Reflecting on Energy Perspectives Worldwide: A Conversation with Maria van der Hoeven

Maria van der Hoeven, Executive Director of IEA

Maria van der Hoeven, Executive Director of IEA

Maria van der Hoeven is an experienced Dutch politician who became Executive Director of the International Energy Agency (IEA) in 2011. The agency was created in 1974 to help the 29 member countries – all of whom are member countries of the Organization for Economic Co-operation and Development (OECD) – to adjust to the oil shock of that decade. While this remains a key part of IEA activity, the organization conducts research into all facets of energy, advises members and non-members alike on energy policy, has built important diplomatic bridges with OPEC producers, and has worked with large energy producing and consuming non-member nations such as Russia, Brazil, China, Indonesia and South Africa.

Ms. van der Hoeven was a long-serving member of parliament in the Netherlands, holding several senior cabinet portfolios before her IEA appointment. Under her supervision, the IEA has deepened its focus on the energy-climate linkage, on renewables and energy efficiency, on innovation and technology, and on energy security for all – including those with least access to services. In recognition of her efforts in this last area, she was invited to serve on the Advisory Board for the UN Sustainable Energy for All Initiative.

As she comes to the end of her four year term as Executive Director, Energy Magazine posed a number of questions to Ms. van der Hoeven about a wide range of energy issues. Two of the most dramatic developments, in the past decade, have been the volatility of oil prices and the switch to natural gas, due in large measure to unconventional reserves and LNG technology. She discussed these and other topics.

“Canada, U.S., and Australia are taking the lead on the expansion of LNG trade.”

“Canada, U.S., and Australia are taking the lead on the expansion of LNG trade.”

What is the IEA’s view on the impact of unconventional production on global LNG trade?

Our 2015 Medium-Term Gas Market Report will be released at the World Gas Congress in Paris on June 4, (Note: this interview was conducted prior to the release of this report) so for now I must refer to last year’s report. What we said back then was that Australia, Canada and the United States were taking the lead in the expansion of global LNG trade, which we expected to grow by 40 per cent to reach 450 billion cubic meters by 2019. In last year’s report, we also said we expected that half of all new LNG exports will originate from Australia, while North America will account for around eight per cent of the global LNG trade by 2019.

Do you see unconventional gas becoming a significant part of the mix and when?

Outside North America, China remains the principal unconventional gas producer and the main source of growth. Based on the 12th Five-Year Plan’s (FYP) objectives, China aims to increase its shale gas production to 6.5 billion cubic meters by 2015 and between 60 and 100 billion cubic meters by 2020. Reaching the short-term target seems realistic, but the 2020 target is still very challenging. In early April the IEA organised an unconventional gas forum in China, and I had the privilege of taking part. It was clear to me from the discussions that China faces many obstacles –
including on water, pricing and regulation – as it seeks to fully develop its shale gas potential. At the same time, one should never underestimate China’s determination to accomplish its goals – and this is a very crucial goal for the government.

Gas markets have been regional but do you see unconventional gas supplies creating a global market of LNG, like the oil market?

Absolutely. We are entering the age of much more efficient natural gas markets, with additional benefits for energy security.

“By 2019, LNG will represent 11 per cent of total gas demand.”

What are your LNG forecasts by region?

By 2019, LNG will represent 11 per cent of total gas demand. Global LNG trade will start to surge in 2016 as a large part of the Australian LNG projects under construction start operating, and the first United State LNG export plant starts as well. The majority of incremental volumes will be swallowed by Asian demand – mostly in China and non-OECD Asia where LNG demand is expected to double. LNG demand in OECD Europe is also expected to increase as domestic production will fall by around 25 billion cubic meters by 2019; this volume will be mainly covered by LNG imports.

Oil prices have fallen, as have natural gas prices over the last decade. What is the impact on business, governments and the world economy?

“In 2016, a large part of Australian LNG projects under construction will start operating.”

“In 2016, a large part of Australian LNG projects under construction will start operating.”

I tend to leave questions about the macroeconomic impact of lower oil prices to colleagues at other organizations, like the IMF [International Monetary Fund]. But what I can talk about is the impact of low oil prices on de-carbonization. While it’s true that the plunge in oil prices may be good for consumers and the global economy, it could also encourage greater use of fossil fuels and thereby hurt efforts to make our planet’s energy system more sustainable. Policy makers from around the world can prevent this by taking advantage of cheaper oil to make meaningful changes in the way we price energy. Two options spring to mind.

The first is eliminating subsidies to fossil fuel consumption. In 2013, governments around the world spent $550 billion on these subsidies, which encourage waste. Reforming such subsidy schemes is difficult, as the short-term costs imposed on certain groups of society can be burdensome and induce political opposition. But such opposition may well be muted now, in the current climate of lower oil prices, than it would have been just a year ago.

By the same token, policy makers in major energy consuming countries should take advantage of the oil market’s collapse to introduce carbon pricing, taxes or low-carbon mandates, or to strengthen existing schemes. Such actions would encourage more efficient use of energy, would boost the economic case for carbon capture and storage, and would promote low-carbon energy sources such as renewables and nuclear power. Moreover, higher taxes on transport fuels would help finance clean energy research, development and deployment. If such schemes are designed properly, and put in place in an environment of lower energy prices, economic discomfort can be minimized. Indeed, many studies suggest they can yield a net economic benefit.

Will high prices return again and if so when?

I get asked this question a lot and I am afraid that we do not forecast prices at the IEA. That said, our most recent monthly Oil Market Report (April 2015) paints a picture of a market that is not yet fully in balance. The United States supply growth is not slowing significantly and crude stocks are at record high levels. OPEC is not cutting production. Something has to give.

Access to affordable energy is key to global development, but some 1.3 billion people lack electricity and 2.6 billion people are without clean cooking facilities. More than 95 per cent of these people are either in sub-Saharan Africa or developing Asia and 84 per cent are in rural areas. Do you see the greater affordability of key fuels like gas and oil helping here and what can governments do to help deliver benefits?

“Some 1.3 billion people lack electricity and 2.6 billion are without clean cooking facilities.”

“Some 1.3 billion people lack electricity and 2.6 billion are without clean cooking facilities.”

The IEA, as part of its World Energy Outlook, has highlighted the crucial issue of energy access for the last 15 years. During that time, there have been periods of relatively high and relatively low energy prices. Despite this, there is still a huge population without access to modern energy, acting as a severe brake on global economic growth and social development. Of key importance are the policies and programs that countries put in place. As just one example, fossil-fuel subsidies exist in many countries that also have energy access problems. Such subsidies can seem well intentioned, but actually be a very costly and inefficient way to support energy access. In such cases, a lower oil price environment provides an opportunity to reform these subsidy schemes – as India, Indonesia and others have done – and use the savings to support energy access in more efficient and effective ways. As many countries have already proven, the barriers to achieving universal access to modern energy are surmountable and the benefits of success are huge.

In your tenure at the IEA, you spoke often about the role of renewables. How will the affordability of oil and gas affect the prospect for renewables?

“Renewables will play an increasing role in the portfolio of technologies.”

“Renewables will play an increasing role in the portfolio of technologies.”

Overall, the stability and predictability of policy and market frameworks matter more for investment in capital-intensive renewables than the short-term fluctuations of oil and gas prices.

Of course, renewables are not yet competitive in all situations and there is a risk that sustained lower oil prices over a longer period may introduce further policy uncertainty and cause investors to delay some renewable investments. But clearly, this is not the moment for policy makers to lose sight of the big picture: renewables will play an increasing role in the portfolio of technologies needed to improve energy security and access while combatting climate change.

Renewables policies should shift away from providing high economic incentives towards creating the market conditions to foster competition and innovation, and reduce cost of the financing. And, as I mentioned earlier, the drop in oil prices is a wonderful opportunity for policy makers to start adopting some kind of carbon pricing and to phase out fossil fuel subsidies, which are still important barriers to the deployment of energy efficiency, renewables and other clean energy technologies.

What is the state of energy innovation and commercialization today?

You don’t need to look for long at the energy system to grasp the central importance of innovation. In the gas sector, you only need to reflect on the displacement of gas lighting by electric light bulbs, the later displacement of much coal-fired power by CCGTs and today’s displacement of gasoline by natural gas in parts of the vehicle fleet. An incredible chain of innovations in the energy sector have been at the vanguard of social and economic transformation for over a century, and it is very exciting to see the progress being made by photovoltaics and hydraulic fracturing today, to name but two. Continual energy technology innovation from big companies and entrepreneurs should be no surprise. The prize for inventing a smarter battery, turbine or meter is enormous; just look at the size of the market!

But we cannot be complacent. We are setting ourselves environmental and energy access targets that rely on better technologies. Today’s annual spending on energy R&D is estimated to be US$50 billion, a third of which is public money. Doubling this level, as has been recommended, requires governments and the private sector to work closely together and shift their focus to low-carbon technologies.

R&D alone is insufficient for moving new technologies from ideas to commercial products, however. Governments have a key role in creating the initial market opportunities that send a signal to innovators and drive investment. Deployment support for renewables reached US$121 billion in 2013, and, while it has not always been efficiently targeted, it has transformed the market outlook for wind and solar to the extent that they are now the lowest-cost source of power in a number of regions. This result, unthinkable only a decade or so ago, is the power of innovation – and I’m pleased to say that innovation is the focus of our new Energy Technologies Perspectives book, published on May 4.

“You don’t need to look for long at the energy system to grasp the central importance of innovation.”

Innovation is enabling broader natural gas use as a low emission transportation fuel, in integrated technology applications like microCHP, and in crossover technology applications like power to gas. What is your view on the applications of gas for the long term?

“Innovation is enabling broader natural gas use for transportation.”

“Innovation is enabling broader natural gas use for transportation.”

I agree that the use of gas in the transportation sector is taking off. In many countries, governments and companies have been taking initiatives to give a boost to these developments. We see that the car industry is also developing cars able to use gas. The expectation is that also in the maritime sector, because of the international regulations on nitrogen oxides and sulfur oxides, the use of gas will expand. But innovations in this sector go further than the transportation sector only. For example, in North West Europe we have seen innovations as “power to gas” to make optimal use of the generation of renewable energy and the existing gas pipeline system. Power to gas (often abbreviated P2G) is a technology that converts electrical power to a gas fuel that can be injected in the pipeline system. This kind of development illustrates the increasing importance of this fuel that is not only limited to one sector.

World energy markets continue to be vulnerable to geo-political strife or natural disasters. What can be done to prepare for the unexpected?

Governments need to ensure that current emergency response policies remain effective by regularly testing their plans and horizon scanning for emerging new risks to evolve those mitigation policies. But governments can’t do this in isolation, and individual companies are responsible to ensure that they own effective business continuity plans.

Energy markets are increasingly globalising – so we also need to cooperate more internationally and work constructively with those emerging new energy consuming countries to develop suitable emergency response policies to help mitigate the impact of supply disruptions on our interlinked economies.

“I agree that the use of gas in the transportation sector is taking off.”

What potential technologies, geopolitics or other variables are out there that can totally disrupt your models and forecasts?

“right now my eye is on storage technologies.”

“right now my eye is on storage technologies.”

It’s nearly impossible to make accurate long-term forecasts with any degree of confidence, as you know. There are just far too many variables to contend with. That’s why at the IEA we limit our forecasts to the medium-term – in other words, five years from now. Beyond that, we engage in scenario analysis: we produce several scenarios, each of which has different assumptions and different outcomes.

Now, if it’s nearly impossible to make long-term forecasts, it’s even harder to forecast the disruptive technologies that turn your forecasts upside down! What I will say, however, is that right now my eye is on storage technologies. Solar panels have been falling in price, and solar is now competitive with conventional fossil-fuel power generation in many markets, from the Middle East to North America. But solar is still limited as a technology by the turning of the Earth: once the sun sets, electricity must come from another source. The development of really cheap batteries capable of storing a large amount of solar power generated during the day could radically change the game.

Diane Francis, editor at large, National Post and author of “Merger of the Century: Why Canada and America Should Become One Country.”