The Economic Impacts for Ireland of High Oil and Gas Prices Pathways to risk mitigation and a low carbon future A research project commissioned by Siemens Limited Contents Table of Contents Foreword 03 Chapter Oil and Gas Prices and their Determinants 04 Chapter Baseline Scenario 2025 07 Chapter Economic and Social Impacts of three Oil and Gas Price Scenarios 09 Chapter Ireland’s dependence on Oil and Gas 15 Chapter Options and actions to reduce exposure to High Oil and Gas Prices 18 Chapter Summary, Conclusions and Recommendations 24 Endnotes and References 27 This publication is a management summary of a more in depth analysis presented by the researchers The full report is available on request from Siemens Limited Pathways to risk mitigation and a low carbon future THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES 01 Foreword Foreword O il and gas prices have been the subject of considerable interest in the wake of a particularly volatile year in 2008 which saw a nominal peak of over $140 per barrel in July of that year, with a subsequent collapse to just under $40 dollars per barrel by December1 The scale of the price swing and the rapidity of the change stand out from real and nominal price trends over the past two decades and serve as a timely illustration of the power of the unexpected As a small open economy, Ireland is heavily dependent on world demand for Irish exports and also on our competitive position within the global marketplace Any shock to the global economy that has a negative impact on global growth will reduce the demand for Irish exports and therefore domestic output Additionally Ireland’s dependency on imported oil and gas for the operation of the economy and society is particularly high and this adds to the level of national risk exposure In this report we examine the macroeconomic impacts for Ireland of three high oil and gas price scenarios for the period from 2010 to 2025 and consider the challenges Ireland may face in the event of such developments The focus is principally on the economic exposure Ireland and the world maintain with respect to oil and gas price volatility and how and to what extent, we can influence the rate of dependency on these Pathways to risk mitigation and a low carbon future fuels in order to mitigate the corresponding level of impacts The report is structured into three core sections: The development of three high oil and gas (HOG) price scenarios out to 2025 An estimation of the macroeconomic impacts for Ireland for each of the three HOG price scenarios as compared with the most recent national Baseline from the Economic and Social Research Institute (ESRI) An outline of strategic options that could reduce Ireland’s reliance on oil and gas Siemens is grateful to Dr Andrew Kelly of AP EnvEcon Limited for his contribution to this report We would also like to acknowledge the support and input of the ESRI Siemens sees itself in the vanguard of the drive for sustainability This report, together with our previous studies, represents part of our contribution and commitment to help stakeholders take informed decisions – decisions that could have economic and environmental ramifications for generations to come Dr Werner Kruckow CEO Siemens Limited Dublin, Ireland July 2010 THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES 03 Oil and Gas Prices and their Determinants Chapter Oil and Gas Prices and their Determinants 04 Historical evidence of change Figure presents the historical free market prices of Illinois crude in both real and nominal dollars per barrel from 1970 to 2010 The most striking events are the 2008 peak and trough where a threefold change in price was experienced within the same calendar year and the significant and extended shock of the late 70’s and early 80’s during the Iran/Iraq conflict period The Table 1: Examples of oil price influencing events SUPPLY SIDE EVENTS DEMAND SIDE EVENTS International conflicts and terrorism Population growth OPEC production rate adjustments Accelerated growth of developing countries Revisions to national reserve inventories Increased penetration of oil and gas powered technologies Revisions to internationally viable oil stocks and production rates Market efficiency Speculation and exchange rates Renewable penetration Other technological change Unconventional oil and gas Shifts in demand of energy services Natural disasters The unknown Figure 1: Annual average crude oil price 1970-2010 Annual Average Crude Oil Price (US $) $120 $100 $80 $60 $40 THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES  Nominal Price 2010 2008 2006 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 1980 1978 1976 $0 1974 $20 1972 Determinants of price Oil is an important global commodity and its price is broadly determined by the fundamental principles of supply, demand and market expectations.3 There are numerous market agents, however the dominant roles are arguably held by a handful of operators OPEC is the most influential player on the supply side while the OECD countries are seen as the most influential group on the demand side Additionally, emerging economies, principally China and India, account for the majority of the increase in global energy consumption and have thereby evolved into important drivers of demand and price change in the global oil market These players and a set of possible ‘events’ are highly influential in the evolution of oil price Some illustrative examples4 of such major price driver events on both the supply and demand side are presented in Table below 1970 T his opening section of the report deals with oil and gas prices and has fed directly into the design of the three HOG price scenarios tested as part of the macroeconomic impact analysis The purpose of this review is not to identify the most likely path for oil and gas prices Shocks, by their nature, are rarely a feature of such exercises and as a result, such an endeavour would no doubt yield a moderate and steady outlook linked to the current situation.2 However, the recent and unprecedented economic crisis serves as an unfortunate and timely reminder of the distinction between the unlikely and the impossible As such we choose to highlight the unlikely We identify the principal price determinants, examine historical evidence of change, and consider long and short run price outlooks from major international analytical sources In essence we gather evidence for ‘what could be’ and thereby use this information to set boundaries for our HOG price scenarios without the constraint of an international consensus on ‘what seems most likely’ Real Price Pathways to risk mitigation and a low carbon future evidence in this case illustrates quite clearly that shocks – both acute and protracted – have occurred in recent history Figure 2: EIA NYMEX WTI 95% confidence intervals in July 08 350 Actual to July 08 300 Historical WTI $/BI 250 Lower Bound Upper Bound 200 150 100 50 Ja n 20 M ar 20 M ay 20 Ju 06 ly Se 006 pt 20 No 06 v 20 Ja 06 n 20 M ar 20 M ay 20 Ju 07 ly Se 007 pt 20 No 07 v 20 Ja 07 n 20 M ar M 008 ay 20 Ju 08 ly Se 008 pt 20 No 08 v 20 Ja 08 n 20 M ar M 009 ay 20 Ju 09 ly Se 009 pt 20 No 09 v 20 09 Figure 3: EIA NYMEX WTI 95% confidence intervals in July 09 250 Actual to July 09 200 Historical Lower Bound 150 WTI $/BI Upper Bound 100 50 09 09 20 v 09 20 pt Se No 09 20 Ju ly 09 20 ay 09 20 ar M M 08 20 n Ja 08 20 v 08 20 pt No 08 20 ly Ju Se 08 20 ay 08 20 ar M 07 20 n Ja M 07 20 No v 07 20 pt 07 20 ly Se 07 20 ay M Ju 07 20 ar 06 20 n M 06 20 v No Ja 06 20 pt 06 20 ly Se 06 20 Ju ay 20 M n M Ja ar 20 06 Figure 4: International energy outlook: world oil ($2007) for reference cases in 2008/2009 140.0 IEO2009 120.0 IEO2008 100.0 $($2007) per barrel Short-term price outlook In Figures and we present short (1 year) price outlook confidence intervals from the Energy Information Administration (EIA) with a view to illustrating the perceived volatility in the market price even on this time horizon Figure is taken from the time of the oil price peak in July 2008 whereas Figure is taken from the same publication one year later in July 2009 (when prices had collapsed and were comparatively stable) In these figures, the red line represents the upper bound expectation for oil price, whilst the green line indicates the lower bound Figure gives us a clear indication of how significant changes in the current price can lead to far greater uncertainty with respect to price outlook In this case indicated by the particularly large gap between upper and lower bound expectations Figure then moves the same methodological assessment forward one year and shows how the fall and apparent stabilisation in oil prices, along with the shorter price outlook time frame allow for a much reduced angle of divergence between the upper and lower bands It is also of note, that when looking back at the actual price path in Figure 2, we see that from the July peak of 2008, prices actually dipped well below the lower statistical bound over the course of the following year Whilst this is only one outlook on price, it serves to illustrate how outlooks and expectations for ‘plausible’ energy prices can shift dramatically in a short period of time– in this case because of the financial crisis and the following Great Recession that took almost everybody by surprise In the context of our developed HOG price scenarios the point here is to note that unforeseen spikes and collapses in price can occur and they can so within a very short space of time Additionally, we make note of how price volatility can debase confidence in the stability of future prices and can thereby create an environment of major uncertainty surrounding future price evolutions 80.0 60.0 40.0 20.0 Pathways to risk mitigation and a low carbon future 2024 2022 2020 2018 2016 2014 2012 2010 2008 2006 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 0.0 1980 Long-term price outlook Forecasting long-term oil prices is challenging and arguably futile Forecasts can respond quite dramatically to current THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES 05 Oil and Gas Prices and their Determinants 06 Figure 5: Annual energy outlook: Reference, high and low price ($2007) oil scenarios to 2025 200.00 Reference High Price 150.00 Real $($2007) per barrel Low Price 100.00 50.00 approximately $175 in the second peak of the ‘Camel’ HOG price scenario which is presented later Conclusion on price outlook The primary conclusion on price outlook is simply that both moderate change and extreme shifts are possible and changes in price can occur within a very short space of time There are numerous factors which may combine to deliver short and sharp price shocks, as well as more persistent combinations that could deliver prolonged changes in price Similarly, expert THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES  2024 2022 2020 2018 2016 2014 2012 2010 2008 2006 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 0.00 1980 events and changes in expectations Both can change quickly as illustrated by the revised EIA International Energy Outlook (IEO) for world oil prices presented in Figure The trend lines represent the change in the ‘reference case’ world oil price($2007) outlook between the IEO 2008 and IEO 2009 reports In the space of a year the price projection – not its confidence interval – has altered significantly, with a near doubling of the real oil price($2007) in 2025 under more recent analysis5 Adjusting values to nominal prices would result in a nominal price forecast for 2025 of approximately $220 per barrel from the 2009 outlook, as compared with a nominal price of over $120 per barrel from the 2008 analysis6 Figure draws on the associated literature and presents the EIA high and low world oil price scenarios which frame the reference case These alternate price projections present a real oil price($2007) low of just $50 and a high of just under $200 in 2025 The boundaries of the high price scenario described here have been used in developing the HOG Price scenarios to restrict the impact of ‘events’ in a given year to the comparable high price scenario range In no case or year the HOG prices exceed the EIA high price scenario peak real value of $200($2007) per barrel The highest real oil price($2008) reached being international outlook on price can change dramatically and quickly for both the short and long-term Into the future, it seems likely that sustained pressure on available resources will ultimately lead to increased price volatility with implications for the market price Therefore, we conclude that there is both precedent and growing potential for price changes of the scale described in the HOG price scenarios in Chapter over longer time frames Pathways to risk mitigation and a low carbon future Baseline Scenario 2025 Chapter Baseline Scenario 2025 T his study models the economic effect of a series of high oil and gas price scenarios on the Irish economy However, oil and gas prices are just one component of the macroeconomic modelling exercise and need to be mapped against a broader perspective comprising the many different parameters and assumptions relating to the structure, interactions and development of the Irish and world economies For this purpose, we have adopted the ESRI’s Baseline forecast for Ireland out to 20257 as the scenario against which the HOG price scenarios are tested Baseline Scenario description The ESRI Baseline 2025 scenario (hereafter, Baseline Scenario) takes a lead from the Recovery Scenarios for Ireland report that was published by the ESRI in May 20098 and specifically the World Recovery Scenario (WRS) described therein9 The principal assumption is that global economies recover from recession by the middle of 2010 and then proceed to grow at rates nearing potential from 2011 onwards10 with a corresponding recovery in world demand for Irish exports The forecasts for the key macroeconomic aggregates of this WRS scenario for Ireland are presented in Table with the principal statistic for average GNP growth of 3.3 per cent over the period 2015 to 2020 and more moderate growth averaging 2.7 per cent over the period 2020-2025 An ESRI ‘storyline’ for this scenario is presented under the next heading Scenario Story Weak domestic demand and the recession in the international economy leads to a substantial fall in output in the manufacturing and market services sectors with overall GNP expected to fall by 9.0 per cent in 2009 and by almost per cent in 2010 The increase in unemployment associated with the contraction in Pathways to risk mitigation and a low carbon future Table 2: World Recovery Scenario Major Aggregates 2009 2010 2010-15 2015-20 2020-25 Annual % Growth Rate Average Annual Growth Rate GDP -7.8 -2.3 5.2 3.3 2.6 GNP -9.0 -1.9 5.5 3.3 2.7 Total Employment (PES basis) -9.2 -5.8 2.8 1.5 1.0 Output, industry -9.2 -3.9 8.3 4.0 2.2 Output, market services -4.6 -1.2 5.2 3.0 3.0 Consumer Prices (Personal Consumption Deflator) -1.0 -0.2 2.5 2.7 2.2 Non-agricultural Wage Rates -3.2 -1.8 3.1 4.6 3.2 Personal Savings Ratio 9.9 10.4 7.9 6.4 5.4 General Government Balance, % GDP -12.3 -11.6 -3.9 -1.2 -1.0 General Government Debt, % GDP 61.0 74.8 81.2 67.8 58.0 Balance of Payments, % GNP -2.2 1.0 5.2 6.7 4.5 Unemployment Rate (ILO basis) 12.7 16.5 6.6 4.9 4.0 Net Emigration (thousands) 30.0 40.0 -8.3 -24.7 -18.2 economic activity over the period 20082010 is expected to lead to significant wage moderation in both the public and private sectors The macroeconomic model suggests that nominal wage rates in the economy as a whole could decline by 6.6 per cent in the period 2009-2011 As a result of the world recovery and the improvement in competitiveness, GNP growth is expected to resume, averaging 5.5 per cent in the period 2010-2015 (i.e the average growth experienced in each of the five years 2011-15) The high degree of responsiveness of the Irish economy to changes in world activity could give rise to a strong recovery from 2011 onwards, assuming the economy regains competitiveness However this recovery would imply a restoration of only some of the losses sustained over the period 2008-2010 As a result of the recession, by 2015 output would be around 15 per cent below where it would have been without the global economic crisis On public finances, the lower level of economic activity is likely to reduce government revenue from a range of taxes while at the same time government expenditure is expected to rise due to increased welfare and national debt interest payments As a result the general government balance as a percentage of GDP is expected to remain very high at 12 per cent in 2010, taking into account the fiscal measures for 2009 and Budget 2010 announced to date The resumption of economic growth after 2011 would bring about an improvement in the general government balance which on the basis of this benchmark scenario is forecast to fall to 3.9 per cent of GDP in 2015 The deterioration in the economy is expected to lead to a dramatic rise in unemployment and the unemployment THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES 07 Baseline Scenario 2025 Specific scenario assumptions Fuel price assumptions in the Baseline Scenario are as follows: • Gas prices fall from €25.8 per MWh in 2008 to €17.7/MWh in 2010, then climb steadily to €31.5/MWh in 2025 • Similarly, oil falls from €56.4/MWh in 2008 to €44.9/MWh in 2010 before increasing to almost €58.2/MWh by 2025 • Coal prices increase from €8.1/MWh in 2008 to €14.0/MWh in 2025 • We assume no growth in real peat prices over the period • Carbon taxes increase from €13.8/tonne 08 Figure 6: Baseline oil price scenario 300 250 200 $/bl 150 100 50 Table 3: Electricity savings in MWh Baseline THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES  25 20 24 23 20 20 22 21 20 20 20 19 20 18 20 20 17 16 CO2 in 2009 to over €40/tCO2 by 2025 Figure illustrates the specific oil price for the Baseline Scenario The price path dips from 2008-2010 in response to the current global recession before assuming a steady linear growth path out to 2025, reaching a nominal price of $185 dollars per barrel in 2025 or just under $100 in $2008 prices The Baseline oil price scenario therefore assumes a steady and moderate increase in oil price with no price shocks anticipated over the next 15 years Electricity demand in the Baseline Scenario has been adjusted to take account of recently implemented measures which have not yet had a substantial impact (further details in DCENR’s National Energy Efficiency Action Plan, 2009-2020)11 but will lead to savings over the period to 2025 Energy demand is reduced by the amounts shown in Table 3, and changes linearly between the reference years With respect to energy infrastructure, plant commissioning and decommissioning in the modelling exercise has be 20 20 15 14 20 20 13 12 20 20 11 10 20 09 20 20 08 20 rate As a result of lower levels of output in the building, manufacturing and market services sectors total employment is expected to fall by 9.2 per cent in 2009 and a further 5.8 per cent in 2010 The unemployment rate is expected to peak at 16.5 per cent in 2010 In line with the anticipated recovery in economic activity from 2011 onwards, employment growth is expected to resume and average 2.8 per cent over the period 2010-2015 This is expected to result in some moderation in the unemployment rate which is projected to fall to 6.6 per cent by 2015 Emigration is assumed to peak at 50,000 in 2012 The cumulative net emigration of 152,000 over the period 2009 to 2015 represents a significant reduction in the labour force as a result of the recession Of course the likely response of migration to the current recession is highly uncertain If migration were not to resume to the extent assumed here this would lead to a larger rise in the unemployment rate and a slower recovery in the labour market than described The combination of the bursting of the housing bubble and the world financial crisis has had a substantial impact on the endowment of labour and capital in Ireland This has served to permanently reduce the potential output of the economy While the Medium-Term Review 2008-2015 published in Spring 2008 suggested that the potential output growth rate for the Irish economy over the period 2005-2020 was around 3.6 per cent a year, today we feel that it is closer to 3.0 per cent a year Over the longer-term we anticipate average GNP growth of 3.3 per cent over the period 2015 to 2020 and more moderate growth averaging 2.7 per cent over the period 2020-2025 en implemented according to the timetables announced by the relevant system operators.12 Note on alternative scenarios It is noted that the Baseline Scenario is the less ambitious of the two main energy scenarios developed in Ireland at the end of 2009 The more ambitious scenario is the ‘White Paper plus’ scenario which incorporates assumptions such as greater penetration of renewables, higher proportions of electric vehicles and meeting all of the targets established within the National Energy Efficiency Action Plan (NEEAP)13 We believe that the targets of the “White Paper plus” scenario and other similarly ambitious scenarios will require concerted national action and investment over the next 15 years and there are many challenges yet with respect to infrastructure, investment and technology that must be considered It is in the context of this challenge that this report hopes to support further debate on the risks we face, the options available and the means of progression It is for this reason that the Baseline Scenario is adopted as our reference case.14 2010 2016 2020 2025 65.5 212.2 401.2 637.4 Pathways to risk mitigation and a low carbon future Ireland‘s dependence on Oil and Gas future dominance of oil and gas in Ireland’s imported fuel mix Ireland is part of a handful of EU 27 countries with greater than 80% energy import dependency SEI (Energy in Ireland, 2009) state that imported oil and gas accounted for 81% of energy supply in 2008 and overall import dependency was running at 89% This is estimated to rise to approximately 91% by 2025 under the ESRI Baseline Scenario In terms of individual import rates, both coal and oil are at 100% Gas stands at 89% (in 2008) and although this will fall as Corrib comes online, we would expect this to rise again to 95% by 2025 in the absence of any further significant finds and an increasing shift towards gas fired power generation In short, our indigenous energy use will remain dominated by imported fuels in the Baseline Scenario Furthermore, if we examine our suppliers, we note that Ireland is entirely dependent on the UK for its gas imports and similar to many of the EU 27, is entirely dependent on outside EU imports of oil With respect to gas, the Commission for Energy Regulation suggests potential scenarios for Irish gas supply (CER, 2009) involving various assumptions of new sources and storage capacity Principally, it is noted that the Corrib gas field could meet over 60% of Irish demand in the medium term However, the production capacity of Corrib is expected to decline rapidly to less than 50% of its peak after years Liquefied natural gas (LNG) imports (e.g., from shale gas) may offer the potential to diversify our suppliers further over the medium term, however, the price of such imports is likely to be influenced by transport, extraction and environmental costs In terms of indigenous production of energy, Figure 24 presents the growing shares of peat and renewables and a decline of natural gas production up to 2008 In absolute terms, indigenous production remains small and the relevance of high import dependency rates become more apparent when we refer back to the overall consumption and dependency on oil and gas in Ireland Looking forward, growth in indigenous energy production of significant scale is only likely to be achieved through further development of renewable energy sources The breakdown of oil and gas by sector in the Baseline is displayed in Figures 25 and 26, respectively For oil, the transport sector remains, by far, the dominant sector 16 Figure 24: Indigenous energy production shares, 1990-2008 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1990 1995 2000 2001 2002 Renewables 2003 2004 Natural Gas 2005 2006 2007 2008 Peat Figure 25: Final consumption of oil by sector, 2008-2025 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2008 2010 2012 Losses 2014 Agriculture Services 2016 Power 2018 2020 Industry Household 2022 2024 Transport Figure 26: Final consumption of gas by sector, 2008-2025 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2008 THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES  2010 2012 Losses 2014 Agriculture Services 2016 Power 2018 2020 Industry Household 2022 2024 Transport Pathways to risk mitigation and a low carbon future with approximately 63% of the oil use share and little change anticipated in the Baseline shares out to 2025 The industry and household sectors account for much of the balance With regard to gas, the power generation sector utilises the greatest share of gas in Ireland, at 63% in 2008 but this share is expected to drop to 51% by 2025 In absolute terms the level of gas used in power generation out to 2025 changes little under the Baseline Scenario, however an increase in demand Pathways to risk mitigation and a low carbon future from households and industry reduces its share This chapter has illustrated a clear dependency within the economy on imported oil and gas Virtually every sector of our economy is to some extent dependent on oil or gas for its normal operation - a common situation in developed countries Understandably this reliance contributes to the fact that shocks to the price of fossil fuels can therefore have pronounced economic and social impacts Rather more unfortunately, the modelling analysis within this report suggests that Ireland is particularly sensitive to such shocks and their outcomes, and as a result would suffer more pronounced economic impacts and a slower recovery as compared with other countries The next topic addressed in this study is to consider broad actions that could be taken to reduce national dependence on oil and gas and to discuss the drivers and motivators for action in this regard THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES 17 Options and actions to reduce exposure to High Oil and Gas Prices Chapter Options and actions to reduce exposure to High Oil and Gas Prices T he previous chapter shows the clear dependency within the economy on imported oil and gas As illustrated in the earlier sections, this dependency among Ireland and our core trading partners creates an economic exposure to high oil and gas prices But what actions can mitigate the exposure to this risk and these impacts? The international dimension of the impacts would likely require concerted action amongst Ireland and its trading partners to reduce our collective reliance on oil and gas if we seek to mitigate the extent of the potential impacts (e.g trade slowdown) However, in this piece we focus on Ireland and in this regard there remain many options which could contribute towards a reduced exposure toward a number of the identified impacts in the report The options for action presented here are extracted from a position paper entitled Ireland in the New Electricity Age20 presented by Siemens Limited In this position paper, Siemens proposes four ‘pillars’ for a sustainable energy system in Ireland, as set out in Table 5, namely : Pillar 1: Maximising electricity generation from renewable sources Pillar 2: Grid upgrade and integration into the European grid Pillar 3: Increased energy efficiency and conservation Pillar 4: Maximising electricity usage in end-use applications In the following pages we consider three “Focus Areas” from these pillars and discuss the drivers and motivators for action in each Focus Area The Focus Areas addressed are as follows: Focus Area 1: Renewable energy generation from wind Focus Area 2: Improvements in energy efficiency and conservation Focus Area 3: Electrifying the transport sector Table 5: Four pillars for a sustainable energy system in Ireland PILLAR DESCRIPTION Pillar 1: Maximising electricity generation from renewable sources Rapid implementation of the existing pipeline in onshore wind along with fast tracking of offshore projects Additionally, in order to maximise the efficiency of wind farms, deploy storage technologies to capture off-peak renewables energy Explore the opportunities from ocean energy Pillar 2: Grid upgrade and integration into the European grid Develop and optimize the national grid for renewable energy, including the: • Development of the national grid infrastructure on an all island basis • Extension of 400 kV and 220 kV network to facilitate transmission from key renewable locations • Implementation of “smart systems” to manage future load-to-generation matching Significantly increase the number and capacity of interconnectors to UK and mainland Europe in order to be able to export surplus renewable energy and benefit from a European/global super grid Pillar 3: Increased energy efficiency and conservation Apply the technical solutions available today to improve the energy efficiency of, inter alia: • Buildings • Domestic appliances • Motors and drives in industry • Public lighting Pillar 4: Maximising electricity usage in end-use applications • Expanding the use of e-cars and hybrid cars • Improving the energy efficiency of diesel public buses through hybrid electric drives and regenerative braking power • Replacement of fossil fuel driven heating by ambient or geothermal heat pumps • Electrifying the national rail network in Ireland 18 THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES  Pathways to risk mitigation and a low carbon future For each of the Focus Areas presented, we offer a qualitative examination of each against four evaluative criteria as presented in Figure 27, namely: (a) Contribution to the Green Economy: Creation of green employment, green business opportunities and a green market place (b) Impact on the Environment: Contribution to emissions reduction and improved international environmental performance (c) Influence on Competitiveness: Impact upon the level of cost competitiveness of Irish businesses and the country’s international attractiveness for investment (d) Mitigation of Energy Risk: Reduction in energy price volatility and energy supply risk in the Irish market This chapter concludes with a quantitative case study that connects the analysis conducted in this report with the business case for investment in a 101 MW onshore wind farm in Ireland This case study illustrates how the varied factors of inflation, interest rates and fossil fuel prices could combine to influence the investment return under both the Baseline and Accelerated Growth scenarios The purpose being to illustrate how a HOG price scenario may influence the investment decision in one of the ‘options’ for change Focus Area 1: Renewable energy generation from wind This first option refers to the progressive scaling up of Ireland’s wind energy generation capacity from both on and offshore large scale projects Ambitious plans are in place in this regard21 in Ireland and in this section we examine some of the reasons to maintain a sustained effort to reach these goals, as well as some of the challenges that must be overcome to be successful (a) Contribution to the Green Economy While Ireland presently does not possess an indigenous wind turbine and component manufacturing industry, the progressive scaling up of Ireland’s wind energy generation capacity represents an important employment opportunity for the green economy Wind energy employment can be broken down into direct and indirect employment Wind turbine and component manufacture are responsible for the majority of direct wind energy jobs (59%, European Wind Energy Association [EWEA] 2009).22 Other direct employment includes jobs created in the initial phase of getting a wind energy project operational; wind farm development, wind turbine and component installation, employment of relevant financial and consultant personnel and R&D, all employment positions that may be created within Ireland Other employment from wind farms refers mostly to jobs associated with wind turbine and wind farm operation and maintenance once a wind energy project has entered its full operational cycle These are longer term positions that would offer further employment creation opportunities in Ireland According to EWEA, the wind energy sector employed 154,000 in the EU in 2007 This figure is forecast to surpass 325,000 Figure 27: Four evaluation criteria for actions Contribution to the Green Economy Cleantech & Jobs Influence on Competitiveness Energy Price & Cost Pathways to risk mitigation and a low carbon future Impact on the Environment Targets & Legislation Mitigation Energy Risk Supply, Stability & Price by 2020 EWEA figures show that in 2007 1,500 people were directly employed by wind energy companies in Ireland EWEA highlight that 15.1 jobs are created in the EU for every MW of installed wind capacity The development of this sector would also support reductions in the national energy import bill for fossil fuels (estimated at approximately €6bn per annum) and could stimulate the development of greater marketable national expertise for export However, the decision to invest in renewable energy technology deployment will be heavily influenced by prevailing market conditions Significant start up costs, access to capital and the expected market return for electricity generated are fundamental considerations for investors With respect to this issue it is possible for governments to create the right conditions to encourage investment This can be achieved through the introduction of policy support mechanisms One of the most common policy mechanisms used to encourage the adoption of renewable energy sources and increase the use of renewable energy technologies in electricity production is the use of renewable energy feed in tariffs (REFIT) Renewable energy investors and developers support the introduction of such tariffs as they provide a form of investor certainty Like many other international governments, the Irish Government has opted for this policy support mechanism In 2006 the Irish government launched the REFIT scheme which has become the main tool for promoting RES-E and wind energy development The REFIT scheme provides support in the form of a fixed feed in tariff to renewable energy projects over a 15 year period thereby providing renewable investors with a degree of short to mediumterm market certainty In the case study presented later, we will illustrate how the Accelerated Growth high oil and gas price scenario may be expected to change the investment case for a 101MW on shore wind farm as fossil fuel prices add upward price pressure to the market price of electricity However, whilst high oil and gas prices and supports such as REFIT can be important in the decision to invest, further challenges persist in terms of access to start-up finance, the speed of planning procedures and the characteristics and availability of the overall grid infrastructure All these challenges must be addressed if wind energy is to achieve a greater share of the electricity generation market and make THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES 19 Options and actions to reduce exposure to High Oil and Gas Prices a strong contribution to the development of the green economy (b) Impact on the Environment Wind is a clean renewable energy insofar as there are no emissions associated with the generation of energy from the wind turbines Thus wind generation can form a key part of the solution for countries seeking to reduce national emissions associated with energy generation Government targets and legislation can provide an added stimulus in this context for the scaling up of national wind energy generation A recent renewables target assigned to the Government under the European Commission’s 2008 Climate and Energy Package requires Ireland to reach a renewable energy share of gross final consumption of energy of 16% by 2020 Prior to this, in 2007 the Government launched its Energy White Paper (Delivering a Sustainable Energy Future for Ireland) which included a number of ambitious renewable targets Targets included renewables achieving a 15% and 33% share of electricity generation by 2010 and 2020 respectively, with the latter value subsequently being raised to 40% in December 2008 Wind energy is not without environmental cost however and turbines themselves require materials, manufacturing and transport which give rise to a level of emissions that may be considered as part of a lifecycle analysis Furthermore, the mass deployment of wind farms imposes a degree of cost on society in the form of visual disamenity (c) Influence on Competitiveness With respect to competitiveness, two factors are identified which may contribute to an increased energy cost in Ireland The first, as discussed in this study, is the potential for high oil and gas prices to increase in international markets Changes in the fuel input cost to oil and gas fired power generation in Ireland would be expected to increase the market price of electricity Secondly the introduction of “full allowance auctioning23” within the EU emissions trading scheme from 2013 onwards to the power sector will also raise the cost base of fossil fuel power generation The degree to which carbon raises the cost base will depend on the price fossil fuel producers have to pay for allowances at official EU allowance auctions as well as the prevailing price for allowances in the EU carbon 20 market Interim technologies such as Carbon Capture and Storage may offer an alternative to allowances but will similarly introduce their own costs to the mix Development of wind generation capacity in Ireland would reduce the exposure to such energy cost increases in Ireland, as wind generation has neither fuel input costs nor a carbon cost Clearly the balance of energy sources in the power sector is an important consideration and in the short-term, wind energy may struggle to compete with gas and coal fired power generation on a direct basis (i.e particularly if there were no supporting REFIT tariff) However, over the longer term as technologies and the grid become more efficient, the renewable energy component of our energy supply should support lower prices than would otherwise prevail where fossil fuel and carbon prices are rising (d) Mitigation of Energy Risk Energy risk as defined in this context encompasses both the potential for a supply interruption and/or particularly unstable and volatile prices The scaling up of Ireland’s wind energy generation capacity can offset some of the risk to supply interruption as wind generation would be an indigenous and nationally managed energy source with no fuel dependencies Furthermore, the absence of a fuel input cost allows wind energy to deliver energy at a reasonably steady marginal cost of production This limits the potential for supply side driven price increases or price volatility However, there are constraints and in order to maximise Ireland’s wind energy potential and improve security of supply significant transmission network development and capital investment are required The ability of the transmission network to absorb large amounts of electricity produced from renewable sources is one of the most significant barriers to the successful deployment of high rates of renewable energy24 A strategy for the storage of wind energy and managing intermittency will become an important part of the renewable penetration plan There are many factors to consider with regard to storage including the additional cost, the maturity of the technology adopted and the feasibility of the option in a given location A recent and comprehensive review of storage technologies for wind generation concludes that there is not one ideal individual solution Instead efforts to closely integrate renewables with the THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES  electricity, heat and transport sectors is noted as offering great potential as the first stage for increasing renewable energy use and this approach can then be augmented and made more flexible with individual storage technologies, particularly pumpedhydro electric or flow-battery energy storage (Leahy et al, 2010)25 The potential of high levels of renewable energy penetration was examined in the 2008 report on an all island grid by the Department of Communications, Energy and Natural Resources (DCENR, 2008)26 This study identified a number of national grid developments and capital investments that need to occur in order for Ireland to achieve a high level (30%-40%) of renewable energy penetration In the first instance DCENR note that the national grid development that is required is extensive The report notes that while the cost related to development are in “acceptable ranges (0.8 – 1.2 €/MWh)”, the developments will require considerable resources to be deployed by transmission owners and operators in addition to the work necessary to implement the east-west and northsouth interconnectors and other extensive transmission infrastructure development required to accommodate non-renewable generation and growth in demand In order to connect wind energy into the grid some 4,000 – 5,000km of new transmission lines will need to be built27 Another factor to be considered is the potential for an interconnection to Europe as part of a European super-grid Focus Area 2: Improvements in energy efficiency and conservation This option refers to increased energy efficiency and conservation through consumer and business investment in available technologies Specific energy technology investments include investments in building energy efficiency, energy efficient home appliances, lighting efficiency and smart lighting A report commissioned by Siemens (2009)28 outlined a number of such technological levers in the context of their potential to deliver CO2 abatement across a range of sectors in Ireland This earlier report offers a useful perspective on the types of energy efficient investment options available In terms of policy direction, on a national scale, ambitious plans have been defined as part of the National Energy Efficiency Action Plan (2009), whereby Ireland hopes to achieve 20% energy efficiency savings Pathways to risk mitigation and a low carbon future by 202029 Here we examine some of the motivations for these goals and some of the barriers to progress (a) Contribution to the Green Economy Whilst many energy efficient technologies may be developed and/or manufactured abroad, the deployment of these technologies will create installation and maintenance jobs in Ireland In parallel it could be expected that the emergence of increased national investment levels in energy efficiency technologies would create an attractive market place which provides a suitable test bed and incentive for indigenous manufacturing and engineering sectors to engage in this area, potentially leading to further job market creation, innovation and exports to the larger international markets Perhaps the greatest challenge with broad nationwide energy efficiency improvements is overcoming the initial inertia that can prevent investment This can be based on a lack of incentive to change but can also simply be the result of long payback periods for the investment which render them less attractive Initiatives such as the ‘pay as you save scheme’30 in the UK are an example of innovative approaches which may overcome the challenge of securing these initial investments Indeed financing models are an integral component of the strategy to deliver efficiency changes in the market place The desire to change can be constrained by the capacity to invest particularly in times of restricted credit availability In this respect new financing and business models are needed One example of possible support to this market would lie in a shift in public procurement policy Public sector investment in energy efficient options could provide a significant source of business to the developing market as well as leadership to households and businesses (b) Impact on the Environment Efficiency is generally a “win-win” situation with respect to the environment Increased efficiency contributes to both reduced emissions and resource use, both of which are core components of sustainability However, while improvements in national energy efficiency are encouraged from a climate change and economic perspective, due consideration needs to be given to the so-called “rebound effect” that can arise from improvements in energy efficiency Brannlund et al (2007)31and Pathways to risk mitigation and a low carbon future Greening et al (2000)32 highlight that potential emission reductions arising from improvements in energy efficiency may be reduced by the existence of the rebound effect Brannlund et al note how the rebound effect can be described as the direct and indirect effects, such as substitution and income effects, induced by a new energy-saving technology In this regard, the state can play a role in terms of complementary policies and legislation, such as incentive levies or a carbon tax For example, in Ireland, whilst the Government’s scrapping of its proposed levy on traditional incandescent light bulbs prevented a significant switch in consumer behaviour towards more energy efficient CFL or LED light bulbs, this proposed levy was an example of how the Government can legislate to encourage investment in energy efficient technology While CFL and LED bulbs are more efficient and economical in the long run, their initial purchase price is higher than the traditional incandescent light bulb The Government’s plan to legislate for an environmental levy on incandescent bulbs would have reduced their price advantage and encouraged consumers to switch to CFL or LED bulbs According to the Government, the sole goal of the levy was to alter consumer behaviour as opposed to generating revenue (DoEHLG, 2006).33 Similarly, a carbon price can serve to protect some of the environmental gains achievable through increased efficiency and energy conservation A recent report by the UK Environment Audit Committee highlighted the important role that carbon prices have to play in the deployment of renewable technologies and energy sources The report emphasised how high carbon prices are needed to deliver substantial green investment (UK Environment Audit Committee, 2010)34 and how they are necessary to curb the demand for fossil fuels and reward the development of renewable technology According to the UK Environment Committee and the Financial Times (2009)35 current carbon prices in the range of €10-20 per tonne of carbon dioxide are too low to drive investment in green technologies and energy efficiency Euractiv (2010) note that the carbon price would have to be at least €100 per tonne of carbon dioxide in order to trigger enough investment for a shift to a truly low carbon society36 Indeed, the International Energy Agency (2009)37 has highlighted that many of the renewable technologies necessary to deliver a low carbon economy and help realise the UNFCCC’s target of 450ppm already exist38 However, at current low carbon prices and without government subsidy or other support many of them are not yet commercially viable Once again, it should be noted, Government action with regard to ‘green procurement’ and supporting transitions to new efficient technologies could also provide significant support to the more rapid development of national energy efficiency by delivering business for suppliers and leadership for consumers (c) Influence on Competitiveness Improved energy efficiency in industry and the services sector can contribute to a reduced and more stable operational cost base The savings associated can improve the competitiveness of an operation and release funds for reinvestment and development However, clearly not all investments will deliver a suitable return and fuel costs would influence the scale of potential gains to be made in each case Thus caution and guidance is required to make sound investments in appropriate efficiency and conservation options Indeed, the barriers to the increased uptake of efficiency related measures can include a lack of awareness of the potential savings and expected return on investment, and connected to this, limited access to capital for such investments Continued efforts are therefore required to inform businesses of the sensible investments in efficiency and conservation that are available to them (d) Mitigation of Energy Risk Increased energy efficiency and conservation offers greater protection from the cost of energy price volatility but does not offer protection from a supply interruption In general however, the simple advantage of increased efficiency and conservation is that the operation requires less energy to achieve the same output as previously Focus Area 3: Electrifying the transport sector This option refers to supporting shifts in the structure of the national transport fleet examining specifically an increased rate of deployment of electric vehicles In addition, it is noted that besides electric vehicles, Ireland needs to invest in railbound city infrastructure and also to electrify the national rail network THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES 21 Options and actions to reduce exposure to High Oil and Gas Prices (a) Contribution to the Green Economy Ireland does not have an indigenous motor manufacturing industry yet the necessary changes for the increased penetration of electric vehicles into the national fleet will provide an opportunity for job creation The successful introduction of electric vehicles into the Irish transport sector will be heavily dependent on the provision of the appropriate infrastructure This refers primarily to the adequate and convenient availability of battery recharging or replacement facilities The initial installation and continued maintenance of such facilities will provide a job creation opportunity Furthermore, although Ireland does not have an indigenous motor manufacturing industry, there are first and second tier suppliers who will also benefit from sales in electric vehicles A potential longer term benefit from electric car deployment with respect to the green economy is the support that the electric car may deliver to the wind energy sector, by providing an additional storage medium for renewably generated electricity – particularly at off-peak times i.e overnight charging (b) Impact on the Environment Transport has proven one of the most significant and challenging sectors to manage nationally with respect to greenhouse gas emissions and transboundary air pollution A shift towards electric vehicles charged by a clean renewable energy source would contribute significantly to the emission reductions from this sector This would in turn support national efforts to meet international greenhouse gas emission reduction targets and also efforts to meet national emissions ceilings for transboundary air pollutant emissions There could also be noticeable reductions in noise pollution associated with road transport as the share of electric vehicles in the fleet grows With respect to related environmental targets and ambitions, this shift would also support national obligations to the renewable energy for transport target (RES-T) which calls for renewable energy to account for 10% of transport energy by 2020, with interim targets of 2% by 2008 and 5.75%39 by 2010 The move towards electric vehicles would also clearly be necessary if the Government is to fulfil plans outlined in November 2008 to have 10% of all vehicles in the transport fleet powered by electricity in 202040 Whilst the environmental gains of such a change in the transport fleet are potentially significant, it is important to stress that the environmental ‘credentials’ of the shift are in part determined by the form of power generation used to provide the electric charging Furthermore, the battery components of electric vehicles could create further environmental issues if proper management and recycling initiatives are not put in place (c) Influence on Competitiveness Ireland’s small size is well suited to the reduced range currently offered by reasonably priced electric vehicles As a result, one of the most frequently cited constraints to their widespread adoption may be less relevant in Ireland Furthermore, by switching to electric vehicles, users (including business, private and public service providers) will be able to lower their operational costs for their vehicle or fleet Savings will accrue in terms of the fuelling cost of vehicles relative to oil driven vehicles, as well as considerable reductions in vehicle road tax Energy Minister Eamon Ryan notes that the cost of driving an electric vehicle for one year equates to one month’s petrol bill for a regularly fuelled vehicle41 However, whilst there are operational cost savings, investment in a new vehicle The impact of HOG on investment decisions: Case study- A 101 MW Wind farm This section builds on the broader discussion of large scale renewable wind generation to look specifically at how changes from our Accelerated Growth (AG) oil and gas price scenario may influence the business case for investment in a 101MW onshore wind farm relative to the Baseline Scenario Table presents the key parameters and assumptions for the financial analysis There are twin sets of parameters for certain variables which vary under the Baseline to AG scenario conditions These relate to inflation, interest and revenue streams For simplification the average annual values have been used and presented in this table for inflation and interest rates In practice these would vary year to year and alter the cash flow development year to year Using the annual average value smoothes payments over the 25 year investment life Another set of assumptions for Year includes the return of 50% of expected annual income in Year and no 22 maintenance but only operational costs in Year Operational costs for this purpose are assumed to be 20% of the expected annual operation and maintenance costs A final assumption has been to ignore the REFIT tariff in this assessment The reason for this has been that where the REFIT tariff is used, a guaranteed market price for electricity generation is in place that would not allow the assessment to capture the change in the market price stimulated by higher oil and gas prices As an interpretative note, the study recognises that the REFIT tariff would improve the returns in both scenarios, up to the point where the REFIT tariff falls below the market price of electricity otherwise available to generators Thus in conducting this analysis, simplifying assumptions have been necessary and clearly projections over a 25 year lifecycle entail uncertainty Nonetheless, the study illustrates the relative difference between the two THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES  scenarios and also the sensitivity of the results to some key parameters – inflation, interest rates and the market price of electricity as influenced by rises in fuel input costs42 Results are presented for the financial analysis in four forms, Net Present Value (NPV), Internal Rate of Return (IRR), Profitability Index (PI) and the Simple Pay Back (SPB) year (when cumulative net cash flow becomes positive) A further point to consider in examining the results is the potential continuation of Section 486 Corporate Tax relief which offers an 18% reduction in taxable income for eligible projects This has not been factored into the financial analysis directly, however, under each scenario this would further improve the after tax profitability The overall results are presented in Table Under each criterion the AG scenario offers the most favourable conditions for the investment The NPV for the AG scenario is over €33 million as compared Pathways to risk mitigation and a low carbon future requires funds and the relative value of the change will be connected to the age and performance of the vehicle or vehicles being replaced It is also noted, that as of yet, electric options for heavy duty vehicles are extremely limited (though there may be potential to explore a hybrid diesel fleet), with most examples constrained to very specific purposes not suitable for road haulage (d) Mitigation of Energy Risk Price changes in the transport sector feed quickly through to the end-user as oil prices change This can create an unstable price in a somewhat captive market with consequences for individuals and businesses Whilst in the longer term individuals and businesses may change their travel patterns and modes in response, the volatility can impact the sector noticeably in the short run Electric vehicles would reduce exposure to such price fluctuations as they can potentially be fuelled at a far lower cost through the grid Whilst oil and gas price changes may influence the market cost of electricity somewhat, the effect would be moderated by the presence of renewable generation sources and the far lower initial base cost of ‘fuelling’ an electric car relative to an oil powered vehicle Table 6: Parameters for 101MW case study Parameter Value Site Location Sligo Source Wind conditions Average annual 7.3 m/s Met Eireann Technology Siemens AN Bonus 2.3MW Technical literature Lifecycle of wind farm 25 years Study Assumption Onshore capacity factor 31% International literature MWh from 101MW farm 274,819 MWh Study calculation Onshore capital cost per MW €1.233m per MW AIGS WS 1* Onshore Operation and Maintenance per MW €51,900 per MW AIGS WS Onshore grid connection costs €1m Adapted study estimate Inflation average baseline to 2035 2.5% per annum Adapted study estimate Inflation average AG to 2035 2.6% per annum Adapted study estimate Debt interest rate BL 4% per annum Adapted study estimate Debt interest rate AG 5% per annum Onshore feed in tariff BL Variable market price Adapted study estimate Onshore feed in tariffs AG Variable market price44 Adapted study estimate Study Assumption Adapted study estimate 43 *All Island Grid Study Table 7: Results of 101MW financial case study to approximately €12 million under the Baseline IRR also compares favourably at 7.7% to the Baseline 5.4% In terms of payback year, the investment is repaid in Year 13 for the AG scenario and Year 17 for the Baseline Finally, the profitability index is seventeen percentage points higher under the AG scenario A visual comparison of the cumulative net cash flows for each is presented in Figure 28 The principal conclusion here is that even with the higher interest and inflation rates, the AG scenario shift in the market price of electricity for the increase in the fuel input cost of oil and gas creates a more favourable investment prospect relative to the Baseline Scenario tested More dramatic changes in power sector infrastructure would themselves influence the market price of electricity and as such these results represent only the micro-scale case study Pathways to risk mitigation and a low carbon future AG Scenario IRR 5.4% 7.7% Payback year of 25 Baseline Scenario NPV €12,420,014 Year 17 Year 13 Profitability Index 9.9% 27.0% €33,850,027 Figure 28: Cumulative net cash flow of 101MW onshore wind farm over 25 years under the Baseline and AG HOG price scenarios �200,000,000 �150,000,000 �100,000,000 �50,000,000 �0 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 - �50,000,000 - �100,000,000 - �150,000,000 CumNCFAG CumNCFBL THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES 23 Summary, Conclusions and Recommendations Chapter Summary, Conclusions and Recommendations T his study has examined some of the economic and social costs that would be incurred under certain high oil and gas price scenarios The results of this analysis suggest there is cause for concern should oil and gas prices rise in a manner comparable to any of the developed HOG price scenarios For example, under the Accelerated Growth Scenario there was an estimated fall in Irish GDP of up to 7.5% below the Baseline conditions in 2025, alongside a host of other identified distributional and societal impacts In this chapter, we present conclusions with respect to high oil and gas prices, their impacts on the economy and society and actions to reduce these impacts These are then followed by the study recommendations Oil and Gas Prices In our examination of oil and gas prices we illustrated how the outlook for price can change dramatically for both the short and long-term thereby reflecting the inherent uncertainty of both the near and far future It is reasonable to assume – although not free from dispute – that the price of oil and gas will ultimately rise as resources are depleted and new sources become increasingly costly to exploit Intervening events such as conflicts and natural disasters may also be expected to create a more uneven path to future price levels The three scenarios presented have been constructed within plausible boundaries of future prices on a time frame from 2010 to 2025 as the basis for our analysis of impacts They reflect alternative paths with more aggressive pressures on price These are scenarios and not predictions and thus their focus is on illustrating plausible alternative futures that may be triggered through one or a combination of numerous events or developments 24 A notable assumption of the study is that oil and gas prices are paired for the purpose of the analysis, despite some emerging evidence to suggest a stronger divergence between the two This divergence may be relevant for shorter term policy decisions, however, in the longer time frame oil and gas supplies are finite and will become constrained either sequentially or in tandem Furthermore, as these fossil fuel resources are depleted and sovereign control is strengthened over what remains, prices can be reasonably expected to become both higher and increasingly volatile Whether such changes occur in 2010, 2020 or 2030 is relevant to the timing of action but not the need for change The principal conclusion in respect of prices is that nobody can offer certainty on future price levels but that the modelled HOG price scenarios all fall within current feasible international analysis ranges Economic and Social Impacts International economic impacts were assessed as well as the specific economic and socio-economic impacts for Ireland On the international front, the modelled results indicate that the USA, UK and Europe would all be expected to suffer pronounced and prolonged economic downturns triggered by: • The inflationary effects of the HOG prices • The interest rate response from monetary authorities • The corresponding falls in investment, output and trade Drops in GDP for these three areas ranged up to 3%-4.5% in 2025 under the various HOG price scenarios45 In Ireland, as a small open economy, the drivers of the impacts are the same However, the scale of the trade impact is particularly severe contributing to a drop in THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES  GDP of between 3.5% – 7.5% in 2025 under the defined HOG price scenarios Socioeconomic and other ‘non-modelled’ impacts for Ireland were also identified as part of the study These impacts included the distributional effect of higher energy costs, the corresponding rise in energy and fuel poverty, restriction of mobility, increased market uncertainty from the price volatility, reduced competitiveness for firms and a higher national energy import cost The principal conclusion in respect of impacts is that the international impact on output for Ireland and our major trading partners would be significant and prolonged Ireland would endure a greater fall in GDP than the other regions and a number of linked socio-economic impacts would exacerbate the costs and challenges faced nationally Options to reduce the impacts of HOG prices There are options available to reduce exposure to the impacts described and a selection of actions have been discussed On the international front, Ireland may not have it within its control to noticeably influence the drop in national output associated with the HOG price scenarios This is due to the strong influence of a slow down in international trade on national GDP In this case however, action in our core trading partner markets (EU, USA and the UK) to reduce their combined exposure to high oil and gas prices would be expected to mitigate the extent of the economic downturn and impacts experienced by all However national action is far from irrelevant and would have a direct influence in mitigating the socio-economic and nonmodelled impacts detailed for Ireland The options considered included the delivery of a high share of indigenous renewable wind energy generation, adoption of a broader Pathways to risk mitigation and a low carbon future range of energy efficiency related measures and supporting the uptake of electric vehicles into the national transport fleet The rationale for action on these options as well as associated constraints and concerns were discussed under headings of prospective contributions towards the four evaluative criteria, namely: • Contribution to the green economy in Ireland • Progress towards and impact on international environmental targets • Influence on the competitiveness and relative attraction of Ireland for business • Mitigating national risk exposure to high oil and gas prices and supply interruptions The principal conclusion in respect of options is that there are a number of actions that can be pursued nationally to reduce dependence on fossil fuels, with associated benefits under the identified criteria However, a number of constraints associated with these options have also been identified – generally relating to financing and infrastructure Mechanisms and efforts to remove these barriers are vital in supporting a shift of scale towards the available options Recommendations of this study There is change underway in Ireland and efforts are being made to meet the environmental and new economic challenges we face There are ambitions being stated, actions being taken and achievements being made Indeed on a broad level the direction and ambition is relatively clear in terms of energy and environmental policy – improved efficiency, lower cost and reduced emissions This direction can arguably be attributed to both international obligations and a general societal acceptance that it is better to be Pathways to risk mitigation and a low carbon future more efficient, less wasteful and kinder to the environment The issue is not so much direction: rather the questions we face are the rate and extent of change necessary, how to overcome the barriers to change and deciding which technological paths to follow This study has highlighted and analysed the extent of the impacts from one specific risk factor, namely high oil and gas prices, as a support to this broader decision making process The results illustrate that the current motivations for change could be significantly altered under high oil and gas price scenarios that present additional and substantial risks to both economic growth and societal welfare The speed and extent of the necessary change are to a point determined by government decisions on balancing risk against investment, as well as the presence or absence of incentives and barriers to change for investors The recommendations of this study are grouped into international action, national action and specific comments on the facilitation of change International Action Recommendations from the study focus on actions within Ireland However, a general recommendation from the study would be to examine the value of broader international action across the US, EU and UK with regard to mitigating the existing exposure to HOG price conditions Whilst the scale of costs and benefits is varied, many of the reasons for action, as well as the costs of inaction that are identified for Ireland, are common to each of these regions also In this regard, co-ordinated international action would provide this extended community with a further buffer against energy price increases or supply threats which can deliver such damaging blows to their respective economies General National Action The challenge with plotting a course of action under conditions of uncertainty is that there is a risk of both doing too much and too little Each may carry additional cost Conclusions and recommendations from the Siemens (2009)46 study on reducing GHG emissions in Dublin by 2025 offer a useful reference of specific technical options A number of levers are identified for emissions abatement across a range of sectors in the report, as well as information on abatement costs and the required investment Whilst the focus was on carbon emission reductions, the direct linkage between fossil fuels and carbon emissions mean the report is equally relevant in the context of this HOG price analysis Indeed one of the advantages of the decisions to be made with respect to fossil fuel usage is that there are many parallel benefits from action that may mitigate the risk of doing too much, including: • Reduced GHG and transboundary air pollutant emissions • Increased efficiency and less resource use • Potential for market leadership in environmental services and technologies Broader national recommendations would be to pursue policy packages that contribute towards the following five objectives for Ireland: • Stable energy prices • Secure energy supply • Reduced environmental impacts • Efficient and competitive economy • Engagement and development of expertise in growing environmental markets Specific National Action In terms of specific national actions, this study has identified a number of options (“Focus Areas”) where Ireland could reduce THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES 25 Summary, Conclusions and Recommendations exposure to oil and gas price changes National actions in this regard would not remove us from the economic impacts of oil and gas price changes entirely, as conditions in global markets are, as shown, critical to Ireland’s small open economy However, our actions are not irrelevant in the context of all impacts considered as part of this study Beyond the discussed actions, if Ireland is to move towards the desired balance, it will require effective and timely implementation of a range of policies and measures, including: Supply side policies • Sustained support for increased exploitation of nationally accessible energy providing resources – principally wind and ocean generation • Development of appropriate market conditions to support this transition – feed in tariffs, supportive planning process for new investments • Prioritising grid improvements – faster connections to the grid, smart grid development, and increased interconnection to Europe • Rolling out of green procurement initiatives to support new investments in green technology • Aiding the business case for investments with a clear strategy and the above mentioned supports so as to facilitate access to capital for investors Demand side policies • Tackling the major sources of household energy demand by supporting consumers to improve insulation, domestic heating efficiency and appliance energy efficiency • Seeking a closer integration of renewables into the electricity, heat and transport sectors • Continuing to support increased energy efficiency in business as a means to dampen overall energy requirements, thereby delivering improved competitiveness for business Closing remarks Policy should consider the economic and social exposure to high oil and gas prices, the security of supply implications of potential international shortages or price volatility, our high dependency on imported fossil fuels (particularly for transport and power generation) and the challenges faced with respect to climate policy and other international environmental commitments Beneficial progress can be made to limit the risks faced and to support broader national objectives Policymakers must balance the costs and benefits of action against the costs and benefits of inaction, all under conditions of considerable uncertainty about the future The risk examined in this study is that oil and gas prices may increase on unexpected pathways and supply may become constrained The cost and impacts estimated in this study are considerable both for Ireland and the international community Options have been discussed that are available to mitigate these potential impacts and there are certainly synergies to be exploited between energy and environmental policies There are however, barriers to progress that can in many cases be addressed through Government actions Table outlines a ‘wishlist’ which Siemens would urge public policymakers to rapidly adopt The greatest question however remains in regard to balance and speed How much of a reduction in risk exposure is enough and what rate of change is fast enough? A definitive answer to these two questions may never be agreed yet the risk exposure identified in this report, in balance with the identified synergies to be exploited from pursuing risk mitigation actions would add urgency to the case for action whilst allaying fears that we risk doing too much Table 8: A Public Policy ‘Wishlist’ A ‘WISHLIST’ FOR PUBLIC POLICY MAKERS 26 Develop a high level 2050 strategic plan with a measurable roadmap for the energy system in Ireland, covering the four pillars47 for a sustainable energy future in Ireland Develop a “carrot and stick” approach for business and the public sector on energy savings and greenhouse gas emissions Support investment with tax incentives and favourable financing models Electrify the transport sector Deliver the rail related projects48 in Transport 21, run hybrid buses in Dublin, speed up the implementation of electric cars and related infrastructure Electrify the national rail network Position Ireland as an attractive test-bed for sustainable pilot projects and encourage industry and the public sector to participate and lead Modernize the public procurement process by implementing a green public procurement policy that takes into account full life cycle costs and supports the quick roll-out of projects in the sustainability area THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES  Pathways to risk mitigation and a low carbon future Endnotes and References Endnotes and References Europe Brent spot price – some variability exists with other price indicators In the subsequent macroeconomic analyses, the baseline scenario represents this moderate and steady outlook for oil and gas prices Preliminary figures for the corresponding 2010 outlook report hold to the same higher price outlook as within the 2009 report For the purpose of this analysis we view oil and gas prices as a coupled entity and interchange between discussions of oil, gas and both as necessary Principally we refer to ‘oil price’ as the default This assumption was defined as part of the original project brief For more on the outlook of the oil-gas price linkage see for example, CERA, 2008 It is acknowledged however, that oil and gas prices may well diverge, particularly in the short to medium term For example, the emergence of shale gas as a source may well create a diverse set of suppliers that is reasonably well resourced which could dampen price or increase pressure for gas However, whilst shale gas may offer a new supply source, the environmental impact and cost of extraction may be factors in the overall gas market price Ultimately, the study acknowledges the presence of factors that may contribute to divergence However, over the longer term it is felt that both resources will face similar pressures Furthermore, the primary defined task of this study has been to evaluate high oil and gas price scenarios and this requirement sets the core assumptions and direction of the piece Values are approximate as detailed index values for the conversion to real prices were unavailable Examples are often linked to one another in some manner (this is the case for all three of the demand side examples) making a sequenced presentation of drivers and events impractical Pathways to risk mitigation and a low carbon future Released December 2009 – this scenario differs somewhat from the modified baseline scenario used by Sustainable Energy Ireland Available at: http://tinyurl.com/ HOGPrice2 2010, increasing linearly to 3750MW by the end of 2025 Increasing wind capacity coincides with decreasing load factors, reflecting reduced availability of high wind locations No offshore, wave or tidal energy is assumed in the baseline scenario Hydro capacity and biomass capacity are assumed to reach 260MW and 61MW respectively by 2010, after which there are no further increases Interconnection increases from 400MW to 900MW in 2012 and remains at this level Finally, with respect to transport, the baseline scenario assumes no penetration of electric vehicles into the market place by 2025 and a steady 3% biodiesel/ethanol share out to 2025 13 The alternative scenario in the ESRI report examined a prolonged global recession The detailed public finance assumptions and international forecasts underpinning the scenario are outlined in Sections 4.2 and 4.3 of the ESRI report ‘Recovery Scenarios for Ireland’ by Bergin et al (2009) 10 Report available online at http://tinyurl com/HOGPrice7 11 Specifically, wind generation capacity in Northern Ireland increases in line with the SONI Seven Year Generation Capacity Statement 2009-2015 and thereafter increases at the same rate as wind capacity in the Republic of Ireland, reaching 930MW by 2015 and 1571MW by 2025 Onshore wind generation capacity in the Republic of Ireland reaches 1500MW in 12 http://tinyurl.com/HOGPrice1 The ESRI’s baseline scenario was taken as the reference for the HOG price modelling as it serves as an outlook of what will happen if we maintain our current pathway and policies The authors believe this is the more appropriate perspective from which to view the impact of the HOG price scenarios The reason for this is simply that the technologies and ambitions of the white paper plus scenario represent the types of technical options and policy decisions that this piece argues are relevant in the debate of mitigating the economic risks associated with HOG prices into the future as well as meeting the considerable environmental challenges now faced for 2020 and beyond 14 All scenarios present a nominal oil price in $/Barrel In the body of the analysis we occasionally refer to real prices which are the nominal prices adjusted back to a 2008 dollar price unless otherwise indicated 15 THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES 27 Endnotes and References The methodology employed engages two models As a small open economy, the Irish economy is heavily dependent on world demand for Irish exports and also on Ireland’s competitive position Any shock to the global economy that has a negative impact on global growth will reduce the demand for Irish exports and therefore domestic output Therefore we have used the NiGEM world model of the National Institute of Economic and Social Research to simulate the effects of the three oil price scenarios on the international economy The results for the international environment have then been incorporated into the ESRI HERMES macro-economic model to determine the impacts on the Irish economy 16 Europe has a minor share of proven world oil and gas reserves Approximate estimates of 1% of global oil reserves and under 3% of global gas reserves Approximately half of these reserves are controlled by Norway (non-EU27) Information sourced at http://www.eia doe.gov/ 17 It is reiterated that the ESRI’s baseline scenario was taken as the reference for the HOG Price modelling as it serves as an outlook of what will happen if we maintain only our current pathway and policies For this reason, Ireland’s ambitions with respect to high levels of renewable penetration and electric cars for example, are not apparent in the figures presented in this section 18 European Wind Energy Association (EWEA), 2009 Wind at Work: Wind energy and job creation in the EU European Wind Energy Association 22 Under the current phase of the EU ETS, participants receive an allocation of credits from the national authority for free In future phases of the ETS, allocations will be reduced and ultimately removed At the point where no free allocations are provided, ETS participants will have to purchase their required number of emission credits under an auctioning system 23 Such analysis requires detailed energy system modelling A useful illustration of the broad scope of tools that could be employed to investigate very high renewable wind penetration to the grid can be found in Connolly D., Lund H., Mathiesen B.V., Leahy M., 2010 A review of computer tools for analysing the integration of renewable energy into various energy systems J Applied Energy, 87 (4), 1059-1082 A first stage application of one of these tools to investigate 100% renewable energy scenarios for Ireland can be found in Connolly D., Lund H., Mathiesen B.V., Leahy M., 2010 Modelling the existing Irish energy-system to identify future energy costs and the maximum wind penetration feasible J Energy, 00523R1 The latter paper is valuable work but is acknowledged as a first step in this research and will require additional refinement over time 24 Leahy, M., Connolly, D and Buckley, N (2010) Wind energy storage technologies in Wei Tong (editor), Wind Power Generation and Wind Turbine Design, WIT Press (Ashurst), 2010 25 That is raw fuels that have not been subject to any transformation or conversion process 19 Ireland in the New Electricity Age Presentation by Dr Werner Kruckow, Siemens Limited to the Transforming Ireland Seminar Series on 14 May 2010 20 Source: http://www.seai.ie/ Renewables/Wind_Energy/Policy_for_ Wind_Energy/#1 21 28 It is important to point out that the authors’ note that this number may change substantially when voltages and/or connection points are changed during an envisaged upgrade of the existing grid 27 Department of Communications, Energy and Natural Resources (2008) All Island Grid Study – Overview, DCENR, January 2008, Dublin and Department of Communications, Energy and Natural Resources (2009) All Island Renewable Grid Study – Updated to include demand side management, DCENR, July 2009, Dublin 26 THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES  Siemens (2009) Sustainable Urban Infrastructure: Dublin Edition – A view to 2025, Research project commissioned by Siemens Ltd 28 Department of Communications, Energy and Natural Resources (2009) Maximising Ireland’s energy efficiency – The national energy efficiency action plan 2009-2020, DCENR, May 2009, Dublin 29 http://www.energysavingtrust.org uk/Home-improvements-and-products/PayAs-You-Save-Pilots 30 R Brannlund, T Ghalwash and J Nordstrom, Increased energy efficiency and the rebound effect: effects on consumption and emissions, Energy Economics 29 (2007), pp 1–17 31 Greening L.A., Greene, D.L., Difiglio, C 2000 Energy efficiency and consumption –the rebound effect - a survey Energy Policy 28 (6-7): 389-401 32 Department of Environment Heritage and Local Government (DoEHLG), 2006 Ireland’s Pathway to Kyoto Compliance: National Climate Change Strategy Ireland Dublin 33 UK Environmental Audit Committee, 2010 The role of carbon markets in preventing dangerous climate change Fourth Report, London See UK Environmental Audit Committee 34 Article that appeared in November 10th edition of the Financial Times – The IEA on the carbon price: CO2 has to cost much more Financial Times: CO2 has to cost much more 35 Pathways to risk mitigation and a low carbon future Euractiv, 2010 UK lawmakers call for EU carbon ‘floor price’ Brussels Euractiv - UK lawmakers call for EU carbon ‘floor price’ 36 International Energy Agency, 2009 World Energy Outlook 2009 Paris 37 450 parts per million is the maximum concentration of greenhouse gases in the atmosphere compatible with giving the world a 50/50 chance of keeping the global temperature increase below 2°C: the level agreed by leading economies’ governments as the acceptable limit for climate change 38 The 2010 interim target was reduced to 3% in October 2008 The tariff under AG is based on an adapted nominal market electricity price which accounts for the higher fuel input cost, forecast shares of oil and gas in power generation, exchange rate changes and inflationary changes of the AG scenario relative to the baseline 44 Drops in GDP are relative to the GDP expected under the baseline scenario oil and gas price conditions 45 Siemens (2009) Sustainable Urban Infrastructure: Dublin Edition – A view to 2025, Research project commissioned by Siemens Ltd 46 39 See Government announces plan for the electrification of Irish motoring http://www.dcenr.gov.ie/Press+Releases/ 2008/Government+announces+plans+for +the+electrification+of+Irish+motoring.htm Government announces plan for the electrification of Irish motoring 40 See Government moves forward with plans for electric vehicles http://www.greenparty.ie/ga/news/latest_ news/government_moves_forward_with_ plans_for_electric_vehicles” Government moves forward with plans for electric vehicles 41 The case study does not consider how very high penetration of renewables would affect the market price of electricity through a more stable market price return Instead the focus is on the business case for a 101MW wind farm under the baseline and AG HOG price conditions respectively 42 Revenue stream is based on an evolving nominal market electricity price from the modelling This accounts for fuel price costs and carbon costs but does not include transmission, distribution or capacity payments 43 47 See Table on page 18 Transport 21 is an Irish infrastructure plan which was announced on November 2005 A cost estimate of €34 billion was attached to the plan at the time A significant portion of this investment focuses on the creation of an integrated rail network in Dublin Projects include a DART Interconnector, several new Luas lines and a Metro system Other rail investment includes the Western Railway Corridor, the redevelopment of a rail link from Navan to Dublin and upgrading and extending suburban rail in Cork 48 Publisher: Siemens Limited Fitzwilliam Court Leeson Close Dublin Ireland Tel +353 216 2000 Internet: www.siemens.ie Printed in Ireland on 100% recycled paper Reproduction of articles in whole or in part requires the permission of the publisher This also applies to storage in electronic databases, on the Internet and reproduction on CD-ROM This report contains copyright protected materials, all rights reserved www.siemens.ie ... expected THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES 15 Ireland? ??s dependence on Oil and Gas future dominance of oil and gas in Ireland? ??s imported fuel mix Ireland is part of a handful... Siemens Limited Dublin, Ireland July 2010 THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES 03 Oil and Gas Prices and their Determinants Chapter Oil and Gas Prices and their Determinants... effect of the oil price shock on the levels of GDP for the US, UK and Euro Area are shown in Figure The THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES 09 Economic and Social Impacts of