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The Global Energy Challenge

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This entry is the first of a series of posts written by members of the World Bank's Development Research group's Environment and Energy team on economic and policy issues involving energy and climate change mitigation.

Issues relating to energy are among the most important and difficult challenges confronting the world today.  Providing sufficient energy to meet the requirements of a growing world population with rising living standards will require major advances in energy supply and efficiency. Doing this while mitigating the risks of climate disruption will be an even more challenging undertaking.  It will require a significant shift in the historic pattern of fossil-fuel use and a major transformation of the global energy system.  Especially in the developing countries, the choice of technology, policy, and economic levers that will be used to transform and expand their energy systems will have profound implications for their growth, international competitiveness, and economic security and prosperity.   This overview focuses on the challenges related to electricity supply; subsequent blogs will address other parts of the energy system.

The scale of the energy challenge

According to World Energy Outlook 2010—the yearly flagship report of the International Energy Agency (IEA)--assuming no change in government policies, world primary energy demand is projected to rise from 12,271 to 18,048 million tonnes of oil equivalent (Mtoe) between 2008 and 2035--an increase of 47 percent.  (For a glossary of energy related technical terms, see here)Electricity demand is projected to grow from 20,183 to 38,423 terawatt-hours (TWh) during the same period--an increase of 90 percent. The compound average growth rate of electricity demand between 2008 and 2035 is estimated to be around 2.4% per annum for the world as a whole (0.9% for OECD and 3.6% for non-OECD countries).  Such a growth rate might, at first glance, appear to be modest. However, the base is substantial---so the implied absolute increase in demand is huge.  Over 80% of that growth is projected to come from developing countries.  To meet these needs, the world's electricity generating capacity will have to increase from about 4,719 gigawatts in 2008 to 8,875 gigawatts in 2035, requiring approximately 4,156 gigawatts of capacity additions--equivalent to adding 4 countries like the US, or 5 continents like OECD-Europe to global electricity demand.

As evidence mounts on the threats of climate change, pressures for curtailing carbon dioxide emissions from coal-fired electricity generation will further escalate.  This gives rise to one of the central challenges in global energy policy: in the context of a carbon-constrained world, with use of coal and, to a lesser extent, natural gas being limited by policy decisions to limit carbon dioxide emissions, what sources will provide the estimated additional 4,156 gigawatts of new electricity generation capacity that it is estimated the world will need by 2035?  Since the bulk of that additional capacity will be required in the developing world, how this challenge might be addressed is a huge and complicated dilemma for sustainable development.

The challenging transition to new energy sources--no silver bullet

A number of technological options exist.  However, there are highly divergent views on their economic, social, and environmental implications.

There are high expectations that further technological innovation will play a critical role in facilitating the transition to a low-carbon (low-C) economy, and considerable excitement about the growing importance of renewable technologies in the future energy mix.  Already, as part of their efforts to reduce greenhouse gas emissions and improve the security of their energy supply, many governments have set ambitious goals and policy targets for sourcing a significant portion of electricity generation from renewables.  These moves also can be motivated by desires to curb damaging local pollutants. The transition to a renewable energy system, however, will be challenging because of problems of intermittency, the  location of renewable resources relative to major population centers, and the massive scale of the prospective shift.

According to the most recent report by the IPCC (Intergovernmental Panel on Climate Change), significant reductions in greenhouse gas emissions can be achieved fairly rapidly and at relatively low cost by increasing the efficiency with which electricity is used and by expanding the deployment of existing renewable generation technologies. However, it is generally agreed that these measures will not be enough to achieve desired long-term greenhouse gas reductions.  Even restraining the increase in per-capita energy consumption in the face of growing energy demand in developing countries, as incomes rise, will require very substantial improvements in energy efficiency.

Hydropower is cost effective in a number of locations, but utilization of potential new sites is likely to be limited given that these sites are often less accessible and precious for environmental and social reasons.  A major expansion of biofuels would require vast land areas for cultivation, in competition with increasing food production and the preservation of natural ecosystems.  The cost characteristics of solar photovoltaics are still unfavorable, except in off-grid locations where the costs of alternatives are even higher.  Although there is considerable interest in Concentrating Solar Power (CSP), it is not yet commercially mature, with challenges related to cost, location and constraints on delivery from source to demand. 

The most promising renewable technology for the near to medium term is seen by many to be wind power, which is already near commercial viability and is achieving high penetration rates in some countries (for example Denmark, Germany and Spain).  When combined with hydro storage--and where a wide area power grid can even out local fluctuations in wind availability, as in the United Kingdom (UK) and Europe--problems of intermittency can be handled up to appreciable shares in total generation. While many developing countries have a substantial wind resource (Central America, Chile, Brazil, Pakistan, Mexico, Mongolia), in others wind resources are less satisfactory and would require substantial complementary investments in transmission and reserve capacity.

Wind and solar are not dispatchable in the traditional sense.  Electricity produced by these technologies is driven by a variety of weather characteristics—e.g. wind speed and direction, cloud cover, and haze. Consequently, they cannot be controlled or economically dispatched by electricity system operators based on traditional economic criteria. The output of intermittent generating units can vary widely from day to day, hour to hour or minute to minute, depending on the technology and variations in attributes of the renewable resource that drive the generation of electricity at a point in time at a particular location. Rather than controlling how much and when an intermittent generator is dispatched, system operators must respond to what comes at them by calling on generators that are dispatchable to maintain network grid reliability.  Because of these technical issues, a large increase in the quantity of intermittent renewable energy has important implications for the costs of balancing electricity supply and demand in real time.  It will certainly require substantial investment in reserve generation capacity, thereby adding to the overall cost of supply.  Moreover, the most efficient sites for renewable energy facilities, especially wind and large scale solar facilities, are often located far from load centers, in remote areas and off-shore. To take advantage of these opportunities, very significant investments in new long-distance transmission facilities will be required.

Fossil fuels can be decarbonized, but the underlying technology is in the early stages of development and is clouded by large uncertainties regarding the speed of implementation and the ultimate feasibility of large-scale application of carbon capture and storage (CCS).  That could change in the near future if commercial scale pilot installations under consideration in a number of countries are implemented.  More to the point, however, CCS is doubly capital intensive, both in terms of the extra equipment to handle the carbon dioxide and the lowered efficiency of the overall plant. Current cost projections suggest CCS would not be economically feasible in the US in the absence of greenhouse gas policies that are comparable to a US$50/tCO2 tax on coal to be commercial.   That carbon price would need to be higher where coal costs and quality are lower, as in South Africa, China and India, thus making CCS costlier than some other low-C options. That said, provided that CCS can be technically proven, it will be needed on a large scale, and will require either a continuing high carbon price to ensure that it is used, or mandated priority for use of CCS equipped plants, along with close monitoring of net carbon dioxide emissions.

Nuclear power can deliver low-C electricity in bulk, reliably and without intermittency, and it has a very small land take in contrast to renewables.  Although capital costs have risen substantially in recent years, so have those of most capital-intensive generation options, so that nuclear power still can be cost-competitive with other large-scale low-C alternatives.

Unlike renewable sources of energy, nuclear power is a complex and unforgiving technology and any human lapses and errors in its deployment can have ecological and social impacts that are catastrophic and irreversible.  Thus nuclear power entails a diverse set of economic, market, and safety risks and uncertainties.  It involves the use of highly toxic materials that must be kept secure from attack or theft.  Moreover, a viable technology for the permanent disposal or reprocessing of spent nuclear fuel has not yet been fully demonstrated.  Finally, in the context of many developing countries, even in a carbon-constrained world, nuclear power may be less economically attractive than a host of decentralized energy efficiency and distributed generation technologies.

The views on the alternative generating options are highly divergent in part due to the large risks and uncertainties underlying the cost elements of different technologies.  These risks and uncertainties are reflected in the wide range of cost estimates.  Wind and solar have been experiencing dramatic cost reductions.  However, the economic future of these technologies is clouded by the costs of dealing with their low energy densities and intermittency.  The costs of nuclear power stations and large coal-fired plants (particularly those with carbon capture and sequestration), on the other hand, have escalated in recent years. 

Reforming “market design”

The organizational and regulatory frameworks that currently govern much of the electric power sector in both developed and developing countries are not conducive to supporting large-scale deployment of low-C technologies.  Moreover, there is a danger that if a large fraction of generation is intermittent (like wind or PV), or inflexible (like nuclear), current frameworks will lead to costlier and less reliable supply.

To play a major role, low-C generation options will require substantial new investment in transmission capacity and considerably larger reserve generation capacity. Without sustained and significant carbon pricing, incentives for undertaking these necessary activities will be blunted.  None of the above is assured by current electricity sector policies in most countries.  Where implemented, carbon prices remain too low and too unpredictable to induce the desired systemic changes.  Feed-in tariffs (FITs) for new low-C generation carry substantial risks of being set too high (as has been the case for less mature technologies like PV in several European countries), producing excess supplier profits and high consumer prices; or too low, risking undersupply.

Liberalized electricity systems with more flexible regulation and greater reliance on market forces for generation have been justified on the basis of producing more economically efficient outcomes. However, one of the general drawbacks of liberalized, unbundled electricity systems is that no member of the industry has the needed combination of incentives and ability for system-wide planning.  This has profound implications for the adequacy and locational efficiency of new transmission and generating capacities. There is a question whether transmission investment will be adequate, timely, and efficiently used.  Mechanisms to cover costs for reserve generation capacity have also proven especially problematic under liberalized markets.  Electricity sector regulation needs to find ways to overcome these challenges without negating the benefits of market liberalization.  These problems will be complicated if the fraction of nuclear power increases, since it is considerably more expensive to operate in a flexible mode, and by growth of highly decentralized and/or intermittent renewables, which increase the urgency of planning and investment for reliable system-wide operation.

Thus, there is an urgent need to consider ways to harmonize the liberalization of electricity markets and mechanisms for supporting low-C technology options.  Both are important, and failing to consider them together can amplify economic risks for developing countries related to electricity system performance, increase the cost of domestic or international support to low-C technologies, and reduce the incentives for speedy deployment.  A variety of policy issues and alternative options need to be carefully examined, as will be discussed in a subsequent blog.

The need for rigorous analysis of benefits and costs

All of the above points highlight difficulties in reconciling the goal of transition to a low-carbon energy supply with the aims of enhancing energy access, and improving operational and financial performance of the electricity sector.  The call for significant investment in low-carbon technologies is important and necessary, but the unintended consequences of some approaches to the transition need to be clearly identified, especially for developing countries.

Improvement in operational efficiency requires pressures to reduce costs, which in turn can soften resistance to tariff reforms necessary to improve financial performance.  Against this, the low-carbon options are largely more costly in the market than conventional alternatives, and are likely to remain so for some time to come.  This fact in turn raises questions as to the aggregate economic impact on developing countries, especially lower-income countries, of an accelerated move toward costlier low-C energy supply infrastructure and the distributional equity of such an additional cost burden.  A related question concerns financing of the transition—the adequacy of international funds for cost-sharing, or the fiscal sustainability of government subsidies needed to otherwise cover the cost.  There is an urgent need to evaluate these issues in the context of relatively comprehensive and rigorous assessments of the costs and benefits of accelerating or decelerating movement toward low-carbon technologies.  Improved frameworks are therefore required with which to compare the costs of reducing CO2 emissions using different proposed options, including a transparent examination of the uncertainties. 
Further Reading

IEA (International Energy Agency). 2010. World Energy Outlook. Paris: OECD.

IPCC (Intergovernmental Panel on Climate Change). 2007.  Fourth Assessment Report: Climate Change 2007.  Synthesis Report.  Geneva: IPCC.  [See especially Table 4.18, Section 4.4.4; and Table 6.6, Section 6.8.5.]

Kessides, I. and D. Wade. 2011.  “Towards a Sustainable Global Energy Supply Infrastructure: Net Energy Balance and Density Considerations.”  Energy Policy (forthcoming).

Kessides, I. 2010.  “Nuclear Power: Understanding the Economic Risks and Uncertainties” Energy Policy 38 (August): 3849-3864.

Newbery, D. 2009. “Transition to a Low Carbon Electricity Market and Needed Reforms.” EDF Energy Meeting, London, 7 July 2009


Ioannis N Kessides

Former Lead Economist, Development Research Group, World Bank

Michael Toman

Research Manager, Sustainability and Infrastructure, Development Research Group

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