REALISTIC ASSESSMENTS OF ENERGY EFFICIENCY OPTIONS FOR CARBON ABATEMENT

Energy efficiency is at the leading edge of the debate on how to reduce and stabilize US greenhouse gas (GHG) emissions in the future. Several influential studies suggest that the US economy can dramatically reduce and stabilize GHG emissions at “no cost.” In particular, these studies suggest that cost-effective energy efficiency investments that are not undertaken by consumers in the marketplace can provide a massive reservoir of carbon abatement investment options available at “negative costs.”

The “negative cost” logic does not hold in the context of a productive capital market. An efficiency investment with a positive return that does not make the cut in a marketplace has a net positive cost, not negative, because doing it requires giving up something that consumers reveal has greater value.

The “negative cost” hypothesis implies a deeply flawed capital market causing massive economic losses along with political and institutional failure to implement available cost-effective remedies.

The “no cost” GHG emissions hypothesis built on the “negative cost” logic should be rejected. A review of the market barrier arguments for energy efficiency shows some arguments are inconsistent, at odds with available data, simply anecdotal, and often misinterpret evidence of market success as evidence of market failure. In addition, the suggested remedies involve many fixes that have already been implemented or remedies that involve additional costs. Finally, available evidence does not substantiate the existence of massive, unproductive misallocations of capital away from energy efficiency investments with cost-effective remedies at the scale implied to cover the cost of redirecting trillions of investment dollars in the US economy to reduce and stabilize GHG emissions in the years ahead.

BIG QUESTIONS FACING THE NORTH AMERICAN NATURAL GAS INDUSTRY IN 2008

Having passed through several years of increasingly tight natural gas markets, the North American natural gas industry has responded with major investments focused on increasing supply. Even as the supply response takes hold, the North American gas industry faces a set of critical questions that will shape the industry in 2008 and beyond. CERA has outlined ten of the most important questions with the two goals of framing the strategic issues that surround them and guiding CERA’s research.

• The high prices of the past several years have stimulated a wave of investment in new sources of supply, which in turn has set the stage for a new cycle of market tightness.
• The role of natural gas in the economy is becoming more significant. Increasingly, environmental policies favor the use of relatively cleaner natural gas over other fossil fuels. At the same time, high oil prices have stimulated the rise of new sources of gas demand, as oil producers use natural gas to produce very heavy oil. The confluence of environmental policy and oil prices is most apparent in the ethanol mandates imposed by federal policymakers.
• Shifting patterns of supply and demand can mean feast or famine for midstream service providers, for whom location is a critical success factor. The years ahead will require significant investment in new pipeline and storage capacity, as changing demand and supply and the rise of liquefied natural gas alter the operational needs of the North American gas industry.

BIG QUESTIONS FACING CHINA'S ENERGY SECTOR

For players already in the market or those monitoring events on the sidelines, evaluating and understanding China’s energy sector is a daunting task. In our effort to create a consistent and coherent analytical framework, CERA has identified five key questions facing China’s rapidly developing energy sector that will shape our China Energy research agenda for the upcoming year.

• Across the value chain China’s energy sector is developing rapidly to fuel strong demand from industry and consumers. The pace of growth and the tension between state and market offer both opportunities and challenges to investors. A clear understanding of the emerging hybrid system is crucial for building sustainable growth.
• Increased reliance on imports and high global energy prices mean that energy security is a major concern for China’s leadership. Strategies for ensuring security include diversification of the fuel mix, improving upstream access to oil and gas, construction of strategic reserves, and demand-side management. Yet each have their trade-offs.
• Reducing pollution and improving efficiency have become central government tenets, but the obstacles are monumental. Tough measures and innovative solutions will be required for the government to hit its targets.

INVESTORS IN RUSSIAN AND CASPIAN ENERGY FACE CRITICAL QUESTIONS

As a new president takes office in Russia and the global economy continues to face uncertainties, investors in Russia and the Caspian region will encounter critical questions in their decision making:

• Russia currently faces the possibility of declining oil and gas production, even as global demand increases. The rapid oil production increases seen earlier in the decade have slowed, raising fears that oil production is set to decline. In addition, Russia has run through its Soviet-era legacy of cheap gas production. What will be the policy response by the new government, and what opportunities may arise for foreign investors?
• Caspian energy production has accelerated rapidly in the past several years, but export capacity has not kept pace. New investment in export capacity for both gas and oil will increasingly figure into investors’ decisions about undertaking projects in the region.
• Political change both in Russia and throughout the region will have an impact on investment decisions.
  • In Russia the orderly transition from President Vladimir Putin to President Dmitri Medvedev may not ensure the continuity with the Putin years which is widely expected.
  • With high commodities prices, investment is flowing into the Caspian region from various sources, yet the familiar flashpoints will continue to contribute to political instability.

BIG QUESTIONS FACING THE EUROPEAN POWER INDUSTRY IN 2008

Through 2008 the European power industry will see the finalization of plans to address the three energy policy objectives of sustainable, secure, and competitive energy supplies. As the European landscape shifts, companies need to reevaluate their strategic direction and reconsider their asset portfolios. This Decision Brief presents CERA’s take on the big strategic questions facing the European power industry in 2008. These questions identify the drivers that will shape the future of the industry and serve as a framework for targeting the issues that CERA’s European power team will analyze in its research.

• Increased environmental regulation will radically change the European power landscape by 2020. Given the lead times and lifetimes of power assets, companies need to make decisions in the shorter term on positioning and investment that will lead to longer-term profitability.
• The drive for greater competition and an integrated market will change the rules of the game for many players. Companies need to be ready to play in a more competitive market.
• Growth has been achieved through merger and acquisition (M&A) activity. As the remaining M&A opportunities become relatively smaller, companies will need to rethink their approach to continued growth.

BIG QUESTIONS FACING THE EUROPEAN GAS INDUSTRY IN 2008

The year 2008 has the potential to be a defining one for the European gas industry, as significant decisions will be made that could affect the structure of the market, and the future of the corporate players within it, for many years to come. Many players will be reexamining and attempting to reposition their strategies to set up a winning hand for the next decade and beyond. The first step in developing a winning strategy is to understand the big questions facing the industry; this Decision Brief presents CERA’s Big Questions for the European gas industry for 2008. These questions revolve around the drivers that will shape the future of the industry—both upstream and downstream—and serve as a framework for targeting the issues that CERA’s European gas team will analyze in its research and advice to clients.

• High commodity prices and the increasingly global nature of the gas market mean that the next decade will look fundamentally different from the previous one. The challenge of finding and developing gas supply for European markets is enormously increased: successful strategies of the past will not endure uniformly across the value chain.
• The priority of the environmental agenda in Europe complicates the demand side for gas. It is not clear whether Europe’s focus on a low-carbon sustainable agenda will threaten the traditional drivers for market growth or will reinforce the imperative of gas as low-carbon fuel that is more readily available than the no-carbon alternatives of nuclear, renewables, and carbon capture. Resolving the demand dilemma will be crucial for strategy identification.
• Gas companies will face challenges as the role of the transmission business is redefined on a wider, or pan-European, scale. Europe’s midstream businesses will need to adapt their commercial practices to a world in which many companies develop a new focus on transmission as a standalone business, and at the same time concentrate on strengthening the horizontal links across national borders. In some cases this may lead to a process of company redefinition; in many others cases it will lead to a reassessment of contracting and trading practices and of the approach to pricing.