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Global Energy Issues


									Global Energy Issues The Chairmen of the e8, representing the leading electricity companies from the G8 countries, met in Evian, France on May 30 and 31, 2006 to discuss global electricity sector issues. The e8 Chairmen offer the following commitments and recommendations: 1. All forms of electricity generation – clean coal, nuclear and renewables, including large hydro – and energy efficiency have a role in meeting electricity demand. There is no universal solution and the optimum mix should reflect available local resources and regional integration. Nations around the world are faced with the serious problem of how to secure the resources needed to generate electricity and meet the increasing demand associated with economic growth. Electricity companies must take into account factors such as the differing conditions specific to each country, the economic viability of each option, the stability of the fuel supply and the environmental impact issues. The optimum combination for a given region, carefully balancing the priorities of each source, is composed of several possible fuel sources – nuclear, natural gas, coal, oil, hydropower and renewables – coupled with energy efficiency measures. Uranium provides high energy output per weight of fuel and is relatively easy to ship and store. According to the IEA Red Book, world uranium resources at an acceptable cost are sufficient to supply the present level of nuclear power for decades to come. Because the generation process emits absolutely no CO2, this option has recently come to be seen as playing an important environmental role. Safety and security are given the highest priority in the operation of nuclear power plants, and their stability of supply and economic superiority have led to them being used for the base-load power supply. Non proliferation and the long-term handling of nuclear waste are also issues to be carefully addressed by the industry. Natural gas is an environmentally friendly fossil fuel since it contains none of the sulfur that causes acid rain, and its low carbon content compared with other fossil fuels means that it has little global warming effect. Liquefied natural gas (LNG) is also the main fuel in thermal power generation and some companies use it as a middle-load or peak power source. Geopolitical risks and rapid demand increase are challenges to be dealt with in the coming decades. The fact that there are still extensive reserves of coal in deposits scattered all around


the world makes coal an extremely economical and stable energy source. Also, through the improvement of efficiency of supercritical technologies and through the use of cutting-edge "clean coal" technologies such as Integrated coal Gasification Combined Cycle (IGCC), high power generation efficiencies can be achieved, reducing CO2 emissions so that power can be generated economically while still protecting the environment. Oil allows for flexibility in procurement while it offers relatively few years of viable remaining deposits compared with other fossil fuels, and the majority are distributed in the Middle East. Some power companies use oil to cope with fluctuations in demand, using low-sulfur crude oil to minimize the environmental impact. Hydropower uses natural energy and generates no CO2 emissions in generation. Today, only one third of the global hydropower potential at current cost is equipped. Reservoir power stations with stored energy facilities and pumped-storage power stations are important power sources during peak periods. Renewables are natural forms of energy, such as solar, wind and geothermal, and have minimal environmental impact. They can contribute to reduce the use of limited fossil fuels. By developing technologies that use energy efficiently, including energy-efficient appliances such as heat pumps and energy-saving household appliances, and by providing consumers with information on better ways to use electricity and raise their awareness of energy conservation issues, we can improve energy efficiency on the demand side and effectively reduce greenhouse gas emissions. There is no single global formula for the best mix of energy supply options. Each country must work towards an optimal solution that reflects all of its particular regional circumstances, including the locally available energy resources. Attention should also be paid to the contribution of transmission networks to optimize the mix and use of financial resources. By sharing their advanced technologies, expertise and experience in formulating best-mix energy supply solutions with developing nations and other partners, the e8 member companies contribute globally to this effort and are committed to improving the balance between electricity supply and demand, reducing energy consumption and fighting global warming.


2. Some industrialized countries need significant investment to maintain electricity infrastructure and face the pressures of demand growth. Huge investments are required and a stable and predictable regulatory framework will facilitate private investment. Electricity infrastructure includes power generation plants, transmission and distribution lines and the associated facilities. Lack of adequate investment in this infrastructure has led to an imbalance between demand, and generation and transmission capacity. The outcomes of this imbalance can threaten energy security and include blackouts and market dysfunction. Demand for electricity in industrialized countries continues to grow, necessitating new generation supply and further enhancement of transmission capacity. Investment in transmission infrastructure is particularly required to expand existing grids to reach remote sites, i.e., wind farms are located in areas with the most favorable wind conditions and minimal visual impact, which are typically far from existing transmission grids and load centers. In addition investment is needed to relieve constraints on transmission grids, to maintain reliable operation, and to upgrade performance for safety and environmental issues, e.g., emissions controls. Investment in infrastructure is often challenged because of tight profit margins and low return on investment arising from pressures to keep electricity prices low. When deregulation has been undertaken with a piecemeal approach, the resulting inefficiencies have often created political pressure for intervention in the market, leading many jurisdictions to reverse market reforms. In addition, changing emissions regulations and extensive regulatory approvals processes impact investment decisions and timelines. Potential solutions can include   Ensuring stable supply of electricity when going forward with deregulation Promoting investment in transmission to increase the number of available sources and make the economics of supplying renewable energy more viable and attractive to end-users   Allowing higher rates of return on regulated asset investments, improving capital cost allowance rates and providing tax incentives Increasing regulatory predictability.


3. The e8 members reaffirm their commitment to promoting sustainable energy development and sharing their expertise with their partners in developing countries. The e8 has launched a human capacity building programme to share best practices in power generation among themselves and with engineers from developing countries in order to improve emissions profiles. Since 1992 the e8 has shared its expertise and experiences with developing country partners through over 40 human capacity building and capital projects. The e8's latest initiative, to share best practices in power generation, will bring together over 100 engineers and technicians from developing countries in 2007. The short-term primary focus of this programme is to help coal-fired and other plant operators with high CO2 emissions share experiences and increase the efficiency of their existing fleets with face-to-face discussions with plant engineers to reduce those emissions, and to generally improve the environmental performance of fleets. If applicable, the plant operators will be encouraged to implement the efficiency improvements as CDM or JI projects and to apply for certification of the emissions reductions under the Kyoto Protocol. In the long term, the networks established by these meetings would facilitate an information flow on engineering concepts and experience of new coal-fired plant technologies such as integrated gasification combined cycle units and related, integrated carbon capture and geologic sequestration systems to reduce CO2 emissions. Other generating technologies could be discussed as well. Elements of the technical transfer programme for existing plants 1. Past experience on improving efficiency: e8 member companies have been improving the efficiency and environmental performance of the units in their fleets for many years and have learned that the greatest increases in efficiency result from integrated scheduled changes in equipment, maintenance activities, operation activities and a well-informed and supportive corporate culture. These changes in technologies and processes have reduced the companies’ CO2 emissions and enhanced particulate control.


e8 member companies will prepare reports of their experience to date which describe fleet-wide efficiency programmes, completed activities at specific plants, and avoided CO2 emissions resulting from these activities. e8 members are already sharing their experience on their units and are open to establishing contacts with their engineers who are knowledgeable about them. 2. Face-to-face meetings at a host plant e8 member companies AEP and RWE are prepared to further host engineers from nations with high CO2 emissions to discuss past experience at selected plants. Holding these discussions at a plant to observe and discuss activities enhances the effectiveness of the technical transfer. Plant operators in the e8 companies are independently applying many of the same efficiency and environmental performance improvement activities. They will publish their efficiency improvement activities for specific host plants in technical reference guides.


4. Cooperation among electricity companies from the G8 countries to achieve significant improvements in electricity technology is essential to meet the challenges of energy security and climate change. The e8 Chairmen offer their support to G8 leaders in addressing these global challenges and commit to share technological data with one another and with colleagues in developing countries. The G8 has reaffirmed the need for a reliable access to energy in order to ensure sustainable development in all world regions. Improvements in electricity technologies are an essential element in reconciling issues of global energy security with the necessity of mitigating climate change. Industrialized countries are conscious of the need to put in place measures to reduce their greenhouse gas emissions and are undertaking initiatives through various mechanisms, including through the UN Framework Convention on Climate Change and the Kyoto Protocol, or by way of voluntary reduction schemes. However, the forecasted economic growth in developing countries will undoubtedly lead to increased greenhouse gas emissions in the developing world, at least in the short-term. It is essential that developed countries share, both amongst themselves and with developing countries, the most efficient technologies for each source of energy generation. Technology developers have access to options for energy conversion that can provide fuel flexibility and emissions control, and lead to efficient use of resources. The electricity sector must work with developers to:    Upgrade electric power systems currently in operation around the world; Introduce sustainable electricity technologies in currently unconnected or underpowered areas; and Allocate and focus adequate resources for research and development to accelerate timelines for the commercial use of new technologies. Electricity companies, in collaboration with manufacturers and research institutes, are committed to conducting research to improve existing technologies and processes. Companies from the G8 countries can pool their resources and work closely together to promote this research.


Various measures can be deployed to transfer this technology to developing countries, including:     Training and education Retrofitting existing energy facilities in developing countries Technology transfer programmes Publication and diffusion of best practices for each technology and technological data related to different energy sources The e8 companies are ready and willing to share their technological know-how and data with partners in both developed and developing countries and are open to exploring participation in various international and regional technology transfer initiatives.


5. Transmission networks need to be further integrated and modernized to create regional efficiency and optimize the use of resources. Regional integration of electric power systems that allows pooling generation sources over a vast geographical area has been a standard approach to attain efficiency of electricity supply. In developed countries there is a long-standing tradition of such integration. In developing countries, the advantages of regional integration are well acknowledged and significant efforts are devoted worldwide to expand the reach of fully integrated power systems. Transmission networks, which can be assimilated to the “nervous system” of an integrated power system, play a key role in electricity supply. In addition to allowing stable delivery of electricity to customers, they must also guarantee using the least-costly generation available. Transmission networks should then be designed, developed and operated in such a way as to optimize electricity supply at all times. In developing countries, the establishment of a suitable regional integrated transmission grid generally implies building, or reinforcing, a “backbone” high-voltage transmission network capable of implementing a strategy of power exchanges in order to minimize the overall cost of generation within a relatively vast area. This is a formidable task in view of the large investments likely to be required and the limited capacity of local financial markets. To achieve a successful regional integration of power systems, the support of international institutions is essential as well as the willingness of international investors and lenders to get involved in capital-intensive electricity sector infrastructure projects in those countries. Such regional integration should also be supported by standardization and appropriate capacity building activities in order to guarantee its success and sustainability. In developed countries, where vast continent-wide interconnected grids already exist, the main challenge is not so much in transmission networks expansion and infrastructure building, but rather in a better use of existing facilities as well as in the modernization of equipment and operating practices in order to improve efficiency and security. Improvement of transmission efficiency relies on the capacity of the transmission system operator (TSO) to identify promptly the transmission problems and the capacity


of the market to react quickly. Solutions such as line addition, transit increase or generation dispatch etc. should be clearly identified and make known to market players. System security is a crucial issue. Recent blackouts and incidents point to the urgent need to strengthen transmission system security by requiring compliance with reliability rules, increasing the role of reliability organizations and building capacity and authority of system operators as well as developing adequate information exchange systems. Technical improvements in regards to protection, equipment, operation practices as well as better coordination and use of advanced technologies should help creating a climate of security and greater efficiencies. In the case of developing countries, rapid urbanization leads to a high rate of electricity demand; in a megalopolis, electricity is likely to be the most sustainable energy vector. The right institutional framework and good governance should be implemented to urge investments in power plants and transmission networks.


6. The Flexible Mechanisms negotiated under the United Nations Framework Convention on Climate Change should recognize the contribution of all forms of electricity generation – including large hydro, nuclear and best available clean coal technologies – as well as sinks such as carbon capture and geological sequestration in managing global emissions of greenhouse gases. In the global debate on the role of electricity generation with respect to GHG reduction, the e8 believes that a more realistic appraisal of large-scale projects could lead to more effective and quantitative results in the long term. Considering that the world population will increase by 50% over the next 50 years and the dramatic rise in the electricity demand over the same period, we should consider promoting large-scale solutions that can make a real contribution to solving the problem. In other words, if Flexible Mechanisms are to play a major role in reducing greenhouse gas emissions, large-scale projects cannot be excluded. Under the Kyoto Protocol, Flexible Mechanisms are arrangements, allowing industrialized countries with a greenhouse gas reduction commitment (so-called Annex B countries) to invest in emissions-reduction projects in developing countries and in other industrialized countries with Kyoto targets, as an alternative to what is generally considered to be more costly reductions in their own countries. To date, most projects registered under the Flexible Mechanisms either   target gases with higher global warming potential than CO2 (HFC, N2O) and generate sufficient revenue so as to be financially attractive; or are small or medium-size projects, especially those in the power and energy sectors. If the Flexible Mechanisms are to play a major role in reducing greenhouse gas emissions and in promoting economic growth in developing countries and in Annex B countries, the contribution of all forms of electricity generation, including large-scale projects, and the role of sinks must be recognized. Barriers currently exist to the deployment of certain technologies but there are good arguments to consider all of the following large-scale technologies in order to reduce GHG emissions: Large hydro – Even if this technology is not “forbidden” per se by the Marrakech

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Accords, the CDM Executive Board has not yet approved a large-scale hydro as a CDM project. On the other hand, EU has placed certain restrictions on the recognition of such projects, using only credits originating from projects that comply with the recommendations of the World Commission on Dam, which are controversial. Scientific evidence shows that large hydro can provide electricity in a sustainable way insofar as it contributes to economic development, especially in developing countries, as well as resulting in significant CO2 reductions. Large coal-efficient power plants – With the current reliance on coal-fired generation in many regions, transitioning to other fuel sources will be a gradual process over time, even if CO2 emissions from coal generation are relatively high compared to alternative sources of energy. Implementation of super-critical or other technologies could bring higher power plant efficiency and CO2 gains, but appropriate baselines have not yet been determined. Large renewable projects – Introducing more renewable in the future energy mix when and where it is appropriate, will help to ensure security of supply along with the reduction of CO2 emissions. This type of project should continue to receive strong support through the CDM process. Nuclear power plants projects – The main barrier at present is political. The Marrakech Accords decision on CDM/JI required Parties to refrain from using credits originating from nuclear projects. Even if this does not prevent a project developer from proposing such a project to the CDM EB, no one has done so to date. Nevertheless, as put in evidence by international organizations such as the International Energy Agency (IEA), in future, the nuclear option will have to be taken into consideration more seriously with a view to mitigating CO2 emissions in a cost-effective way while reducing dependence on fossil fuels. Carbon sinks and geological sequestration – Technologies to capture and store greenhouse gases already exist but require further R&D to be made available on a large-scale basis. COP/MOP is currently examining possible inclusion of these technologies under the Flexible Mechanisms.

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7. International financial institutions should prioritize energy issues and develop appropriate financial mechanisms to attract private investment in and transfer technology to developing countries. Access to adequate finance and investment is the first and basic prerequisite for the development of energy sources in developing countries. In addition, investment risks – geo-political, economic and regulatory – are usually high in these countries and the lack of established financial markets and institutions makes the task of attracting investment more challenging. Approximately 1.6 billion people have no access to electricity today. Eighty-percent of these people live in rural areas in the developing world, mostly in South Asia and sub-Saharan Africa. At CSD-14, several barriers were identified to energy access, including the lack of prioritization and integration of energy access into development strategies, and limited investment and financial support. Furthermore, high oil prices and energy security exacerbate the issue of energy access and create a more vulnerable situation for many developing countries. To meet the huge challenge of providing energy to these populations in a sustainable manner, International Financial Institutions (IFIs) need to create the proper conditions to attract the private sector and foster public-private partnerships. Above all, energy issues should be made a top priority within these institutions, so they become a catalyst of capital flows throughout the developing world. IFIs need to work in partnership with the private sector and adapt to the flexibility required by private sector operations. They could provide ways to absorb many risks encountered in such environments, foster relationships with governments that help reduce political risks for a project in a way that commercial banks cannot and share knowledge and experience in the regions with the private developers. IFIs could adapt financial instruments to promote private sector involvement on a long-term basis. For instance, the private sector needs tools such as the negotiation of debt maturity, currency risk hedging, carbon financing and up-front disbursement of CER values, revenue guarantees, reasonable financing terms when not available

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elsewhere, matching funds throughout the operating lives of projects, hedging of long-term contracts etc. IFIs could also assist in the development of local bank systems and services and favour access to micro-credits for rural consumers. The private sector will only invest when it can count on a reasonable rate of return from a predictable and reliable cash flow, and will seek flexible and inclusive policies. Creative risk-sharing instruments and arrangements, as well as a sound investment climate, will help the private sector to take a major role in energy access in developing countries and in transferring the most advanced technologies.

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8. The development of long-term contracts in the electricity sector could allow companies to take into account the requirements of security of supply without diminishing the fluidity and efficiency of short-term markets. Global security of supply is a crucial issue in today’s world. All parties concerned, such as producers and consumers, governments and international organizations, are developing and examining scenarios that balance demand and supply, taking into consideration the various geo-political factors over the next 50 years, including electricity market deregulation and liberalization. Liberalized markets should provide the basis for long-term contracts (three to fifteen years long) as well as short-term instruments such as day-to-day transactions, real-time balance and financial instruments. As major project development will be needed to respond to ever growing demand and such development will require investment with a longer recovery period, it becomes crucial to develop a market for long-term contracts and the regulatory incentives to support its creation. Such long-term contracts will allow electricity companies to serve consumers under conditions that firm up the price of the resource and its availability on a long-term perspective. Volumes of private and public financing in the electricity sector in developed as well as in developing and emerging countries are insufficient. Potential exists but investors are reluctant to take the risks of long-term development unless the market and the regulatory framework provides a proper investment climate and instruments to mitigate risks. In the absence of instruments for matching debt maturity with the duration of a given project development, no significant progress will be achieved in developing resources and securing energy supply. In some regions, concession approaches are being developed to attract investors where a lack of access to energy and security of supply impede social development in the region. To better manage risk and increase the predictability of security of supply in the electricity sector, it is necessary to  diversify between different types of contracts, including market-based

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long-term and spot contracts   adopt timely decision-making processes, and ensure appropriate adherence and enforcement of contractual agreements.

Certainty is a key issue for investors and the regulatory framework should promote the development of a long-term contract market with appropriate incentives and conditions to assist in creating necessary liquidity.

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9. The mandates of existing international institutions responsible for energy issues should represent and reconcile the interests of both producer and consumer countries. Two major organizations on the international scene have mandates covering energy issues. In addition, virtually all major oil and gas producing countries and consumer countries are represented within the International Energy Forum (IEF). The principal aim of the Organization of Petroleum Exporting Countries (OPEC, established in 1960) – whose 11 Member Countries produce about 40% of the world’s crude oil (55% of the oil traded internationally) and 15% of its natural gas – is to coordinate and unify the petroleum policies of its member countries and determine the best means for safeguarding their interests. The oil crisis of the 1970s led to the establishment of the International Energy Agency (the IEA, established in 1974 has 26 member countries), whose basic aims include dialogue with oil producing countries and cooperation among oil consuming countries to develop functioning energy markets and stable international energy trade as well as improvements in energy efficiency and better protection against energy-related environmental damage. Both producer countries and consumer countries share a common goal: stabilization of prices on international oil markets to allow for steady income for producer countries and efficient, economic and regular supply of petroleum to consumer countries. The Gulf War in 1990-1991 highlighted the geo-political and economic importance of oil and was a turning point in dialogue at the political level. Beginning in 1991, Ministers of both OPEC and IEA countries began meeting in the International Energy Forum (IEF) to address issues of energy security and the links between energy, environment and economic development. The International Energy Business Forum brings together IEF Ministers and CEOs of leading energy companies. Sixty-nine countries now participate in the IEF, representing virtually all major oil and gas producing countries and consumer countries. The annual forums aim to foster interdependency through dialogue at the ministerial level and with industry representatives with a view to promoting stable and transparent energy markets to support the world economy, security of energy supply and demand, expansion of global trade and investment in energy resources and technology.

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Under IEF, programmes such as the Joint Oil Data Initiative (JODI) assist in ensuring transparency and reliability of world oil statistics as a basis for a stable market In the private sector, the World Energy Congress conducts similar activities. The 2005 G8+5 and the 2006 G8 Summit acknowledged the importance of partnership and further integration between producers and consumers, including enhanced dialogue on growing energy interdependence and security of supply and demand issues. The G8 called for open, transparent, efficient and competitive energy markets and recognized the essential role of international institutions and governments in addressing this challenge. The G8 St-Petersburg Plan of Action on Global Energy Security called for the IEF to broaden the dialogue between energy producer and consumer countries, including information exchange on medium- and long-term policies and programmes, and to expand membership in the JODI. At the present time, there is no international forum bringing together producers and consumers in the electricity sector. With the growth of regional interconnection, such a forum will undoubtedly necessary to establish fair pricing systems and ensure energy security; the mandate of IEA could be broadened to cover these issues.

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10. Governments have a role to correctly educate citizens on the importance of using all energy supply options and energy efficiency and conservation measures. Government assistance is needed to develop public acceptance for all available technologies, including nuclear, and to expand the definition of renewable energy. In the face of growing worldwide concern for the effects of climate change and the need to ensure global energy security, the electricity sector can offer an important contribution by proposing a wide range of solutions for both energy supply and conservation, and suggest the optimum energy mix for a given set of regional conditions. Acceptance of a wide range of technologies by the general public and local populations is key to implementing such an energy mix. Governments and industries should cooperate effectively, through voluntary

agreements with clearly defined roles, to develop public acceptance for all available technologies such as renewable energy, nuclear and fuel recycling, clean coal and carbon capture and storage. In addition to ensuring that proper safety measures are in place, various steps can be taken to educate citizens and foster their acceptance: 1. Public Consultation To establish a common understanding with the public, governments and industries should prioritize public hearings, which allow them to better understand not just what the public thinks about global energy issues, but also why the public holds such views. Based on this information, communications activities and mechanisms should be created to heighten awareness and allow for increased public participation in the policy-making process. 2. Learning Opportunities Together, governments and industries must diversify and improve opportunities and techniques to teach the public, beginning at an early age, about energy issues such as energy efficiency and conservation measures, the appropriate definition of renewable energy and the role of all available technologies. End-use energy efficiency awareness programmes in schools can have a particular impact in changing behavior in homes. 3. Transparency It is important for governments and industries to disclose projects that may have a large social or environmental impact, as well as communicate safety efforts and report

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abnormal occurrences timely and honestly. Transparent activities are fundamental in gaining public acceptance for using all energy supply options, especially nuclear energy. For example, workshops with all interested stakeholders, as well as websites or other forms of information dissemination, should be created. These activities also allow industries to improve their own relationships with the local community. 4. Coexistence with Local Residents Local acceptance of siting of all energy facilities is a vital factor for implementing the optimum energy mix. As a key player in the region, industries must understand the local community’s development vision, then cooperate and participate in such efforts, as partners from the planning stage, by extensively using their resources and expertise to create sustainable, broad-based and comprehensive regional development based on a proactive regional vision. A holistic approach involving all stakeholders is likely to facilitate understanding and acceptance of projects in the long run. Continuous dialogue should address the concerns of all stakeholders at every stage of the project: studies, design, construction and operation.

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