Difficult choices: Energy transition needs pragmatism

In a series of posts related to to the World Economic Forum’s New Energy Architecture report, Simon Henry, Chief Financial Officer of Royal Dutch Shell calls for pragmatism as a guiding principle in the transition to a New Energy Architecture. Read the Japanese Case study related to this report here. You can  also read all of our energy reports and see our latest videos, including our New Energy Architecture Video on our Energy Issues Page.

We as a society face a complex challenge managing the world’s transition to a New Energy Architecture. The exact course and speed of the transition will depend greatly on the policies governments adopt, as well as how companies and individuals behave in response. The right balance between economic growth, environmental sustainability and energy security will entail trade-offs and difficult choices for all involved. So our focus must be on practical, cost-effective solutions that produce results. There is no single way forward. Each country must work with its own resources and constraints to determine the best approach.

New forms of energy will play a critical role in the future of the world’s energy system. New energy technologies need about 30 years to achieve 1% of the overall market. Biofuels are just now reaching 0.5% of total energy demand, after decades of development and government support. Wind may get to the 1% mark in the next few years, nearly three decades after the first big wind farms were built in Denmark and the US.

New energy sources take time to develop because of the massive scale of our modern energy system, which has been more than a century in the making. For instance, today’s largest wind turbines are nearly 100 times more powerful than the ones installed in the mid-1980s. Wind already attracts 7-8% of the annual total energy investment, which is now well over US$ 1 trillion per annum.

As the world’s population pushes toward 9 billion and living standards improve, global energy demand could double in the first half of this century. And that is assuming we make heroic efforts to improve energy efficiency. Shell’s scenarios team thinks renewable energy could meet 30% of the world’s energy needs by 2050. To illustrate the magnitude of the task ahead, by 2020 the world will need to replace 40 million barrels of daily oil production. That’s four times what Saudi Arabia produces today. And much of it will need to come from resources that have not even been found yet.

Among the practical solutions countries can use to address these challenges, two stand out.

Natural gas can play a critical role, precisely because it can underpin economic growth, address environmental concerns and enhance energy security. And it requires no new technology development to do so. Generating electricity from natural gas instead of coal can cut CO2 emissions at individual plants by 50-70%. That is important because coal is currently responsible for 44% of the world’s energy-related CO2 emissions. Gas-fired generators can ramp up or down more easily than other types of plants, making them important allies to intermittent power from renewables like wind and solar. Natural gas can also enhance supply security in many cases, as new sources are developed. The world currently has recoverable gas resources equal to about 250 years, at current production rates.

Another important step countries can take is to focus on smarter urban development. Cities today hold half of the world’s population and generate up to 80% of total CO2 emissions.  With the urban population expected to grow more than 70% over the next 40 years, the way in which they develop will greatly affect energy demand. “Smart” cities’ technology holds tremendous opportunity, through more efficient public transport, energy-efficient buildings and designs that utilize waste heat and renewable energy sources. By investing heavily to upgrade our infrastructure, we can offset some of the growth in energy demand while creating new jobs.

Government policies are key. Success requires careful assessment of the inherent trade-offs. New technologies need to be mature enough to attract the huge investments required, which in turn can only be financed through market mechanisms. And long-term, stable policies will be needed – a requirement sometimes at odds with shorter term political considerations.

Managing the transition to a more sustainable energy system is one of the major challenges of our age. I feel confident that human ingenuity and frameworks such as those presented in this report will help the world get there. Government, industry and all of society must join forces and accelerate the process.

Author: Simon Henry, Chief Financial Officer, Royal Dutch Shell, Netherlands

Photo: Lower Manhattan is seen with it’s lights turned off, in participation with Earth Hour, in New York March 31, 2012. Lights started going off around the world on Saturday in a show of support for renewable energy. REUTERS/Allison Joyce