Energy Management :: 2012/13

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1 :: 2012/13 Class # 10 Economics Prof. Tânia Sousa taniasousa@ist.utl.pt

World Economic Product (GWP) has grown almost at the exact same rate (a sixteenfold increase) that the global comercial Total Primary Supply

2 What are the links between and Economics? (Smil) There is a very high correlation between the rate of energy use and the level of economic performance During the last century the Gross World Economic Product (GWP) has grown almost at the exact same rate (a sixteenfold increase) that the global comercial Total Primary Supply (TPES). TPES per capita increased from 14 GJ to 60 GJ; High correlation between per capita averages of GDP (PPP adjusted) and TPES (for 63 countries) for the year 2000 GJ/capita varies by a factor > 20 High correlation also for a single country in time Portugal

3 What are the links between and Economics? (Smil) But The link changes with development stages Identical rates of economic development in different countries are supported by different increases in TPES (total primary energy supply) intensity (energy use per unit of GDP): A measure of the efficiency of a country in using energy Low values correspond to environmental and economic advantages intensity in time: EI rises during early stages of industrialization, its peak is sharp and short, and then declines as mature economies use inputs more efficiently EI for the World rised from 11 MJ/US$ (1990) in 1900 until 1970 and declined to the initial value in 2000

4 What are the links between and Economics? (Smil) intensity for different countries in 1999: Most countries have EI between 5 and 13 MJ/$ PPP EI does not depend on the GDP/capita (e.g., India and Australia have similar EI)

5 What are the links between and Economics? (Smil) Factors that control EI: Degree of energy self-sufficiency Composition on primary energy supply Differences in industrial structure Country size Climate Problems with EI: Treatment of Primary Electricity (e.g. Sweden vs. Denmark) the method of partial substitution will inflate all large-scale producers of electricity It is misleading if it counts only with commercial forms of energy animate labor and biomass were the most important forms of energy for most of humankind until middle of the 20th century

Eras and Transitions Transformations before industrial

Animate labor from humans and work animals (levers, inclined

water & wind mechanical work & transport Biomass fuels (wood,

6 Eras and Transitions Transformations before industrial civilization: Solar radiation food & feed, light and heat Animate labor from humans and work animals (levers, inclined planes, pulleys) mechanical work & transport Kinetic energies of water & wind mechanical work & transport Biomass fuels (wood, charcoal, crop residues, dung) residential & industrial heat and light Gunpowder warfare

Eras and Transitions Transformations before industrial civilization: The dominance of these energy transformations in the western world come to an end in the latter half of the 19th century These

7 Eras and Transitions Transformations before industrial civilization: The dominance of these energy transformations in the western world come to an end in the latter half of the 19th century These energy transformations remained the most import for most of humankind until middlle of the 20th century Annual per capita primary energy consumption < 20 GJ Final Exergy 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Coal Oil Natural Gas Combustible Renewables Electricity & CHP Heat Feed & Food Other non-conventional

Eras and Transitions Transformations that came with industrial civilization: Fossil fuels heat & mechanical work & transport (steam engines, internal combustion engines and steam turbines) The first

8 Eras and Transitions Transformations that came with industrial civilization: Fossil fuels heat & mechanical work & transport (steam engines, internal combustion engines and steam turbines) The first commercially successful true engine was the atmospheric engine, invented by Thomas Newcomen around 1712 used for pumping water from mines and providing water for waterwheels away from rivers & sea James Watt developed ( ) an improved version of Newcomen's engine

9 Why are these links important? Higher energy use has higher impact on the environment: Land use changes (surface mines, large water reservoirs) Pollution of ocean water (seaborne transport of crude oil) Greenhouse gas emissions (combustion of fossil fuels) Air pollution (combustion of fossil fuels) Accidental releases of radiation (nuclear power plants and storage of radioactive waste)

10 Why are these links important? Higher energy use has higher impact on the environment (Grubler & Nakicenovic, 2000)

11 Why are these links important? Some energy forms such as oil are becoming more scarce/expensive

Links -Economy-Environment What will the economy in the

present but bigger Models will help us understand the

12 Links -Economy-Environment What will the economy in the future look like? More self-reliant local economies and ways of life Global Economy dependent on renewable energies Similar to the present but bigger Models will help us understand the impact of energy supply & technological innovations & policy measures on the environment and the economy?

13 Issues in modeling energy-economy interactions 1. Trade-offs for people between environmental quality ( with the use of energy) and income ( with the use of energy) GDP: There are important factors for the quality of life such as inequality in the society, environmental quality and unemployment rate that are related with GDP but that are not controlled only by GDP ( Other macroeconomic measures such as Genuine Savings consider depletion of natural resources and damage caused by pollution.(world Bank) Measures of social welfare that depend on consumption and on environmental degradation. Social welfare depends on utility of each person

14 Utility functions: a review Utility functions specify the hapiness U of a person or a population as a function of consumed goods X 1, X 2, : max U = U( X,..., X ) st.. XP m Examples: b c U = ax... 1 X2 U = a+ bx1+ cx U = Issues: ( ax bx ) min,, n Indiference curves (substitutability between goods) i i i Cobb-Douglas Utility Function Linear Utility Function Leontief Utility Function x 2 U(x 1,x 2 ) = x 1 x 2 ; x 1

15 Issues in modeling energy-economy interactions 2. How much can energy be replaced by other productive factors?

16 Production Functions: a review Production functions specify the output Q of an economy as a function of inputs X 1, X 2, : Q= f( X1, X2,...) Examples: b c Q= ax... 1 X2 Cobb-Douglas Production Function Q= a+ bx1+ cx Q = ( ax bx ) min,, Linear Production Function Leontief Production Function Issues: What are the relevant production factors (K, L, E, M, T,.) How much are they substitutable?

17 Growth Economic Models Exogeneous Models Endogenous models as a production factor The parcel of growth not explained has been decreasing

18 Issues in modeling energy-economy interactions 2. How much can energy be replaced by other productive factors? Production functions that have energy as a production factor, e.g., LINEX (Ayres): L+ U L Q = AU exp at ( ) 2 + at ( ) bt ( ) 1 K U

weight) Hydrogen cars (hydrogen infrastructure and cost, cost) Possibility of replacing oil liquids in internal

19 Issues in modeling energy-economy interactions 3. How much are different forms of energy replaceable by each other? Transport is the most problematic use Electric cars (driving range; Recharge time, 4 to 8 hours, battery cost, bulk & weight) Hydrogen cars (hydrogen infrastructure and cost, cost) Possibility of replacing oil liquids in internal combustion engines by more efficiency, other fossil (coal-to-liquids, tar sands, oil shale) or renewables (ethanol, biodiesel)

20 Issues in modeling energy-economy interactions 4. What is the energy that really matters (primary, final, useful, productive or useful work)? During the twentieth century the quantity of final energy taken from one unit of primary energy has doubled or even tripled The energy that is more intimated related with productivity is the productive energy but this is also the most difficult one to quantify What about the energy used for non-productive activities?

21 Issues in modeling energy-economy interactions 5. Investment in renewable energies and energy efficiency technologies Depends on the price of fossil fuels; Controls conversion efficiencies between primary, final and useful energy; Controls price of renewable energies; 6. Oil Price Depends on demand vs. supply Depends on speculation in financial markets; Controls behavior of energy firms (e.g., investments in new oil fields)

22 Issues in modeling energy-economy interactions 7. The amount of fossil fuel reserves Depends on technology (e.g., shale gas) game changers such as accidents (Japan, 2010) Reliable information about depletion rates

23 City ON na energy-economy model (electricity) is the only production factor Electricity has both a productive (industry and services consumption) and nonproductive (residential and municipal consumption) role Services and industry produce added-value to the economy as a whole

24 City ON na energy-economy model The central planner splits income between building power plants, technology development, resources (constant prices) and consumption Households have an utility function that depends on pollution generated by the electricity production sector and useful consumption Transformation between final and useful consumption depends on efficiency A central planner has to keep people happy (high useful consumption + low pollution)

25 City ON an energy-economy model Power plants can be renewable and non-renewable. Non-renewable power plants pollute & Renewable plants depend on wind, sun and water availability Characterizationof power plants and technology development (& investment) were realistic

26 City ON an energy-economy model This model was used by Biodroid to develop a serious game to EDP It was applied to Portugal with some adjustments to forecast optimal electricity production & GDP evolution Supply should have a more relevant role for renewables due to environmental impacts.

27 Wars an energy-economy model Introduce more production factors (labor, capital and technology) Introduce energy scarcity to simulate dependence of economic growth on energy Introduce more types of energy (at least oil & renewable electricity) to simulate whether the economy can make a smooth transition between fossils and renewables Introduce mechanisms that are relevant for the oil price formation (speculation, decisions on investments by energy firms, decisions of oil consumption by non-energy firms and households) There is no central planner to make decisions, i.e., households, the energy sector and the non-energy sector have internal dynamics A set of 3 models: a macroeconomic model, and 2 agentbased models for energy firms and for financial markets

28 Wars: The macroeconomic model

29 Wars An agent based model for energy firms Were do Companies Invest? Research Storage Financial Market Oil & Gas Model : hydrocarbons depletion renewable penetration Renewables Companies have to deal with huge investements lags: 7-10 years Hydrocarbons scarcity push Oil&Gas companies to renewables Market Structure: Oligopolist Very capital intensive industry > Few companies control the market

30 Wars An agent based model for the financial market A limited number of intelligent, but boundedly rational financial agents; Agents use different heuristic trading rules to buy or sell oil future contracts; Fundamental rules: use real variables such as change in oil stocks or GDP growth to predict future oil prices Technical rules: use historical price series to predict future oil prices From the mismatch of supply vs. demand emerges a price

31 Wars Interaction between models Agent-based financial model Oil Price GDP Oil Stock changes Oil Price Macroeconomic model Oil Supply Taxa juro GDP Agent-based energy firms model

32 Economy Interactions: useful work accounting Resource-based accounting. Use x Resource A Primar y Final Use y ( ) Use z Use x Resource B Primar y Secondary Final Use y ( ) Use z Use x Resource C Primar y Final Use y ( ) Use z

33 Economy Interactions: useful work accounting Use-based accounting. Resource A Resource B Resource C Primary Primary Primary Final Use x Resource D Primary Resource A Resource B Resource C Primary Primary Primary Secondary Final Use y Resource D Primary Resource A Resource B Resource C Primary Primary Primary Final Use z Resource D Primary

34 Economy Interactions: useful work accounting Definition of uses. 5 categories of use: Heat High Temperature Heat Medium Temperature Heat Low Temperature Heat Light Mechanical Drive Muscle Work Other electric uses

35 Economy Interactions: useful work accounting Exergy accounting. Exergy sector own uses Resources Extraction and primary processing Primar y Exergy Transformation Secondary Exergy Distribution Final Exergy Useful Work Losses Losses Heat Light Final Exergy Mechanical drive 2 nd law efficiencies Useful Work Muscle work Other electric uses

36 Economy Interactions: useful work accounting Application to Portugal: Main data sources: International Agency energy balances ; Henriques, Sofia Transitions, Economic Growth and Structural Changes (2011): Portuguese energy data

37 Economy Interactions: useful work accounting Useful work Final exergy consumption PJ

38 Economy Interactions: useful work accounting 25% Aggregated Final-to-Useful Efficiency 20% Electrification 15% 10% 5% Increasing use of oil products; Decreasing share of food and feed. Motorization: increase in mechanical drive uses from oil products 0%

20% 10% 0% 1850 1860 1870 1880 1890 1900 1910

39 Economy Interactions: useful work accounting 100% Final Exergy 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Coal Oil Natural Gas Combustible Renewables Electricity & CHP Heat Feed & Food Other Non-conventional

1950 1960 1970 1980 1990 2000 2010 Low Temperature Heat Medium Temperature

40 Economy Interactions: useful work accounting 100% Useful Work 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Low Temperature Heat Medium Temperature Heat High Temperature Heat Mechanical Drive Other Electric Uses Light Muscle Work

41 Economy Interactions: useful work accounting 20 1,4 18 1,2 16 Final exergy / GDP (MJ/2010 ) ,0 0,8 0,6 0,4 Useful work / GDP (MJ/2010 ) 4 2 0,2 0 0, Final exergy / GDP (MJ/2010 ) Useful work / GDP (MJ/2010 ) (GDP series from Lains, P., 2003 & European Comission)

42 Economy Interactions: useful work accounting carriers: It is visible the transitions from combustible renewables to coal, and later to oil and electricity. The share of food exergy consumption dramatically decreased. uses: Transitions from poorer to nobler uses, such as high temperature heat, mechanical drive and other electric uses.

43 Economy Interactions: useful work accounting Useful work intensity is somewhat constant since 1856 with a variation of about 20%. Decoupling can only occur by reducing primary-to-final and/or final-to-useful efficiencies (THERE ARE THERMODYNAMIC LIMITS!), This result must be confirmed to other countries.

CONTENTS TABLE OF PART A GLOBAL ENERGY TRENDS PART B SPECIAL FOCUS ON RENEWABLE ENERGY OECD/IEA, 2016 ANNEXES

CONTENTS TABLE OF PART A GLOBAL ENERGY TRENDS PART B SPECIAL FOCUS ON RENEWABLE ENERGY OECD/IEA, 2016 ANNEXES TABLE OF CONTENTS PART A GLOBAL ENERGY TRENDS PART B SPECIAL FOCUS ON RENEWABLE ENERGY ANNEXES INTRODUCTION AND SCOPE 1 OVERVIEW 2 OIL MARKET OUTLOOK 3 NATURAL GAS MARKET OUTLOOK 4 COAL MARKET OUTLOOK