Lloyds of London just issued a White Paper on Sustainable Energy Security. It is a paper addressed to businesses and it says everything I’ve been saying for the last couple of years.When I attended those two Peak Oil conferences, it was because I wanted to learn how to position my business for the future. And I did.
Here is a formal road map that other businesses can follow. Modify the information to allow for Hawaiian conditions.
Strategic risks and opportunities for business
Executive summary
1. BUSINESSES WHICH PREPARE FOR AND TAKE ADVANTAGE OF THE NEW ENERGY REALITY WILL PROSPER – FAILURE TO DO SO COULD BE CATASTROPHIC
Energy security and climate change concerns are unleashing a wave of policy initiatives and investments around the world that will fundamentally alter the way that we manage and use energy. Companies which are able to plan for and take advantage of this new energy reality will increase both their resilience and competitiveness. Failure to do so could lead to expensive and potentially catastrophic consequences.
What if the EPA declares CO2 a dangerous gas? What is plan B? C?
2. MARKET DYNAMICS AND ENVIRONMENTAL FACTORS MEAN BUSINESS CAN NO LONGER RELY ON LOW COST TRADITIONAL ENERGY SOURCES
Modern society has been built on the back of access to relatively cheap, combustible, carbon-based energy sources. Three factors render that model outdated: surging energy consumption in emerging economies, multiple constraints on conventional fuel production and international recognition that continuing to release carbon dioxide into the atmosphere will cause climate chaos.
This means that people will need to bite the bullet and accept the high cost of renewable fuels. But what if we have the opportunity for cheap renewable electricity? And what if this means that we can elevate the living standards of the host Hawaiian culture? Should we turn it down, or should we fight for it?
Geothermal is cheap and renewable and, compared to fossil fuels, bio fuels and bio mass alternatives, it is environmentally friendly. Of course we should fight for it!
3. CHINA AND GROWING ASIAN ECONOMIES WILL PLAY AN INCREASINGLY IMPORTANT ROLE IN GLOBAL ENERGY SECURITYChina and emerging Asian economies have already demonstrated their weight in the energy markets. Their importance in global energy security will grow. First, their economic development is the engine of demand growth for energy. Second, their production of coal and strategic supplies of oil and gas will be increasingly powerful factors affecting the international market. Third, their energy security policies are driving investment in clean energy technologies on an unprecedented scale.
China in particular is also a source country for some of the critical components in these technologies. Fourth, as ‘factories of the world’, the energy situation in Asian countries will impact on supply chains around the world.
4. WE ARE HEADING TOWARDS A GLOBAL OIL SUPPLY CRUNCH AND PRICE SPIKE
Energy markets will continue to be volatile as traditional mechanisms for balancing supply and price lose their power. International oil prices are likely to rise in the short to mid-term due to the costs of producing additional barrels from difficult environments, such as deep offshore fields and tar sands. An oil supply crunch in the medium term is likely to be due to a combination of insufficient investment in upstream oil and efficiency over the last two decades and rebounding demand following the global recession. This would create a price spike prompting drastic national measures to cut oil dependency.
With every year that goes by, the world’s oil fields are aging at the rate of 4 million barrels per day. Saudi Arabia produces only 10 million barrels per day. This means that every 2½ years we need to have found the equivalent of a Saudi Arabia. Are we doing this? NO! We have not found giant oil fields like Saudi Arabia since the 1970s. We have not found enough to make up the natural aging of oil fields.
It is estimated that we will only be able to produce half of the 4 million barrel decline. This means that in less than two years, once our extra capacity runs out, we will be short two million barrels per day.
Supply constraints will drive up the price of oil.
“A supply crunch appears likely around 2013…given recent price experience, a spike in excess of $200 per barrel is not infeasible.” Professor Paul Stevens, Chatham House.
5. ENERGY INFRASTRUCTURE WILL BECOME INCREASINGLY VULNERABLE AS A RESULT OF CLIMATE CHANGE AND OPERATIONS IN HARSHER ENVIRONMENTS
Much of the world’s energy infrastructure lies in areas that will be increasingly subject to severe weather events caused by climate change. On top of this, extraction is increasingly taking place in more severe environments such as the Arctic and ultra-deep water. For energy investors this means long-term planning based on a changing – rather than a stable climate. For energy users, it means greater likelihood of loss of power for industry and fuel supply disruptions.
6. LACK OF GLOBAL REGULATION ON CLIMATE CHANGE IS CREATING AN ENVIRONMENT OF UNCERTAINTY FOR BUSINESS, WHICH IS DAMAGING INVESTMENT PLANS
Without an international agreement on the way forward on climate change mitigation, energy transitions will take place at different rates in different regions. Those who succeed in implementing the most efficient, low-carbon, cost-effective energy systems are likely to influence others and export their skills and technology. However, the lack of binding policy commitments inhibits investor confidence. Governments will play a crucial role in setting policy and incentives that will create the right investment conditions, and businesses can encourage and work with governments to do this.
7. TO MANAGE INCREASING ENERGY COSTS AND CARBON EXPOSURE BUSINESSES MUST REDUCE FOSSIL FUEL CONSUMPTION
The introduction of carbon pricing and cap and trade schemes will make the unit costs of energy more expensive. The most cost-effective mitigation strategy is to reduce fossil fuel energy consumption. The carbon portfolio and exposure of companies and governments will also come under increasing scrutiny. Higher emissions standards are anticipated across many sectors with the potential for widespread carbon labelling. In many cases, an early capacity to calculate and reduce embedded carbon and life-cycle emissions in operations and products will increase competitiveness.
8. BUSINESS MUST ADDRESS ENERGY-RELATED RISKS TO SUPPLY CHAINS AND THE INCREASING VULNERABILITY OF ‘JUST-IN-TIME’ MODELS
Businesses must address the impact of energy and carbon constraints holistically, and throughout their supply chains. Tight profit margins on food products, for example, will make some current sources unprofitable as the price of fuel rises and local suppliers become more competitive. Retail industries will need to either re-evaluate the ‘just-in-time’ business model which assumes a ready supply of energy throughout the supply chain or increase the resilience of their logistics against supply disruptions and higher prices. Failure to do so will increase a business’s vulnerability to reputational damage and potential profit losses resulting from the inability to deliver products and services in the event of an energy crisis.
We have changed our business model to give our customers the opportunity to shorten their supply chain. And we have included many small farmers in order to make ourselves more resilient, which benefits our customers (the retailers).
With our hydroelectric plant, we will immunize ourselves from the increasingly risky and unstable fossil fuel infrastructure.
HECO should go to geothermal faster, rather than slower, in order to accomplish the same thing.
9. INVESTMENT IN RENEWABLE ENERGY AND ‘INTELLIGENT’
INFRASTRUCTURE IS BOOMING. THIS REVOLUTION PRESENTS HUGE OPPORTUNITIES FOR NEW business PARTNERSHIPS
The last few years have witnessed unprecedented investment in renewable energy and many countries are planning or piloting ‘smart grids’. This revolution presents huge opportunities for new partnerships between energy suppliers, manufacturers and users. New risks will also have to be managed. These include the scarcity of several essential components of clean energy technologies, incompatible infrastructures and the vulnerability of a system that is increasingly dependent on IT.
Many opportunities will come up. Will we recognize them? If we expect this to happen, we can.
“Peak oil presents the world with a risk management problem of tremendous complexity.” US Department of Energy 2007. A vast array of studies have attempted to predict the time at which global oil production will reach a maximum level, from which point it will go into irrevocable decline. Some suggest that this ‘peak’ has already occurred, while others maintain it is either impossible to predict or shows no sign of appearing. Looking further than a decade into the future presents many uncertainties, including: the availability and cost of extraction technologies; substitute technologies; pricing systems in major economies; and carbon legislation. A comprehensive two-year study by the UK Energy Research Centre completed in August 2009 found that a peak in conventional oil production before 2030 appears likely, and there is a significant risk of a peak before 2020. With average rates of decline from current fields, the report says that just to maintain current production levels would require the equivalent of a new Saudi Arabia coming on-stream every three years. What’s more, giant fields pass peak production levels and there is a shift to smaller, more difficult to produce fields that have faster depletion rates meaning the rate of decline will accelerate.
Better to be safe than sorry. Plan on oil spikes in two years.
Rare earth metals (REMs) are a group of 17 elements whose unique properties make them indispensable in a wide variety of advanced technologies. They are an important example of material scarcity in the ‘third energy revolution’, because they are indispensable for so many of the advanced technologies that will allow us to achieve critical national objectives. As such, disruption to their global supply is a new energy security concern. Their production, alongside the metals and magnets that derive from them, is dominated by one country, China. At present, China produces 97% of the world’s rare earth metals supply, almost 100% of the associated metal production, and 80% of the rare earth magnets. REMs such as neodymium are the world’s strongest magnets and are key components for more efficient wind turbines, each of which requires about two tonnes. They are also important in enabling the miniaturising of electronic equipment; consequently demand grew between 15% to 25% per year from 2003 to 2008.
We need to know where they occur so we can avoid bottlenecks. In many cases in the future, simplicity will be a virtue.