Accenture New Energy Architecture Enabling Effective Transition

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New Energy ArchitectureEnabling an eective

transition

World Economic Forum In partnership with Accenture

Industry Agenda


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World Economic Forum

2012 - All rights reserved.

No part o this publication may be reproduced or transmitted in any orm or by any means,

including photocopying and recording, or by any inormation storage and retrieval system.


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3New Energy Architecture Enabling an effective transition

PreaceContents

The worlds energy architecture dened as the integrated physicalsystem o energy sources, carriers and demand sectors shaped bybusiness, government and civil society is in a state o transition.During a private session at the World Economic Forum Annual Meeting

2011 in Davos-Klosters, Switzerland, 90% o participants, consisting oexecutives o the worlds largest energy companies, policy-makers andthought leaders rom across the energy value chain, expressed a beliethat signicant change is underway in energy architectures around theworld. Almost one-third said they believe the world has reached aninfection point that marks a radical shit in the way in which we source,transorm and consume energy.

While the pressures and possibilities or change in energy architectureare at a historic height, what is less clear is what shape the transitionwill take. What will the New Energy Architecture look like? Whatenabling environment will create the most eective transitiontowards an energy architecture needed to meet tomorrows energyrequirements or dierent countries and globally? How can weensure that the New Energy Architecture goes urther to underpin thesometimes competing needs o economic growth and development,environmental sustainability, and energy access and security?

Created to assist decision-makers, the World Economic Forum ispleased to present this report on how to enable an eective transitionto a New Energy Architecture. The New Energy Architecture project isconducted under the Forums Energy Industry Partnership and involvesa range o business, government and civil society constituents rom theenergy and other related sectors.

Through the project, a methodology has been created that identiesthe critical points o intervention that can impact the eectivenesso the transition to a New Energy Architecture and more eectivelyunderpin economic growth and development, environmentalsustainability, and energy access and security. This includes thecreation o an Energy Architecture Perormance Index (EAPI), a tool

designed to help countries monitor the progress o their transition, aswell as the completion o detailed country studies on Japan and India.

The World Economic Forum partnered with Accenture andcollaborated with Industry Partners and other constituents to drive thedialogue and research. Representatives rom 28 global companies,government agencies and civil society are actively involved, includingABB, the Akio Morita School o Business, AMEC, BASF, Chevron,CH2M Hill, Cisco, Climate Group, DTEK, The Economist, Eskom,HCL Technologies, Hewlett-Packard, Huawei, Intel, InternationalElectrotechnical Commission, the International Energy Agency,Mercuria Energy, Nalco, Novozymes, Powertech Labs, RenewableEnergy and Energy Eciency Partnership (REEEP), REN21 RenewableEnergy Policy Network, Royal Dutch Shell, Sasol, Standard CharteredBank and the United Kingdom Atomic Energy Authority.

Representatives rom these organizations contributed strategicdirection and thought leadership through a steering board and taskorce, whose members are listed in the Appendix. Through workshopsin Brazil, South Arica, Austria, Indonesia, France, the United Kingdom,China, Japan and India, the project has engaged urther leaders obusiness, government and civil society.

3 Preace

6 Executive Summary

10 Section 1: The Transition to a New

Energy Architecture Bringing Balance to the EnergyTriangle

10 1.1 A Conceptual Frameworkor UnderstandingEnergy Architecture

13 1.2 The Energy Triangle andthe Need or a New EnergyArchitecture

14 1.3 The Transition to a NewEnergy Architecture: What Willthe World Look Like in 2035?

15 1.4 The Eect o Trade-os onthe Transition to a New Energy

Architecture21 Section 2: The New Energy

Architecture Methodology Enabling an Eective Transition

22 2.1 Assessing Current EnergyArchitecturePerormance: The EnergyArchitecturePerormance Index

26 2.2 Creating New EnergyArchitectureObjectives: An ArchetypeApproach

30 2.3 Dening the Enabling

Environment:The Four Pillars

39 2.4 Introducing Areas oLeadership: KeyConsiderations orStakeholders

42 Appendices: The Creation o theEnergy ArchitecturePerormance Index

42 Appendix A: Computation andStructure o the EnergyArchitecture PerormanceIndex

43 Appendix B: Technical Notes

and Sources or theEnergy ArchitecturePerormance Index

45 Appendix C: Comparison oEnergy ArchitecturePerormance IndexPerormance by Archetypes

50 Appendix D: RobustnessTests Conducted on theEnergy ArchitecturePerormance Index

51 Acknowledgements

Roberto Bocca,Senior Director, Heado Energy IndustriesWorld EconomicForum

Espen Mehlum,Associate Director,

Head o KnowledgeManagement andIntegration EnergyIndustries, WorldEconomic Forum


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4 New Energy Architecture Enabling an effective transition


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Executive Summary

Momentous changes in the energy landscapes o the past, such as therise o the steam engine in the 1800s and widespread electrication inthe 1900s, have driven proound developments in the wider economyand helped to shape and develop modern societies. Today, we are

again moving to a New Energy Architecture one with lower and non-carbon uels, increased electrication with greater interconnections anda leaner system as we strive to do more with less.

Now more than ever, decision-makers must understand the coreobjectives o energy architecture generating economic growth anddevelopment in an environmentally sustainable way while providingenergy access and security or all and how they are being impactedby changing dynamics.

Responding to these oten competing objectives is challenging, asactions to tackle issues such as resource scarcity and climate changemust be delivered against the background o dicult economicconditions ollowing the global nancial crisis.

The inherent tension between the objectives orces dicult trade-os to be made. In some instances, decisions are made without aconsideration o their broader impacts, leading to fux in the systemand uncertainty or industry and investors.

A methodology to assist decision-makers

This research was initiated to help decision-makers drive an eectivetransition, based on a holistic approach that takes into account theimpact o decisions across the energy value chain, and the need tobalance competing imperatives.

To assess each countrys perormance and progress, we have createdan Energy Architecture Perormance Index (EAPI). The EAPI consists othree sub-indices that explore each objective (economic, environmental

and security), enabling policy-makers to understand the broaderconsequences o their decisions and the trade-os they imply.

Our assessment has highlighted a number o key trends that arecommon to groups o countries. These similarities oten relate to acountries stage o economic development and the extent o theirnatural resources. They show that countries are making their transitionto a New Energy Architecture in very dierent contexts.

In recognition o this we have created our archetypes, groupingcountries that ace similar challenges and a similar vision or a NewEnergy Architecture. The archetypes are intended to provide a newramework or thinking about energy transitions, recognizing that thereis no one-size-ts-all model. The archetypes consist o nations looking

to:

Rationalize and re-organize mature energy systems Capitalize on signicant hydrocarbon resources Grow their energy supply to support economic expansion Access basic energy services at aordable pricesFour enabling pillars

Analysing countries in each archetype that have created strongenabling environments reveals our mutually supportive pillars that arecommon to all:

Policy initiatives to put in place the rules, price signals and risk-return incentives that attract investors and acilitate development Technology and inrastructure to address specic challenges in acountry or stage o the value chain Market structures enabling producers to meet consumers needseciently Human capacity to drive change and develop solutions

Flowing across the our pillars is the exchange o inormation, whichwill be critical to ensuring an integrated approach and driving publicengagement.

Given that energy architecture is both a local and global issue, increating enabling environments each nation needs to understandthe broader implications o their actions as well as the internationalconstraints they may ace. Scale and complexity are also criticalconsiderations. They demand a patient and incremental approach thatmay mean it is not until ater 2030 that we will see a rmly embeddedNew Energy Architecture as the cumulative eect o innovation acrossthe our pillars takes hold.

The role o stakeholders in meeting the New Energy Architecture

challenge

Three key groups o stakeholders have a role to play: government,industry and civil society. Based on the ndings o our research, webelieve that stakeholders should take the ollowing steps to enable an

eective transition and meet the New Energy Architecture challenge:

1. Understand the trade-os being made in driving change, reducingthe economic impacts o the write-down o legacy assets. This isparticularly relevant or those with large legacy systems in place, asin the majority o OECD countries.

2. Consider boundary constraints, both internal and regional, whenmaking decisions with regard to New Energy Architecture. Theavailability, or lack, o physical elements such as land and waterto acilitate change, as well as the capacity o social elements toenact change, should shape decisions.

3. Benchmark progress, measuring perormance over time to providetransparent insight into challenges and provide a solid basis rom

which to make policy and investment decisions, and prioritizeopportunities or improvement.

4. Learn rom archetypes, to better understand the varying costsand benets o dierent transition strategies, and to learn romthe successes and ailures o those who ace a similar set ochallenges.

5. Create mutually supportive enabling environments, takingadvantage o each o the our pillars and ensuring that there is noweak link in the chain.


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Energy transition calls

or practical solutions

Simon Henry, Chie Financial Ofcer,

Royal Dutch Shell, Netherlands

As this report so clearly underscores, governments and societyace a complex challenge managing the worlds transition to a moresustainable energy system, while simultaneously increasing energysupplies to meet surging global demand. The exact course and speedo the transition will depend greatly on the policies governments adopt,as well as how companies and individuals behave in response.

This report rightly emphasizes how striking the right balance betweeneconomic growth, environmental sustainability and energy security willentail trade-os and dicult choices or government policy-makers

and society. Indeed, or many countries there is likely to be a gapbetween what is desirable and what is doable. So their ocus must beon practical, cost-eective solutions that produce results.

There is no single way orward. Each country must work with its ownresources and constraints to determine the best approach. This reportlays out a useul conceptual ramework or the actors and trade-oscountries must consider as they shape energy policy and chart a pathto the uture. It also proposes or the rst time a perormance indexto help benchmark progress in all three areas: economic growth,sustainability, and energy security. The index is a good start onbuilding a useul indicator that will no doubt be rened and improvedover time, and it should help stimulate the right discussions.

Among the many actors that will shape the uture o the worlds

energy system, a ew will play truly critical roles. One is how quickly theworld can shit to new orms o energy. History shows that once a newenergy technology is proven, it takes about 30 years or it to achieve1% o the overall market. Biouels are just now reaching 0.5% ototal energy demand, ater decades o development and governmentsupport. Wind may get to the 1% mark in the next ew years, nearlythree decades ater the rst big wind arms were built in Denmark andthe US.

New energy sources take time to develop because o the massivescale o our modern energy system, which has been more than acentury in the making. And because o the need to build industrialcapacity and learn by doing. For instance, todays largest windturbines are nearly 100 times more powerul than the ones installed inthe mid-1980s, and can produce in much lower wind conditions. Windalready attracts 7-8% o the annual total energy investment, which isnow well over US$ 1 trillion per annum.

Another important actor will be the magnitude o growth in globalenergy demand. As the worlds population pushes toward 9 billionand living standards improve, demand could double in the rst hal othis century. And that is assuming we make heroic eorts to improveenergy eciency. Shells scenarios team thinks renewable energycould meet 30% o the worlds energy needs by 2050. That will bea tremendous achievement and will take a concerted developmenteort. About 60% o demand will still be met by ossil uels, with theremaining 10% met by nuclear.

To illustrate the magnitude o the task ahead, by 2020 the world willneed to replace 40 million barrels o daily oil production. Thats ourtimes what Saudi Arabia produces today. And much o it will need tocome rom resources that have not even been ound yet.

Among the practical solutions countries can use to address thesechallenges, two stand out.

Natural gas can play a critical role going orward, precisely becauseit addresses all three o the actors identied in this report. It can

underpin economic growth, address environmental concernsand enhance energy security. And it requires no new technologydevelopment to do so. Generating electricity rom natural gas insteado coal can cut CO2 emissions at individual plants by 50-70%. That isimportant because coal is currently responsible or 44% o the worldsenergy-related CO2 emissions. Gas-red generators can ramp up ordown more easily than other types o plants, making them importantallies to intermittent power rom renewables like wind and solar. Naturalgas can also enhance supply security in many cases, as new sourcesare developed. The world currently has recoverable gas resourcesequal to about 250 years, at current production rates.

Another important step countries can take is to ocus on smarter urbandevelopment. Cities today hold hal o the worlds population andgenerate up to 80% o total CO2 emissions. With the urban populationexpected to grow more than 70% over the next 40 years, the way inwhich they develop will greatly aect energy demand. Smart citiestechnology holds tremendous opportunity, through more ecientpublic transport, energy-ecient buildings and designs that utilizewaste heat and renewable energy sources. By investing heavily toupgrade our inrastructure, we can oset some o the growth in energydemand while creating new jobs.

Government policies are key. Success requires careul assessment othe inherent trade-os between the three elements o the triangle oimperatives. New technologies need to be mature enough to attractthe huge investments required, which in turn can only be nancedthrough market mechanisms. And long-term, stable policies will beneeded a requirement sometimes at odds with shorter term political

considerations.

Managing the transition to a more sustainable energy system is one othe major challenges o our age. I eel condent that human ingenuityand rameworks such as those presented in this report will help theworld get there. Government, industry and all o society must joinorces and accelerate the process.


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8 New Energy Architecture Enabling an effective transition 8New Energy Architecture Enabling an eective transition

Challenges and Opportunities on the

Transition to a New Energy Architecture

The Global Agenda Council on New Energy Architecture

Eectively addressing the challenges o economic growth, energysecurity, energy access and environmental sustainability will requirea undamental remaking o energy production, distribution andconsumption systems around the world over the coming decades. TheGlobal Agenda Council or the New Energy Architecture met in Dubai,United Arab Emirates, in October 2011 to discuss the possible pathwaysto address these challenges.

The Council recognizes that energy is a complex issue with a multitudeo participants, each with dierent interests and priorities. The purpose othis note is to highlight key issues to consider as nations look to drive aneective transition.

Signicant change is underway in the world o energy and many actorsare infuencing this change events, economic actors, energy securityconcerns, government policies, environmental goals and innovation arethe dominant actors driving this change. Since the last Annual Meeting:

The uture o the nuclear sector has become uncertain ater theaccident at Fukushima The Arab Spring has led to signicant political change in the MiddleEast and created uncertainty about uture supplies rom the region The shale gas revolution has started to spread rom North Americato other parts o the world and the technology is now being appliedto tight oil Oil prices have reached their highest annual average since recordshave been kept

Energy Policies

Government policies in every country in the world infuence both nationaland international energy architecture. Given the strategic signicance othe industry, this is expected. It is also expected that national interestswill continue to dominate energy policies. However, at present, there is a

patchwork o policies in most nations and internationally.

Leaders rom across the energy spectrum oil and gas, powergeneration and low-carbon technologies should join orces to developa coherent policy ramework or the uture. The ramework should bebased on core principles that address energy security, economic growthand sustainability. Policies that are supporting the transition to a lowercarbon uture should be supported, but there must be realism about therole that the ossil uel industry will continue to play or the oreseeableuture to help achieve energy security and economic growth. At theroot o all policies is the undamental belie that open borders enhancediversity and security o energy supplies. The global energy system hasshown its resilience in the ace o crisis and disruptions and any attemptsto create barriers should be discouraged. To meet the uture demand orenergy, investments in excess o US$ 1 trillion per year will be required

or the oreseeable uture. This presents a signicant opportunity orjob creation in all parts o the energy sector and policies that supportinvestments in the energy sector should be encouraged.

Energy Efciency

According to the International Energy Agencys 2011 World EnergyOutlook, global energy demand is expected to increase by one-thirdrom 2011 to 2035. Demand-side management is needed to curb theincrease as much as possible, with energy eciency holding the key.Signicant improvements in energy eciency are possible with knowntechnologies. Both transportation and power generation make use oless than one-third o their primary energy input. It is well known thatdeployment o energy eciency technologies requires up ront capitalinvestment that is paid back over a period o time. There are many

other market challenges such as asymmetric inormation fow and theprincipal-agent problem. There is a lack o a coherent policy rameworkto address energy eciency across the world. In the current economicconditions, a ocus on energy eciency is good or everyone policy-makers, consumers and businesses.

Energy industry leaders should rearm their commitment to drivingimprovements in energy eciency as a core pillar o the uture energyarchitecture around the world. Policy-makers should also commit toremoving barriers or the deployment o new technologies that providecost-eective solutions to improve energy eciency. I the leadingplayers in the energy industry do not commit themselves to greaterenergy eciency and other demand side improvements, we shouldexpect to see the growth o new entrants rom other industries (such asIT), as well as new companies that are starting to capitalize on business

opportunities in this space.

Climate Change

According to the IEA, global energy-related emissions o CO2increased by 5.3% to a record 30.4 gigatonnes in 2010. I this trendcontinues, it is very likely that the global average greenhouse gasconcentrations will exceed 450 ppm. Since the start o the GreatRecession, tackling climate change has become increasingly dicultdue to scal challenges aced by many governments around the world.

There is a growing recognition o the need or adaptation as well asmitigation as witnessed during COP-17 in Durban. At the same time,there is a spurt in innovation in low-carbon energy technologies. Thebiggest challenge these start-ups ace is a lack o capital investmentor scaling up their technologies and a lack o understanding o theenergy industry structure. A rapid deployment and scale up o new

innovations require closer partnerships between the incumbents andnew entrants. Incumbents should increase their investments in newhigh-risk, low-probability technologies and new entrants should leveragethe experience and expertise o the incumbents. In the current economicclimate, lack o nancing has become a major impediment or the scaleup and rapid deployment o new technologies. Energy industry leadersshould become the catalysts or these partnerships.Innovation

This decade is crucial or evaluating the multiple pathways to a dierentand more sustainable energy uture. The world is relying on majortechnological innovations in the energy sector to create this uture. Thelarge capital stock on both the demand and supply side o the energyequation makes revolutionary change nearly impossible. However, theenergy sector should strive or a ast evolution and rapid scale up o

new technologies, rom laboratory to large-scale applications. Thiswill require signicant new investments in technology development, anew generation o skilled workorces, and new plants and equipment.

These investments will enable us to scale up new ideas and identiy thetechnologies that can grow rom a US$ 50 million start-up to a US$1 billion business. Industry leaders and policy-makers should developa common ramework or energy sector innovation and commit theinvestments required to tackle this challenge.


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Conclusion

Rational behaviour and sound business decisions have long beenhallmarks o the energy industry. In the past, the industry has workedcollaboratively with civil society and governments to develop and supportpolicies that promote economic growth and environmental security. Willthis continue to happen in the uture? This is the biggest challenge orthe industry leaders gathered in Davos. Addressing this challenge is thebiggest opportunity to make a real and sustainable contribution to thecreation o the uture energy architecture.

Members o the Global Agenda Council or the New Energy Architecture: Atul Arya, Senior Vice-President, Research and Analysis, IHS Miranda Ballentine, Director o Sustainability, Wal-Mart Stores Xavier Chen, Vice-president, Policy and Business Integration, BP(China) Holdings Limited Tejpreet Singh Chopra, President and Chie Executive Ocer, BharatLight and Power Sean M. Cleary, Chairman, Strategic Concepts Anoush Ehteshami, Dean o Internationalization, Durham University Bob G. Elton, Adjunct Proessor, University o British Columbia; andCouncil Chair Arthur Hanna, Managing Director, Energy Industry, Accenture Michael Liebreich, Chie Executive, Bloomberg New Energy Finance Peggy Liu, Chairperson, Joint US-China Collaboration on CleanEnergy (JUCCCE)

Tatsuo Masuda, Proessor, Nagoya University o Commerce andBusiness Graduate School Ricardo Melendez-Ortiz, Chie Executive, International Centre orTrade and Sustainable Development Ernest J. Moniz, Proessor and Director MIT Energy Initiative,Massachusetts Institute o Technology (MIT) Annetta Papadopoulos, Associate Partner, IDEO Kristine Pearson, Chie Executive, Lieline Energy Qin Haiyan, Secretary-General, Chinese Wind Energy Association David Sandalow, Assistant Secretary or Policy and International

Aairs, US Department o Energy Vijay Vaitheeswaran, China Business, Finance and Tech Editor, The


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1.1 A Conceptual

Framework orUnderstanding Energy

Architecture

It has been common or some time tocharacterize the concerns surrounding energyas a triangle o imperatives relating to theeconomy, environment and energy security.1To be eective, energy architecture shouldbe designed with these imperatives in mind.Although, it should be noted that deliveryagainst each o them is limited by a set o

boundary constraints.

We dene energy architecture as theintegrated physical system o energy sources,carriers and demand sectors shaped bygovernment, industry and civil society.

Our conceptualization o energy architecturecan be seen in Figure 1. While this is a greatlysimplied view, it provides an overview o thecomplex interactions involved, underlining thata systems-based approach should be takento managing change.

Energy

Access &

Security

Economic Growth & Development

Environmental

Sustainability

Carriers

Energy Sources

Markets &

Demand Sectors

Social

Physical

Industry

GovernmentCivil Society

Boundary Constraints

Energy Triangle

Physical elements :

Includes energy sources,

their carriers and end

markets.

Social elements :Includes political

institutions, industry and

civil society, which shape

the physical elements.

The Energy Triangle :Ultimate objectives that

the energy architecture is

designed to support.

Boundary constraints :

Factors limiting

performance against the

energy triangle, both

physical and social.

Definitions

Figure 1 Energy architecture conceptual ramework

Section 1:The Transition to a New

Energy Architecture Bringing Balance to theEnergy Triangle

1This concept is commonly reerred to by the IEA among others,whose mandate has been broadened to incorporate the ThreeEs o balanced energy policy-making: energy security, economicdevelopment and environmental protection.


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The eect o boundary constraints on energyarchitecture perormance4Boundary constraints limit perormance against the three imperativeso the energy triangle. These constraints relate to both physicalissues (such as hydrocarbon reserves) and social issues (such as theavailability o human capital).

Nations must consider boundary constraints, both internal andregional, when making decisions with regard to New Energy

Architecture. Solar technology is a good example: crystalline solartechnology is the most economical solution in areas where landavailability is scarce or land costs are high; PV is the most economicalsolution in locations where land is abundantly available as well as inhigh temperature locations; and, Concentrated Solar Power (CSP)requires availability o water and direct insulation.

Understanding o boundary constraints changes over time. Forexample, the decision o the US to pursue a concerted drive orliqueed natural gas (LNG) re-gasication capacity in the early parto this decade was based on an assumption that American energyarchitecture was constrained by a lack o gas reserves. That picturenow looks very dierent, ollowing the discovery o shale gas reserves.

Below we provide examples o boundary constraints. This list is notexhaustive, but is intended to provide an overview o the range ochallenges that nations ace. These issues are urther explored in thebelow opinion piece by Juan Carlos Castilla Rubio and Wes Frye romthe Planetary Skin Institute:

Geographic setting and climate: Energy consumption, particularlywith respect to heating and cooling, is a unction o geographiccircumstances and climatic conditions. For example, in the US,January temperatures are negatively correlated with natural gasconsumption and July temperatures are positively correlated withelectricity consumption, refecting heating and cooling needs,respectively. Other climate attributes, such as humidity, also contributeto the specicity o demands or energy. Optimal sources or energysupply also depend on local conditions, such as wind patterns and

solar concentration. The use o oshore wind power is particularlysuited to the United Kingdom, Norway and Holland, which have thehighest potential wind resource in Europe,2 and additionally seasonaldemand correlates well to seasonal variability in wind speeds.

Hydrocarbon reserves: The availability o indigenous sources ohydrocarbons helps determine the nature o energy architectures.For example, those with large reserves, such as Saudi Arabia, haveconstructed energy architectures that are ocused on the production,use and export o hydrocarbons. Those who lack access to reserves,such as Japan and South Korea, have built energy systems ocusedon non-hydrocarbon sources o energy and increased eciency.Reassessments o hydrocarbon positions may radically shit as inthe case o the US and its recently discovered shale gas reserves orreduce optionality as in the case o the United Kingdom due to North

Sea eld decline.

Water availability: The entire energy cycle requires water, rom drilling togeneration to distribution o energy. Today, energy uses about 8% o allreshwater withdrawn worldwide. In the US, energy now accounts or40% o all reshwater withdrawals. US Department o Energy ocialshave thereore told the US Congress that uture energy production willbe dependent on water access.3

Legacy inrastructure: The longevity o energy inrastructure rompower plants to building stock prolongs the operation o obsolete

technologies. Today, light water reactors (LWRs) dominate the nuclearpower industry despite being considered inerior to other technologies,particularly in terms o saety. Their dominance is due to 1950s R&Dunding by the US Navy, which required the rapid development o acompact and lightweight reactor. As the civilian nuclear industry beganto develop, LWRs were at a more advanced stage o developmentthan either heavy water reactors or gas graphite reactors, and came tobe the standard design.4

Human capital: The energy industry is challenged by a lack o a next

generation o employees. Without a signicant increase in upskillingand recruitment, the industry will struggle to expand and takeadvantage o wider technical developments. For example, in upstreamoil and gas, the average age o employees is 46-49. With an industrytypical retirement age o 55, a severe shortage o human capital isorecast in the near uture.5 The burgeoning renewables industryis growing rapidly and is drawing employees rom a small pool oexperience, not supported by an established base in education andtraining. A survey revealed that globally 55% o renewable energy rmshad struggled to source talent.6

Section 1: The Transition to a New Energy Architecture Bringing Balance to the Energy Triangle

2 EEA Technical Report: Europes Onshore and Oshore Wind Potential. 2009. Copenhagen:European Environment Agency (EEA).3 World Economic Forum Water Initiative. Water Security: The Water-Food-Energy-Climate Nexus.2011. London: Island Press.4 Cowan, Robin. Nuclear Power Reactors: A Study in Technology Lock-in. In The Journal oEconomic History, 1990, Vol. 50, No. 3: 541-567.

5 Ryder, John. Complex Human Resource Challenges Call or New Approaches. In Talent &Technology, 2007, Vol. 1, No. 1: 14-16.6 Renewable Energy at the Crossroads: Building an HR Structure or Sustainable Growth, 2010.New York: Towers Watson.


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A platorm approach to

understanding and managing

the energy risks across the land-

water-energy-climate nexus

Juan Carlos Castilla-Rubio, Chie Executive Ofcer,

Planetary Skin Institute

Wes Frye, Chie Development Ofcer (Energy), Planetary

Skin Institute

The Challenge: With the worlds population passing seven billion people, resource scarcity becomes the newnormal or the 21st century. The importance o considering boundary constraints to energy and all resource planningcannot be overemphasized. Managing the complex interrelationships (the nexus) between energy, water, air quality,land, ood and climate is critical to optimize economic growth, accessible energy and environmental sustainability.

There is a undamental relationship between water, energy and emissions. Coal, gas and nuclear power plants uselarge quantities o water or cooling steam back into water. Some renewable generation uses large quantities owater as evaporation in hydro reservoirs, irrigation o ethanol-producing crops and steam in solar thermal. Pumpingequipment or water treatment and distribution (rom cities to irrigation) depends on reliable, low-cost energy.

Water shortages impact energy supply. Droughts have caused temporary closings o nuclear plants in Australia,France, Germany, Romania and Spain. With 88% o its electricity rom hydropower, Brazil experienced a severedrought a ew years back, orcing the government to ration power to prevent extensive blackouts and cut industrialusage rom 15% to 25% at great economic cost. In India, demand or water and energy are projected to double in thenext two decades, threatening uture energy supply and inrastructure investment.

Water shortages constrain new power plant siting and approvals. In Caliornia, the Solar Millennium company wasorced to abandon wet cooling or a proposed solar trough power plant ater the water district reused to supply the815 million gallons o water a year the project would need. Conversely, water surplus provides opportunities. Despitebeing the third largest exporter o oil with vast oil and gas reserves, Norway generates over 99% o its electricity romhydropower.

Most observers can sense that resource constraint issues are imminent, but only rudimentary insights exist onwhen and where problems are likely to occur and under what circumstances. Many analytic approaches to resourceplanning exist, but most are economic-ocused, static, and span broad regional or national levels. They lack detailed

geospatial and temporal resolution needed to perorm dynamic risk modelling. This lack o resolution is troublesomeor making plans in relation to resources that are local in nature such as water, land and wind/solar/geothermalavailability. Yet, this is precisely what is needed to make across-the-board resource allocation decisions that minimizethe overall risk prole.

The Opportunity: Assessing opportunities and risks o the energy-water nexus require a more comprehensiveapproach to resource planning one that integrates better sensing and analytic modelling capabilities, spans multipledisciplines across various spatial and temporal dimensions (e.g. weather, hydrology, land-use, energy and climatesystems), optimizes trade-os between economic, risk and environment goals, and characterizes inormation in termso risk distributions and mitigation measures.

The Planetary Skin Institute was ounded to address these capabilit ies, with innovations to incorporate real-time dataeeds rom river gauge sensors, machine learning to improve characterization o hydrological models, and continuouslyupdate water and energy risk assessments as new socioeconomic and biophysical data are identied. This wouldbetter equip stakeholders to answer such important questions as:

What is the risk probability/impact o energy-on-water and water-on-energy or a specic geography? What is the best trade-o between energy-water usage that maximizes overall societal value? What scenarios and interventions most reduce the risks on planned energy inrastructure?Energy planners, industry, government and society-at-large need to adopt a broad, systemic view o how tounderstand and proactively manage the risks across the land-water-energy-climate nexus. Failure to act will impactour uture signicantly.



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1.2 The Energy Triangle and

the Need or a New Energy

Architecture

As highlighted above, energy architectureshould be designed to meet the imperatives othe energy triangle. We dene the purpose oenergy architecture more explicitly as being to:

Generate economic growth

and development

Energy architecture underpins economicgrowth, and is a principal platorm orhuman development and social welare. Itis interlinked with other aspects o criticalinrastructure and provides an essentialinput into many economic processes. Theaordability o energy or private consumersand the impact o energy costs on businesscompetitiveness are major issues. Pricing

is central to sending appropriate signalsto consumers to refect the true costs oenergy and to producers to ensure a viable,responsive energy industry that invests inexploration, production, transormation anddistribution.

in an environmentally sustainable

way

The production, transormation and consumption o energy areassociated with signicant negative environmental externalities. Globalattention is currently ocused on climate change, with growing scienticevidence suggesting that ailure to limit global warming to an increase

o 2C above pre-industrial levels would make it dicult to avoidpotentially irreversible changes to the earths ability to sustain humandevelopment.7 A range o urther issues relating to environmentaldegradation and the energy sector remain o continuing concern,including water scarcity and air pollution.

while providing energy access and

security or all

The secure supply o energy is subject to a number o risks anddisruptions. Principal concerns relate to the reliability o networksor transmitting and distributing energy, and the vulnerability tointerruptions o supply, particularly or countries unduly dependent on a

limited range o sources. Energy security is also about relations amongnations, how they interact with one another, and how energy impactstheir overall national security.8 Here we extend that denition to includethe provision o adequate access to all parts o the population, inrecognition o the importance o tackling energy poverty in many

nations in the developing world.

Figure 2 The energy triangle


Gen

erateec

onom

icgrowth

and

dev

elopm

ent..

. ...Inanenvironm

entallysustainableway...

... While providing energy access and security for all

The need or a New Energy Architecture: Thegrowing challenge o the energy triangle9

Today, meeting the imperatives o the energy triangle has becomeparticularly challenging as security and environmental imperatives including tackling resource scarcity and climate change are bothstrong, and must be delivered against the background o dicult

economic conditions ollowing the global nancial crisis.

The nancial crisis reminded the world o the intrinsic link betweenenergy and the economy. The International Energy Agency (IEA) hashighlighted the important role that the run-up in oil prices rom 2003to mid-2008 played in the global economic downturn10 and there is arange o literature documenting the connection between hikes in oilprices and the recession.11

In the resultant downturn there has been a pressing need or aordableenergy to drive recovery through economic growth. Oil prices oaround US$ 100/bbl are weighing down on the ragile macroeconomicand nancial situation in the OECD, pressuring national budgetsin non-OECD countries and encouraging price increases in othercommodities.

As economic concerns have grown over the course o the past year,the pressing need to solve the global economic situation has takenpriority over discussions relating to environmental sustainability.12 Withrising national debt prompting budget cuts in many countries, somegovernments are questioning whether they can continue to und theclean technology programmes and nancial support mechanisms thathave helped oster innovation in this eld. For example, the severeimpact o the economic downturn on Spain led the government toretroactively reduce the eed-in-tari or solar PV by 30% to enable thegovernment some leeway in keeping energy prices at a moderatelevel.

7 IPCC Fourth Assessment Report: Climate Change. 2007. Geneva: IPCC.8 See Daniel Yergin, The Quest: Energy, Security and the Remaking o the Modern World, 2011, pp.265-283.9 The below two sections reer to scenario-based projections o how energy architecture maychange. Given that the assumptions that underpin scenarios are oten radically dierent, we havethereore tried to be consistent in the scenario that we reer to, ocusing on the IEAs World EnergyOutlook 2011 New Policies Scenario.

10 World Energy Outlook 2009. Paris: International Energy Agency. For a more detailed analysiso the contribution o oil price rises to the economic downturn see James Hamilton, Causes andConsequences o the Oil Shock o 2007-08, Brookings Papers on Economic Activity, Spring 2009.11 Murphy, David J. and Charles A. S. Hall. Energy Return on Investment, Peak Oil, and the Endo Economic Growth. In Ecological Economics Reviews. Robert Costanza, Karin Limburg & IdaKubiszewski, Eds. Ann. N. Y. Acad. Sci. 1219: 52-72.12 The World Economic Forums Global Agenda Council on New Energy Architecture highlighted thispoint at their meeting in Abu Dhabi, United Arab Emirates, in October 2011.


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While many countries have moved orward with their plans to addressclimate change, more needs to be done i we are to meet a scenarioin which the increase in global temperature rises is kept below 2C,as per the Copenhagen Accord. According to the IEAs New PoliciesScenario, more than 60% o the global increase in energy use rom2009 to 2035 is expected to be met through ossil uels, with coalaccounting or 20% o the increase.13 By 2035, the resulting carbonemissions would lead to a concentration o carbon in the atmosphereo 650 ppm CO2 eq., signicantly higher than that which internationalnegotiations are currently struggling to achieve (450 ppm CO2 eq.).14

Today, people worldwide are aected by adaptation challenges such aswater shortages, crop ailures, tropical diseases, fooding and extremeweather events. The World Health Organization (WHO) estimates thatclimate change may already be causing more than 150,000 deaths ayear.15 Based on current trends the aects o climate change are likelyto worsen.

Despite signicant progress, particularly among OECD nations,air pollution remains a considerable, and in some cases, growingchallenge or many nations. The expansion in coal use or powergeneration in countries such as India and China has resulted incontinuing high levels o sulphur dioxide emissions. Levels o nitrogenoxides have also grown, and are expected to rise urther, as the scaleo increasing mobility has outpaced the eect o emissions standards.According to the International Institute or Applied Systems Analysis,these trends imply a worsening health impact. In India, or example, itwould lead to a reduction o lie expectancy o more than six monthsper person by 2035, compared with current levels.16

Expectations or increasing emissions and concerns over air pollutionunder current policy scenarios are also a consequence o risingdemand. In the next 40 years the global population is expected toincrease by one-third, peaking at over 9 billion. This growing populationwill become an increasingly urban one: the urban population isexpected to increase by 85% rom 3.4 billion in 2009 to 6.3 billionin 2050.17 This will result in an explosive growth in demand, with theIEA orecasting a 40% increase in primary energy demand by 2035 incomparison with 2009.18

Concerns over energy security are set against a continuing struggleby many nations to even provide access to modern energy. Today,1.3 billion people lack access to electricity and 2.7 billion people arewithout clean cooking acilities with this gure expected to declineby only 281 million by 2030.19 Access to modern orms o energy isviewed as being crucial to the achievement o the eight MillenniumDevelopment Goals (MDGs)20 and is intrinsically linked to increasingproductivity and promoting economic growth in the developing world.

13 World Energy Outlook 2011. New Policies Scenario. Paris: International Energy Agency.14 World Energy Outlook 2011. New Policies Scenario. Paris: International Energy Agency.15 Climate and Health Fact Sheet, World Health Organization, 2005, http://www.who.int/globalchange/news/sclimandhealth/en/index.html.

16 Emissions o Air Pollutants or the World Energy Outlook 2011 Energy Scenarios. September,2011. Austria: IIASA.17 The UN World Urbanization Prospects, 2009 Revision18 World Energy Outlook 2011, New Policies Scenario. Paris: International Energy Agency.19 World Energy Outlook 2011. Paris: International Energy Agency20 See IPCC, Working Group III Mitigation o Climate Change, Special Report on RenewableEnergy Sources and Climate Change Mitigation, 2011, Technical Summary

21 World Energy Outlook 2011, New Policies Scenario. Paris: International Energy Agency.22 Energy Outlook 2011, New Policies Scenario. Paris: I nternational Energy Agency.23 GE Reports: Top 10 countries or smart grid investment, 2010.24 GE Reports: Top 10 countries or smart grid investment, 2010; Pike research, Smart meter

market orecasts, 2011.

1.3 The Transition to a New Energy

Architecture: What Will the World Look

Like in 2035?

National and international attempts to respond to this growing set ochallenges are resulting in changes to energy architecture, promptingthe transition to a New Energy Architecture.

On one level, this transition represents a shit rom carbon-based uels to non-carbon based uels, as the world looks to

combat climate change. As part o this push two sources will play anincreasing role in the energy mix: wind and solar. Wind energy outputis orecast to grow rom 273 TWh in 2009 to 2,703 TWh in 2035, whileconcentrated solar power and solar photovoltaic output is expected toincrease rom negligible output in 2006 to 1,048 TWh in 2035.21

The growth in renewable energy, combined with eorts to expand

the use o electric vehicles, will result in increased electrifcation

o the energy sector. Electricity generation will account or 18% ototal primary energy demand in 2035, up rom 14% in 2009.22

New technologies are being developed to manage what will

become an increasingly complex grid. The top 10 countries orsmart grid investment were expected to invest a collective US$ 18.5billion in 201123, and installed smart meters are expected to reach 1billion in 2016.24


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The transition will bring a greater ocus on natural gas, as

hydrocarbons continue to be the mainstay o the energy mix.Under the IEAs New Policies Scenario, hydrocarbons account or 75%o global primary energy supply in 2035, down rom 81% in 2009.Even under the IEAs most aggressive carbon abatement scenario,hydrocarbons account or 62% o the mix. The replacement o coaland oil with gas is seen in all scenarios, particularly low-carbonscenarios, with its contribution to global consumption rising rom 25%in 2009 to 35% in 2035 in the IEAs 450 Scenario.25

Innovation will be seen across the oil and gas sector, as theindustry looks to secure sustainable supplies. Deepwater will godeeper, into water depths in excess o 2,000 meters, and into pre/sub-salt as seen in the Lower Tertiary plays in the Gul o Mexicoand in pre-salt Brazil. Fields that exhibit high pressure, temperature,sulphur and CO2 will become increasingly common. Production willalso increasingly ocus on unconventional assets. Indeed, shale gasproduction has already been dubbed the biggest energy innovation ina decade tight oil may be the next such innovation.

25 World Energy Outlook 2011, New Policies Scenarios. Paris: International Energy Agency.26 Yergin, Daniel and Robert Ineson, Americas Natural Gas Revolution. In The Wall Street Journal, 2November 2009.27 World Energy Outlook 2011, New Policies Scenario. Paris: International Energy Agency.28 Advanced Nitrogen Oxide R&D, US Department o Energy, 2006.29 Global Status o CCS. 2011. Canberra: Global CCS Institute.30 BP Energy Outlook 2030, 2011. London: BP.31 Accenture analysis o Bureau o Transportation Statistics.32 Accenture analysis o US Energy Inormation Administration data.

Clean coal with have a prominent role to play. It accounted ornearly hal o the increase in global energy use over the past decade,and, unless aggressive climate legislation is put in place, it will continueto remain the second largest primary uel globally and the backboneo electricity generation out to 2035.27 Given its environmental impact,

coals continued use will require an increased ocus on increasingeciency and reducing emissions rom coal-red plants. Change isalready underway: in the US low NOx burners were installed on 75%o coal power plants in 2006, reducing NOx emissions by 40-70%, aspart o the US Department o Energys Clean Coal Technology Program 28;and there are currently14 pilot carbon capture and sequestration (CCS)projects under construction or operating.29

There will be a signifcant role or the fth uel energy

efciency as we transition to a less energy intensive world.Energy intensity is orecast to accelerate its rate o decrease rom 1%(1990-2010) to 2% per annum in 2010-2030.30 Present improvementsare partially driven by government intervention. The Chinesegovernment has laid out its 12th Five-Year Plan in which it statedaims to reduce energy intensity by 16% by 2015. Future eciencyimprovements will be increasingly driven by cost pressures, as hasalready been observed in some markets between 1980 and 2010 theaverage eciency o gasoline uelled passenger cars in America rose

by 22%31 as the nominal price o gasoline increased by 32% (2005US$).32

Finally, the New Energy Architecture will increasingly be one

driven by the developing world. Nearly 90% o global energydemand growth out to 2035 is in non-OECD countries; OPEC oilproduction reaches more than hal o the world total in 2035; andnon-OECD countries account or more than 70% o global gasproduction.33

1.4 The Eect o Trade-os on the

Transition to a New Energy Architecture

Managing the transition to a New Energy Architecture is not easy. Theimperatives o the energy triangle may reinorce or act in tension withone another, orcing dicult trade-os to be made (see Figure 3).

In some instances, continuing concerns over volatility in the globaleconomy have absorbed signicant eorts o government and industry,and have taken precedence over issues connected to environmentalsustainability. For example, in September 2011 the US administrationbacktracked on a new rule to mitigate air pollution. The Ozone NationalAmbient Air Quality Standard as proposed by the EnvironmentalProtection Agency (EPA) would have reduced ambient ozone, atoxic gas created by power-plant emissions and exhaust umes.According to the EPA, this would have saved up to 12,000 lives and2.5 million working and school days lost to the toxic eect o ozone onAmerican lungs each year. The rule would have cost polluters and the

government up to US$ 90 billion per year.34 This toll came to be seento be too much to levy in a strained and uncertain economic climate.

In other cases, eorts to bolster energy security, such as throughthe exploitation o unconventional oil and gas reserves, have resultedin growing environmental sustainability concerns. The rapid growthin shale gas production has stoked environmental controversy andpolicy debate. Some have supported shale gas production in order toboost energy security, as seen in the US where the share o shale gasin produced natural gas rose rom 1.6 percent in 1996 to 23 percentin 2010 and is expected to reach 46 percent by 2035.35 Others havepulled back over environmental concerns, as seen in Frances decisionto ban hydraulic racturing, despite a technically recoverable shalegas resource o 180 trillion cubic eet, which dwars current provedreserves o 0.2 trillion cubic eet.36

In a number o non-OECD countries, the continued use o ossiluel subsidies as a means to promote economic development hascreated a market distortion that encourages wasteul consumption,which in many cases heightens existing energy security challenges.For example, in India the government regulates the price o diesel,in order to insulate the domestic economy rom the volatility o theinternational prices o petroleum products. This policy is designedto enable economic development and protect industries such as thehaulage sector by alleviating infationary pressures. However, it hashelped contribute to surging demand and increased reliance on energyimports. It also comes at considerable cost; subsidies on petroleumproducts accounted or 2% o GDP in May 2011.37 Reorming such

33 World Energy Outlook 2011, New Policies Scenario. Paris: International Energy Agency34 Supplement to the Regulatory Impact Analysis or Ozone. January, 2010. Washington DC:Environmental Protection Agency.35 World Shale Gas Resources: An Initial Assessment o 14 Regions Outside the United States.

April, 2011. Washington DC: US Energy Inormation Agency.36 World Shale Gas Resources: An Initial Assessment o 14 Regions Outside the United States.

April, 2011. Washington DC: US Energy Inormation Agency.37 OECD Economic Surveys: India, June, 2011. Paris: OECD.


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Sources: Shale Gas and New Petrochemical Investment: Benets or the Economy, Jobs and US Manuacturing, American Chemistry Council, March 2011; EIA, US NaturalGas Imports & Exports: 2010; Lie cycle greenhouse gas emissions o Marcellus shale gas, Mohan Jian, W Michael Grin, Chris Hendrickson, Paulina Jaramillo, Jeanne

VanBriesen and Aranya Venkatesh, Environmental Research Letters, July September 2011; IEEE, Water and Shale Gas Feature, William Sweet, 2010; EU European EnergyPortal, Eurozone Fuel Prices, June 2011; European Nuclear Society; The German Renewable Energy Federation BEE; MAPI, Economic Implications o EPAs Proposed OzoneStandard, Donald Norman, 2011.

Figure 3 Example trade-os within the energy triangle


Impact

Decision Trade-off

Economic growth &

development Energy access & security

Environmental

sustainability

The rule would havecost up to US$ 90 billionper yearThe rule could haveresulted in up to 7 million

job losses before 2020

The EPA estimated thatthe rule would havesaved up to 12,000 livesper year lost due to theeffect of toxic ozone on

American lungs eachyear

France is 98% reliant ongas imports

Initial explorationindicates that there aretechnically recoverableresources of 180 trillioncubic feet, sufficient toprovide France with gasfor 100 years at currentconsumption levels

Removal of anyenvironmental concernsassociated withhydraulic fracturing, i.e.water contamination

Removal of the subsidymay have causedincreased inflationRemoval of the subsidywould have furtherdelayed efforts to

transition away fromusing biomass forcooking

Energy importdependence is nowaround 25%Oil companies remainvictims of under-recovery, reducing

investment available fordomestic exploration

Energy efficiency of highconsumption productshas improved by up to80%

Japan has the highestnational energyefficiency in the world

Japan has improved itsefficiency by 37% sincethe 1970s

Greenhouse gasemissions from transporthave decreased

US air pollution

regulation

In September 2011 the USdecided not to introduce theOzone National Ambient AirQuality Standard asproposed by the EPA, which

would have reducedambient ozone

French shale

gas exploration

In June 2011 the Frenchgovernment banned the useof hydraulic fracturing citingenvironmental concerns

Energy

efficiency in

Japan

In 1998 Japan initiated theTop Runner Program todevelop the worlds bestenergy-efficient products. Itset minimum energyefficiency standards basedon best in classperformance for 9 products,eventually expanding to 21

Indian diesel

and kerosene

subsidies

In 2010 the Indiangovernment cut the subsidyon gasoline but maintaineddiesel and kerosenesubsidies citing theirimportance to the transport

sector and low-incomehouseholds

38 German nuclear shutdown orces E.ON to cut 11,000 sta. The Guardian. 10 August 2011.39 Business attacks Berlin nuclear rethink. Financial Times. 30 May 2011.40 The knock-on eects o Germanys nuclear phase-out. Nature. 3 June 2011.

measures is challenging the short-term economic impacts on somesegments o society are high and induce strong political opposition but in the case o India, would help an energy sector already creakingunder the pressure o high demand.

In some instances trade-os are not consciously made, with decisions,particularly when taken quickly, leading to unintended consequences.Germanys response to the Fukushima nuclear plant disaster inJapan is one such example. This resulted in the immediate shutdowno Germanys seven oldest nuclear plants, plus the Krummel plant,

which has been out o operation since 2009 due to saety concerns.The countrys remaining nine plants are to be phased out by 2022,instead o 2036 as previously planned. The decision came alongsidea renewed commitment to renewables, which are targeted to accountor 35% o electricity generation by 2020, and was intended to bringGermany long-term economic and environmental benets by puttingit at the oreront o green technology. However, in the short-term atleast, the economic and environmental impacts may be negative.E.ON announced in August 2011 that it would cut 11,000 jobs, ascharges relating to plant closures and the continuing tax on spentnuclear uel rods, pushed the group to its rst quarterly loss in 10years.38 Meanwhile the BDI (Bundesverband der Deuschen Industrie)has warned o certain electricity price increases or industry.39 Carbonemissions will also rise, with an increase o between 170 million and400 million tonnes o carbon dioxide between 2011 and 2020, asGermany turns to coal and gas plants to replace nuclear generation inthe short term.40

Bringing Balance to the Energy Triangle

What these decisions show is that responses to trade-os withinthe energy triangle are prone to change based on the broadermacroeconomic climate (as seen in the American decision regardingair pollution) and public sentiment (as can be seen in the Germangovernments response to Fukushima). O concern is that thesedecisions are consequently made without detailed analysis, or aconsideration o the impact across the energy triangle. Such decisionsplace the energy system in fux, creating considerable uncertainty or

industry and investors.

To bring greater balance to the energy triangle and enable an eectivetransition, it is important that policy-makers look to the long term,providing a more stable policy environment based upon an in-depthunderstanding o the trade-os they are making. Where possible,decision-makers should aim to take actions that result in positive netbenets or all three imperatives o the energy triangle.

Examples o how this can be achieved are discussed in the belowset o opinion pieces. Rhonda I. Zygocki, Executive Vice-President oPolicy and Planning, Chevron, looks at how a large, long-term energyproject can successully negotiate the expectations and challengesinherent in global energy architecture. Arthur Hanna, ManagingDirector, Energy Industry, Accenture, highlights the role o energyeciency (also see Figure 3). Gao Jian, Chie Executive Ocer, Trina

Solar, looks at the potential contribution o renewables when givenappropriate scale. Fred Krupp, President, Environmental DeenseFund, looks at how shale gas can play a role when appropriate saetymeasures are put in place.


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Balancing the energy triangle: The

Gorgon Project

Rhonda I. Zygocki, Executive Vice-President o Policy andPlanning, Chevron Corporation, USA

In an industry as complex as energy, success depends upon making thoughtul and pragmaticchoices. Balancing the energy and economic needs o society with the importance o ensuringenvironmental sustainability can be a challenge, but it is one that Chevron takes very seriously.Providing energy throughout the world requires long-term investments. These investmentscontribute positively to energy security across many regions and to economic growth anddevelopment in many communities. At the same time, saeguarding the unique and sometimesragile ecosystems that surround operations through sound environmental stewardship is justas important an imperative or Chevrons businesses.

The Gorgon Project o the north-west coast o Australia represents the largest investmentin the corporations history. It also provides an existing model o how Chevron has sought tobalance the elements o the energy triangle economic growth and development, energy

security and access, and environmental sustainability through the development o naturalgas.

Strengthening National and Local Economies: At US$ 37 billion (AUS$ 43 billion), the GorgonProject targets 40 trillion cubic eet o gas and represents Australias single largest resourceproject. Estimates indicate that Gorgon will contribute US$ 56 billion (AUS$ 65 billion) to

Australias gross domestic product as liqueed natural gas (LNG) will be ofoaded rom acilitieson neighbouring Barrow Island and transported mostly to Asian markets, while natural gas orWestern Australias consumption will be piped ashore. Australias prime minister, Julia Gillard,toured the project site recently and said, Having been here and seen Barrow Island and [the]Gorgon Project, its given me a real sense o the size and scale o this project and what it isgoing to mean to the nations utureThis is a great project or employment in this country.

Gorgons economic benets will undoubtedly transcend generations and the project is set tobe an important pillar o the Australian economy. Throughout its decades-long operationallie, it will create thousands o direct and indirect jobs, and the tens o billions spent on local

goods and services over the next 30 years will have considerable fow-on eects that cascadethroughout the Australian economy. Such is the economic strength o large and long-termenergy investments like the Gorgon Project.Bolstering Security o Supply to Asia and Western Australia: Equally important is the need orenergy security. By 2030, world demand or energy is expected to grow by approximately 33%,with Asia predicted to account or 60% o that growth. As demand or energy grows, naturalgas will play a vital role to help meet that demand as the cleanest burning ossil uel. Australia,surrounded by natural gas resources on the doorstep o growing demand in the region, iswell positioned to provide much needed supply to a burgeoning part o the world. In addition,diversity o supply is essential or energy security in Australia itsel. The Gorgon Project willplay an important role in supplying Western Australias uture energy needs by providing anew source o domestic gas. In terms o scale, the roughly 40 trillion cubic eet o natural gascontained in this resource is enough to power a city the size o Singapore or 50 years.

Protecting Biodiversity and Reducing Emissions: Barrow Island, a Class A nature reserve, willbe home to the Gorgon Project or many decades. The islands rich and unique biodiversity has

remained intact throughout the last 45 years, during which Chevron has implemented stringentquarantine measures, and Barrows conservation remains a national priority. Maintaining thisenvironmental record involves a mix o advanced technology and a commitment to detail,addressing everything rom minimizing the industry ootprint to managing light levels rom ouroperations on Barrows nearby beaches where turtles lay their eggs.

Increasing global demand or energy also requires nding new and improved ways to managegreenhouse gas emissions. Gorgon is playing a leading role with the development o one othe worlds largest commercial-scale carbon dioxide injection projects. This process will meanthat the projects greenhouse gas emissions can be reduced by about 40%. Moreover, usingGorgon LNG as a orm o energy can reduce global greenhouse gases by about 45 milliontonnes per annum compared with the use o coal. Put more simply, that is the equivalent oreducing Australias annual greenhouse gas emissions by 8%.

In these ways, the Gorgon Project represents a current example o how a large, long-termenergy project can successully negotiate the expectations and challenges inherent in theglobal energy architecture described in this report. Through the sae and reliable productiono natural gas, Chevron seeks to provide energy in a way that balances the needs o society.Helping to protect local biodiversity, reduce global emissions, secure energy supplies tosustain human progress in Asia or decades, and deliver long-term economic growth andemployment to local and national economies can all be done in tandem, as the Gorgon Projectdemonstrates.


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The Role o Energy Efciency in

Balancing the Energy Triangle

Arthur Hanna, Managing Director, Energy Industry, Accenture,United Kingdom

As highlighted by the World Economic Forum report Energy Eciency: Accelerating the Agenda,produced in collaboration with Accenture, improved energy eciency can assist in sustainingeconomic growth without putting unsustainable burdens on the worlds energy supplies or theenvironment, thereby helping bring balance to the energy triangle. This can be seen in Europe,which the World Energy Council (WEC) highlights as an example o signicant improvementsin energy eciency rom 1990 to 2006, achieving a 40% average decrease in nal energyconsumption per unit o GDP. The WEC estimates that i all regions o the world have the sameenergy eciency perormance as the EU in 2006, a total 420 Mtoe o uel could have beensaved, avoiding 1.3 GT CO2 emissions.42

Energy eciency has now risen to be an important component o energy policies. Over 70% ocountries have developed energy eciency targets43 and implemented a wide range o policy

measures rom mandatory targets to incentives and subsidy schemes. China has set a goalo doubling energy eciency; Russia has set a target o reducing the energy intensity o theRussian economy by 40% by 2020; and in the US the Obama administration has ocused onenergy eciency investments as an engine o economic growth: One o the astest, easiestand cheapest ways to make our economy stronger and cleaner is to make our economy moreecient.44

Energy eciency savings at the consumer level have a knock-on eect up the value chain. Ina traditional coal plant, or example, only about 30-35% o the energy in the coal ends up aselectrical output. Although integrated gasication combined cycle (IGCC) plants are capableo eciency levels above 60%, as are the most ecient gas-red generators, there is still atremendous quantity o energy let behind. Meanwhile, transmission and distribution systems,which include everything between a generation plant and an end-use site, typically run at losseso between 6-8%.45 This means that a unit o electrical energy saved at the consumer level, canresult in three units o energy saved upstream.

These energy savings mean more money in the pockets o consumers and an enhancedbottom line or commercial businesses. A study by the Lawrence Berkeley National LaboratorysEnvironmental Energy Technologies Division into the realized and project impacts o energyeciency standards or residential and commercial appliances in the US during the period1988-2006 ound that the eciency gains would lead to US$ 241 billion in consumer savingsby 2030.46 Meanwhile, the Global eSustainability Initiative, a consortium o leading high-techcompanies, estimates that smart building technology has the potential to save US$ 20-26 billionin electricity cost savings.47

Despite this promise, according to the IEA, improvement rates in overall energy eciency havedeclined rom a historical average o 2% per year to an average o 1% per year since 1990.48Distortions and market ailures discourage investment in eciency. Oten, consumers are poorlyinormed about the savings on oer. Transaction costs are also high: it is a time-consumingchore or someone to identiy the best energy-saving equipment, buy it and get it installed.Indeed, energy eciency is oten the casualty o principal-agent ailures, as in energy-ecientbuildings, where developers may be reluctant to take action because the immediate benet olower electricity bills will go to tenants not them. Furthermore, consumers expectations with

regard to pay-back periods are oten unrealistic, with homeowners demanding exorbitant rateso return on investments in energy eciency o around 30%.49

Higher consumer demand will be the key growth driver and urther work needs to be done onproviding a convincing cost perspective to those making investment decisions.50 Policy-makersshould play a role here, providing motivation or consumers to adopt energy eciency based ona carrot and stick approach, incentivizing energy eciency through measures such as the UKRenewable Heat Incentive while also mandating energy eciency standards across the valuechain, rom vehicles to new buildings and consumer products. These eorts should also beunderpinned by the provision o inormation on the potential benets o energy eciency. Policy-makers are not alone in this endeavour. Industry should look to develop new business models aspart o an integrated approach to commercial and residential energy eciency, such as throughhorizontal integration and the creation o Energy Service Companies (ESCOs).


42 Energy Eciency Policies around the World: Review and Evaluation. January, 2008. London: World Energy Council.43 Overview o Energy Eciency Policies in the World: Synthesis o the WEC-ADEME Survey. June, 2010. London: World EnergyCouncil, www.worldenergy.org/documents/wec_survey_london.ppt.

44 The White House, Oce o the Press Secretary, Remarks by the President on energy, 29 June 2009.45 Energy Eciency in the Power Grid. 2007. ABB.46 Meyers, S., McMamon, J. Realized and projected impacts o US energy eciency standards or residential and commercialappliancessavings by 2030. The Energy Eciency Standards Group, March 2008.47 SMART 2020: Enabling the low carbon economy in the inormation age. 2008. GeSI.48 Energy Technology Perspectives 2010 Blue Map Scenario. Paris: International Energy Agency.49 The elusive negawatt. The Economist. 8 May 2008.50 Integrating Energy Eciency across the Power Sector Value Chain. October, 2011. Geneva: WBCSD.


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Renewable Energys Role in Balancing

the Energy Triangle

Gao Jian, Chairman and Chie Executive Ocer, Trina Solar(TSL), Peoples Republic o China

The energy crisis and climate change are two o the most pressing challenges acing theworld today and are set against a dicult economic environment. Mitigating these threechallenges known as the energy triangle will require signicant eorts and nancialcommitments rom stakeholders within both the public and private sectors, as well as civilsociety. Given appropriate scale, renewable energy has the potential to help balance theenergy triangle, contributing towards the creation o a New Energy Architecture.

Despite the challenging economic downturn, the industry has made signicant progresstoward developing clean energies or the uture. In 2010, we saw US$ 250 billion investedin clean energy with the US and Europe adding more renewables than conventional

power capacity. As o 2009, China had the worlds largest renewable capacity installation;contributing 37 GW to the global total o nearly 80 GW added renewable capacity that year.In addition, we have witnessed the industry moving rom laboratory technology to vastcommercialized applications in household and large utility scale installation projects such assolar or wind power stations all over the world. Government policies have largely contributedto this surge in investment and production. More nations have recognized the wider benetso renewable energy and have made the development o renewable energy a top priority. Forthe rst time, China has highlighted environmental protection and energy saety as one o thethree main ocuses o the 12th Five-Year Plan.

Though the advantages o distributed power generation coupled with the cleanliness andeciency o manuacturing make renewable energy an optimal solution to meeting the threeimperatives o the energy triangle, a signicant scaling up o renewables is needed that makesrenewable energy economically competitive to other energy sources. In some regions, suchas Germany, Italy and Caliornia, renewable energy technologies such as solar energy are

expected to reach grid parity rom the users end in two to three years. Grid parity meansthe user pays the same amount or electricity coming rom solar source as they would romconventional energy sources. With constant innovation by the industry, we are very optimisticthat beore 2020, the cost o energy produced by renewables would come down signicantlyto the level that would be as economic as compared to other energy types.

Innovation has also played a key role in the growth o the renewables. In China, the ChinaState Key Lab o Photovoltaic Science & Technology incubated by the private sector is a casein point as an innovative way to drive green growth urther. Traditionally, State Key Labs inChina are built in universities or state-owned research institutions that receive unding romthe central government. The act that the country approved a state key lab to be built by theprivate sector sends a positive signal to encourage industry sector to invest and innovate andachieve technological breakthroughs urther.

The renewable energy industry by nature comes with an important social responsibility and

the industry as a whole is contributing to the community across the world and within theirindividual organizations. In collaboration with NGOs and charity organizations o all levelsworldwide, the industry is donating solar panels or renewable energy solutions and servicesto people in need and developing o-grid systems or the areas without grid. Through severaldierent education programmes, we are demonstrating to the younger generation the benetso green energy and they are disseminating that inormation to the global population.

Looking at the challenge, renewable energy still constitutes a small base in the total energyconsumption worldwide, we see a huge gap and also an enormous opportunity ahead o us.Ensuring that renewable energy is available at the lowest possible cost as early as possibleand is part o the solutions to energy crisis and climate change, thereby helping to eectivelybalance the energy triangle is our common goal.

Making renewable energy a main stream in the decades to come cannot be done by onestakeholder alone. What is clear is that each stakeholder has a critical role to play and the

scale o challenge will require momentous commitment by all stakeholders across the board.We, as the industry, in collaboration with other stakeholders, are ready to lead the way.



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Finding the Right Balance on Natural

Gas

Fred Krupp, President, Environmental Deense Fund, USA

As newly abundant shale gas transorms the US energy economy burgeoning rom 2% o totalUS natural gas supply in 2001 to about 30% today environmental concerns have overtaken thepublic debate. People across the US worry that shale gas cannot be tapped without polluting theirdrinking water, ouling their air and overwhelming their communities. A signicant segment o thepublic has concluded that o the three imperatives o the energy triangle growth, sustainability andsecurity the environmental challenge is not being met.

As a result, communities around the US are having a shale gas rethink. From New York toPennsylvania to Colorado to Texas, cities and counties are enacting rules to regulate, limit andsometimes block development. As the shale gas revolution moves around the globe, with signicantreserves identied in China, Argentina, Poland and Mexico, opposition is also spreading. France, orexample, has imposed a nationwide ban on hydraulic racturing.

It does not have to be this way. And the irony is that environmentalists such as mysel had cheeredthe prospect o a shale gas revolution precisely because o the environmental benet it oered.Since natural gas releases less carbon dioxide when burned than coal, it gives us a short-term wayto reduce the emissions that cause global climate change. As we work to shut down our dirtiestcoal-red power plants, demand or natural gas will increase, until the day when truly clean energysources such as wind and solar achieve industrial scale.

Some are concerned that shale gas will slow the transition to wind and solar. While these concernsare understandable, since the need to accelerate this transition is so great, the truth is that until wedevelop cost-eective systems or large-scale energy storage, natural-gas red power will help usdeal with the intermittency o wind and solar. Shale gas is a complement to renewable energy, buteorts to make it sae are no substitute or a sensible climate and energy policy. Though naturalgas can be an important piece o a cleaner uture reaping its benets requires us to reduce localenvironmental threats and allay public concerns about impacts to air, water and lands.

Last spring, at the direction o President Obama, US Energy Secretary Stephen Chu created a

seven-member natural gas advisory board, charged with recommending ways to ensure that thisresource can be tapped saely. I was privileged to serve on this panel, chaired by MIT proessorJohn Deutch, which held a series o hearings, visited well sites and convened a public meeting insouthern Pennsylvania to hear directly rom people living with intensive shale gas development.While no government panel by itsel can restore public trust, I believe our recommendations i putinto place by state and ederal regulators and the industry could help lead the way orward.

The panels two reports, released in August and November 2011, are a call to action, statingunequivocally that Americans deserve assurance that the ull economic, environmental andenergy security benets o shale gas development will be realized without sacricing public health,environmental protection or saety...This means that resources dedicated to oversight o the industrymust be sucient to do the job.

I have no doubt that smart, muscular regulation is essential to re-establishing public trust, and I ampleased that the panel endorsed this conclusion.

Industrys ailure to disclose the chemicals used to racture shale ormations is one reason trust has

eroded. The panel emphasized the need or comprehensive racking chemical disclosure rules, aswell as new standards or well construction and wastewater management. The industry must alsoprovide more data on operations, including emissions o methane, a highly potent greenhouse gas.Methane leakage in the production and distribution o natural gas undermines its climate advantageover other ossil uels. The panel called or better data collection on leaks and tough standards toreduce these emissions.

The report also calls or the assessment o baseline water qual ity, disclosure o the compositiono drilling wastewater and measurement o air emissions. It calls or a national database o publicinormation on shale gas operations and an industry-led organization dedicated to improvement obest practices.

It is not easy to balance public saety and energy security, but it is essential. Despite the angerand mistrust surrounding the shale gas issue, industry leaders and environmentalists are alreadyworking together on the guidelines needed to ensure a sae shale-gas revival. The EnvironmentalDeense Fund, where I work, is collaborating with Southwestern Energy and others to drat modelregulations or well integrity that can be tailored to the specic needs and circumstances o each

state.

This model regulatory ramework, together with implementation o the committeesrecommendations, has the potential to change the atmosphere around US shale gas development,but only i industry, environmentalists, and regulators work together. Ater a year o acrimony, it ishigh time we did more o that.



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This project was initiated to help decision-makers enable a more eective transition to aNew Energy Architecture. To do so we havecreated a methodology to help them lookto the long term and provide a stable policyenvironment, based upon a holistic and in-depth understanding o the consequences odecisions across the energy value chain. Theend result will be a New Energy Architecturethat is more responsive to balancing theimperatives o the energy triangle. Thisprocess comes in our steps:

Step 1 Assessing current energyarchitecture perormance: This processbegins with an assessment o current energyarchitecture perormance using a selection

o quantitative indicators. These indicatorsare designed to explore how countries arecurrently perorming in relation to the threeelements o the energy triangle.

Step 2 Creating New Energy Architectureobjectives: Based on strengths andweaknesses identied, a set o objectives or aNew Energy Architecture that more eectivelymeets the imperatives o the energy triangleare created.

Step 3 Dening the enabling environment:An enabling environment that supports NewEnergy Architecture objectives is designed.

Step 4 Dening areas o leadership:The ultimate output is the creation o anaction plan that details the relative roles ogovernment, industry and civil society increating an enabling environment or thetransition.

Figure 4 New Energy Architecture methodology

a) Understand current

energy architecture

b) Select KPIs to assess

current and historic

performance

1. Assessing current

energy architecture

performance

2. Creating New Energy

Architecture

objectives

4. Defining areas of

leadership

a) Highlight energy

architecture challenges

b) Identify New Energy

Architecture objectives

a) Develop high-level

action plan for steps

to be taken by

government, industry,

the finance

community and civil

society to shape the

transition

What are the objectives

for a New Energy

Architecture?

Who is responsible for

implementing enabling

environments?

How is energy

architecture currently

performing?Keyquestion

Activity

3. Defining the

enabling

environment

a) Create an enabler

toolkit that highlights

the potential actions

that can be taken to

accelerate the

transition

b) Map enablers totransition objectives

What enabling

environment will achieve

transition objectives?

The Energy ArchitecturePerformance Index

An archetype approachThe four pillars of an enablingenvironment

Key considerations forstakeholders

Section 2:The New Energy Architecture

Methodology Enabling anEective Transition


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In the ollowing sections we apply this methodology at the globallevel, while also highlighting some country specic insights. Thisbegins with an overview o the approach taken to assess currentenergy architecture perormance and present the key ndings o theanalysis. We then explore how New Energy Architecture objectivescan be created using an archetype approach. This is ollowed by anexploration o the enabling environments that need to be created toachieve objectives, which is given urther context through deep-divecountry studies on Japan and India. The nal section discusses theroles o government, industry and civil society in working co

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Accenture New Energy Architecture Enabling Effective Transition

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