Megatrends Of Energy
A few currently active trends have shown enough constancy to allow us to venture some predictions about the next two decades. Enron has surveyed the available forecasts and weighed their predictions using our own understanding and a firm faith in the long-term attraction of competitive markets. It is rooted, naturally, in a careful understanding of the century that is about to end. But the winds of history that brought us to this point are less predictable than the breezes that power our turbines. The gentle currents and strong gusts that propel the energy industry have changed direction over the last few decades. They make distant energy forecasts about as accurate as trying to predict the weather, or even the global temperature, a century from now. Casey Stengel was smart to advise, “Never make predictions, especially about the future.”
As we all know, the Cold War was an economic, intellectual, and frequently military conflict over the future course of world development. While both sides claimed to be democratic, they differed violently on the questions of political, economic and religious liberty. One side argued that a powerful state could not only achieve the best life for its people but also determine what the best life would look like. The other side argued that free individuals and competitive markets could best create the good life and that no one else could tell them what to value.
The side of liberty won the historic global conflict; the major players on the side of control have dissolved or embraced reform. The power structure was inverted. As the American Ambassador to Czechoslovakia reported in 1991: “All the former prisoners are now the government.” But liberty also won the intellectual battle: the forces of control now bear the burden of justifying restrictions of personal freedom. This burden on monopolies gives energy, and energy companies like Enron, the chance to move freely and expand.
It is not quite sufficient to say that the West won the Cold War. The war itself necessarily constrained some of our thinking and living, and even in the heart of the West, some championed the value of the control. It is no longer interesting to argue that the world is different after the war. But following the trajectory of the victory into the energy future will help us to understand – and to achieve – the potential of the next century.
To begin, the Earth’s energy demand will grow more quickly over the next couple of decades than in the recent past. Between 1985 and 1995, energy demand grew by 1.4% per year, from 305 quads (or quadrillion British thermal units) to 350 quads. This growth rate was much slower than world GDP growth of 3.4%, partly because the price spikes of the seventies stimulated conservation that extended into the late 80s. Also, the Soviet Union, while producing only 8% of the world GDP, consumed 20-25% of its energy and what happened there between 1985 and 1995 significantly reduced its energy consumption. By 2018, we expect world demand to reach 564 quads by growing at a rate of 2.4% per year. This growth will increase all energy sources except nuclear, where decommissioning of nuclear plants in the United States will slightly outweigh new construction in China and elsewhere. Oil and coal will grow modestly, while natural gas and renewables will grow much more rapidly. Electricity demand, which must be generated from these sources, will also grow rapidly. Every area will want more, especially Asia. In fact, China’s and India’s demand will grow over threefold from 1996 to 2015. Other countries are listed in. Natural gas will probably capture at least a third of this growth and potentially much more.
Most significantly, natural gas will overtake coal as the second most used fuel between 2005 and 2018. Every region of the world will demand more gas: from North America growing at 2.6% per year to Latin Am-erica growing at more than 7%. And this growth will occur in every segment of the economy, from houses to power plants. Can the energy industry keep up with this demand? We can, for two reasons. The first is the economic attractiveness of gas-fired combined-cycle power plants, whose Levelized cost makes both coal and nuclear energy yesterday’s expensive technologies. The second is a supply of natural gas that gets larger every time we look. For most practical purposes, natural gas is a resource that could fairly be described as unlimited.
Consider: proved natural gas reserves, which are already available and economical to bring to market total 5,011 trillion cubic feet (Tcf). In 1976 many politicians thought the world was running out of natural gas, but since that year, in spite of heavy production, the proven gas reserves have almost doubled. Like the demand for it, the supply of gas is dispersed around the world, with the Former Soviet Union accounting for two-fifths. These world reserves would last for 65 years at current consumption rates. Consumption will increase, but so, we expect, will prove reserves. Enron predicts that total potential economically recoverable resources are about three times proven reserves, or 15,457 Tcf, a 200 year supply at current consumption rates.
In other words, the natural gas we can reasonably expect to recover would fill a cube 47 miles on a side and this cube is not shrinking. Since 1995, it has expanded by about a tenth.
In spite of increased demand, we expect the price of electricity to decline over the next decade due to better use of surplus capacity and improving technology. In the United States, retail markets will deregulate state by state, with competition spanning the nation by 2005. The result will be a huge, open market for gas, electricity and new energy technologies that will total $300 billion annually. This change is also sweeping across the Atlantic and beyond. Europe’s energy market of $250 billion is opening and growing. The United Kingdom and the Nordic countries already have some choice. Six other nations are making substantial progress: the Netherlands, Spain, Poland, Denmark, Germany, and Italy. The changes in Europe and the United States are excellent opportunities, which companies like ours are pursuing vigorously (we already supply 4% of the electricity in the United Kingdom).
Meanwhile, other parts of the world are privatizing their state-owned monopolies. Overall, emerging markets will see a need for $3.55 trillion in new energy infrastructure by 2018. Deregulation at home and privatization abroad mean that consumers will be able to reap the economic benefits of sufficient magnitude to improve their standards of living.