Dr. Fatih Birol is chief economist and head of the Economic Analysis Division of the Paris-based International Energy Agency (IEA). He is organizer and director of the World Energy Outlook, the IEA’s annual flagship publication. A Turkish citizen, Dr. Birol was born in Ankara in 1958.
Dr. Birol earned a BSc degree in power engineering from the Technical University of Istanbul. He received his MSc and PhD in energy economics from the Technical University of Vienna. He worked for six years in the Secretariat of the Organization of Petroleum Exporting Countries in Vienna, before joining the IEA in 1995.
PEi: How will the current economic turmoil impact the power generation sector?
Birol: The economic crisis will have implications throughout the energy supply chain, but I expect the most substantial impact will be on the power generation sector. This is mainly because of the sector’s highly capital intensive nature, a special problem for non-OECD countries.
However, in the OECD countries, there is a different problem. Many power plants in the US and Europe will be retired within the next ten years. So they need to build power plants not only to meet demand growth but also to replaced the lost fleet.
I am expecting two main effects. Firstly, the delay or cancellation of many power projects and secondly, higher cost technologies such as wind power, particularly offshore wind power, being left aside. One needs high fossil fuel prices and a strong economy in order to afford such projects. Since the market is in such a myopic state there is a lot of risk, and this may cause a shift to lower cost technologies such as coal fired generation.
In addition, if the current financial crisis were to continue for a sustained period, it would shift our collective focus away from the climate change agenda. In turn this could mean that the new technologies that need a great deal of support from governments, like carbon capture and storage (CCS), may face difficulties.
PEi: Will falling oil prices affect investment in power generation?
Birol: I find the falling oil price situation much more worrying than when it was at $147/barrel last summer.
If current plans for investment in power generation are postponed due to the current financial crisis, we may see a supply crunch when energy demand starts to pick up, say around 2010. This supply crunch could be worse than previous forecasts and in turn may lead to even higher energy prices than we saw last summer.
Since 2007, many OECD and some consuming countries have put in place policies in order to diversify their energy mix and to improve energy efficiency. Unfortunately many of these policies are at risk in the current downturn, which is also causing climate change to slip down the international agenda.
This is a pity because climate change is a problem that will be with us for many years to come. Simply ignoring it may mean we have to deal with it under much more difficult circumstances than if we act now.
Therefore there is a strong role, both in developing countries, as well as in OECD countries for governments to make sure that the investment risk is reduced to a minimum.
PEi: Will renewables be a casualty of the credit crunch?
Birol: Renewables are growing very strongly and according to our Reference Scenario (World Energy Outlook 2008), again based on current policies in place, they will be the second largest source of power generation, including hydropower, after coal and natural gas by 2015. The main drivers are wind farms and solar power.
However, if governments were to slow down their support for renewables as a result of the current economic crisis, and oil prices remain at current levels for a sustained period, implementing renewable energy will become more challenging than we think.
PEi: What will coal’s role be in the worldwide energy mix?
Birol: We talk a lot about renewables, natural gas, nuclear power and all the other sources, but forget the forecasts. In the past seven years, if you add together the volumes of growth coming from gas, renewables, nuclear and all the other sources, it is still only equal to coal. Coal has increased by as much as all other fuels.
Coal will play an increasingly crucial role in the global energy mix, especially in non-OECD countries. More than one-third of global growth in energy demand will come from coal in our Reference Scenario, which is based on the policies and measures legally enacted as of mid-2008. Eighty-five per cent of coal demand growth will come from India and China. This is unsustainable and needs to be changed and challenged.
Incremental primary energy demand in the Reference Scenario, 2006-2030 Source: IEA World Energy Outlook 2008
PEi: How important is CCS to mitigating climate change?
Birol: The IEA thinks that there is a crucial role for CCS to play if we are to make major reductions in carbon emissions, but there are at least three major problems. One is the cost issue, the second is the legal framework issue and the third, and most important, is that the large power plants in which we need to build CCS are in China and India, not just in the UK or Switzerland. If these economies are weakened by the financial crisis as well, these developing countries’ willingness to develop CCS will be brought into question.
PEi: In your World Energy Outlook 2008, the IEA estimates that a carbon price of $180/tonne per CO2 would be necessary by 2030 for sufficient implementation of CCS to attain a worldwide CO2 level of 450 ppm. Is this realistic?
Birol: This is based on the most expensive CCS and it does not necessarily apply to all countries. It is thought that $180/tonne per CO2 will be needed to develop CCS project in certain countries, especially in the oil-rich developing nations where you have very low gas prices and energy costs.
Of course, the required carbon price may be significantly lower in the OECD countries as well as India, China and other countries, but we definitely need extra incentives.
PEi: There is an flaw here. If we wait and wait for the carbon price to rise to build CCS, it may be too late to be effective. What more can be done to encourage investment in low-carbon technologies?
Birol: My major appeal with the World Energy Outlook 2008 to world leaders is this: At Copenhagen [which will host the United Nations Climate Change Conference, 30 November à‚— 11 December 2009] we need a framework that puts OECD economies and non-OECD economies in context in order to create a global carbon market.
OECD countries should take the lead and take the burden for the first CCS plants to show that it is feasible. This would open the door for reducing the costs inherent with CCS technology and then for the transfer of the technology to developing countries.
PEi: The European Union’s Emission Trading Scheme has seen a dramatic drop in the price of carbon in recent months. In light of this, how could governments incentivize CCS further?
Birol: There are many ways governments could support CCS. For me, CCS is the OECD governments’ litmus test as to whether they are serious about climate change. They should be proactive so that carbon markets do not collapse, even if it is just a temporary measure. Wrong decisions taken with a short-term view could become very costly and difficult to reverse.
PEi: Can there possibly be a one-size-fits-all approach to tackling climate change?
Birol: We propose a hybrid approach. In the absence of China and India and other developing countries on board, we have no chance whatsoever in achieving the 450 ppm scenario.
Every country has their own affordability, policy and mechanisms. If carbon market mechanisms are not in place, we can find other mechanisms for them such as a sectored approach to improve efficiency moving forward.
But, at the end of the day this will be a political decision in addition to an economic one, and in that context it is very encouraging that the new US administration places climate change at the top of the agenda. I hope that we see the effects of that in Copenhagen.
There is a need for international regulation, but which form this regulation will take remains to be seen. I believe that there must be economic incentives for developing countries otherwise there will be no chance to bring them on board the climate change agenda. If IEA member governments do not show their willingness in a concrete and sincere manner to developing countries then we will have less chance to get them on board.
PEi: Are India and China any closer to joining the IEA?
Birol: We are working very closely both with India and China. They are coming to our committee meetings. We hope they will join, but for the time being there are no concrete agreements or any steps in that direction.
We know that we need them to be much more relevant in the markets, but we also feel that they want to work more with us in the future.
PEi: In an increasingly liberalized power sector, how can the clash between the profit motive of utilities and the need to mitigate climate change be reconciled?
Birol: The question of energy market liberalization and profit maximization objectives of the utilities versus the public interests is and old one but profound. There is significant work for governments to do in putting in place certain regulations, which would allow utilities to be able to enjoy their profits while, at the same time, obey some rules for the good of the public.
Europe has made some steps, albeit at a very premature stage, in this direction that may well develop in the future. And with the US and Japan also moving in this direction, we can expect, perhaps, more to come from this in the future. I think the climate change challenge is so huge that we cannot leave it to the markets alone.
Dr. Fatih Birol is the keynote speaker at POWER-GEN Middle East. The conference and exhibition takes place in Manama, the Kingdom of Bahrain between 17-19 February 2009.