The key message of the Paris Climate Agreement is that the energy sector should be part of the drive towards renewable energy and part of the “innovation frontier”, says Christoph Frei, Secretary-General of the World Energy Council, the largest global network in the energy business, with member committees in over 90 countries. “The long road from Paris is to build on the best technology, to develop and deploy innovation. If you are not on the forefront of this, you may not be around in the foreseeable future”, warns Frei, who has been the Council’s leader since 2009. Frei discusses the implications of Paris for oil producers, the coal and gas sectors and utilities. “If you are coming from a traditional context, you have to move to a new environment.” Interview courtesy of World Energy Focus.
Does Paris provide a clear enough signal for energy companies and investors to set them on a new course for the future? That is after all what the energy sector has been asking for most of all from policymakers: an end to uncertainty, predictable policy, balanced regulatory frameworks. According to Christoph Frei, who has worked tirelessly to unite the global energy sector behind a vision towards a sustainable future, the answer is a clear yes.
“Paris has made it absolutely clear that we need to get started on the decarbonisation pathway. True, we do not have an international carbon price, which would be the best solution for the energy sector. But we have a shadow price: we know that implementation of the INDC’s (national climate plans) will reduce emissions from 59 GT to 55 GT in 2030. That may be a second-best solution, but it provides one aspect of clarity. And we know it’s just a start. It’s only one-third of where we need to get. The plans will be reviewed and ambitions will be ratcheted up to meet the goals.”
“Oil-rich countries will have to rethink the context in which they produce and this will weaken cartel thinking”
Frei says the outcome of Paris exceeds expectations. “A year ago, we hoped to get some 100 countries to submit an INDC. In the end we got 185 countries. Yes, there are gaps to be closed – an ambition gap, a financing gap – but there is a deal. That was never obvious.” He adds that it was clear that Paris was not going to lead to a clear carbon price. “That was not even on the agenda.”
If you were CEO of a big energy company, what would you do now?
“You have to put another piece in there that’s very important: innovation. The INDCs are a commitment to promote renewables and cleantech. You have to combine that with the innovation story. Twenty countries are doubling their RD&D budget over the next 5 years. Industry leaders have announced a Manhattan-type innovation drive. If you are not on the forefront of that as an energy company, you are going to lose out. There may be no legally binding deal to force you to do things, but if you are not part of the innovation frontier, you may not be around in the foreseeable future. That is the biggest outcome of Paris. It’s a huge pressure but also a massive opportunity.”
We know there is a carbon budget now that will limit growth of fossil fuels. How should companies active in fossil fuels deal with that?
“Well, a number of companies, such as Eon and RWE, have already decided to split off their fossil fuel business. If you are coming from a traditional context, and you have to move to a new environment, with different types of investors, different timeframes, dealing directly with households, that requires different skills. That said, we will also need a system backbone. We will need gas in many economies for a very long time. We also need the skills, the investors, the policy measures, to deliver this backbone. So these players have their justification as well.”
“We could not support the logic of the industry that coal is needed to provide access to energy for the poor”
Utility companies may be able to split up, but what about oil and gas companies?
“The demand for oil is mostly driven by transport. If you get growth in natural gas, biofuels and e-mobility, you will want to make sure as a company that has infrastructure that you can use and monetise this infrastructure in the future as well. You will want to have fuelling stations that can offer a mix of fuels. On the supply side, many international oil companies are changing from oil to gas but they are also investing in renewable energy. I expect some major announcements on that front.
On the upstream side, some serious questions need to be asked. OPEC has been ruled for a long time by the Hotelling logic, which holds that as the availability of a finite resource is reduced over time, its marginal value will go up (named after a theory of the US economist Harold Hotelling, editor). The whole discussion on unburnable carbon destroys the Hotelling logic. Oil-rich countries will have to rethink the context in which they produce and this will weaken cartel thinking. The logic to produce as much as you can now is becoming stronger.”
What about coal companies, what future do they have?
“In our latest scenarios report we already said coal faces great uncertainty, which was not a story the companies really wanted to hear. We could not support the logic of the industry that coal is needed to provide access to energy for the poor. This certainly does not apply in sub-Saharan Africa, which has a rural agenda, not the centralised one that coal stands for. And we said that CCS (carbon capture and storage) would not be as easily picked up as many were claiming. So it is not easy to have a view of a prosperous future for coal. Companies need to get really pro-active on CCS if they want to believe in the future of their resource. If they don’t come up with a coherent long-term vision for the CCS development, it’s going to be difficult to do anything that shows true scale and goes beyond a project by project approach.”
“Gas is still a strong story for the near future”
The World Energy Council has set up a Global Gas Centre to provide a better understanding of the role of gas in the energy mix. Do you see gas as a bridge to the future?
Gas is still a strong story for the near future. As a substitution for coal, but also as a bridge in other areas, for example, in transport, or as storage medium for renewable energy. There will be a lot of opportunities for gas. This is why we have set up a Global Gas Centre. We believe that we will see gas playing a key role.
What about energy efficiency?As usual we are not hearing much about that.
This is one area where reality has fallen short of what he hoped for. Yes, we are making progress. Over the last 20 years, we have made energy intensity gains of 1.3% per year on average. In the decade before 2000 it was 1.6%, then in the first decade of the 2000s it was 1%, in 2010-2012 it was back up to 1.7%. Still, this is far below the assumptions in our scenarios and in the Sustainable Energy for All objective of 2.6%. A much greater effort must be made. I think it’s a mistake to call energy efficiency a low-hanging fruit. It requires complex cross-constituent and cross-sectoral leadership, whether itis in transport, shipping, housing, etcetera.
“People are becoming aware that the unlikely events of yesterday have become today’s reality. That affects the way they look at climate change”
Do you think climate change has become a bigger story lately in developing countries and in resource-rich countries that have traditionally been defensive on this topic?
A country like Saudi Arabia has embraced solar energy and energy efficiency, because they know if they don’t do that, it will limit their export opportunities for oil. That’s not motivated by climate change of course. If you look on the climate side, the biggest change I have seen is in Latin America, which has been hit hard by extreme weather events, such as droughts and floodings. You also see that in parts of Asia and Africa. People are becoming aware that the unlikely events of yesterday have become today’s reality. That affects the way they look at climate change. But the biggest change I’ve seen is in business. People are now looking at renewables as a business model in many more places than before.
How do you see the activities of the World Energy Council develop with regard to climate change?
It is important to understand that after Paris the world is entering a triple transition. First the transition of decarbonisation. Then there is what you might call the market design transition: the need for new regulatory frameworks and incentives to adapt to the new realities provided by the renewable energy revolution. This goes much beyond electricity, it also affects gas, transport and other sectors. Third, there is the resilience transition. This is where we are doing a lot of work with our Financing Resilient Energy Infrastructure project, where we look at the impact of extreme weather events, cybersecurity threats and the energy-water-food nexus on the energy sector. This implies a different way of thinking about infrastructure and critical systems. To navigate these transitions with limited resources, you have to be very clear what your priorities are. This is exactly what our scenarios, our work on the energy trilemma and on resilience is about.
About the World Energy Council
The World Energy Council describes itself as “the world’s principal impartial network of energy leaders and practitioners promoting an affordable, stable and environmentally sensitive energy system for the greatest benefit of all.” Formed in 1923, the Council is the UN-accredited global energy body, representing the entire energy spectrum, with more than 3000 member organisations located in over 90 countries and drawn from governments, private and state corporations, academia, NGOs and energy-related stakeholders. The Council “informs global, regional and national energy strategies by hosting high-level events, publishing authoritative studies, and working through its extensive member network to facilitate the world’s energy policy dialogue.”
The Council’s most important publications are:
- the annual World Energy Trilemma, and Trilemma Index, which benchmarks countries according to the environmental sustainability, security and equity of their energy system
- the World Energy Issues Monitor, an annual survey of the views of over 1,000 energy leaders including ministers, chief executives and the heads of the Council’s national member committees covering nearly 80 countries
- the tri-annual World Energy Scenarios, which assesses “energy futures until 2050”, based on input from 60 experts from across the world with modelling provided by the Paul Scherrer Institute
The World Energy Council’s main event is the tri-annual World Energy Congress, probably the largest and highest-level gathering of energy leaders in the world. The upcoming World Energy Congress will be held in Istanbul from 10-13 October 2016.
Among the World Energy Council’s supporters (“patrons” and “partners”) are companies like Alstom, EDF, ENGIE, GE, Hydro-Quebec, Korea Electric Power, PricewaterhouseCoopers, Saudi Aramco, Siemens, Tokyo Electric Power, Verbundnetz Gas, Abengoa, DNV GL, Enel, Eon, EY, National Grid and Repsol.
Energy Post publishes the monthly and annual magazine of the Council, World Energy Focus. This interview was first published in the January 2016 edition of World Energy Focus.
For inquiries about the World Energy Focus 2016 Annual edition which will be distributed at the World Energy Congress in Istanbul in October, please contact Karel Beckman, email@example.com