Key Elements of an Energy Sector Transformation: Launch of the IEA's new annual publication Energy, Climate Change and Environment: 2014 Insights

This is a preview of a forthcoming International Energy Agency (IEA) publication on energy, climate change and environment.

The IEA energy policy is focused on energy security, economic growth and development, and the environmental climate change issue. The interaction between energy and climate has become very important for the IEA due to its importance to the energy sector.

We have one future climate-friendly scenario, the 450 scenario. We also produce an annual energy technology perspective which is more focused on the energy transition and how newly developed clean technology will facilitate the transition to a low-carbon economy. We also have a market report series focused on energy markets for coal, oil, gas, renewables, and also for energy efficiency. Furthermore, we publish many types of statistics.

We are establishing a new annual publication focused on analysis of the interaction between energy, climate change and environment. It will present technical analysis of selected policy issues at the energy-climate interface on a specific theme that will be studied, and it will also update key energy and emissions data annually.

At the global level, the emissions picture is not very good. Our analysis of the global carbon intensity of the overall energy supply shows that the global energy mix is neither cleaner nor less carbon-intensive than it was 20 years ago. The development of emerging economies, in particular, China and India, has contributed to a more carbon-intensive global energy supply. The simultaneous development of low-carbon supplies such as nuclear and renewables in the Organisation for Economic Co-operation and Development (OECD) countries has prevented deterioration in the global carbon index. Carbon dioxide (CO₂) emissions have been on the rise because of population growth and development in emerging economies. This puts us on a trajectory for global warming of six degrees Celsius; certainly not in line with the transition to a low-carbon economy.

The global energy system must be transformed into a cost effective, clean, and secure energy system. A broad range of solutions are needed that will cover a series of time frames in terms of their contribution. We need to develop and deploy technologies that can make a short-term difference, such as commercially available renewable power sources as well as energy efficiency technologies, and also those that can make a long-term difference.

We also need to support the development of technologies that can meet long-term reduction needs, such as carbon capture and storage (CCS). Progress has been very slow, however, and fossil fuels remain an important part of the mix. More research and development (R&D) and technological progress are needed.

In our clean energy future scenario, the global energy mix looks very different. Energy use will be lower and fossil fuel use will fall both in absolute and relative terms. Zero-carbon and fuel sources will account for over half of the energy supply. As fossil fuel share decline, we see a strong increase in renewables, including biomass and waste, as well as nuclear.

Our energy sector carbon intensity index (ESCII) under our three scenarios shows that a continuation of current trends is clearly unsustainable. A radical change of the energy system presents a great-scale challenge. Less radical change taking into account the pledges made by various governments in terms of energy efficiency, greening, etc. would be easier but is still insufficient for a clean energy future.

The United Nations Climate Change Conference (COP 20) meets in Lima, Peru in December 2014 and COP 21 in Paris, France in December 2015. COP 20 will be the last opportunity to influence countries' Intended Nationally Determined Contribution (INDC) before beginning their submission in the first quarter of 2015. This will also be the last major opportunity to inject ideas into the agreement. We are working on the preparation of this meeting, and, in that context, we will present this new publication.

We plan to bring energy sector perspectives into the United Nations Framework Convention on Climate Change (UNFCCC) discussions in Lima by communicating some key IEA messages.

The first message is that short-term action does pay off. For the two-degree Celsius goal to remain possible, emissions from the energy sector need to peak before 2020. This was the key message of the World Energy Outlook Special Report 2013 last year.

The second message is that there are multiple drivers of actions to reduce emissions (e.g., better health and air quality, improved energy access, reduced road congestion, etc.). We need to harness all drivers of actions that can reduce emissions, as greenhouse gas targets alone are not enough.

Third, decarbonization of the power sector is critically important in the medium-term, enabling later decarbonization of heat and transport. This will likely require the unlocking of some existing high-emission infrastructure through policy intervention.

Fourth, action which may not have a large short-term impact on emissions is essential to enable deep long-term energy sector decarbonization. Such long-term perspective is important. This includes shifting investment to low-carbon assets which reduce further lock-in of high-emission infrastructure and also entail support for low-carbon technology development in order to reduce cost and increase the feasibility of decarbonization on a global scale.

Fifth, even if the temperature rise is kept to two degrees Celsius, there will be impacts to manage in order to maintain secure energy supplies and protect critical infrastructure. The physical resilience of the energy sector in the face of climate-related risk is an essential issue we need to look into. The IEA has developed some activities on the resilience of energy structure.

Chapter topics and focuses include:

• Policies and actions to unlock existing high-emission assets. Options exist and are already being implemented in various countries.
• Alternative energy metrics and their utility in tracking decarbonization progress.
• There will be a special focus on linkages between air pollution control and greenhouse gas (GHG) emissions.
• We round it out with an update on emissions trading systems across the globe.
• Finally, there will be an update on trends in energy and emissions data that should be of interest to energy practitioners and climate policymakers alike.

In the first chapter, I would like to provide an overview using the example of coal-fired power generation. New coal-fired generation constituted nearly half of the increased demand for electricity from 2001-2011, and, of this, 60% uses lower-efficiency subcritical technology. This level of investment without CCS is not consistent with our 2°C Scenario (2DS). If current investment trends continue, by 2017, emissions from infrastructure already in place, across its lifetime, would generate all emissions allowed under the 2DS. It is highly unlikely that all new energy sector investment after 2017 will be zero-emission. Thus, policy options are needed to accelerate the transition, i.e., to unlock the high-emissions assets by driving earlier retirement, fuel-switching, or retrofitting this infrastructure with CCS. These actions could be driven by policies ranging from direct regulation and regulations and standards that alter supply-demand balances to market-based policies that work via price changes.

This chapter surveys actual policies in place in Canada, China, Australia, the United States, and other countries. It also underscores the need to proceed with caution in designing policies to unlock coal-fired generation. Utilities and other power companies are expected to be a major source of investment in new clean generation. The analysis concludes that policies that drive earlier retirement could be coupled with support for a CCS retrofit or biomass conversion to provide options. Policies that provide companies with flexibility to manage these obligations within their portfolios are preferable, which means fleet-wide emissions performance standards rather than any individual plant regulation.

I'd like to continue to talk about the rest of our publication, in which we attempt to analyze policy options that can be considered for low-carbon infrastructure and the two-degree Celsius goal.

We attempted to examine unlocking of infrastructure, the emissions trading system (ETS), which is a more market-based approach, and several other policies, including the U.S. regulatory approach.

Chapter two looks at the new landscape of emissions trading schemes. The European Union (EU) and several other countries introduced and are operating ETS. The EU was the first, in 2005, and other countries followed. In China, there are several provinces and cities doing their pilot scheme. Tokyo has introduced something of an emissions trading scheme and a nationwide system is under consideration.

In this publication, we look at different ETS issues, especially in relation to the energy sector. The first challenge is implementing ETS in energy systems in more regulated sectors. These provide a testing ground for ETS in highly regulated electrical systems which can constrain the way in which emitters respond to price signaling, which is more operant in the open electricity system.

Second, we looked at the need to address the impact of including carbon pricing in electricity prices. Passing the cost of carbon on through higher electricity prices helps price signaling beyond the electricity generator to electricity users, who will have an incentive to reduce their use. However, electricity price increases can adversely impact vulnerable groups, including low-income households and energy-intensive trade-exposed industries.

Third, the importance of incorporating policy flexibility to respond to external influences is discussed. Poor alignment between existing policies and ETS could be controversial. In the EU, ETS complemented policies designed to increase Europeans' share of renewable energy to 20% and improve energy efficiency by 20%.

We drew several conclusions. First, ETS may be implemented in highly regulated electricity systems, though additional measures may be needed. Also, groups affected by rising electricity prices may achieve better outcomes than they would by preventing the price rise. Third, integration of ETSs and complementary energy policies can ensure that each set of policies meets its respective objectives. Even existing ETS systems are trying to adjust to the changing situation, and many countries are considering introducing ETSs, such as Korea.

This chapter explores the range of metrics that could be used to track decarbonization of the energy sector.

Energy sector action is critical to achieving GHG targets. However, GHG targets are not the primary driver of energy sector emissions reduction. Energy sector policies and actions that reduce GHG emissions may be motivated primarily by wider benefits such as energy security, cutting air pollution, or reducing energy bills, with the actual cutting of GHG emissions coming as a secondary benefit.

We categorized metrics into three types. Type I metrics focus on GHG targets such as total annual emissions or the GHG intensity of gross domestic product (GDP) or energy supply. They are applicable to all time frames. Type II metrics focus on non-GHG targets such as improving energy efficiency and increasing the share of renewable. They tend to be relevant for short- and mid-term time frames. Type III metrics focus on long-term transformation of the energy sector, such as policies and actions to help avoid further lock-in of carbon-intensive infrastructure. These metrics trace actions that will have a significant impact on long-term emissions but minimal impact on short- and medium-term emissions. Their use enabled us to expand our thinking about how to deal with CO₂ reductions.

This chapter looks at air pollution and GHG emission linkages. Rising concerns about local air quality have the potential to accelerate actions that can bring about GHG reductions as a co-benefit. At the same time, efforts to reduce GHG emissions can lead to improvements in local air quality.

The first section of our publication investigates the extent to which air quality controls imposed on large stationary sources of pollution may produce GHG co-benefits. The other two sections are in-depth case studies of the world's largest emitters: China and the United States. China's air quality constraints have important implications for GHG emissions mitigation in key industry sectors. The U.S. government's regulatory approach targeting GHG emissions reductions is also considered.

Here, we look at plant-level compliance options and impacts on GHG emissions. Four options are identified: pollution control retrofitting, efficiency improvement, fuel switching to gas or biomass, and closure of inefficient plants. In Europe, the Large Combustion Plant (LCP) directive and the integrated pollution prevention and control (IPPC) directives are operating. In Canada, there is nationwide regulation along with local state actions. In the province of Ontario, the last coal-fired power plant stopped burning coal earlier this year, making it the first province or state in North America to become coal-free. Just 10 years ago, coal-fired power produced 25% of the province's electricity. Also, looking at the United States, there is cross-state air pollution regulation which limits emissions of sulfur dioxide (SO₂) and mono-nitrogen oxides (NOx), which is known as the Cross-State Air Pollution Rule (CSAPR), and the mercury and air toxic rule is known as the Mercury and Air Toxics Standards (MATS).

We look at China and the United States as case studies. China has a heavily industrialized growth model. Various nationwide and local efforts were made to deal with air pollution at the time of the 2008 Summer Olympics in Beijing and the Shanghai World Expo. Five-year nationwide pollution control plans were undertaken, and China recently declared war on pollution for PM2.5 and PM10.

I would like to point out several issues in China. The case study concludes with some strategic considerations for policymakers. One is that China's air pollution controls can lead to significant GHG reductions, but they must be structured to achieve these dual goals simultaneously.

We next looked at the U.S. federal government's new approach to GHG reductions. The principal vehicle for these regulations is the U.S. Clean Air Act, the federal environmental law that has been used to reduce air pollution since the 1970s. Although it was not designed with GHG emissions in mind, the U.S. government is adapting existing programs for the purpose of GHG emission reduction.

The GHG reductions from recently proposed separate standards for new and existing power plants are all based on CO₂ intensity. The standards require new power plants using even the most advanced coal technologies to install CCS. New natural gas combined cycle plants would meet the standard already. The standards for existing power plants are more important, as existing power plants currently account for 32% of total U.S. GHG emissions. These standards, designed to achieve an overall reduction in GHG emissions from the U.S. power sector of 30% by 2030 relative to 2005, take the form of state-specific carbon intensity goals. They were built around four "building blocks" varying by state: heat rate improvements at coal-fired power plants, re-dispatch of base load power from coal plants to natural gas combined cycle (NGCC) plants, increased use of zero- and low-emission power sources, including nuclear and renewables, and demand-side energy efficiency measures. The proposed rules will allow states to use market-based approaches to meet their intensity targets, and to coordinate their compliance plans with other states.

First, the U.S. GHG standards for new power plants are expected to result in negligible changes in CO₂ emissions. Few coal plants were scheduled to be built anyway, given that projected market conditions favor natural gas and renewable generation. By 2020, when the power sector rules are scheduled to take effect, power sector emissions are expected to have declined by 13% since 2005. Thus, the standards for existing power plants are effectively proposing to reduce emissions by an additional 17% over the following decade. What that implies is that, by 2030, natural gas is expected to be the dominant fuel in U.S. electricity generation, but coal would still produce a significant share. By 2030, the CO₂ intensity of U.S. power generation is projected to fall by 19% from its 2012 fleet-wide rate. Rules for mobile sources for new cars and trucks are also important in this time period.

In the last chapter, we look at energy and emissions data, including the current status of energy use in 10 world regions. According to the data, the impact of the nuclear shutdown in Japan had a big impact in Asia. It would be worthwhile to look at the trends in different regions.

Q1. First, the CO₂ intensity of the global energy supply seems to have increased from 2010-2015. What is the main reason for this? Second, you mentioned that energy sector decarbonization is not driven solely by emission goals. One big reason for decarbonization is energy security. The IEA message in Lima should have a balanced view of the drivers. Third, you talked about efficiency retrofitting of coal plants. What is your view on the role that coal should play in developed countries' energy portfolios? Is it a better policy to get rid of coal completely and then allow developing countries to use it more freely, or do you think it is desirable for developed countries to have some coal in their portfolios due to its high efficiency?

Didier HOUSSIN
I think there are several factors. The nuclear phase-out in Japan, Germany, and elsewhere is one. The economic rebound--more significant in emerging economies--has been based more on fossil fuels, following the recession in OECD countries. Second, because the willingness to take climate change measures has diminished, we thought it is important to emphasize the benefits of the energy transition unrelated to climate change, such as energy security, cost effectiveness, and job creation. Third, we are only saying that it would be better to develop clean coal technologies rather than subcritical coal in the short to medium term. Coal continues to dominate power generation at the global level in the short to medium term, but in the long term, coal fired plants will need to be retrofitted with CCS if we are to meet our climate policy goals.

Q2. The publication represents long-term insight. How do we reflect these messages in climate change negotiations that focus on long-term issues with a short-term mindset?

HATTORI Takashi
We tried to examine different metrics unrelated to short-term GHG reduction which can have long-term effects if implemented immediately, for example, energy efficient building standards. We expect climate negotiators to analyze the impacts on the energy sector, submit appropriate contributions, and agree on the framework.

Q3. I have a question about the co-benefits. You mentioned that clean air would have co-benefits, but some types of pollution actually reflect more heat back into space instead of trapping it. The pollution in China might have actually helped reduce global warming because those effects were greater than the warming effects. Do you think it's completely reasonable to think of these as co-benefits or to try to take more of a balanced approach to messaging?

HATTORI Takashi
We tried to look at the effects of the different approaches to air pollution. Some of them have positive effects on reducing CO₂ and some do not. These impacts need to be approached cautiously.

Q4. What do you think is an appropriate carbon pricing range to make CCS viable in the global power market? Also, what about the effects of low gas prices? If gas prices rise, coal plants with CCS might become more competitive. Do you have any expectations?

Didier HOUSSIN
Regarding the cost of CCS, we don't really know the cost, because we lack concrete experience and the cost will differ by region. Canada has cut the cost of its next project by up to 30%. In clean technology, the only success story is renewables. That entailed policies encouraging new technologies, many years of R&D and market conditions. These conditions have not existed for CCS. We need more policy incentives--CCS mandates, carbon pricing, trading schemes, long-term investment mechanisms, etc.

Regarding the negative effect of low gas prices in North America on CCS adoption--yes and no. If coal consumption tends to plateau and greater coal usage limits occur in many countries, you might see coal prices come down because the resources still exist. My last point is that, in the long-term and in the low-carbon scenarios, you need CCS for gas.

Q5. What are your views on the Japanese energy situation? Today, we have zero nuclear and 90% of our power generation is fossil fuel energy, of which 90% is imported, resulting in an 11 trillion yen trade deficit. Electricity bills are up by 30%. This is a totally unsustainable situation, but we are trying to change everything under the new strategic energy plan.

Didier HOUSSIN
The key question for Japan is how to restart some nuclear plants. The second issue is the very high natural gas prices in Asia. It is important to move away to some extent from oil-based pricing for natural gas and try to develop a market in Asia. Developing renewables is another part of the equation but maybe not at too high of a price; overly generous feed-in tariffs can lead to dangerous bubbles. The first thing is energy efficiency. Japan has achieved very good results in that domain. Since the Fukushima nuclear power plant accident, support for nuclear in France has dropped. It remains high, but it is very sensitive, and the government's position is to cap the share of nuclear energy at 50%.