Energy Policy 39 (2011) 2507–2511

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Energy Policy

0301-42

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Viewpoint

IEA World Energy Outlook 2010—A comment

Hisham Khatib

World Energy Council, P.O. Box 410, Amman 11831, Jordan

a r t i c l e i n f o

Article history:

Received 17 January 2011

Accepted 3 February 2011

Keywords:

Energy future

Energy planning

Emissions

15/$ - see front matter & 2011 Elsevier Ltd. A

016/j.enpol.2011.02.017

ail address: Khatib@nets.com.jo

a b s t r a c t

The World Energy Outlook 2010 is a comprehensive energy report issued by the IEA. It is rewritten

annually to reflect the world’s changing energy and economy realities; it also introduces new issues

relevant to the energy sector. This year it dealt with Caspian Energy, Energy Poverty and Energy

Subsidies. WEO is controversial in few aspects; it still promotes a 450 Scenario which has become out of

reach. This year however it introduced a more realistic New Policies Scenario which will need a lot of

good will and investments to accomplish. Governmental policies are going to chart future energy sector

performance; increasingly this is becoming decided by non-OECD countries. A more pragmatic future

energy outlook is needed to reflect developing countries priorities for growth and utilization of local

resources and how to accommodate this with abatement priorities through energy efficiency measures

and technologies.

& 2011 Elsevier Ltd. All rights reserved.

1. Introduction

The annual International Energy Agency (IEA) report ‘‘WorldEnergy Outlook 2010’’ (WEO 2010) is a remarkable document. Itgoes beyond a mere energy report or outlook predictions. Itinteracts with the global economic and social issues as well asfuture environmental and developmental considerations. One ofthe strengths of the document is its continuous annual updating.Instead of sticking to a predetermined dogma, WEO predictionsrespond to changing global economic realities and newly intro-duced technologies. Written and reviewed by some of the bestenergy specialists and economists it has become one of theworld’s foremost annual developmental reports awaited andreviewed by many specialists every year. WEO introduces everyyear new energy topics into its review. This year, besides theusual fossil and non-fossil energy issues and the environmental,demographic and economic outlook, WEO 2010 introduced threenew sections covering the ‘‘Caspian Energy Scene and Prospects’’,the important subjects of ‘‘Analyzing Fossil Fuel Subsidies’’ and‘‘Energy Poverty’’.

Having said that, WEO 2010 for some is still a controversialreport prepared by IEA which is an agency formed in 1974 by 28advanced economies as a response to the oil embargo of 1973. Itsprofessional image has steadily improved over the years. How-ever the WEO 2010 merits many comments and critical review-ing. It is not intended here to summarize the WEO 2010; this iscomprehensively covered in its ‘‘Executive Summary’’, available

ll rights reserved.

on the Internet (www.iea.org), but to highlight some of the mainissues and to point controversial outlooks and views.

2. WEO 2010 scenarios

The world future energy outlook is projected through differentscenarios. The report rightly recognizes that it is governmentpolicies which are going to chart future energy sector perfor-mance. Different assumptions about these polices led the IEA intothree scenarios:

1.

New Policies Scenario: Presented for the first time, takesaccount of the broad policy commitments that have alreadybeen announced and assumes cautious implementation ofnational pledge to reduce greenhouse-gas emissions by 2020and to reform fossil-fuel subsidies.

2.

Current Policies Scenario: Takes into consideration only thosepolicies that had been formally adopted by mid-2010. Actuallyit is business as usual scenario.

3.

The 450 Scenario: Assumes implementation of high-end ofnational pledges and stronger policies after 2020, includingthe near-universal removal of fossil-fuel consumption subsi-dies, to achieve the objective of limiting the long-term con-centration of greenhouse gases in the atmosphere to 450 partsper million (ppm) of CO2 equivalent and global temperatureincrease to 2 Celsius.

I shall start by arguing that the 450 Scenario is no longerfeasible. Realities on the ground and performance of governmentshave already rendered such scenario unrealistic. The concentration

H. Khatib / Energy Policy 39 (2011) 2507–25112508

of all long-lived greenhouse gases in the atmosphere has alreadyreached 455 ppm in 2005 (IPCC, 2007), and greenhouse-gas emis-sions are continuing to grow year after another. World energy-related CO2 emissions in 2020 are likely to exceed 35 gega-tons(Gt) compared to 22 Gt in 1990. The 450 Scenario that aimed atstabilizing CO2-eq concentrations in 2150, at 450 ppm, has to bereplaced by more realistic scenarios. I think that the most ambi-tious is The New Policies Scenario which puts us on a long-termpath that is consistent with the atmospheres concentration ofcarbon dioxide equivalent reaching around 650 ppm in around2120. The Current Polices scenario, which is business as usual, canlead to concentrations exceeding 1000 ppm after 2100.

It has to be realized that energy growth is now almostexclusively concentrated in non-OECD countries. These countriesaccount for over 93% of the world’s expected increase in energyconsumption in the coming years. Non-OECD countries are moreconcerned in their actions by economic growth and public welfarethan any other consideration. They are also anxious to utilize localresources, even polluting ones, whenever available and econom-ical. If this means more emissions, let it be. Their outlook is short-term economic development rather that long-term environmentalconsiderations which are difficult to ascertain and are unclear.Their main challenge is to phase out subsidies; carbon pricing isnot on their agenda. Therefore it is the action of these non-OECDcountries, mainly China, which is going to decide the future globalCO2 equivalent emissions in the atmosphere for decades to come.

These trends were clear in the United Nations FrameworkConvention on Climatic Change (UNFCCC) in Copenhagen inDecember 2009, where the negotiating process suffered the biggestdamage, and in Cancun, Mexico, in December 2010, where little,other than good willed intentions, was achieved. The modestsuccess of Cancun was in promises: the Green Fund, preventionof further deforestation, monitoring carbon emissions and con-sensus on how to simulate international co-operation on develop-ing and disseminating low-carbon technologies. But most of theseremain a wish-list of commitments—and inadequate commit-ments at that (Dickson, 2010). There is the uncertainty on thefuture of the Kyoto Process itself and the reluctance of biggestemitters – the United States and China in particular – to makesubstantial concessions and commitments and apply them withinthe next few years. All of this makes the 450 Scenario out of reach.

Still a substantial part of WEO 2010 is devoted to this 450Scenario, which detracts the reader from the realities of the paththat the future global energy scene is taking. The New PoliciesScenario introduced by IEA in 2010 may be the best that we canrealistically aspire to. I hope that future World Energy Outlookreports will take more realistic outlooks.

One further comment is that of the atmospheric heatingimplications of the GHGs concentration. IEA chose to safely adoptIPCC predictions of two degrees increase in atmospheric tem-perature under the 450 Scenario and above 3.5 1C temperatureincrease under the 650 ppm of the New Policies Scenario. Climatepredictions and atmospheric temperature implications of CO2

concentration are still controversial. These controversies areadding to the hesitancy in globally adopting binding commit-ments (Gillis, 2010).

3. Energy subsidies

The WEO 2010 devotes a complete section to the subject ofenergy subsidies. This is an important issue which was shiedaway in past discussions but it came into the forefront after a callfrom G-20 Leaders at the Pittsburgh Summit in 2009.

The IEA defines an energy subsidy as ‘‘any government actiondirected primarily at the energy sector that lowers the cost of

energy production, raises the price received by energy producersor lowers the price paid by energy consumers’’. WEO 2010 rightlypoints out that fossil-fuel subsidies result in an economicallyinefficient allocation of resources and market distortions, whileoften failing to meet their intended objectives. Subsidies thatartificially lower energy prices encourage wasteful consumption,exacerbate energy-price volatility by blurring market signals,incentivise fuel adulteration and smuggling, and undermine thecompetitiveness of renewables and more efficient energy tech-nologies. For importing countries, subsidies often impose a sig-nificant fiscal burden on state budgets, while for producers theyquicken the depletion of resources and can thereby reduce exportearnings over the long term. No more this is evident than in theMiddle East.

WEO 2010 estimates fossil-fuel consumption subsidies ataround $312 billion in 2009. The fast majority were in non-OECDcountries. Subsidies are mainly manifested in oil producingcountries selling oil and electricity to local residents at less thanthe world opportunity cost of this material, sometimes electricityis provided free. The world’s highest subsidies are provided byIran which reached $66 billion, followed by Saudi Arabia at $35billion and Russia at almost the same figure. Iran’s subsidiesamounted to an astronomical figure of 20% of the country’s GDP,in 2009. Realizing that, the Iranian government, as of end of 2010,started dealing with these grave subsidies in a firm manner,which is a positive development. The subsidy reform plan calls forthe subsidies on fuel, electricity, and certain goods to be cut overthe course of five years. The administration has decided to paycash subsidies for an undetermined period of time to compensatelow-income families for the inflationary repercussions of the plan(MEES, 2010). It is hoped that Iran’s initiative will be copied byother countries in the Middle East region where energy subsidiesdominate.

Subsidies in the power sector come next to oil in theproliferation of energy subsidies. In some countries of the Gulf,electricity is not only cheaply available, but also at no cost tolocals. Nothing can lead to waste more than this. Middle Eastelectricity demand is growing at rates of 6–8% annually in everycountry in the region mainly because of subsidies. This is threetimes the world’s average growth. It is causing many countries inthe region to burn valuable crude or oil products to fuel thisaccelerating demand. Not only this is increasing emissions but itis also depleting the financial resources of these countries inbuilding capital intensive facilities for electricity generationand fuel provisions which could easily be saved through tariffreforms.

As a matter of fact energy subsidies extend beyond fossil fueland electricity subsidies. Theft and non-payment of electricitybills, sometimes overlooked, is not uncommon in some countrieswhich only add to subsidies and waste. There is belief, in some oilexporting countries, that their petroleum wealth is a heavenlyendowment which can be freely utilized by the citizens. Also, thatthe opportunity cost of natural gas in zero, because it is abun-dantly available. Although such views can be convincingly dis-missed, however, I would like to point out that fuel constitutesonly one-third to one-half of electricity production cost. Mostof the cost is for operations and amortizing and servicing theinvestments in equipment and installations, all of which arecapital intensive, beside the operational and maintenance costs.These all are expenses which should be paid for.

There are also calls for the need to provide electricity insubsidized manner to certain low-income consumer groups aswell as industries. If there is real need for this, then the subsidyshould be made in cash and not in electricity bills. Electricitysubsidies lead to inefficient use and waste. Correspondingly it isessential to charge fair electricity tariff that cover actual cost to

H. Khatib / Energy Policy 39 (2011) 2507–2511 2509

avoid waste. Subsidizing the industry and economy can be in cashpayment or other fiscal means, if need be (the Iranian initiative).

But subsidies are not restricted to fossil-fuel subsidies. OECDcountries have introduced production subsidies (sometimes theycall them support programs) to aid the diffusion of mainlyrenewable energy. Such support no doubt helps the move tocleaner forms of energy, but their main incentive is energysecurity. OECD countries are anxious to subsidize expensive localresources (renewables, nuclear, biofuels, etc.) to improve theirenergy security prospects.

WEO 2010 estimates that OECD governments support forelectricity from renewables and for biofuels cost $57 billion in2009, up from $44 billion in 2008 and $41 billion in 2007. Thissupport grows to $205 billion by 2035 in the New PoliciesScenario, or 0.17% of global GDP. Between 2010 and 2035, 63%of the support goes to renewable electricity and 37% to biofuels.Large-scale government support is needed to make renewablescost competitive with other energy sources and technologies andto stimulate the required technological advance. But it is sub-sidies all the same that add up to consumers cost.

I reckon that many, if not most; of the renewable energyprograms in OECD countries are not feasible without thesesubsidies. Recently some phasing out is taking place. This is likelyto slow new renewable energy programs in OECD countries.

4. Electricity, nuclear and renewables

Electricity is versatile, clean to use, easy to distribute andsupreme to control. Just as important, it is now established thatelectricity has better productivity in many applications thanmost other energy forms. All this led to the wider utilization ofelectricity and its replacement of other forms of energy in manyuses. Demand for electricity is now growing globally at a ratehigher than that of economic growth and, in many countries, atalmost 1.5–2 times that of demand for primary energy sources.Other than for the transport sector, electricity can satisfy mosthuman energy requirements. It is expected that, by the middle ofthe 21st century, almost 70% of energy needs in some industria-lized countries will be satisfied by electricity (Khatib, 2003).

In the WEO 2010, it is predicted that final electricity con-sumption, according to New Policies Scenario, will increase at anaverage annual rate of 2.2%, compared to 1.2% in case of primaryenergy consumption, thus indicating the growing role of electri-city in final energy demand. It also has to be realized thatelectricity is the only practical energy carrier to convey newrenewables, hydro and nuclear into final consumption. With theincreasing share of these resources in the energy supply chain therole of electricity is destined to strengthen year after another.

In the New Policies Scenario, global electricity generationgrows by 75% over the 2008–2035 periods, rising from 20 183terawatt-hours (TWh) in 2008 to 27 400 TWh in 2020, and35 300 TWh in 2035. Coal continues to be the main source ofelectricity production, despite its share of the world mix decliningfrom 41% in 2008 to 32% by 3035. In contrast, the share ofgeneration from non-hydro renewable energy sources – wind,biomass, solar, geothermal and marine – increases more thanfive-fold, from 3% in 2008 to 16% by 2035. Electricity productionfrom natural gas maintains a constant percentage of globalgeneration at about 21%; similarly, the shares of hydro andnuclear also stay flat at 16% and 14%, respectively. Coal, remainsthe dominant fuel source in the power sector. Coal use in China isexpected to dominate world coal consumption in 2035 rising toalmost 50% of coal use in global power generation.

WEO 2010 predicts significant improving outlooks for renew-ables and nuclear. This growth over the past few years has been

remarkable, mainly driven by feed-in tariffs in OECD countriestrying to attain better energy security prospects and improvecleaner environment. In the environmentally driven New PoliciesScenario share of renewables will increase from 19% in 2008 to32% in 2035, while nuclear will continue to contribute 14% of totalelectricity consumption all through this period. In absolute terms,renewables-based electricity generation triples between 2008 and2035 and almost catches up with coal-fired generation by theend of the projection period (11 200 TWh). For most renewables-based technologies and in most regions, direct governmentincentives are the main driver of growth rather than carbonmarkets in the New Policies Scenario.

Traditional hydropower is expected to contribute half theshare of renewables generation by 2035 in New Policies Scenario,and 16% of global electricity, wind 8%, solar photo-voltaic 2%, andconcentrating solar power plants (CSP) slightly more than 1%, andthe rest from biomass, geothermal and marine. If these trends arerealized one-third of global electricity will be contributed byrenewables (half of that new renewables), and with nuclearcontributing 14%, correspondingly by mid century around halfglobal electricity will be available from non-fossil fuels. This, ifaccomplished, will be a remarkable achievement but it alsocarries risks in investments, cost of supply and serious problemsin dispatching with increasing costs to consumers.

A significant feature of WEO 2010 is the improved outlook tonuclear. This was not the case in earlier reports, particularly WEO2009. Encouraged by significant nuclear startups in China, theMiddle East as well as other parts of the world, nuclear electricityoutput is expected to grow year after another matching globalelectricity generation growth at 2.2% annually and significantlycontributing towards abatement of emissions. But nuclear out-look for the United States does not seem to be that promising.Rising cost of nuclear is going to limit its investments and itspresent installed capacity of 10%, in 2009, may drop to 3% in 2035(EIA, 2011), a discouraging prospect.

5. Oil resources and oil peak

The WEO 2010 makes three important highlights concerningfuture oil market outlook:

�

In the New Policies Scenario, demand continues to growsteadily, reaching about 99 mb/d (excluding biofuels) by2035—15 mb/d higher than in 2009. All of the growth comesfrom non-OECD countries, 57% from China alone, mainlydriven by rising use of transport fuels; demand in the OECDfalls by over 6 mb/d. � Global oil production reaches 96 mb/d in the New Policies

Scenario, the balance of 3 mb/d coming from processing gains.Crude oil output reaches a plateau of around 68–69 mb/d by2020—marginally below the all-time peak of about 70 mb/dreached in 2006, while production of natural gas liquids andunconventional oil grows strongly.

� Total OPEC production rises continually through to 2035 in the

New Policies Scenario, its share of global output increasingfrom 41% to 52%. Total non-OPEC oil production is broadlyconstant to around 2025, as rising production of natural gasliquids (NGLs) and unconventional production offsets a fallin that of crude oil; thereafter, production starts to drop.Increased dependence on a small number of producing coun-tries would intensify concerns about their influence overprices.

This means that conventional crude oil production, as weknow it, has peaked at 70 mb/d in 2006. The difference between

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oil demand and conventional crude availability is made byproduction of NGL and non-conventional oil, both of which areexpected to grow steadily to make up for crude oil production atless than 70 mb/d.

This is important consideration to future oil pricing, becausethe output of cheap conventional crude oil is steadily falling shortof rising world oil demand. The balance to be satisfied by moreexpensive sources of NGL and non-conventional oil including tarsands, heavy oils, etc.

The WEO 2010 points out the growing insensitivity of oildemand and supply to price. Oil import prices can reach $113/b in2035 (in year—2009 dollars) in the New Policies Scenario. Butthey can exceed $135/b in 2035 under business as usual con-siderations. The obvious conclusion is that oil prices and cost oftransport is going to increase in nominal as well as real prices inthe coming few years.

6. Energy poverty

In a world in which the majority of us take the absoluteavailability of electricity and commercial fuels for granted, thereare still 1.4 billion people that lack access to electricity. Also2.7 billion people today still rely on biomass, and likely toincrease to 2.8 billion in 2030 according to WEO 2010. Thisenergy poverty is one of the big tragedies of our universe. Tilltoday more than 40% of the world’s population relies on non-commercial fuels in the form of biomass, waste, trees, dung, etc.to provide them with the necessary energy for cooking andheating. The detrimental household air pollution from the use ofbiomass in inefficient stoves, according to WHO, would lead toover 1.5 million premature deaths per year in 2030. Availability ofmodern fuels and electricity is essential not only for health but forhuman development as well.

Realizing all this WEO 2010 introduced what it called EnergyDevelopment Index (EDI) in order to measure and better under-stand the role that energy plays in human development.

The EDI is calculated in such a way as to mirror the UNDP’sHuman Development Index and is composed of the following fourindicators, each of which captures a specific aspect of potentialenergy poverty:

�

Per-capita commercial energy consumption: which, in WEO2010 view, serves as an indicator of the overall economicdevelopment of a country? � Per-capita electricity consumption in the residential sector:

which serves as an indicator of the reliability of, and con-sumer’s ability to pay for, electricity services?

Fig. 1

�

Share of modern fuels in total residential sector energy use:which serves as an indicator of the level of access to cleancooking facilities? � Share of population with access to electricity.

A separate index is created for each indicator, using the actualmaximum and minimum values for the developing countriescovered. Performance in each indicator is expressed as a valuebetween 0 and 1, calculated using the formula below, and the EDIis then calculated as the arithmetic mean of the four values foreach country:

Indicator¼actual value�minimum value

maximum value�minimum value

The EDI is quite useful, although not ideal in measuring energypoverty. By including per-capita electricity consumption in theresidential sector, the indicator rewards those developing coun-tries that are subsidizing electricity tariffs and fuel prices thusencouraging over use and waste.

Correspondingly, it is not surprising that wasteful countrieslike Libya, Iran and Venezuela top the list of countries with thehighest Energy Development Index, with countries in Sub-Saharan Africa are rightly down at the bottom of the Index. Ihope that, with time, IEA will refine the EDI to become morereflective of the true energy development of nations and their realenergy poverty.

7. Abatement

WEO 2010 continued to concentrate more on the 450 Scenarioas the path way to reach ideal emissions target, than to discussmore realistic possibilities. I reproduced from the Outlook Fig. 1 tocompare world energy-related CO2 emission savings by policymeasures in the 450 Scenario compared to the Current PoliciesScenario and New Policies Scenario.

From Fig. 1 it is clear that energy-related CO2 emissions of43 GT in business as usual (Current Policies Scenario) can bereduced to about 36 GT in 2035 by adopting the New PoliciesScenario and as low as 22 GT in the 450 Scenario. Efficiency is themost important factor in abatement strategies followed byincreasing use of renewables, biofuels and nuclear. To fulfill the450 Scenario, CCS figures out prominently at 26% of the totalabatement achievements. Realizing the modest progress in CCStechnologies till today, this only adds to the impracticability inachieving anything near to the 450 Scenario targets in 2035. Itis mainly in improving efficiency in electricity generation andenergy use (in industry, buildings as well as transport) that

H. Khatib / Energy Policy 39 (2011) 2507–2511 2511

significant abatement measures can be achieved. It is better toconcentrate on this than to hope for unrealistic achievements inother quarters, CCS for instance, or continued subsidies andsupport for renewables through feed-in tariffs which has becomea source of complaint in some OECD countries and unwelcome innon-OECD countries.

It is in Chapter 7, on Power Sector Outlook, that WEO 2010charts a more realistic outlook to improving efficiency. As pointedearlier final energy use is increasingly becoming electrified andimprovements in the power sector can lead the way to less CO2

intensity. This is achieved not only by increasing renewables andnuclear share, but also by improving the efficiency of electricitygeneration and increasing the share of natural gas and CCGT highefficiency plant. The New Policies Scenario points out to improve-ments in the average efficiency of the world coal-fired fleet toreach above 40%, in 2035, up from 35% today, mainly throughsuper critical plant and ultra super critical plants, with gas firedgeneration rising by almost 77%. CCS technologies are expected to

have a modest but realistic share of 1.5% in 2035. Globally theshift to low-carbon technologies in the New Policies Scenariocauses the CO2 intensity of power generation to fall by 34%, from536 g of CO2 per KWh today to less than 360 g of CO2 per KWh in2035. This is the way forward.

References

Dickson, D., 2010. Cancun Climate Talks Prove Skeptics Wrong, But There is Still aLong Way to Go, Oilprice.Com, 25/12/2010.

EIA, 2011. Annual Energy Outlook 2011. U.S. Energy Information Administration,Washington, DC Energy Informer, January 2011, forthcoming.

Gillis, J., 2010. A scientist, his work and a climate reckoning. The New York Times,22/12/2010.

IPCC (Intergovernmental Panel on Climate Change), 2007. Climate Change 2007:Synthesis Report. IPCC, Geneva.

Khatib, H., 2003. Economic Evaluation of Projects in the Electricity SupplyIndustry. Institution of Electrical Engineers, London.

MEES, 2010. Middle East Economic Survey, 27 December 2010, Nicosiap, p. 18.