Chapter 1: Introduction to Energy Economics PDF

CHAPTER 1: INTRODUCTION TO ENERGY ECONOMICS Lectures: Capucine Nobletz Tutorials: Pablo Aguilar Pérez 13/09/2024 TEXTBOOK ▪ Bhattacharyya, Subhes C. (2019). Energy Economics: Concepts, Issues, Markets and Governance. Springer. London....

CHAPTER 1: INTRODUCTION TO ENERGY ECONOMICS Lectures: Capucine Nobletz Tutorials: Pablo Aguilar Pérez 13/09/2024 TEXTBOOK ▪ Bhattacharyya, Subhes C. (2019). Energy Economics: Concepts, Issues, Markets and Governance. Springer. London. ISBN = 978-1-4471-7467-7 978-1-4471-7468-4. URL: http://link.springer.com/10.1007/978-1-4471-7468-4 Pladifes| Date | 2 INTRODUCTION WHAT IS ENERGY ECONOMICS? DEFINITION & SCOPE DEFINITION SCOPE ▪ “Energy economics studies energy resources and energy commodities. It includes forces motivating firms and consumers to supply, convert, transport, use energy resource; market and regulatory structures; distributional and environmental consequences; economically efficient ▪ Analysing the role of energy across key sectors, including use.” (Sickles and Huntington, 2008). residential, industrial, transportation, and commercial. ▪ Exploring the interplay between energy policy, market forces, and sustainability goals. ▪ Simply saying, energy economics is a branch of the economy that analyses how energy production, ▪ Assessing the critical role of energy in fostering economic distribution and consumption affect the economy and stability and growth. the environment. Pladifes| Date | 4 HISTORICAL CONTEXT & DEVELOPMENT OF THE FIELD ▪ Early Analysis: ▪ Liberalization and Environmental Focus in the 1990s: Energy issues have been analysed from an economic Energy markets were liberalized and restructured perspective for over a century. globally. Climate change and environmental issues remained ▪ Emergence as a Specialized Field: prominent topics. Energy economics became a specialized branch following the first oil shock in the 1970s. ▪ Today: Energy transition issues towards a net-zero goal; ▪ Expansion in the 1980s: Energy autonomy with new energy dependence, e.g. In the 1980s, energy economics expanded to include critical metals, in a fragmented world; environmental concerns, highlighting the impact of Integrating not only climate change but also energy use on development and sustainability. biodiversity and nature issues. Pladifes| Date | 5 ENERGY ECONOMICS IS MULTIDIMENSIONAL ▪ Energy-Sector Complexity: Comprises highly technical industries with distinct characteristics. Exerts a global influence on economic activities. Shaped by interactions across international, regional, ▪ Economic-Energy Interdependence: national, and local levels. Energy depends on inputs from sectors like industry, transport, and households. ▪ Energy-Related Interactions: It is crucial for the functioning of most sectors. Energy Trade: Driven by natural resource disparities Impacts energy demand, resource substitution, and supply-demand imbalances. supply, investments, and key macroeconomic International Influences: Guided by legal variables like output, trade balance, inflation, and frameworks, treaties, and organizations like the UN, interest rates. World Bank, and IMF. Geopolitical Dynamics: Shaped by cooperation, competition, and conflicts among countries and entities. Pladifes| Date | 6 KEY ENERGY METRICS, CONCEPTS, AND DATA CHALLENGE DEFINITION OF ENERGY DEFINITION WHAT DOES THAT MEAN? ▪ “Energy is defined as the capacity of a physical system to work” (Textbook, p.9). ▪ For the first law: ▪ Forms of Energy: When energy is used, it doesn’t disappear; it simply Energy appears in various forms such as heat, light, transforms from one form to another. motion, electrical, chemical, and gravitional. Examples (EIA): ̵ A car engine burns gasoline, converting the ▪ Laws of Thermodynamics: chemical energy in gasoline into mechanical First Law: Energy cannot be created or destroyed, energy. only transformed. ̵ Solar photovoltaic cells change radiant energy Second Law: Energy conversions always produce from the sun into electrical energy. some low-grade, less useful energy, mainly as waste heat. This limits the efficiency of energy use. Pladifes| Date | 8 DEFINITION OF ENERGY (NEXT) (NEXT) WHAT DOES THAT MEAN? THE SECOND LAW OF THERMODYNAMICS. ▪ Recall: Energy conversions always produce some low-grade, less useful energy, mainly as waste heat. This limits the efficiency of energy use. ▪ What is energy efficiency? This is the amount of useful energy obtained from a system. A perfectly efficient machine would convert all energy into useful work. However, in reality, energy conversion always results in both usable and unusable forms of energy. ▪ Example: the human body Like a machine, the body uses food as fuel to move, breathe, and think. However, it's less than 5% efficient, with most energy being lost as heat, which may or may not be useful depending on the body’s temperature needs. Pladifes| Date | 9 ENERGY TYPES ▪ Primary energy: Energy is obtained directly from natural resources without any transformation other than separation and cleaning. ▪ Examples: coal, oil, natural gas and solar energy. ▪ Secondary energy: Energy obtained from primary sources or from another secondary source through transformation processes. ▪ Examples include refined petroleum products from crude oil and electricity from burning coal. Source: European Commission Pladifes| Date | 10 ENERGY TYPES (NEXT) Solar NON-RENEWABLE ENERGY & RENEWABLE ENERGY ▪ Non-Renewable Energy: Bioenergy Wind Energy sourced from finite natural reserves. For instance, crude oil, formed in the earth's crust over geological periods, is non-renewable. Renewable energy sources ▪ Renewable Energy: Energy derived from natural sources that are replenished at a faster rate than they are consumed. Ocean Geothermal Examples: solar energy and wind power. ▪ Want to know more? Hydropower United Nations: What is renewable energy? Pladifes| Date | 11 ENERGY TYPES (NEXT) COMMERCIAL ENERGY & NON-COMMERCIAL ENERGY FIGURE: CRUDE OIL PRICES – DOLLARS PER BARREL ▪ Commercial Energy: Energy that is traded in the market. It has a market price. Examples: oil, gas or electricity markets. ▪ Non-commercial Energy: Non-commercial energy refers to energy sources that are typically not bought and sold in the marketplace. These are often traditional energy sources used for domestic purposes, particularly in rural areas. Examples: Firewoord for cooking or heating. Pladifes| Date | 12 ENERGY SYSTEM Energy Supply System: The series of systems or Production activities necessary to ensure energy supply. Import / Export Supply Stock Change ▪ Supply encompasses the production, import/export, and changes in commodity stock Refining levels. Electricity generation Transforma ▪ Transformation processes convert primary tion Fuel processing energy into secondary energy to facilitate consumer use, involving inherent losses. Final use of energy and non-energy uses ▪ Final use includes both energy and non-energy Use applications such as cooling, lighting, and heating. Pladifes| Date | 13 ENERGY UNITS PHYSICAL UNITS ▪ Physical units are used to measure various attributes such as distance, area, volume, height, weight, mass, force, and energy. ▪ Different types of energy and fuels are measured using specific physical units, including: Barrels or gallons for liquid petroleum fuels like gasoline, diesel, and jet fuel, as well as biofuels such as ethanol and biodiesel. Cubic feet for natural gas. Tons for coal, where a short ton is 2,000 pounds, and a metric ton is approximately 2,205 pounds. Kilowatt-hours (kWh) for electricity. Pladifes| Date | 14 ENERGY UNITS (NEXT) POPULAR UNITS FOR COMPARING ENERGY British Thermal Units (Btu): Measures heat energy; Used to quantify the Energy Conversion: energy content in fuels, heating, and air conditioning systems. Importance: Converting energy Barrels of Oil Equivalent (BOE): Represents the energy released by burning one barrel of crude oil, used to compare different energy sources (like oil and units is essential for comparing gas). and aggregating energy data from different sources. Metric Tons of Oil Equivalent (TOE): The energy from burning one metric ton of crude oil, a standard for comparing large energy quantities from different sources. Practical Applications: Ensures consistency in reporting, Metric Tons of Coal Equivalent (TCE): Measures the energy released by burning one metric ton of coal, useful for comparing energy from coal to facilitates international trade, and other fuels. supports policy formulation. Terajoules (TJ): Equal to one trillion joules, used for expressing large-scale energy production or consumption. Source: EIA Pladifes| Date | 15 EXAMPLE OF ENERGY CONVERSION BTU CONTENT OF COMMON ENERGY UNITS CLASS EXERCICE ▪ 1 barrel of crude oil produced in the United States = 5,684,000 Btu ▪ Two identical houses. ▪ 1 gallon of finished motor gasoline (containing about 10% fuel ethanol by volume) = 120,214 Btu ▪ House 1: heats with a natural gas furnace and used 67,000 cubic feet of natural gas last winter. ▪ 1 gallon of diesel fuel or heating oil (with sulfur content less than 15 parts per million)= 137,381 Btu ▪ House 2: heats with an oil furnace and used 500 gallons of oil last winter. ▪ 1 gallon of heating oil (with sulfur content at 15 to 500 parts per million) = 138,500 Btu ▪ 1 barrel of residual fuel oil = 6,287,000 Btu ▪ By converting the natural gas and oil consumption data into Btu, which house consumed the most energy for ▪ 1 cubic foot of natural gas = 1,036 Btu heating? ▪ 1 gallon of propane = 91,452 Btu ▪ 1 short ton (2,000 pounds) of coal (consumed by the Source: EIA. electric power sector) = 18,820,000 Btu ▪ 1 kilowatthour of electricity = 3,412 Btu Pladifes| Date | 16 EXERCICE CORRECTION Natural gas (home 1): 67,000 cubic feet x 1,036 Btu per cubic foot = 69,412,000 Btu Heating oil (home 2): 500 gallons x 137,381 Btu per gallon = 68,690,476 Btu Result: Home 1 Pladifes| Date | 17 ENERGY ACCOUNTING FRAMEWORK ▪ Objective: Know how to read the energy balance table in energy reports. Supply block ▪ Definition: The energy accounting framework provides a comprehensive account of energy flows from Transformation block original supply sources through conversion processes to end-use demands, ensuring that all double counting is avoided. ▪ An energy balance table has three main blocks: Demand block The supply block, the energy transformation block and the demand block Pladifes| Date | 18 WHAT IT LOOKS LIKE? Manufactured Primary Petroleum Natural Bioenergy Primary Heat Coal Electricity Total fuel oils products gas & waste electricity sold Production 358 0 36 619 0 32 924 13 730 17 539 0 0 101 169 Imports 2 383 1 165 49 861 33 269 42 555 5 327 0 2 865 0 137 426 Exports -479 -5 -30 239 -20 679 -15 098 -641 0 -816 0 -67 956 Marine bunkers 0 0 0 -2 086 0 0 0 0 0 -2 086 UK Overall Energy Stock change +779 +312 -771 -30 -577 -11 0 0 0 -298 Total supply 3 042 1 473 55 469 10 474 59 804 18 406 17 539 2 049 0 168 256 Balance 2023 (unit Statistical difference -22 -3 -0 +103 +132 0 0 -24 0 +186 ktoe) Total demand 3 063 1 476 55 469 10 371 59 672 18 406 17 539 2 074 0 168 070 Transfers 0 +13 -143 -15 +622 -647 -8 748 +8 748 0 -170 Transformation -2 235 -686 -55 326 54 340 -19 979 -10 562 -8 790 16 174 1 523 -25 542 … … … … … … Energy industry use 0 293 0 3 618 4 263 0 0 1 368 336 9 878 Ktoe: kilotonnes of … Losses 0 62 0 0 423 0 0 2 491 0 2 976 oil equivalent … …. … Industry 668 294 0 2 212 7 504 1 745 0 7 411 586 20 421 … … … Transport 11 0 0 48 869 84 2 697 0 939 0 52 601 … Other 149 127 0 5 567 28 042 2 753 0 14 787 601 52 026 … Non energy use 0 26 0 4 431 0 0 0 0 0 4 457 Pladifes| Date | 19 READING – THE SUPPLY BLOCK Primary oils Petroleum products Total Supply is equal to primary production plus imports minus Production (P) 36 619 0 exports minus bunkers plus or minus changes in stocks. Imports (M) 49 861 33 269 Exports (X) -30 239 -20 679 𝑻𝑺 = 𝑷 + 𝑰 − 𝑴 − 𝑩 ± 𝑺 Marine bunkers (B) 0 -2 086 Why the primary production of petroleum products is equal to zero? Stock change (S) -771 -30 Total supply (TS) 55 469 10 474 Legend: 2023 UK energy balance table. Ktoe: kilotonnes of oil equivalent Pladifes| Date | 20 READING – THE TRANSFORMATION BLOCK Primary oils Petroleum products Transformation (T) -55 326 54 340 Electricity generation 0 -426 Heat generation 0 -56 Petroleum refineries -55 665 55 235 … … 0 Patent fuel manufacture 0 -46 Can you describe this transformation Other 339 -366 block? Why is the “petroleum refineries” Energy industry use (O) 0 3 618 category negative for primary oils and Electricity generation 0 0 positive for petroleum products? Oil and gas extraction 0 508 Petroleum refineries 0 3 110 Coal extraction 0 0 Coke manufacture 0 0 Blast furnaces 0 0 Patent fuel manufacture 0 0 Storage 0 0 Other 0 0 Losses (L) 0 0 Legend: 2023 UK energy balance table. Ktoe: kilotonnes of oil equivalent Pladifes| Date | 21 READING – THE TRANSFORMATION BLOCK Primary oils Petroleum products Transformation (TI, TO) -55 326 54 340 Electricity generation 0 -426 Heat generation 0 -56 Petroleum refineries -55 665 55 235 For the first column, we are … … 0 interested in primary oil, so it seems Patent fuel manufacture 0 -46 intuitive that at the end we will Other 339 -366 Energy industry use (O) 0 3 618 subtract the oil refineries. On the Electricity generation 0 0 contrary, in the second column, we Oil and gas extraction 0 508 are interested in oil products, so, Petroleum refineries 0 3 110 logically, the oil refineries have Coal extraction 0 0 positive values. Coke manufacture 0 0 Blast furnaces 0 0 Patent fuel manufacture 0 0 Storage 0 0 Other 0 0 Losses (L) 0 0 Legend: 2023 UK energy balance table. Ktoe: kilotonnes of oil equivalent Pladifes| Date | 22 READING – THE DEMAND BLOCK Primary oils Petroleum products Final consumption (FC) 0 61 078 The final consumption (FC) is the sum Industry (I) 0 2 212 of the consumption in the different sectors. Transport (T) 0 48 869 Other (O) 0 5 567 Domestic 0 2 065 𝑭𝑪 = 𝑰 + 𝑻 + 𝑶 + 𝑵 Public administration 0 654 Commercial 0 1 628 Agriculture 0 843 Miscellaneous 0 376 Non energy use (N) 0 4 431 Legend: 2023 UK energy balance table. Ktoe: kilotonnes of oil equivalent. Pladifes| Date | 23 READING – ACCOUNTING EQUALITY The Statistical Difference is equal to: Petroleum Primary oils products SD = TS – TD Total supply (TS) 55 469 10 474 As a result, total supply is equal to total demand, plus the statistical difference (can be Statistical Difference (SD) 0 103 negative): Total demand (TD) 55 469 10 371 TS = TD + SD Transfers -143 -15 Transformation (T) -55 326 54 340 What are the transfers? They represent the energy flows that are Energy industry use (O) 0 3 618 moved from one category (or account) to another without being consumed or Losses (L) 0 0 transformed at that point. Final consumption (FC) 0 61 078 Legend: 2023 UK energy balance table. Ktoe: kilotonnes of oil equivalent. Pladifes| Date | 24 READING – ACCOUNTING EQUALITY 𝑇𝐷 = 𝐹𝐶 – 𝑇 + 𝑂 – 𝐿 − 𝑇 Petroleum Primary oils products Example 1: Primary oils 𝑇𝐷 = 55 326 + 143 Total supply (TS) 55 469 10 474 𝑇𝐷 = 55 469 Statistical Difference (SD) 0 103 Example 2: Petroleum products Total demand (TD) 55 469 10 371 𝑇𝐷 = 61 078 – 54 340 + 3 618 – 0 + 15 𝑇𝐷 = 10 371 Transfers -143 -15 Transformation (T) -55 326 54 340 Total demand is equal to final consumption minus transformation, plus energy industry use, Energy industry use (O) 0 3 618 minus losses and transfers. Losses (L) 0 0 Final consumption (FC) 0 61 078 Legend: 2023 UK energy balance table. Ktoe: kilotonnes of oil equivalent. Pladifes| Date | 25 ENERGY COMMODITY ACCOUNTS & OVERALL ENERGY BALANCE ▪ Energy Commodity Accounts (ECA): ▪ Overall Energy Balance (OEB): Records all relevant flows of an energy Converts all flows into a common commodity in its original units (tons, barrels, accounting unit (Joule, kilocalories, Btu, cubic meters, etc.), similar to a cash etc.) to analyse the energy system account, capturing national-level inflows dynamics, economic activities, structural and outflows. changes, and fuel use patterns. This allows for precise tracking but doesn't This historical data helps in energy demand permit overall appraisal due to the lack of a analysis and forecasting for planning common unit. purposes. Pladifes| Date | 26 I WANT TO LEARN MORE ▪ If you want to train yourself and see in detail how an energy balance chart is made up. ▪ Click on this link Aggregate energy balances (DUKES 1.1) - Excel Pladifes| Date | 27 FIGURE OF ENERGY BALANCE TABLE Click click to better see this figure Pladifes| Date | 28 CONCLUSION: ENERGY BALANCE TABLE ECONOMIC READING OF AN ENERGY BALANCE TABLE AND ITS COMPONENTS ▪ Understanding Energy Needs: Provides a comprehensive overview of a country’s energy requirements. ▪ Transformation Analysis: Examines the transformation section to assess the evolution of energy efficiency and technical efficiency ▪ Supply Patterns: over time. Highlights domestic production and the share of imports and exports, offering insights into a country’s vulnerability to external partners and its ▪ Demand Patterns: self-reliance in energy supply. Analyses final consumption data to illustrate the demand patterns within a country and the underlying energy supply mix. Pladifes| Date | 29 KEY ENERGY ECONOMIC NOTIONS (TO KNOW) ▪ Energy Supply Mix: Measures the share of each type of energy in the ▪ Share of Energy Products: total energy supply. Indicates the share of energy products used in total A diversified energy supply is generally more energy consumption. advantageous for a country. It is interesting to compare the share of renewable energy with fossil energy. ▪ Self-Reliance in Supply: Measures the share of domestic energy production ▪ Energy Efficiency or imports in relation to the total energy Energy efficiency means using less energy to requirement. accomplish the same task or achieve the same outcome. Pladifes| Date | 30 KEY ENERGY ECONOMIC NOTIONS (TO KNOW) ▪ Power Generation Mix: Shows the share of electricity generation by fuel ▪ Per Capita Energy Consumption: type (e.g. natural gas, coal, nuclear). The ratio of final energy consumption per capita to A diversified generation mix is good. the population. Higher ratios often indicate a higher level of ▪ Refining Efficiency: development. The ratio of refinery output to refinery throughput. ▪ Energy Intensity: ▪ Overall Energy Transformation Efficiency: The ratio of energy consumption to economic output The ratio of final energy consumption to primary indicates the importance of energy for economic energy demand. growth. Pladifes| Date | 31 ILLUSTRATIONS: ENERGY SUPPLY MIX WORLDWIDE World total energy supply by source, 1971-2019 Light blue: coal; Dark blue: oil; Natural gas: light green; Nuclear: dark green; Yellow: hydro; Biofuels and waste: light orange; Other including clean-energy sources: dark orange. Source: IEA (2021) Pladifes| Date | 32 ILLUSTRATIONS: ENERGY SUPPLY MIX – EUROPEAN UNION Legend: Share of primary production by energy source, 2021 Legend: Share of primary production by energy source, 2021 (in %) – European Union (in %) – France Source: Eurostat Source: Eurostat Pladifes| Date | 33 ILLUSTRATIONS: SELF RELIANCE IN SUPPLY / IMPORT – EUROPEAN UNION EU energy dependency rate – Total % of net imports in gross available energy, based on terajoules) Total: Solid fossil fuels, Natural gas and Crude Oil Colors: In blue: 2021 year In yellow: 2000 year Source: Eurostat Pladifes| Date | 34 ILLUSTRATIONS: SHARE OF ENERGY PRODUCTS – EUROPEAN UNION Legend: Share of energy products in total final energy consumption, European Union, 2021 (in %) Source: Eurostat Pladifes| Date | 35 ILLUSTRATIONS: POWER GENERATION MIX – EUROPEAN UNION Legend: Production of electricity by source, European Union, 2021 (in %) Source: Eurostat Pladifes| Date | 36 ILLUSTRATIONS: ENERGY EFFICIENCY – EUROPEAN UNION EU final energy consumption EU primary energy consumption (in million tonnes of oil equivalent) (in million tonnes of oil equivalent) Pladifes| Date | 37 DEBATE ON THE ENERGY EFFICIENCY BUT ARE WE REALLY CAPABLE OF REDUCING OUR TELL ME MORE ENERGY CONSUMPTION? ▪ Market barriers and government interventions? The market barriers One idea about climate change is that technology and interventions debate is about whether energy efficiency can be will save us all. We will increase the energy effectively driven by market forces alone or if targeted government efficiency of clean technologies so that we can action is needed to overcome the existing market failures and barriers. consume less for the same level of comfort, and ▪ Energy efficiency versus economic efficiency? The debate between improve current and future energy security and energy efficiency and economic efficiency centers on how to reconcile affordability. But is it that simple? the goals of reducing energy consumption (energy efficiency) with maximizing economic output and resource allocation (economic Indeed, there are a number of debates efficiency). surrounding energy efficiency, including: market ▪ Rebound Effects? The rebound effect debate focuses on whether barriers and interventions, energy efficiency improvements in energy efficiency actually result in the intended versus economic efficiency, and the rebound energy savings or if they are partially or completely offset by changes effect. in behaviour or economic activity that lead to increased energy consumption. Pladifes| Date | 38 DATA CHALLENGE IN ENERGY REPORTING (1/2) ▪ Data quality: ▪ Data availability: In the absence of accurate sales and consumption Several agencies collect data: EIA (US Energy data, estimates are used, leading to bias and Information Administration), IEA (International questions about the reliability of models. Energy Agency), IRENA (International Renewable Consistency problems arise in data reporting, with Energy Agency), BP, Eurostat, or UNSD (United internal and logical errors. Nations Statistics Division). For example, trade data for imports and exports The time lag between data collection and publication often do not match due to different conversion reduces the usefulness of the information. factors and discrepancies between reported origins and destinations. Pladifes| Date | 39 DATA CHALLENGE IN ENERGY REPORTING (1/2) ▪ Boundary Problems: Using energy data from different sources and countries introduces several issues. ▪ Conversion factors: For instance, different countries have varying The choice and precision of conversion factors can conventions for energy classification and consumer significantly impact the overall data picture. categorization. For example, coal quality varies between countries and extraction sites, requiring specific factors for ▪ Common measurement unit: each country and period (as extraction sites Aggregating energy sources with different forms and dominate differently over time). qualities is challenging, complicating cross-country comparisons. Pladifes| Date | 40 MCQS 3. Which unit is commonly used to measure electricity consumption in households? a. Joules (J) b. Kilowatt-hours (kWh) 1. Which of the following best defines energy economics? c. British Thermal Units (BTU) a. The study of natural resource distribution d. Barrels of Oil Equivalent (BOE) b. The study of financial markets c. The study of energy resources and commodities, 4. Which of the following components does the supply block in including the forces motivating their supply, conversion, the energy accounting framework include? transport, and use, as well as market and regulatory a. Final energy consumption structures and environmental consequences b. Energy transformation processes d. The study of consumer behaviour c. Energy losses and the sector’s own use d. International trade, stock change, and domestic 2. What is considered a primary energy source? production a. Electricity b. Refined oil products 5. What is one of the main challenges associated with energy c. Crude oil data reporting? d. Heat from a furnace a. Consistent and accurate real-time data availability b. The abundance of reliable data sources c. The ease of cross-country comparisons d. The lack of biases in estimated data Pladifes| Date | 41 MCQS - ANSWERS 3. Which unit is commonly used to measure electricity consumption in households? a. Joules (J) b. Kilowatt-hours (kWh) 1. Which of the following best defines energy economics? c. British Thermal Units (BTU) a. The study of natural resource distribution d. Barrels of Oil Equivalent (BOE) b. The study of financial markets c. The study of energy resources and commodities, 4. Which of the following components does the supply block in including the forces motivating their supply, conversion, the energy accounting framework include? transport, and use, as well as market and regulatory a. Final energy consumption structures and environmental consequences b. Energy transformation processes d. The study of consumer behaviour c. Energy losses and the sector’s own use d. International trade, stock change, and domestic 2. What is considered a primary energy source? production a. Electricity b. Refined oil products 5. What is one of the main challenges associated with energy c. Crude oil data reporting? d. Heat from a furnace a. Consistent and accurate real-time data availability b. The abundance of reliable data sources c. The ease of cross-country comparisons d. The lack of biases in estimated data Pladifes| Date | 42 ENERGY SUPPLY AND DEMAND BASIC PRINCIPLES OF ENERGY DEMAND DEFINITION DEFINITION FROM A MACROECONOMIC PERSPECTIVE ▪ Energy demand refers to the total amount of energy consumed by end users in a specific area or market over a ▪ From a more macroeconomic perspective, energy demand given period. It encompasses all forms of energy used for refers to the quantity of energy that consumers are willing various purposes, such as residential heating and cooling, and able to purchase at various prices during a given transportation, industrial processes, and electricity period. consumption. Pladifes| Date | 45 THE DEMAND CURVE THE DEMAND CURVE ▪ The aggregate demand can be represented by the demand curve (see Chapter 0) representing a decreasing relation between price and the quantity of goods consumed. ▪ The main determinants of demand are the price of the good, the price of related goods, the prices of other goods, the disposable of the consumer, preferences and tastes. Pladifes| Date | 46 FIGURES OF DEMAND TRENDS (1/2) Source: bp Statistical Review of World Energy (2022) Pladifes| Date | 47 FIGURES OF DEMAND TRENDS (2/2) Legend: ▪ Dark orange: renewables; ▪ Blue: Hydroelectricity ▪ Light orange: nuclear energy ▪ Gray: coal ▪ Red: natural gas ▪ Green: oil Source: bp Statistical Review of World Energy (2022) Pladifes| Date | 48 ENERGY DEMAND FACTORS (1/3) ECONOMIC ACTIVITY & INCOME LEVEL ENERGY PRICES & INDUSTRIAL STRUCTURE ▪ Energy Prices Price Levels: Higher energy prices can reduce ▪ GDP Growth: demand as consumers and businesses seek to lower Higher economic growth leads to increased costs. industrial production, commercial activities, and Price Volatility: Fluctuations in energy prices can overall energy consumption. affect short-term and long-term energy consumption patterns. ▪ Income levels: Higher household incomes typically lead to increased ▪ Industrial Structure (the structural effect): energy consumption due to greater use of Economies dominated by energy-intensive industries appliances, heating, cooling, and transportation. (e.g., manufacturing, mining) will have higher energy demand compared to service-based economies. Pladifes| Date | 49 ENERGY DEMAND FACTORS (2/3) ENERGY SUPPLY INFRASTRUCTURE & TECHNOLOGY POPULATION AND DEMOGRAPHICS ADVANCEMENT ▪ Energy supply infrastructure: ▪ Population and Demographics The availability of energy infrastructure and Larger populations naturally consume more energy. reliability of supply can influence energy Rapid population growth can significantly increase consumption. energy demand. ▪ Technological progress (the intensity effect): ▪ Urbanization: Technological improvements in energy efficiency can Urban areas tend to consume more energy due to reduce energy demand. higher-density living, transportation needs, and The introduction of new technologies (e.g., electric industrial activities. vehicles, digital devices) can increase energy consumption. Pladifes| Date | 50 ENERGY DEMAND FACTORS (3/3) GOVERNMENT POLICIES & REGULATIONS TRADE, WEATHER & CLIMATE ▪ Globalization and Trade Global trade can impact energy demand, particularly ▪ Government Policies and Regulations in energy-intensive industries. Government subsidies can lower energy costs and The integration of global supply chains can lead to boost consumption, while taxes can have the shifts in energy consumption patterns. opposite effect. Environmental regulations, efficiency standards, and ▪ Weather and Climate renewable energy mandates can influence energy Seasonal changes impact heating and cooling needs, demand. thus affecting energy demand. Long-term climate trends can alter energy (This will be discussed in more detail later) consumption patterns, particularly in heating and cooling. Pladifes| Date | 51 ELASTICITY OF ENERGY DEMAND DEFINITION & FOR ENERGY DEMAND ▪ The impact of the different factors depends on their ▪ In the context of energy demand, three main types of elasticity with respect to energy demand. elasticity are considered: Price elasticity; ▪ Demand elasticity measures the responsiveness of the Income elasticity; quantity demanded of a good to a change in its price or Output growth elasticity. other factors. Pladifes| Date | 52 PRICE ELASTICITY OF ENERGY DEMAND DEFINITION FACTORS AFFECTING PRICE ELASTICITY: ▪ Substitutability: ▪ Definition: Availability of alternative energy sources (e.g., Price elasticity of demand is the percentage change renewable energy) can increase elasticity. in the quantity demanded of energy resulting from a ▪ Time Horizon: one percent change in its price. In the short term, energy demand is less elastic because consumers and businesses cannot easily ▪ Elastic vs. Inelastic Demand: change their energy usage habits. Over the long Energy demand is typically inelastic, meaning that term, elasticity increases as people and firms can changes in energy prices result in proportionately adopt more energy-efficient technologies. smaller changes in the quantity of energy ▪ Economic Sector: demanded. This is because energy is often a Industrial energy demand tends to be more elastic necessity with few immediate substitutes. than residential energy demand due to the ability to invest in energy-saving technologies. Pladifes| Date | 53 INCOME ELASTICITY OF ENERGY DEMAND DEFINITION FACTORS AFFECTING INCOME ELASTICITY: ▪ Definition: Income elasticity of demand measures the percentage change in energy demand resulting from a one percent change in income. ▪ Level of Economic Development: In developed countries, the increase in energy ▪ Normal vs. Inferior Good: demand with rising income may be less pronounced Energy is generally considered a normal good, because basic energy needs are already met. meaning that as income increases, energy demand also increases. ▪ Energy Efficiency: Nota Bene: An inferior good is a good for which As income rises, individuals and firms may invest in demand falls as income rises. The term inferior good more energy-efficient appliances, vehicles, and refers to affordability rather than quality. Example: If buildings, which can reduce the overall growth in my income decreases, I will reduce my consumption energy demand. of expansive means of transport (such as airplanes) and prefer other means such as trains. Pladifes| Date | 54 OUTPUT (GDP) ELASTICITY OF ENERGY DEMAND DEFINITION STAGE OF ECONOMIC DEVELOPMENT ▪ In developed economies, energy demand is relatively inelastic to GDP, meaning that economic growth leads to a ▪ Definition: proportionally smaller increase in energy consumption. Output growth elasticity of demand measures the ▪ Conversely, in developing countries, energy demand is responsiveness of energy demand to changes in the more elastic to GDP. As these economies grow rapidly, economic output of a country or sector. they require significantly more energy to sustain their development. This higher energy demand is due to greater reliance on energy-intensive industrial activities and We find the same relationship as the income elasticity of changing lifestyles. energy demand. ▪ In contrast, developed economies with a greater reliance on the service sector often experience a decoupling of energy demand from economic growth. Pladifes| Date | 55 PERFECTLY INELASTIC DEMAND Look at the purple curve! This demand curve is perfectly inelastic. When the price of energy rises from 10 to 12, the quantity of energy demanded remains constant at 10. Pladifes| Date | 56 INELASTIC DEMAND Look at the light blue curve! This demand curve is inelastic. When prices increase from 10 to 12, the quantity decreases but at a smaller rate than the price increase. Pladifes| Date | 57 ELASTIC DEMAND Look at the dark blue curve! This demand curve is elastic. When prices increase from 10 to 12, the quantity of goods produced decreases at a greater rate than the price increase. Pladifes| Date | 58 CLASS TUTORIAL (1/2) ▪ Recall: Demand elasticity is the percentage change in the ▪ What would be the expected sign for each? quantity of energy demanded resulting from a one percent change in the relevant variable, such as energy ▪ For price elasticity? For the short and long run? price, output, or income. ▪ For income elasticity? In developed countries? In developing countries? ▪ For output elasticity? Pladifes| Date | 59 CLASS TUTORIAL (2/2) - ANSWERS ▪ For income elasticity? In developed countries? In ▪ For price elasticity? developing countries? We expect a negative elasticity, meaning the We expect a positive elasticity for income. This quantity of energy demanded decreases by x% for means that a 1% increase in income would lead to an every 1% increase in the price of energy. x% increase in energy demand. For instance, the price elasticity of energy demand is For instance, the income elasticity of energy demand -0.01 in the short term and -0.2 in the long term. is 0.2% for developing countries and 0.1% for This indicates that a 1% increase in energy prices developed countries. leads to a 0.01% decrease in demand in the short term, but a 0.2% decrease in the long term. ▪ For output elasticity? We expect a positive elasticity between output and Nota Bene: the numbers used to describe elasticity are energy demand, indicating that an increase in output fictitious. would lead to an increase in energy demand. Pladifes| Date | 60 BASIC PRINCIPLES OF ENERGY SUPPLY This section is deliberately broad, as we will go into more detail on the supply of different energy sources in the following chapters. DEFINITION ▪ Energy supply definition: Energy supply refers to the total amount of energy available for consumption within a country or region. It encompasses the entire process of energy production, from the extraction of raw resources to the delivery of usable energy to end consumers. Pladifes| Date | 62 ENERGY SOURCES (1/2) FOSSIL FUELS ▪ Coal: Characteristics: Solid, carbon-rich material formed from ancient plant matter. Extraction Methods: Surface mining, underground mining. Applications: Electricity generation, industrial ▪ Natural Gas: processes, steel production. Characteristics: Gaseous hydrocarbon, primarily methane. ▪ Oil: Extraction Methods: Drilling, hydraulic fracturing. Characteristics: Liquid hydrocarbon formed from Applications: Electricity generation, heating, ancient marine organisms. industrial processes. Extraction Methods: Drilling (onshore and offshore). Applications: Transportation fuels (gasoline, diesel), heating, petrochemicals. Pladifes| Date | 63 ENERGY SOURCES (2/2) RENEWABLE ENERGY SOURCES ▪ Geothermal Energy: ▪ Solar Energy: Characteristics: Energy from the Earth’s internal Characteristics: Energy from the sun, harnessed heat, accessed by drilling. using photovoltaic cells or solar thermal systems. Applications: Electricity generation, direct heating. Applications: Electricity generation, heating, lighting. ▪ Biomass: ▪ Wind Energy: Characteristics: Organic material used as fuel (e.g., Characteristics: Energy from wind, captured by wind wood, agricultural residues). turbines. Applications: Electricity generation, heating, Applications: Electricity generation. biofuels. ▪ Hydropower: ▪ Nuclear Energy: Characteristics: Energy from moving water, typically Uranium and Thorium: harnessed by dams or run-of-river systems. Characteristics: Radioactive metals used as fuel in Applications: Electricity generation. nuclear reactors. Applications: Electricity generation through nuclear fission. Pladifes| Date | 64 FIGURES OF ENERGY SUPPLY TRENDS (1/5) World total energy supply by source 700,00 600,00 500,00 400,00 Do you recognise this figure? What strikes you? EJ 300,00 200,00 100,00 0,00 2019 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Coal Oil Natural gas Nuclear Hydro Biofuels and waste Other 2017 Source: IEA (2021) Pladifes| Date | 65 FIGURES OF ENERGY SUPPLY TRENDS (2/5) OECD country list: 38 member countries. These are Australia, Austria, Belgium, Legend: Canada, Chile, Colombia, Costa Rica, Light blue: OECD Czech Republic, Denmark, Estonia, Dark blue: Middle Finland, France, Germany, Greece, East Hungary, Iceland, Ireland, Israel, Italy, Light green: Non- Japan, South Korea, Latvia, Lithuania, OECD Europe and Luxembourg, Mexico, Netherlands, New Eurasia Zealand, Norway, Poland, Portugal, Dark green: China Slovakia, Slovenia, Spain, Sweden, Yellow: Non-OECD Asia Switzerland, Türkiye, United Kingdom, and Orange: Non-OECD United States. Americas Red: Africa Purple: Bunkers What can we infer from this figure? What is the “bunkers” category? Source: IEA (2021) Source: IEA (2021) Pladifes| Date | 66 FIGURES OF ENERGY SUPPLY TRENDS (3/5) Increasing trend Catch-up effect Legend: Light blue: OECD Dark blue: Middle East The bunkers category refers to Light green: Non- fuels used for international OECD Europe and Eurasia shipping and aviation, which are Dark green: China not included in national energy Yellow: Non-OECD Asia consumption figures as they take Orange: Non-OECD place outside national borders. Americas Red: Africa Purple: Bunkers It allows to avoid to distort national energy supply/demand statistics. Source: IEA (2021) Source: IEA (2021) Pladifes| Date | 67 FIGURES OF ENERGY SUPPLY TRENDS – SCENARIOS (4/5) Source: IEA (2021). Legend: Y-axis in petajoule (PJ) where 1 petajoule (PJ) = 10^15 joules. Colours: Light Blue, Coal; Dark Blue, Oil; Light Green, Natural gas; Dark Green, Nuclear; Yellow, Hydro; Orange, Bioenergy; Dark Orange, Other. Other includes geothermal, solar, wind, tide, etc. What are STEPS and SDS scenarios? What can we infer from this graph? Pladifes| Date | 68 FIGURES OF ENERGY SUPPLY TRENDS – SCENARIOS (5/5) Source: IEA (2021). Legend: Y-axis in petajoule (PJ) where 1 petajoule (PJ) = 10^15 joules. Colours: Light Blue, Coal; Dark Blue, Oil; Light Green, Natural gas; Dark Green, Nuclear; Yellow, Hydro; Orange, Bioenergy; Dark Orange, Other. Other includes geothermal, solar, wind, tide, etc. What are STEPS and SDS scenarios? What can we infer from this graph? STEPS (Stated Policies Scenario): includes existing energy policies as well as an assessment of the likely outcomes of implementing announced policy intentions. SDS (Sustainable Development Scenario): outlines an integrated approach to achieving internationally agreed targets on climate change (Paris Agreement), air quality and universal access to modern energy. Pladifes| Date | 69 GLOBAL ENERGY CLIMATE (GEC) MODEL – FOR CURIOUS STUDENTS Do you want to know more about the scenarios constructed The Announced Pledged Scenario (APS): This scenario by the IEA? (Click here) assumes that all climate pledges and commitments made globally by governments and industry, including The IEA used the Global Energy Climate (GEC) Model to Nationally Determined Contributions (NDCs), net zero examine future energy trends: targets, and universal access to electricity and clean cooking targets, are met in full and on time. Each scenarios are built on a different set of underlying assumptions about how the energy system might evolve over time. The STEPS (States Policies Scenario): This scenario Scenarios are not predictions! reflects current energy policies (base year 2023), assessed by sector and country. It also includes policies under development and takes into account planned clean Three main scenarios: energy technology manufacturing capacity. This approach The NZE Scenario (Net Zero Emissions by 2050): This provides a realistic projection based on existing and near- scenario provides a roadmap for global energy systems to term energy-related policies around the world. achieve net zero CO2 emissions by 2050. It does not depend on emission reductions from sectors outside Why comparing APS and STEPS is interesting? The energy to meet its target. Additionally, universal access to differences between the STEPS and the APS highlight the electricity and clean cooking is achieved by 2030 in this 'implementation gap' that needs to be closed if countries are scenario. to meet their announced decarbonisation targets. Pladifes| Date | 70 FACTORS AFFECTING ENERGY SUPPLY 1. Resource availability 2. Technology 3. Investment 4. Regulations 5. Geopolitics Many thanks to ChatGPT for this beautiful figure! Pladifes| Date | 71 FACTORS AFFECTING ENERGY SUPPLY - RESOURCE AVAILABILITY ▪ Geographical distribution: Location of resources: Energy resources are ▪ Resource Depletion: unevenly distributed across the globe. Finite Nature of Non-Renewables Energy: Fossil For example, oil reserves are abundant in the Middle fuels and uranium are finite resources. Over time, East, coal in the United States and China, and easily accessible reserves deplete, leading to hydropower potential in regions with significant river increased extraction costs and a shift towards systems and elevation changes. harder-to-reach deposits. Access to resources: Some regions may have large ▪ Renewable Resource Variability: energy resources that are difficult to access due to The availability of renewable energy resources such remote locations, harsh environments, or lack of as solar, wind, and hydropower can vary significantly infrastructure. based on weather patterns, seasons, and geographical location. Do you know the difference between reserves and resources? Pladifes| Date | 72 RESERVES AND RESOURCES SHOULD NOT BE CONFOUNDED! ▪ Definition: Resources refer to the total quantity of a material ▪ Reserves are the subset of resources that have been identified or substance that exists in the Earth's crust. This encompasses and are economically extractable under present market both discovered and undiscovered deposits, regardless of conditions and with available technology. their economic viability with current technology. ▪ Therefore, this is: “1. Economically Recoverable Identified ▪ Resources are classified into four groups: Resources” 1. Economically Recoverable Identified Resources: Known quantities that are economically viable to extract with current technology. Total Resources 2. Economically Recoverable Undiscovered Resources: Estimated quantities believed to be economically viable, pending discovery and confirmation. Economically Viable 3. Sub-Economic but Identified Resources: Known Technologically Feasible quantities that are currently not economically viable to extract. Legal and Regulatory Approved 4. Sub-Economic and Undiscovered Resources: Estimated & Proven and Probable Reserves quantities that are currently not economically viable and have not been discovered. Pladifes| Date | 73 OIL RESERVES 2020 Source: Energy Institute (2024) - Statistical Review of World Energy Pladifes| Date | 74 FACTORS AFFECTING ENERGY SUPPLY - TECHNOLOGY ▪ Renewable Energy Technologies: ▪ Advancements in Exploration Techniques: Over the last two decades, data analysis and Solar and Wind Innovations: Innovations in photovoltaic (PV) cells, wind turbine efficiency, and visualisation improvements have contributed to energy storage solutions have made renewable increased exploration success. energy more competitive with fossil fuels. The exploration process remains a trial-and-error Geothermal and Biomass: Improved technologies process involving high risks and significant costs. for harnessing geothermal energy and converting biomass into biofuels and biogas have expanded the ▪ Advancements in Extraction and Production: potential for renewable energy supply. Improved Extraction Techniques: Technologies such as hydraulic fracturing (fracking) and horizontal ▪ Energy Efficiency Improvements: drilling have made it possible to access previously unreachable oil and gas reserves. Production Efficiency: Technological advancements Enhanced Recovery Methods: Techniques like in power plants, refineries, and industrial processes can lead to more efficient energy production and Enhanced Oil Recovery (EOR) can extend the life of lower costs. existing oil fields. Grid and Storage Technologies: Innovations in smart grids and energy storage (e.g., batteries, pumped hydro storage) enhance the reliability and efficiency of energy supply. Pladifes| Date | 75 WHAT ARE THE MAIN EXPLORATION TECHNIQUES? – FOR CURIOUS STUDENTS ▪ Seismic Surveys: Description: Using sound waves to map ▪ Magnetic and Gravity Surveys: underground formations and identify potential Description: Measuring variations in the Earth's resource deposits. magnetic and gravitational fields to infer the Advantages: High resolution, accurate, deep presence of resources. penetration, adaptable to terrestrial and marine Advantages: Cost-effective, broad applications, non- environments. invasive. Limits: Expensive, potential wildlife disturbance, Limits: Lower resolution, less effective for deep complex data interpretation. exploration, ambiguous data interpretation. ▪ Remote Sensing: ▪ Exploratory Drilling: Description: Utilising satellite imagery and aerial Description: Drilling test wells to obtain core surveys to detect geological features indicative of samples and assess resource potential. resource deposits. Advantages: Direct sampling confirms resource Advantages: Wide coverage, non-invasive, cost- presence and detailed analysis. effective, and access to remote areas. Limits: Extremely expensive, environmental impact, Limits: Limited to surface features, lower resolution, high financial risk. weather dependent. Pladifes| Date | 76 WHAT ARE HYDRAULIC FRACTURING (OR FRACKING) – FOR CURIOUS STUDENTS ▪ Hydraulic fracturing, or fracking is a powerful technique for extracting natural gas and oil from deep rock formations, known as “shale”. ▪ How it works? Drilling operators inject water, sand, and a blend of chemicals into horizontally drilled wells, which fractures the shale and allows the release of natural gas or oil. ▪ What are the main advantages and limits? While it has significantly boosted energy production and economic growth by providing access to previously unreachable hydrocarbon reserves, it also poses environmental (e.g. water quality, air pollution) and public health challenges that require careful management and regulation. Do you want to read more on that subject? Click here! Pladifes| Date | 77 WHAT ARE ENHANCED OIL RECOVERY (EOR) TECHNIQUES? - FOR CURIOUS STUDENTS ▪ Overview: ▪ Definition: Oil recovery in hydrocarbon production involves “Enhanced oil recovery (EOR) is the process of various techniques aimed at extracting the maximum artificially stimulating a reservoir to recover more oil amount of oil and gas from a hydrocarbon reservoir. after secondary recovery techniques have become Since production rates fluctuate throughout the unable to sustain desired production volumes. well's lifecycle, the reservoir often requires Additionally, EOR is usually employed when the oil additional stimulation to maintain production levels left in the reservoir is trapped in hard-to-reach (low- at sustainable rates for as long as possible. permeability) sections with poor oil-water contact or As a result, different recovery methods are applied irregular fault lines.” based on factors such as the well's age, the geological characteristics of the formation, and the ▪ Do you want to know more? (Click here) associated operational costs. Pladifes| Date | 78 FACTORS AFFECTING ENERGY SUPPLY – INVESTMENT (1/2) ▪ Capital Investment: ▪ Investments are based on cost-benefit considerations. Infrastructure Development: Significant financial investment is required to build and maintain energy ▪ Examples of several factors: infrastructure such as power plants, refineries, Development and operating costs: These include pipelines, and transmission networks. the capital required to develop the field or site and Research and Development (R&D): Investment in ongoing operating costs. R&D is essential for developing new technologies, Environmental compliance: Costs associated with improving existing ones, and making energy complying with environmental regulations. production more efficient and sustainable. Settlement relocation: Costs associated with relocating communities, if necessary. ▪ Public and Private Funding: Geological conditions: Costs affected by the Government Support: Public funding, subsidies, and geological characteristics of the site. incentives can drive investment in energy projects, Development schedule: Timetable and associated particularly in emerging and renewable energy costs for project completion. sectors. Additional Drilling and Testing: Costs of further Private Sector Role: Private companies and investors exploration and testing. play a critical role in financing energy projects and Local Infrastructure: Availability and cost of bringing innovations to market. infrastructure to transport production. Pladifes| Date | 79 FACTORS AFFECTING ENERGY SUPPLY – INVESTMENT (2/2) ▪ Uncertainty and Estimation: Many cost and benefit elements are uncertain at the time of the investment decision. Estimates are based on experience, expert judgment, and historical data. ▪ Corporate Culture and Risk Appetite: Larger Companies: Often more risk-averse due to their extensive resources and broader stakeholder obligations. Smaller Companies: Tend to be more willing to take risks, seeking higher returns from potentially less explored opportunities. Source: S&P (2024) Pladifes| Date | 80 FACTORS AFFECTING ENERGY SUPPLY - REGULATIONS ▪ Subsidies and Incentives: ▪ Environmental Regulations: Government subsidies and incentives for specific Policies aimed at reducing emissions, protecting energy sources can shape the energy mix by making ecosystems, and promoting sustainability can certain types of energy more economically influence the type and amount of energy produced. attractive. For example, carbon pricing, emissions trading systems, and renewable energy mandates (we will develop this point later). ▪ Market Regulations: The degree of market liberalization, competition, and regulatory oversight can impact energy supply ▪ Safety Standards: dynamics. Regulations ensuring the safety of energy For example, deregulation in electricity markets can production, transportation, and consumption can lead to increased competition and lower prices. affect operational costs and practices. Pladifes| Date | 81 FACTORS AFFECTING ENERGY SUPPLY – GEOPOLITICS (1/5) ▪ Political Stability: (1) Impact of Conflicts: Political instability and conflicts in key energy-producing regions can disrupt supply chains, leading to volatility in energy prices ▪ Do you have examples? and availability. (2) Nationalization of Resources: Government control or nationalization of energy resources can influence global supply and investment patterns. Pladifes| Date | 82 FACTORS AFFECTING ENERGY SUPPLY – GEOPOLITICS (2/5)