Contemporary Economic Policy: Energy and Growth - Essay Example

Running Head: Contemporary Economic Policy: Energy and Growth Contemporary Economic Policy: Energy and Growth [Institute Table of Content Content Page No. Executive summary 3 1. Introduction 5 2. UK energy trends 6 3. Energy prices and UK economy - an overview 9 4. UK energy policy 9 5. Economic trends 10 6. Energy trade 11 7. Energy demand 12 8. Renewable energy 15 8.1 Sustainable energy 16 9. Recommendations 18 10. Conclusion 20 Executive Summary The world's energy system is in crisis. Present global trends in energy supply and consumption are demonstrably on shaky ground - environmentally, economically, socially. But that can - and must - be altered; there's still time to change the road we're on. It is not an amplification to claim that the future of human prosperity depends on how successfully we deal with the two central energy challenges facing us today: securing the supply of reliable and affordable energy; and effecting a rapid transformation to a low-carbon, efficient and environmentally benign system of energy supply. What is needed is not less than an energy revolution itself. This World Energy Outlook demonstrates how that might be achieved through decisive policy action and at what cost. It also describes the consequences of failure. Take oil for example, which is the world's essential supply of energy and will remain so for many years to come, even under the most optimistic of assumptions about the pace of growth and exploitation of alternative technology. But the sources of oil to meet rising demand, the cost of producing Oil and the prices that consumers will need to pay for it are extremely uncertain and constantly fluctuating, perhaps more than ever. The surge in prices in recent years drastically ending in the price spike of 2008, joined with much greater short-term price instability, have highlighted just how sensitive prices are to short-term market imbalances. They have also alerted people to the ultimately finite nature of oil (and natural gas) resources. In fact, the immediate risk to supply is not one of a lack of global resources, but rather a lack of investment where it is needed. Upstream investment has been rising rapidly in nominal terms, but much of the augmentation is due to heaving costs and the need to battle rising decline rates - especially in higher-cost provinces outside of OPEC. Today, most capital goes to exploring for and developing high-cost reserves, partly because of limitations on international oil company access to the cheapest resources. Expanding production in the lowest-cost countries will be central to meeting the world's needs at reasonable cost in the face of dwindling resources in most parts of the world and accelerating decline rates everywhere. 1. Introduction: The United Kingdom has been a net importer of energy resources (Oil and Gas) the energy sector itself has a big chunk in the over-all economy of the nation. However with the ever fluctuating and unpredictable fuel prices, it does not seem like a feasible approach to depend on traditional energy resources. A better and more mature energy policy needs to be prepared and implemented. The purpose of this paper is to highlight key energy consumption trends in the UK, review the energy policy and come up with a better approach towards dealing with the economic impact of energy. The energy industries in the UK play an innermost role in the economy by producing, transforming and supplying energy in its various forms to all sectors. They are also major contributors to the UK's balance of payments through the exports of crude oil and oil products (National Statistics Publication 2007). i) 4.8 per cent of GDP; ii) 8.6 per cent of total investment; iii) 44.3 per cent of industrial investment; iv) 137,800 people directly employed (5 per cent of industrial employment); 2. UK Energy trends: It would be better if the consumption trends in energy are review first, before analyzing the energy policy itself. In the year 2007 the percentage of primary energy derived from major sources was: Oil: 38.0% Natural gas: 37.7% Coal: 16.7% Nuclear power: 5.8% Renewable: 1.8%. Keeping this in mind, we would consider the consumption statistics for the UK, which include the carbon emission compared to the energy used: (Mobb. 2007) This indicates that at present, oil and Gas dominate the fuel usage in UK. However we must consider the fact, that fuel prices for both oil and Gas are not reliable. They can turn into major economic shocks since UK imports a major chunk of fuel. On current trends, energy-related emissions of carbon-dioxide (CO2) and other greenhouse gases will rise inexorably, pushing up average global temperature by as much as 6C in the long term. Strong, urgent action is needed to curb these trends. The 15th Conference of the Parties, to be held in Copenhagen in November 2009, provides a vital opportunity to negotiate a new global climate-change policy regime for beyond 2012 (the final year of coverage of the first commitment period of the Kyoto Protocol). The conference will need to put in place a framework for long-term co-operative action to bring the world onto a well-defined policy path towards a clear, quantified global goal for the stabilization of greenhouse gases in the atmosphere. It will also need to ensure broad participation and put in place robust policy mechanisms to achieve the agreed objective. (OECD/IEA, 2008). Consider UK's energy imports for example (Mobb, 2007). This clearly states that imports can rise alarmingly, depending on the demand and supply theory. The fact which makes UK more fuel dependant is the depletion of the North Sea reserves. If the statistics are over viewed, we would realize the seriousness of this situation. The rising imports along with fuel prices' uncertainty can result in an economic disaster anytime soon. 3. Energy Prices and UK Economy - An overview The energy price hike and economy are co-related, for example an increase in natural gas prices affects both consumers and industries. At the industry level, higher gas prices raise the costs of producing goods and services, which in turn are passed on to product prices. Prices of consumer products, capital goods, and exports all rise as a result. At the same time, household consumers are also directly affected because of higher fuel bills. As a consequence, the economy experiences a general rise in inflation. 4. UK Energy Policy: Britain has willingly taken up the challenge to counter energy dependency and the crisis ahead. The 2007 White Paper: "Meeting the Energy Challenge" delivers the following points to address: 1. To put the UK on a path to cut carbon dioxide emissions by some 60% by about 2050, with real progress by 2020; 2. To maintain reliable energy supplies; 3. To promote competitive markets in the UK and beyond, helping to raise the rate of sustainable economic growth and to improve productivity; and 4. To ensure that every home is adequately and affordably heated. Our research mainly focuses on the first three points as they link directly to the economic indicators. We shall consider each one of them and then provide adequate way outs and solutions to meet these challenges. Let us first consider the economic analysis of the energy sector. 5. Economic Trends: Supply-demand overview The chart below elucidates the production and consumption of energy (Department of Energy and Climate Change 2009): The chart below elucidates the production ad consumption of energy: Energy supply In 2004, the UK total primary energy supply (TPES) was 234 million tones of oil equivalent (Mtoe). (By way of comparison, in the same year, the US had a TPES of 2 326 Mtoe, Japan 533.2 Mtoe, Australia 116 Mtoe, Austria 33.2 Mtoe and France 275.2 Mtoe.) TPES in the UK In recent years, coal supply has continued to fall while oil supply has stabilized and is now increasing, largely due to transport demand. Supply grew by 0.6% from 2003 to 2004 and from 1994 to 2004 grew at annual average rate of 0.5%. By way of comparison, the average annual TPES growth for all OECD countries from 1994 to 2004 was 1.3%. Natural gas and oil are the UK's leading primary fuels, accounting in 2004 for 37.4% and 35.8% of TPES, respectively. These are followed by coal (16.0%), nuclear (8.9%), biomass (1.3%), hydropower (0.2%), wind and solar (0.1%), and imported electricity (0.3%). The major fuel supply trend of the last 30 years has been the rise in the share of natural gas at the expense of coal and oil. Oil use for electricity generation dropped from nearly one-quarter of the total to very small amounts today. Increased exploitation of substantial gas reserves in the UK Continental Shelf (UKCS) in the North Sea led to greatly expanded natural gas use, particularly in the 1990s when substantial gas-fired combined cycle gas turbine (CCGT) electricity generation was built. Wind and solar have seen the greatest percentage growth, more than doubling from 2000 to 2004, although their combined overall contribution of 0.1% remains negligible. The government estimates that oil and gas will continue to be the dominant fuels up to 2020 and renewable energies will expand substantially but still only reach 1.2% of TPES in 2020. (IEA. 2007). 6. Energy Trade: While the UK produced notably more coal in the 1970s and early 1980s than it does today, it has not been a major exporting country. With the decline in domestic mining activity since the late 1980s, imports have risen largely, increasing by more than 160% from 1990 to 2004. The UK has been a net importer of fossil fuels in only six of the 24 years from 1980 to 2004. 2004 was the first year since 1991 that the country was a net fossil fuel importer. With the North Sea production falling and growing domestic demand, it is likely the UK will continue to be a net importer in the foreseeable future. In 2004, coal imports accounted for more than 60% of supply to the UK. 2004 was the first year since 1996 that the UK was a net natural gas importer. The decrease in production from the UKCS fields occurred more rapidly than expected. While oil remains a net export (15.3 Mtoe of net exports in 2004), declining production and increasing domestic demand will likely soon reverse this (IEA, 2007). 7. Energy Demand: In 2004, oil was the most important energy source for final consumption, accounting for 47.2% of TFC. This was followed by natural gas (31.3%), electricity (17.9%), coal (1.9%), heat (1.2%) and biomass (0.3%). For the IEA as a whole in 2003, oil accounted for 52.7% of TFC, followed by gas (20.2%), electricity (19.6%), coal (3.2%), biomass (3.0%) and others (1.3%). In 2004, UK total final spending (TFC) of energy was 163.7 Mtoe. From 1999 to 2003, TFC grew by an average annual rate of 0.4% and from 1973 to 2003; it grew by an annual average rate of 0.3% for a total increase of 11% over the 31 years. By way of comparison, TFC for the IEA as a whole rose by 31% from 1973 to 2003. The fuel whose share of TFC is considerably different in the UK than in the IEA as whole is natural gas. The higher share in the UK reflects the accessibility of North Sea domestic production and the all-embracing UK pipeline network. The transport sector is the largest final energy user in the UK, accounting for 33.5% of TFC in 2004, 73% of which was used for road transport. The residential sector was the next largest user of energy with 27.4% of the total, followed by industry (20.0), other sectors (mostly commercial and public sector, 12.1%) and non-energy use (7.0%). UK energy policy of the last ten years has been rather successful. The country has had secure energy at low prices and has taken important steps towards addressing GHG emissions on both domestic and international levels. Its pioneering work in market liberalization of the gas and electricity sectors has brought many benefits and provided a good example for other countries. The strong UK commitment to competitive energy markets has resulted in clear benefits for UK energy consumers and a diverse energy sector (IEA 2008). (John. et al. 2007) Having seen the demand, supply and the production of energy, we can easily realize the steps which can be taken to combat the upcoming challenges. As discussed in the energy policy. The most important point in the policy relates to, secure and reliable supply of energy, for sustainable growth of economy. The million dollar question is how to have a secure and reliable supply of energy The answer seems pretty predictable; utilize alternate sources of energy to cope up with the energy demands. However we must understand that security of energy supply is a must. Security of supply requires us to have adequate admission to accessible fuel supplies, the infrastructure in place to transport them to centers of demand and effective markets so that supply meets demand in the most efficient way. Many of the measures already described for tackling carbon emissions also contribute to the healthy diversity of energy sources that is necessary for meeting the energy security challenge. There are two main securities of supply challenges for the UK: Managing increased dependence on oil and gas imports, especially in the light of the global distribution of energy reserves and growing international demand; and Ensuring that the market delivers substantial and timely investment in electricity generating capacity and networks so that households and businesses have the electricity they need at affordable prices. The Government's response is to continue to open up markets and to work internationally to develop strong relationships with suppliers, developing liberalized markets. So where does nuclear power fit within this debate Although it is mentioned a lot more in the Review compared to the White Paper (441 times, compared to 55 to be exact), the Government does not propose building new stations itself. Instead, it will leave it to the market, although it will ease some of the planning constraints (which it also aims to do for renewable) and look into providing a design authorization procedure. However, as with many other aspects of the Energy Review Response, the document is not likely to be the last word on the subject, as there are plans for further consultation, and the establishment of further reviews and studies in issues such as identifying suitable sites, and managing the costs of decommissioning and long term waste management. In the Action Plan 2007, diverse tactics have been devised to undertake the above-mentioned challenges. Controlled use of fossil fuels is the best way to check the emission of greenhouse gases. Different measures can be embarked on to reduce dependence on fossil fuels. The UK Energy Efficiency Action Plan 2007 put pressure on efficient and cost-effective use of the sources of energy to meet the energy efficiency goals. This in return lowers the UK's requirement of imported energy. Considering the fact that in-house production of clean fuels can reduce dependency on external fuel providers. Energy efficiency in UK also contributes towards the nation's energy security. Improved energy efficiency cuts down the energy bills for the consumers of the United Kingdom. It also makes energy more affordable for the common people of UK. Energy efficiency measures implemented so far have been highly successful in the context of energy efficiency in UK. 8. Renewable Energy: The UK has self-effacing natural resources for hydropower, biomass or solar energy although it does have an outstanding wind profile and a long coastline for wave and tidal energy. In 2004, renewables accounted for just 1.6% of TPES, the second-lowest figure in the OECD. By far the largest share of renewable energy has come from biomass which accounted for 1.3% of TPES. This was followed by hydropower (0.2% of TPES), wind power (0.07%) and solar thermal energy (0.01%). In spite of these humble levels, renewable energy has seen rapid growth rates in recent years. From 1990 to 2004, renewables grew by more than 240% (annual rate of 9.2%) and from 2000 to 2004, renewables grew by more than 50% (10.6% annually). By way of evaluation, the UK TPES for all fuels grew at an average annual rate of 0.7% from 1990 to 2004. Renewables play a slightly larger role in power generation. In 2004, total electricity generation from renewable resources was 3.8% of the total with 2.0% coming from biomass, 1.3% from hydropower and 0.5% from wind. The share for 2005 is 4% although the breakdown by technology is not available. Renewables' share of total power generation has risen from 1.9% in 1990 and from 1.8% in 2002 when the Renewables Obligation was introduced. In 2004, 240 MW of new wind capacity was built, in 2005 446 MW and, for the first eight months of 2006, 601 MW. There is a further 329 MW under construction. In January 2006, construction of a 44 MW biomass plant, the largest in the UK, was begun. The UK government projects that; renewable energy production will expand substantially in the coming years. From the 2004 level of 1.6% of TPES, renewables are expected to account for 4.3% in 2010 and 6.1% in 2020. Biomass is expected to see the greatest absolute growth, increasing its contribution by 9.8 Mtoe between 2004 and 2020, or more than 400%. Wind is projected to have the greatest percentage growth with an increase of nearly 700% from 2004 to 2020. For electricity generation, renewable energy is projected to account for 13.4% of the total by 2020. The UK Government's target for renewable energy production is to produce 20% of electricity in the UK by the year 2020. The 2002 Energy Review set a target of 10% to be in place by 2010/2011. The target was increased to 15% by 2015 and most recently the 2006 Energy Review further set a target of 20% by 2020. (NSP 2007) As for Scotland, the Scottish Executive has a goal of generating 17% to 18% of electricity from renewable resources by the year 2010, rising to 40% by 2020. Renewables located in Scotland count towards both the Scottish target and to the overall target for the UK. Thus Scottish government steps are equally commendable. 8.1 Sustainable energy: Sustainable energy has many meanings, it can however be understood by the diagram below: To be sustainable, clearly the fuel supply must be sufficient--not run out shortly. That means fuel depletion and poverty has to be considered in the initial phase. Since environmental issues exist primarily too, a sustainable source of energy production should not add much carbon to the atmosphere, either hence a low carbon emission fuel is required. We are running short on fresh water; therefore sustainable fuel must not put a burden on the water supply. Moreover, an energy source that relies heavily on imported raw materials or parts, or is dependent on our whole high-tech way of life, is not likely to continue or survive very long. Ideally speaking, any energy source we want to highlight in the future will meet all of these decisive factors, and in addition, will be inexpensive to produce. The problem is that it is very difficult to find fuels that meet all these criteria. (Oildrum, 2009). 9. Recommendations: In order to stabilize the energy-economy balance, it is clear that UK must concentrate on low carbon emission and sustainable energy. On the economy side, this will reduce the dependence for oil and gas. Thus the cash flow won't be outwards, it would rather be inward. On a macro-economic level, a new infrastructure for sustainable energy means proper funds and technological factors. The government has already shown willingness at more than one place, to fund for a cleaner energy infrastructure (CSE 2009). Now the solution stands clear, sustainable energy in the form of Wind, Tidal power, Fuel Cell technology and various others need to be considered thoroughly for their economic feasibility. It can be stated that more than one renewable source of energy can be utilized as a backup plan, in case the traditional energy resource become scarce or their prices spike. Preventing catastrophic and irreversible damage to the global climate ultimately requires a major decarbonization of the world energy sources. The World Economic Outlook 2008 (OECD/IEA, 2008) looks at the situation and states that, The energy sector in the UK will have to play the central role in restricting Carbon emissions - through major improvements in efficiency and rapid switching to renewables and other low-carbon technologies, such as carbon capture and storage (CCS) Securing energy supplies and speeding up the transition to a low-carbon energy system both call for essential action by government - at national and local levels, and through participation in co-ordinated international mechanisms. Households, businesses and motorists will have to change the way they utilize energy, whereas energy suppliers will need to invest in developing and commercializing low-carbon technologies. For this purpose the government has to adopt the following: (Fells, 2008). To make this happen, government have to put in place suitable financial incentives and regulatory frameworks that support both energy-security and climate-policy goals in an integrated way. Removing subsidies on energy consumption, which amounted to a staggering $310 billion in the 20 largest non-OECD countries in 2007, could make a major contribution to curbing demand and emissions growth. High international oil prices, by deterring consumption and encouraging more efficient demand-side technologies, push in the same direction, but only at the expense of economic growth and of living standards in consuming countries, both rich and poor. And some of the alternatives to conventional oil that high prices encourage are even more carbon-intensive. Many countries have made progress in crafting national responses, but much more needs to be done. A new international climate agreement is but a first essential step on the road towards a sustainable energy system; effective implementation is just as crucial. Delay in doing either would increase the eventual cost of meeting any given global climate target (DEFRA 2007). 10. Conclusion: Apropos the above mentioned analysis and subsequent recommendations and measure, it can be concluded that the UK energy policy needs to be implemented more strictly. Fuel poverty, high prices and international dependence are becoming major issues to the economy now. Some way or the other, these have to be curbed. The best way out of the scenarios is, to work on the policy ideas. Marketing plans and alternate fuel markets have to be discovered; more efficiency in regards to fuel is needed. Low carbon emission is surely the need of the hour, since it in capsules all aspects of the economy (Connor, P. 2003) - Maintain diversity - Improve Energy Efficiency and focus on carbon reductions - Carbon Hedge needed for capital investments to change carbon footprint - Support low CO2 R & D - Role for decentralized micro generation - but recognize limitations - Nuclear - remove barriers to new build including planning - CCS - demonstration projects and investment in technology - Markets will deliver security of supply - Support European liberalization and transparency - Long-term focus on regulation for networks Therefore the economy can only grow with reference to the energy sector, when a thorough plan for low carbon emission fuels and an infrastructure for the same are prepared. The energy policy must also highlight the key markets for energy. The energy demand and supply needs to be balanced, by producing more renewable energy. Once the economy balance is attained, more can be done for the growth in energy sector. References Agency, I. (2008). World Energy Outlook 2008: Complete Edition - ISBN 9264045600. SourceOECD Energy, 2008(24), i-578. Fells and Candida Whitmill, (2008) A Pragmatic Energy Policy for UK Fells Associates August 2008. What does Sustainability Mean for Energy (2009.). Retrieved April 24, 2009, from http://www.theoildrum.com/node/5187 Mobbs, (2007) Energy in the UK Putting our consumption in perspective; Version 1, April 2007. Produced by the Free Range Energy beyond Oil Project Retrieved April 24, 2009 from http://www.fraw.org.uk/ebo/ Centre for sustainable energy (CSE) 2009. Retrieved April24, 2009 from http://www.cse.org.uk/cgi-bin/news.cgifull&live&&1374 Home: UK National Statistics Publication Hub. (n.d.). Retrieved April 24, 2009, from http://www.statistics.gov.uk/ BP Global | BP. (n.d.). Retrieved April 29, 2009, from http://www.bp.com Bell, M., & Lowe, R. (2000). Energy efficient modernization of housing: a UK case study. Energy and Buildings, 32(3), 267-280. Connor, P. (2003). UK renewable energy policy: a review. Renewable and Sustainable Energy Reviews, 7(1), 65-82. Home: UK National Statistics Publication Hub. (n.d.). Retrieved April 29, 2009, from http://www.statistics.gov.uk Iniyan, S., & Jebaraj, S. (2006). A review of energy models. Renewable and Sustainable Energy Reviews, 10(4), 281-311. OECD & Development, (2006). FUEL PRICES TO END-USERS Vol. 2005 release 01 -. IEA Coal Information -, 315(1), 1-1. Trade, G. B., & Industry. (2003). Our Energy Future: Creating a Low Economy (Command Paper). London: Stationery Office. UK Dept for Business, Enterprise & Regulatory Reform. (n.d.). Retrieved April 29, 2009, from http://www.berr.gov.uk/ Energy Efficiency in the UK Retrieved April 29, 2009, from http://www.economywatch.com/energy-efficiency/uk.html Read More