Peak-oil, global warming concerns opening new window of opportunity for alternative energy sources

Aug. 18, 2003
A new window of opportunity is opening for alternative energy sources.

This is the last in a series of six special reports on Future Energy Supply

A new window of opportunity is opening for alternative energy sources.

As was the case in the 1970s and early 1980s, the latest surge of interest in developing alternative energy sources is propelled by concerns over high oil prices and environmental impacts of fossil fuel use.

But there's a difference this time around. In the earlier boom of alternative energy investment, the impetus stemmed from a more-immediate crisis: skyrocketing oil prices that most observers at the time saw as virtually unrelenting in their ascent. Pollution concerns were a secondary, more-diffuse factor. The former proved a prophecy unfulfilled—jarringly, with the 1986 oil price collapse. The latter concerns were addressed, in a similarly diffuse manner, with a myriad of environmental and conservation measures that have, in fact, helped to constrain conventional energy supply development. And much of the alternative energy campaign in that era was focused on synthetic fuels—essentially unconventional fuels derived from fossil fuel sources. Both the renewables and synfuels activity booms withered in the face of collapsed oil prices.

Today, the drivers favoring alternative energy development are twofold, parallel fears of pending crises: that a peak in global oil production is imminent and that the world might face catastrophic global warming.

This time around, many proponents of the imminent-peak theory say, the oil price shock will be permanent and even catastrophic for humankind. And the push to curb emissions of greenhouse gas (GHG) emissions to combat purported global warming have enabled advocates of renewable energy to coalesce their efforts around a single-issue "magic bullet" for eliminating many pollution and energy security concerns: the decarbonization of the world's energy supply.

Accordingly, efforts are proliferating worldwide to promote alternative energy schemes, principally renewable sources of energy. Except for a few niche applications, almost all renewable energy projects are supported by government regulatory and fiscal incentives—and sometimes mandates. And the most significant gains by renewables in global energy market share will be made first in the production of electricity, where they already have a significant toehold—mainly in the form of conventional hydropower, which is not generally considered an alternative energy source.

Renewables have much more ground to make up when it comes to the other main element of global primary energy supply, transportation fuels. Adapting solar, wind, and geothermal projects to existing electric power grids has proven no great feat. But adapting renewable energy sources to the world's existing transportation infrastructure—not to mention consumers' low-cost, ease-of-use preferences—will prove much more problematic.

In the debate over future energy supply, the potential contribution to global energy supply from the resurgence of two important conventional energy resources, coal and nuclear, often tends to get discounted because of negative connotations to their respective environmental and safety records. However, each of these sectors also hopes to leverage their advantages—price and lower GHG emissions, respectively—with the impending-crisis alarms gaining more attention. Clean-coal technologies and safer nuclear reactors could do much to blunt the progress toward wide acceptance of renewables.

Even major oil companies are getting in on the renewables act. In most instances, these are selective investments, driven as much by some companies' desire to demonstrate good corporate citizenship and environmentally friendly operations to various stakeholder groups. But for some, namely Royal Dutch/Shell Group and BP PLC, investment in renewables is seen as an investment in a new business with sizeable growth and profits potential. In fact, they and other oil and gas companies tend to regard a robust position in natural gas as essentially part of an "alternatives" portfolio.

Even for these aggressive efforts in renewables, however, such investments are seen as having longer-term potential and that oil and gas will remain their core businesses for decades to come.

A long-term view isn't tenable, say both alternative energy advocates and proponents of the imminent-peak theory of oil production. The latter even contend that massive energy price hikes and stringent conservation and energy-efficiency measures will be needed to force the world to make a needed, if rough, transition to alternative energy sources.

If they're right, those same mandated high energy prices will act to help stave off the day of peak oil production. Because such mandates are likely to come in the form of carbon taxes, that means a permanent crimp in the growth of demand for oil. If such efforts come to pass, the future portfolios of oil and gas producing companies increasingly will favor natural gas, until it too falls out of favor or abundance.

Renewables today

To hear the enthusiasts in the renewables camp tell it, renewables are the fastest-growing sources of energy.

According to the Worldwatch Institute, use of unconventional renewable energy supplies grew in the 1990s by rates far outstripping those of conventional energy sources: wind power by 24.2%/year, photovoltaics by 17.3%/year, and geothermal by 4.3%/year. That compares with growth rates in the same period of 1.9%/year for natural gas, 1.8%/year for conventional hydro, 0.8%/year for oil, 0.5% for nuclear, and –0.5%/year for coal.

But that growth comes from a low base. According to the 2000 World Energy Assessment (WEA), produced by the United Nations Development Program and the World Energy Council, "new" renewables (which excludes large hydro at 2.2% and traditional biomass at 9.5%) accounted for only 2.2% of the world's total primary energy supply (TPES) in 1998 vs. almost 80% for fossil fuels and 6.5% for nuclear.

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It's worth noting that the biggest share of the renewable energy market (excluding large hydro) is held by biomass. Edinburgh energy analysts Douglas-Westwood Ltd. estimates that biomass accounts for 15% of total world energy supply—and as much as 35-50% of domestic energy in some developing countries (Fig. 1). While some industrial applications of "new" biomass technology are based on combined-heat-and-power, electric power generation, space heating, and decentralized energy schemes, the bulk of biomass energy involves noncommercial fuels from plant and animal sources (burning wood, animal wastes, etc.). The International Energy Agency has estimated that 2.4 billion people in developing countries depend on traditional biomass for heating and cooking.

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Looking at the developed member countries of the Organization for Cooperation and Economic Development, where nonbiomass renewables have made the greatest inroads, renewables combined share of TPES in 1999 was only 6.1% (Table 1). When large hydro is excluded, the renewables share drops to 3.9%.

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There is a broad panoply of alternative energy initiatives being implemented, yet few are considered to be widely accepted on a commercial basis (Table 2).

"While there is a convergence of positive factors, renewables are being held back from achieving their market potential due to a number of market failures and barriers," the International Energy Agency said in an October 2002 special report. "The policy framework to rectify these market barriers and failures is only slowly emerging but has not yet evolved sufficiently to sustain renewable energy as a commercially competitive alternative to fossil fuels."

Renewables' potential

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In its World Energy Outlook 2000 (WEO), IEA sees the nonhydro share of renewables in TPES growing from its current level of about 2% to 4% by 2020 in the OECD (Fig. 2). That entails the fastest rate of growth of any energy source, averaging 2.8%/year.

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The US Energy Information Administration projects that consumption of renewable energy worldwide will jump by 56% from 2001 levels to 50 quadrillion btu in 2025 (Fig. 3). Most of this growth, however, will come in the form of large hydro projects in developing countries.

"Renewable energy sources are not expected to compete economically with fossil fuels in the midterm forecast," EIA said in its 2003 International Energy Outlook. "In the absence of significant government policies aimed at reducing the impacts of carbon-emitting energy sources on the environment, it will be difficult to extend the use of renewables on a large scale."

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However, in an alternative WEO scenario, IEA contends that the nonhydro renewables' share of electric power generation could increase significantly in the OECD nations if policies to support their use are instituted (Fig. 4). The agency estimates that renewables' share in 2020 electricity markets could quadruple to 8.6% from 1997 levels "if market barriers and failures were removed."

IEA also acknowledges the big push renewables received from the UN Climate Change Conference in Kyoto in December 1997: "The greenhouse gas emissions reduction targets of the Kyoto Protocol imply that developed countries will pay particular attention to renewable energy because of its great potential for reducing global greenhouse gas emissions."

Will Rowley, general manager and senior analyst with Douglas-Westword, contends that, despite the feverish growth rates for renewable energy, the sector's small starting base "makes it difficult for renewables to have the level of impact many would like and that we need over time.

"Just as we are seeing dramatic developments in gas following on from oil in the offshore industry, we are seeing the continued expansion of the wind industry following on from hydro," he told OGJ. "While the wind industry has grown significantly over the past decade, there are still considerable growth opportunities, particularly in the emerging offshore sector."

BP believes that renewables could account for up to 5% of world demand by 2020, depending on how much government policies will allow nuclear market share growth, says John Mogford, group vice-president, renewables and alternatives.

"In some locations, the percentages could be higher, depending on the abundance of wind and sunshine and the commitment of governments to encourage the transition to less carbon-intense forms of energy," he told OGJ.

Looking at the longer term, Shell projected the market-share growth for renewables if they were to expand supply as quickly as oil had in the early 20th Century. That would lead to renewables providing 50% of TPES by 2050, which Shell put at renewables' upper limit.

EIA's reference-case analyses show that, "with current laws and polices in place, alternative energy sources—in particular a few renewables such as wind, biomass, and geothermal—will continue to be minor contributors to energy supply," said Christopher Namovicz, EIA operations research analyst. "In the US, they'll grow significantly over the next 20 years, but at best this will allow them to keep up with growth in conventional energy, not outpace it. Of course, this assumes the expiration of some key federal subsidies, which are scheduled to expire at the end of this year under current law."

Mary Anne Sullivan, a partner with law firm Hogan & Hartson specializing in energy issues, notes that "the most avid proponents of renewables (including wind, solar, geothermal, biomass, and waste-to-energy) generally seem to agree that 20% is a realistic, but aggressive, target by 2020.

"This is a huge increase from where we presently stand, but it does appear to be the direction things are moving in the developed world. Europe is aiming even higher, but it remains to be seen whether the 30% targets some of them talk about are achievable at affordable prices and with the reliability modern society demands."

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Regardless of eventual market share, capital investment in renewable energy projects will soar in the coming decade, nearly tripling from 2001 levels, according to a report by Douglas-Westwood (Fig. 5).

Industry investment

While the oil and gas industry's track record on investment in renewables may be spotty at best, Shell and BP have been in the forefront of establishing renewables as core business opportunities.

In 1997, Shell committed to invest $500 million over 5 years to significantly increase the renewables side of its operations, establishing it as a core business. It extended the effort in 1999 when it formed Shell Hydrogen in a bid to pursue and develop business opportunities related to hydrogen and fuel cells worldwide.

BP's strategy for renewables is to develop, produce, and sell energy solutions that make economic sense for its customers, according to Mogford.

"That's how we run our oil and gas business. And that's how we're approaching renewables and alternatives.

"We're committed to the continued growth of our solar business, which is already one of the world's largest. We're doing it by controlling our costs, focusing on the right product lines, identifying those places where our products are competitive, and offering consumers in those locations reliable, integrated solar solutions that produce both clean power and a healthy return on investment.

"We are also supporting alternative energy research. We're not working to develop hydrogen-powered vehicles. We're leaving that to the automakers. Instead we're working to identify and understand the options for producing and delivering hydrogen to consumers so that hydrogen infrastructure and hydrogen-powered vehicles can arrive in the market together.

"Finally, we are working in partnership with policymakers and others to advance technology and inform the discussion on how to mitigate the environmental consequences of energy consumption, encourage energy efficiency, spur the growth of alternatives, and meet world energy demand."

The leaders

Leading the pack in terms of renewable energy growth is wind power (Fig. 6).

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The American Wind Energy Association estimated in 1996 that worldwide installed wind power capacity had jumped to over 6,000 Mw that year and was on target to reach 18,500 Mw by 2005.

In fact, the global large wind turbine market was expected to reach an installed capacity of 39,100 Mw as of this year, according to a February 2003 report by Norwalk, Conn.-based Business Communications Co. Inc. BCI estimated this market would climb to 110,100 Mw by 2007, for a 29.5% average annual growth rate (AAGR). The consulting firm projected wind energy revenues would almost track that AAGR, jumping to $16.3 billion by 2007.

Rowley noted that, over the next decade, "wind energy will continue to be the engine of renewable growth throughout the world, closely followed by biomass. The fastest-growing sectors are likely to be offshore wind followed later by wave and tidal (although from a very small base)."

That view was shared by Mogford, who said that, excluding nuclear-generated power, wind energy will make the biggest contribution in the near term in the electricity arena.

"Hydrogen has the long term potential to become a major contributor to the world's supply of transportation fuels," he added. "Use of solar panels in small applications will continue to grow and will become a competitive source of electric power in more and more locations as the technology improves and as government policies evolve. But in the short and midterm, solar power will not significantly contribute to global energy supply."

Geothermal and waste biogas (from landfills, wastewater treatment plants, and animal feedlots) are another area of strong renewables growth. BCI projected capacity from this sector would increase to 20,600 Mw in 2008 from 13,400 Mw in 2002, as annual revenues climb to $1.13 billion from $857 million.

The market for solar photovoltaics (PV) is expanding at 20-35%/year, according to IEA, as PV costs have dropped to one third to one fifth of 1980 levels. It pegged total installed PV capacity worldwide at 800 Mw, on track to reach 12,000 Mw by 2010.

Renewables' hurdles

Cost has been cited most frequently as the primary hurdle for renewable energy sources significantly increasing market share. In fact, renewables soon will begin to approach cost-competitiveness with conventional power sources, according to a 2001 analysis by Arthur D. Little Inc. (Fig. 7).

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But there are technical and practical hurdles as well to implementing renewables on a broad scale.

Sullivan contends that all alternative energy resources are at an economic disadvantage.

That disadvantage has declined for wind energy, and it continues to decline as the technology continues to advance, she noted: "The same seems likely to occur with solar, although the pace is considerably slower. Recently, wind is facing more siting challenges, as the industry pursues unconventional sites, such as offshore locations.

"There are some inherent disadvantages with biomass and waste-to-energy, including uniformity of fuel quality, that compound the cost disadvantage."

Rowley expressed his firm belief "in the power of economics and the notion that if the incentives are good enough, then technological hurdles can be overcome. This is particularly the case if you compare, for example, the hurdles that the offshore oil and gas industry has overcome in chasing deepwater prospects.

"With offshore wind, the momentum being built up in Europe needs to be maintained to accelerate market development. With wave, tidal, and current stream, the technology still needs to be proven on a larger scale."

Mogford sees both economic and technological hurdles for alternative energy.

"UThe economics of wind and solar power depend greatly on the abundance of wind and sunshine, the price paid for power sold back into the grid, and the tax treatment of investments in alternative energy," he said.

"There are places, like California, where the case for investing in a solar system is today very compelling because the consumer can recover his investment in a relatively short time. However, major improvements in existing technologies are needed if we're going to drive down the cost of alternative energy and expand its use to places where there is less wind, less sunshine, or a less-favorable investment climate for alternative energy consumers."

Mogford added that financing is usually a forgotten element in assessing renewable energy projects.

"In locations where capital markets are well-developed, it is easy to move say, a $25,000 investment into a price per kilowatt-hour," he said. "Where financing isn't available, the capital investment can be a barrier to alternatives built on a previously installed infrastructure financed at a macro level."

According to Namovicz, the hurdles for broader acceptance of renewables are largely economic.

"Intermittent generators like wind and solar do have technical issues that can impact grid operations at higher penetrations," he said. "These can be addressed by technology, but at a cost that tends to increase with increasing penetration on the grid. The main costs here, especially for wind, are additional dispatchable capacity that needs to be kept in reserve to cover periods of high demand and low wind, but also the cost of excess wind generation during times of low demand and high wind. When wind is less than 1% of generation, neither of these are significant issues, but at 10% or 20%, or even higher penetration rates, they become real costs that could affect the economics of further wind development.

"Ultimately, the renewables are natural resources, and like all natural resources, they vary in quality, ease of exploitation, and accessibility. But these limits can generally be overcome by spending more money or developing better technology, so these limits are also mostly economic as well."

But those added costs for reserve power are prohibitive, contends energy consultant Robert Hirsch, senior energy program adviser at Science Applications International Corp., San Diego.

"Society demands electric power-on-demandUwhereas wind and sunlight are by nature unpredictable and intermittent," he wrote in a recent white paper. "For wind or PVs to meet society's need for power-on-demand on the scales some have envisioned, either the cost will be enormous, or we will need to mate renewable technologies with fossil-fuel electric generation. This will entail costs much greater than popularly quoted."

Transportation fuels

Even greater hurdles await alternative transportation fuels, given the difficulty of penetrating a market that evolved in parallel with an infrastructure dedicated to fuels refined from crude oil.

While there is much talk of vehicles propelled by hydrogen, electricity, or fuel cells, their commercial prospects indeed rate them as "fuels of the future."

The Massachusetts Institute of Technology Energy Laboratory in 1999 undertook an assessment of likely new technologies for passenger vehicles in 2020 and concluded there would be "no overall winners in the race for cars with lower (GHG) and other emissions.

"Initial results from the assessment show that the gains from continued work on conventional fuels and vehicles that emerging technologies like the fuel cell will have trouble competing," the research group's Malcolm Weiss wrote in its newsletter. "By 2020, conventional vehicles will be twice as efficient, half as polluting, and cost little more. New technologies will provide somewhat greater efficiency and emissions gains but at a much higher cost."

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(Fig. 8 compares characteristics of an "evolved" Toyota Camry powered by a gasoline internal combustion engine [ICE], a gasoline ICE-battery hybrid, and a methanol fuel cell.)

"With little or no private benefit to purchasers, the new technologies are unlikely to succeed in the marketplace unless government action or public pressure calls for major reductions in [GHG] emissions," Weiss wrote.

Similarly, California's efforts to impose a zero-emission vehicle (ZEV) quota for new cars sold in the state within the near term ran aground this year, although they may resurface in a drastically rewritten standard (OGJ, Mar. 10, 2003, p. 17).

The ZEV program, essentially a path toward mandating electric vehicles, initially required automakers to offer 10% ZEVs of their total vehicles to be sold in the state by 2003. It provided grants to cut ZEV costs to purchasers that amounted up to a $9,000 subsidy per vehicle. Yet, as energy consultant and retired Chevron Corp. executive Thomas G. Burns noted in a study for the Petroleum Industry Research Foundation Inc., for all but one of the qualifying vehicles, the subsidy would offset less than half of the incremental cost of the electric vehicles (Table 3).

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Hydrogen-fueled cars are the alternative flavor du jour. Automakers in the US, Europe, and Japan are spending billions for research and development on new fuel technologies, notably hydrogen fuel cells. The Bush administration has earmarked $1.7 billion over 5 years for hydrogen energy R&D.

Shell Hydrogen notes that while the first commercial hydrogen fuel cell-powered passenger vehicles might appear around 2010, the costs of providing a new hydrogen infrastructure "are immense." The company estimates that the initial investment required in the US alone to supply just 2% of cars with hydrogen by 2020 at $20 billion.

Sullivan finds DOE's target of 2015 for commercialization of hydrogen-fueled vehicles "highly optimistic, given that it requires both new vehicle technology and a whole new fuel infrastructure system.

"Hybrid gas-electric and improved efficiency seem likely to make a greater contribution to the transportation picture before hydrogen does."

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Similarly, the petroleum industry sees hydrogen and other alternatives making only a minor contribution to the transportation fuels mix in the next 20 years, even under the aggressive substitution efforts proposed by the European Union (Fig. 9).

Energy efficiency

One aspect of the energy sector could put a bigger dent in oil's market share than renewables: improved energy efficiency.

Global energy efficiency overall is only about 37%, according to Wim C. Turkenburg and André Faaij of Utrecht University, in a paper written for the WEA.

"A large, unrealized potential for greater energy efficiency exists at the point of end use, for example, through more efficient vehicles, appliances, and buildings," the authors wrote. "UGains in energy efficiency of 25-35% are cost-effectively achievable in industrialized countries over the next 20 years, with higher potentials (30-45%) achievable in developing and transitional economies."

ExxonMobil Corp. recently noted dramatic gains in energy efficiencies, pointing out that industrialized countries now use about one third less energy to produce $1,000 of economic output than in 1970.

"On a worldwide basis, total efficiency gains represent energy savings of more than 55 million boe/d," the company said. "Without these savings, energy use today would be more than 25% greater.

"Worldwide, we expect efficiency improvements to continue, averaging about 1%/year and resulting in additional savings of about 60 million boe/d by 2020."

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Werner Zittel, of Germany's L-B-Systemtechnik GMBH, outlined the savings in overall oil consumption that could be gained from a range of improvements in fuel economy in new European Union vehicles (Fig. 10), in a presentation at a workshop on oil depletion held by the Association for the Study of Peak Oil & Gas (OGJ, July 14, 2003, p. 18).

Subsidies needed

Despite the greater inroads made by renewables in the global energy mix, there is a consensus that government subsidies for them will need to continue for the foreseeable future if they are to compete.

"The requirement for subsidy is already reducing in many areas, although it will be many years before a true competitive market develops. California has already seen the tendering of unsubsidized wind power in competition with gas-powered generation," Rowley said. "As we move forward, we will increasingly see improved economics from technology and simple experience that will make renewables increasingly competitive.

"It is also worth noting that, while efforts are being made to reduce the output cost of renewables, it is also likely that in time conventional power generation costs may rise, a factor often ignored by people comparing costs."

Mogford contends that government help will be needed to encourage consumer acceptance, foster technical progress, and bolster continued industry investment in alternative energy.

"Most emerging technologies require help, especially when competing with technologies that have established infrastructures and have been in use for many years," he said. "In some areas of the world, where power distribution infrastructure doesn't exist or where there are structurally high power prices, distributed renewables like solar are already competitive."

Subsidies have played a critical role in growth of some renewables, especially wind power, which is probably the renewable closest to being competitive on a large scale in the near term, according to Namovicz.

"Even when you take out the subsidy, the total cost per kilowatt-hour of wind is going down largely because of improvements to the technology. But it is chasing a moving target, since the competing conventional technologies are also improving," he said. "If we continue to see stratospheric natural gas prices for an extended period of time, wind could be competitive with little or no subsidy. However, looking at the fundamentals of gas supply, we think the long-term price outlook for gas will make wind competitive mostly in niche markets without a subsidy. "Wind in particular is close enough to being economic that almost any subsidy would spur some amount of additional development, although larger subsidies would, of course, induce more development."

Kyoto catalyst

The subsidies required to keep renewables competitive with conventional fossil fuels could come in through the back door. This could entail punitive taxation on carbon-based fuels in order to reduce demand for them and thereby cut emissions of carbon dioxide and other GHGs, in an effort to comply, at least in spirit, with the goals of the Kyoto Protocol.

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Aggressive efforts at supporting renewable energy development in the name of Kyoto and other air quality concerns could result in renewables capturing a huge chunk of market share from oil and coal, the two most carbon-intensive primary energy sources. Natural gas fares better under a Kyoto scenario, according to Zittel's modeling (Fig. 11).

The most important aspect of compliance with the Kyoto Protocol and similar GHG-reduction initiatives is that they maintain a high profile for the issue of long-term energy supply, management, and the environment, Rowley contends.

"The greater the profile, the greater the confidence within the wider markets [finance, insurance, etc.] that renewables is an area worth operating and investing in," he said. "In time, renewables will increase their market share, and Kyoto and (related efforts) do help lever progress, although the effect is not universal and differs by country and region."

Mogford also sees carbon-reduction initiatives as having an impact on renewables' growth opportunities, albeit with limited effect in the near term.

"In the short term, the impact will be limited, as major changes in energy supply take a long time to accomplish because these changes often require significant investment by energy consumers, not just energy producers," he told OGJ. "In the short term, it is difficult to see a carbon price that creates major change, although it will clearly accelerate demand [for renewables]."

EIA has studied several CO2 reduction programs, including the latest legislation introduced in the US Senate this year, by Sens. John McCain (R-Ariz.) and Joe Leiberman (D-Conn.) to mandate CO2 emissions cuts (OGJ, Aug. 11, 2003, p. 37).

"These types of programs will likely spur a significant growth in renewable market share, and even nuclear sees some new building activity," notes Namovicz. "However, we've also done analyses of other programs, such as establishing a national Renewable Portfolio Standard, which show similar effects. Of course, there are differences based on the types of technologies targeted and the targeted level of carbon reduction or renewable growth and so forth.

(So) if the question is: 'Is a Kyoto-type program the only way we'll get increased renewables,' the answer is 'no'; there are numerous direct or indirect ways to spur this growth. If the question is: 'Will a Kyoto-type program increase renewable market share,' the answer is 'yes.'

Even without subsidies, market share mandates, or carbon taxes, heightened concerns over climate change and air quality will prove a chink in oil's competitive armor, according to Sullivan.

"Carbon capture and advanced emissions controls will drive up the effective cost of fossil fuel resources," she said. "Great progress is needed on these fronts, given the ready availability and high reliability of that resource, balanced against the challenge of global climate changeUI do not think we are about to drive traditional fossil fuels out of the picture by any means, but we are headed to a situation where renewables are a significant part of almost every energy supplier's balanced portfolio."

Making the transition

If the depletionists are right about global oil production peaking around the turn of the decade, then renewables won't need much in the way of subsidies or Kyoto mandates; skyrocketing costs of oil will help usher in a renewables era sooner than anyone currently predicts.

But the resulting high energy costs for everyone will prove a massive economic dislocation for the world, a grim scenario often outlined by the peak-oil theorists. Some have even painted alarming pictures of civilization crumbling as a result of this new oil shock.

"No technology breakthrough can come to alter the imminent oil peak; it would take much too long to put new technology in place to hope to dent oil and gas demand," said A.M. Samsam Bakhtiari, National Iranian Oil Co. senior expert. "Even if the two great hopes of solar and cold fusion would materialize, they could not be developed in time, as it takes decades (not years) to put in place the necessary infrastructures."

But there is a prevailing view among most energy economists that an approaching peak and subsequent steep decline in global oil production will send early price signals that will crimp demand, spur development of nonconventional oil resources, and thus stave off the peak day.

Another prominent peak-oil theorist, who declined to be identified, acknowledged that "prices will rise, but they will send a signal that comes too late, given the long lead times to create new energy infrastructures. This will result in a reduction of demand but, unfortunately, the so-created room of maneuver will be short-lived because non-Middle East oil supply will continue to decline with little chance that new investments will be sufficient to compensate for both this decline and the potential [overall] rise of demand.

"To this equation, one should add the negative impact on the GDP, as was the case during the last 30 years each time the price of oil went up. I believe that it won't be the end of the civilization, but it will certainly be a painful transition."

Some of the depletionists contend that the only answer is for governments to take steps now to boost energy prices and thereby conserve what oil reserves remain.

But the unidentified peak-oil theorist is a contrarian on that score.

"The idea that planners, and especially state planners, could be smart enough to rise the prices progressively to avoid a shock is totally unrealistic," he told OGJ. "My preference is to leave things happen and ensure that governments will not intervene. A competitive industry is by far the best means to ensure a rapid and correct adaptation."

Rowley too sees increasing pressure on oil supplies within the next decade but offers a less apocalyptic vision.

"[Natural] gas will act as a next phase after oil, but what we expect to see over the next decade is a realization that conventional energy costs can only go one way, up," he said. "The global economy has a wonderful way of coping, and transition away from conventional to renewables will occur.

"The real pivotal impact of renewable energy will be within the period of 2010-20, where players will be making significant choices between a maturing renewable sector and conventional [energy sources]."

Noting that recent history is full of instances in which technical progress or volatility of primary energy sources has led to major changes in energy supply or energy consumption, Mogford voices the BP stance that "oil will remain in relatively abundant supply for at least the next 15 years, with gas being plentiful for several decades longer.

"More than economics will drive the growth of alternative energy. Security of supply, minimization of environmental impacts, and technical advances will also be factors."

But will the transition to renewables be an orderly one? Sullivan expressed her belief in an orderly transition: "We have seen occasional price spikes in traditional energy resources over the last 30 years, and I suspect we will continue to see those from time to time, for various reasons.

"But I also suspect that governments will tailor their policies on emissions, renewable portfolio requirements, and technology funding to ensure that, except for the occasional, unusual price spikes, there is an orderly transition to an era in which renewables and nonconventional fossil fuel technologies are playing a major role in our energy supply picture."

Therefore, she reckons that it will be another 20-25 years before alternative energy sources play a dominant role the world's energy mix.

But orderly and rapid are not necessarily mutually exclusive in this outlook, says Namovicz.

"If 'orderly' transition means 'gradual' transition, I think that history shows that transitions to a new form of energy can happen relatively quickly, over the course of a decade or so, but are not necessarily disorderly," he said. "If, either through subsidy or natural market forces, one or more renewable technology becomes very economically attractive, there may be a boom period where lots of new capacity is built every year for a few years, just like lots of new gas combined-cycle capacity has been built over the past few years. But just because they're building lots of new combined-cycle units doesn't mean the coal units are suddenly disappearing. It shouldn't be too surprising to see a similar pattern if wind or biomass suddenly broke through some economic threshold, with lots of new annual capacity additions all of a sudden, but with the impact greatly dampened because the existing capital stock is so large, and they weren't necessarily being built to replace that [capital stock], but potentially to satisfy new demand."

In addition to the existing-capital-stock issue, Namovicz also cautions observers to remember the effect of market feedbacks in citing his expectation that it will be a long time before renewables can become the world's dominant energy source.

"If wind becomes economic because natural gas is too expensive, then they will build lots of wind [projects]. But this will take market share from gas and lower the gas price. At the lower gas price, the new economics for wind may dampen its growth."

Human concerns

If in fact a permanent oil shock is looming on the near horizon, it would seem that an early effort to impose higher energy prices for that reason or to support an early transition to renewables would have its own severe economic consequences, especially for developing countries. In effect, this could accelerate the price shock. The likely deep recession that would ensue could hit not only the developing countries directly but also squelch economic growth in the developed countries, upon which the former depend heavily for export markets and economic aid.

"If energy becomes, as I fear, a driver of slower growth, recessions, and hard adjustment, the process might be even more difficult and painful for the developing countries," said the unidentified peak-oil advocate. "I do not know what should be done but am pretty sure about what should not be done: The worst outcome for the developing countries would be the closure of the borders of the rich countries and the start of protectionist policies in the name of the security of supply."

Rowley contends that while such increased prices will have an impact on economic development, "it is surprising how many developing economies have a high concentration of renewable energy and often at cheaper prices than the developed world (particularly biomass and hydro). Within the Kyoto protocol and much of the similar accords, the developing nations have much easier targets than the developed world, so in theory the pressure is on the developed world to swallow the bulk of increased costs."

He sees no easy mechanism to mitigate the shock of increased energy costs, "although on a global basis the dependency on fuel types is much more balanced than it ever has been over the past 50 years."

The difficult questions center on how people react to spiraling energy prices.

"Will [higher energy prices] be accepted as inevitable and just another business variable, or will confidence be dented and lead to a paralysis in activity and growth?" Rowley asked. "I think more work needs to be done on a country-by-country basis to assess those with imbalanced energy portfolios and their potential swing factor in the confidence of markets."

In some instances, those higher energy costs are already a fact of life in developing countries, Namovicz pointed out.

"Much of the developing world already has high-cost energy, especially for electricity, where you can encounter weak grid systems that rely on smaller, less-efficient generating capacity," he said. "I agree that low-cost energy will be important in economic development, but I'm not sure that the starting point is the low-cost energy we see in the US.

"In some cases renewables, which are expensive by our standards, could be the low-cost energy, especially for people living in remote, off-grid villages or in countries with little or no local conventional resources. A price shock would occur from forcing high-cost renewables into a low-cost energy market, but I'm not sure you'd see much of a price shock forcing high-cost renewables into a high-cost market where they are much closer to being competitively priced. The developing world isn't all the same, and renewables may be a relatively high-cost option in some places but a lower-cost option in others."

But overall, a broad transition to alternative energy sources is likely to come much slower in the developing countries because the poor countries can't afford the higher cost of the new technologies, Sullivan contends.

"India, for example, has spoken clearly on its intent to develop its economy first and worry about carbon emissions and climate change later, which is the pattern it sees as entirely consistent with the way the US and Europe have proceeded," she said. "But the cost will go down as new technologies are commercialized and become the world standard. At that point, and not before, the new technologies and alternative fuels will gradually become the standard in the developing world."

Mogford says BP believes the world can manage the tradeoffs among global demand growth, security of supply, and the environmental concerns caused by the use of fossil fuels.

"It's important that all parties—governments, energy suppliers, and end users—work together to find innovative solutions to this issue," he said. "There's a lot we can do to improve energy efficiency and reduce the environmental impact of our existing energy supply. Any change should be managed in the most economically efficient way.

"Our view is that this is especially important in managing carbon emissions [a truly global issue] via mechanisms such as trading, which promotes investment where the most impact can be made."