydroelectricity will remain important but will decline and be replaced with wind energy that will start to increase in importance and contribute more than half of the contribution from hydroelectricity.
- Note 12: Biofuels – Biofuels, are liquid fuels and the only renewable source used directly for transportation. A good example of biofuel use is ethanol from sugarcane production in Brazil. If ethanol costs less than 70% of gasoline, then it is convenient to fill up your car on ethanol in Brazil. The other alternative biofuel is to produce essentially diesel out of biomass. This is called biodiesel and is oil produced out of rapeseed oil or palm oil.
- Note 13: Geothermal Energy – Geothermal energy is a source of heat which can be used both for heating and power generation. Below the Earth’s crust is molten lava at a very high temperature. The deeper under the surface of the Earth, the higher temperatures. By drilling a sufficiently deep hole in the earth’s surface and sending water down this hole, the water can be transformed into steam. The steam is circulated back to the surface and this is harvested either for heating or for electricity generation.
- Note 14: Solar Energy – A simple method of harnessing solar energy for thermal energy is the use of boxes or pipes painted black to absorb more of the sun’s light and generate heat. Solar energy for electricity generation is achieved using photovoltaics or concentrated solar power. Photovoltaics use multiple panels that are composed of silicon crystals which generate an electric current when exposed to light. Photovoltaic panels will produce electricity when there is light and do not need direct sunlight. When it is dark and at night, it does not produce any electricity. A concentrated solar power plant contains a large array of mirrors to focus the sunlight on a target and therefore requires clear skies and directional sunlight for adequate reflection of sunlight from the mirrors. So you have this requirement of directional sunlight. The target is a vessel that contains either an oil or a salt that melts under the high temperature generated in the vessel. The high temperature is stored in the vessel and this allows heat exchange and electricity production to continue for some time after dark. However, the mirror must always be facing the sunlight directly for the system to work.
- Note 15: Wind Energy – Wind energy is generated by wind turbines, which can be installed onshore or offshore. Offshore wind turbines are located in the sea and have a larger generation capacity than onshore wind turbines since the wind is normally stronger and more regular offshore. However, the cost of installation offshore is much higher than onshore making offshore wind turbines less economically viable. In several European countries, wind energy receives significant government support with lots of subsidies, enabling rapid expansion of offshore wind farms.
- Note 16: Hydroelectricity – Hydroelectricity is the most important source of electricity from renewables and it has several advantages because it is always available and can be ramped up whenever required. However, it depends heavily on the geographical location since a country with a flat terrain without mountains or desert land cannot generate hydroelectricity. Therefore hydroelectricity has limited potential for further expansion. In addition, whenever a river passes through many countries, this creates controversy and requires some kind of international agreement and understanding between the countries when it comes to the generation of hydroelectricity. Brazil, Norway, Austria and Switzerland are countries that have geographically favourable conditions and have successfully harnessed the potential of hydroelectricity to generate more than 40% of their electricity demands.
- Note 17: Energy Grid Integration – Non-Flexible Power Generation – The power grid needs to be able to produce electricity at the moment when it is demanded. If demand on the grid exceeds supply, the grid will collapse, causing extensive blackouts. The demand on the grid is not stable. The demand that is always there and needs to be satisfied throughout the year is called baseload. For baseload, coal fire or nuclear power plants are used to meet the baseload since these power plants do not have much flexibility in terms of ramping up or down the power generation. Their high capital cost can be justified if they can generate energy for most of the year.
- Note 18: Energy Grid Integration – Flexible Power Generation – The mid-merit level [2]or mid-priced electricity is the electricity demand which is higher than the baseload but lower than the peak load. This demand is present usually during the day and early evening and is met by load-following power plants that operate in direct response to changing demand for power supply. They either shut down or ramped down significantly during the night and early morning. Combined cycle gas turbines are specially adapted for satisfying such medium load demands and are more flexible than coal or nuclear power plants. Since they use gas, a more expensive fuel, it is more economical to not run them all the time. In addition, the grid also has peak loads when the demand is more than the intermediate loads. These loads are present for very few hours every year depending on the time of the day or the weather and are very unpredictable. Peak load demand is met by power plants such as open-cycle gas turbines which are very flexible and have very fast response times. Even though they use gas and are not as efficient as combined cycle gas turbines, open-cycle gas turbines can ramp up power quickly, require lower capital investment and are expected to operate only for a few hours over the entire course of the year making them the most economical solution to support peak demands. Where available, hydroelectric power plants can also have fast start-up times and can be used to support baseloads, intermediate loads and peak demands. Their ability to support baseloads depends on the continuous supply of water.
- Note 19: Energy Grid Integration – Intermittent Renewable Power Combination – Intermittent renewables like solar and wind can contribute to the baseload. Since their supply cannot be controlled they are connected to the grid for immediate distribution and utilization. These intermittent renewables reduce the amount of the baseload to be supplied by coal or nuclear power plants. However, for renewables to have a larger share of the baseload, the flexibility of the grid is crucial. Grid combinations using open gas turbines or a hydro plant will work much better than nuclear or coal when intermittent renewables are part of the energy mix when compared to coal or nuclear energy. This is because you can easily increase the amount of electricity when the supply of renewable energy drops. In different scenarios produced by the International Energy Agency (IEA)[3], one case considers decarbonization to be reached in 2050 primarily due to a significant share of nuclear power. This scenario considers 18% of the energy demand to be met by intermittent renewables. In another scenario considered by the IEA, intermittent renewables reach more than 30% of the demand but this requires an extremely flexible system which is very challenging to implement and may only be possible in some countries like Brazil and Norway.
- Note 20: Nuclear Energy – Global Perspective – Historically, nuclear energy plants were operating in the United States, Western Europe and Russia. In the more recent years, some Western Europe countries like Germany and Switzerland are moving away from nuclear power and most new plants are being built in Asian countries. It is important to point out that the knowledge and experience of how to control the nuclear power plant will shift to the regions where new plants are built. The technology developments and the most advanced technologies will be developed by countries that build the new plants. In 2013, there were a total of 437 nuclear power plants in operation. The top three countries operating nuclear power plants were the United States, France and Japan. The other countries with nuclear power plants are Russia, South Korea, China and India. In Europe, France obtains nearly 75% of total electricity from nuclear power, while countries like Belgium and Hungary obtain around 50% and Sweden and Ukraine depend on nuclear power plants for more than 40% of electricity. It is also interesting to note that nuclear energy is the only form of energy for which we have an international organisation – the International Atomic Energy Agency.
- Note 20: Nuclear Energy – Cost determinants – The cost of nuclear energy depends on four determinants – how new nuclear power plants are built – overnight cost, the cost of capital, the capacity factor of the plant and the economic lifetime of the plant. An improvement in each of these factors will contribute to the reduction of the long-run marginal cost of electricity. According to the IEA analysis, the base case long-range marginal cost of nuclear energy was 66 dollars per megawatt-hour. The overnight cost is the cost of a nuclear plant if we assume that it takes no time to build it, meaning that there is no interest to pay over the construction period. It has become more expensive to build nuclear plants today due to the increased safety features and regulatory requirements that need to be met. The longer the construction time the higher the long-run marginal cost of electricity. The overnight cost also varies in different parts of the world due to differences in design, quality and regional conditions. The cost of capital is the minimum remuneration that investors expect for the investment and the risk they undertake to provide capital for building the nuclear plant. If the plant is being built or sponsored by a private company, it is very likely to be high because a private company has to take a loan, make interest payments and even pay dividends to the shareholders. On the other hand, if the build is state-owned or guaranteed by the state, then, the cost of capital can be substantially lower. The typical plant operates for 40 years and this is the economic lifetime. If the operational life can be increased beyond 40 years, it will reduce the long-run marginal cost.
- Note 20: Security of Energy Supply – After the interruption of Russian gas flow to Europe in January 2009, the European Union approved a new set of legislation dealing with the security of gas supplies, where a test called the “N-1” standard was implemented. The “N-1” standard says that each EU member must be able to satisfy its highest demand, equal to the two coldest months of January and February, that was experienced in the past 20 years. To pass this test, each EU member country must invest in additional capacity to ensure that they can meet the national demand even when they lose their most important connection of gas from outside the EU. This could be achieved by installing new re-gasification plants, there are not normally utilised but are available in case LNG imports are required from other parts of the world. Another solution could be to invest in new pipelines within the EU countries or to create the possibility of reverse flow in existing pipelines between EU countries.
A few useful links
- Copy of Natural Gas Maps – Google
- Merit order – Wikipedia
- International Energy Agency (IEA) website
- David MacKay – A reality check on renewables – Ted Talk
- Marginal Revolution University – Youtube channel – An excellent resource for learning about the fundamental concepts in economics.
- NuScale – A company offering scalable advanced nuclear technology for electricity generation.