Germany Invests Heavily In Alternative Energy Production

As part of its New Energy Architecture initiative to better understand the changes currently in full swing within the global energy system, the World Economic Forum recently published its Global Energy Architecture Performance Index Report 2014. The report identifies and examines various indicators across countries and regions that are significant for an effective global transition to a new energy architecture. Conceptually, energy architecture is defined as “the integrated physical system of energy sources, carriers and demand sectors that are shaped by government, industry and civil society.”

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Source: World Economic Forum, Global Energy Architecture Performance Index Report 2014

The report’s conclusion is straightforward and not surprising: Transition pathways look different in each country and require governments to develop a long-term vision in order to adequately manage risks to energy supplies (energy security) while supporting the country’s developmental path. Easier said than done. Competing policy objectives – such as economic growth, environmental sustainability, and energy access as well as security – without assigned clear priorities often interfere with each other and create unintended consequences. The key question is how to effectively balance the demands of providing an affordable, sustainable and secure energy supply in a dynamic global context?

In this respect, the “dynamic global context” should actually be the operational key phrase used to think about a new energy architecture transition. Commodity markets are affected by shifts in global energy demand and supply patterns due to the emergence of new technologies (e.g. hydraulic fracturing and the ensuing U.S. shale revolution), regulation (energy policy), and the impact of unforeseen events (e.g. impact of Fukushima on Japan’s energy-mix or on the nuclear phase-out in Germany). All have transformed the global energy sector and will continue to do so. The report’s findings include that rapidly industrializing countries are, for the most part, characterized by more energy- and emission-intensive economies than those in MENA, the region with the world’s greatest endowment of natural resources, where the abundance of fossil fuel subsidies leads to inefficient energy use. To address subsidy reform in the face of rising energy demand, the report recommends a long-term gradual phase-out accompanied with a clear communication strategy.

Moreover, diversification of energy sources and, thus, energy security remains a key challenge for many countries. In this respect, José Manuel Entrecanales, Chairman and CEO of Acciona (Spain), makes a very interesting security argument for renewables: “As local and geographically well distributed sources of energy, renewables increase a country’s energy independence and security in two important ways. By replacing fossil fuel imports, renewables strengthen a country’s balance of payments. They also bring price stability to electricity markets by making power generation less dependent on the volatile prices of fossil fuels, over which importing countries have no control.”

At this point, note that the transformative effects of shifts in global energy demand and supply patterns on international trade and energy relations will both increase opportunities for diversifying domestic economies and for diversifying the “energy supply chain.” International energy relations have become and will become further much more complex with various “core energy countries” serving as both energy producers and consumers. This will also redirect oil and natural gas flows from the Middle East to the fast growing East Asian energy market. At the same time, new export volumes of natural gas from North America will have a clear impact in redefining the merit order for new LNG projects around the world as well as the priorities of exploration activities in general. However, in order to benefit from these opportunities a corresponding increase in costly infrastructure to support such global cross-border energy trade is required.

From an energy perspective, given that trade is becoming more regionalized and given the uneven spread of natural resources across many regions, another way of accomplishing the desired diversification of energy sources could be an integrated supply network – a wider integration of power markets – within a region such as across the Gulf Cooperation Council countries in the Middle East, or across ASEAN countries with an integrated ASEAN power grid and the development of a trans-ASEAN gas pipeline or across sub-Saharan Africa with many resource-rich countries. Admittedly, even though the integration of energy systems could be instrumental in balancing supply and demand in the regions mentioned above, they do face challenges that are likely to hinder any integration plans such as, most importantly, lack of political and economic stability as well as integration, or the immense costs of addressing differences in the fixed energy infrastructure. Therefore, the two most likely regions to take steps in this direction will remain the EU and, perhaps, the NAFTA region in the long term. In the latter case, however, the U.S. would have to see significant ‘energy security’ value in an energy integration with Mexico and Canada, which appears unlikely at this stage.