Tatsuya Terazawa Chairman and CEO The Institute of Energy Economics, Japan
Message for August 2022
It was a great honor for IEEJ to co-host the 43rd IAEE (International Association for Energy Economics) International Conference held in Tokyo between August 1 and 3. This year’s Conference provided the first in-person meeting opportunity for the IAEE International Conference since 2019. We are pleased that 693 leaders and experts in the field participated, including 243 in-person attendance from overseas. As we face the two challenges of tackling global warming and the energy crisis simultaneously, I believe that in the long history of IAEE international conferences, this year’s conference was held at a most important and crucial moment. I would like to thank our co-hosts, IAEE & GRIPS (National Graduate Institute of Policy Studies) and all the participants, organizers and sponsors who made this year’s conference possible. In this month’s Chairman’s Message, I would like to share with you my 7 takeaways from the IAEE Tokyo conference, thanks to the insightful and stimulating discussions made by the participants.
First, there was a very strong sense of crisis. Dr. Fatih Birol, IEA’s Executive Director, described the current situation as the “First world energy crisis”. Compared with the two oil crises of the 70’s, we are now facing crises of many forms of energies including oil, natural gas/LNG, and coal. Compared to the 70’s, when the affected countries were limited to the advanced economies that were the major players/actors in the world economy, today’s crisis is affecting the whole world from emerging/developing countries to advanced economies. The vast majority of the conference’s participants shared the view that energy security has been greatly elevated in its importance. Dr. Hoesung Lee, Chair of IPCC, sent a strong warning that we are diverting from the 1.5 degrees path, with the likelihood that the global temperature could rise to 3.2 degrees above the pre-industrial level by 2100 based on the currently submitted Nationally Determined Commitments (NDCs). He stressed that local actions should be consistent with the global goals. Both Dr. Birol and Dr. Lee pointed out that investment to support the energy transition was grossly insufficient and a very serious problem.
Second, many participants were stressing the role and importance of natural gas/LNG as one of the major energies. They are needed to support the growth of the emerging and developing world, and will help in the transition away from coal. As the share of renewable energy rises, they will provide for dispatchable power to accommodate the intermittency of renewable energies which is growing in importance. Strong concerns were raised that with insufficient investment, we may experience a shortage of supply capacity for natural gas/LNG leading to another price hike in the future. In this regard, a number of participants pointed out that financing should be provided to enable investment especially for non-Russian natural gas/LNG. The resource development of natural gas/LNG should be aligned with our long-term goal of carbon neutrality. As such, the production of hydrogen/ammonia from gas, with CCS, is considered as an important mean to ensure the alignment.
Third, there were very strong expectations for hydrogen and its derivatives including ammonia to support the transition. They were considered as keys to decarbonize the hard-to-abate sectors and through co-firing with coal, they reduce the carbon emission of coal fired power plants, especially for the young fleet currently in Asia. But cautions were pointed out against too much premature hype. There remains a number of challenges. In particular, the lack of market and the absence of scale were pointed out by many. Transportation and the necessary infrastructure investments were also recognized as challenges. To overcome this “chicken and egg” problem, government policies and public-private partnership were deemed essential. To realize the potential of hydrogen, it was clear that we cannot make it happen overnight. We have to develop the market, realize the scale and prepare the infrastructure in stages. On this point, it was widely recognized that “blue hydrogen/ammonia” produced from fossil fuels could be the practical first step before “green hydrogen/ammonia” becomes more competitive through the cost reduction of electrolysis and with a more abundant availability of renewable energies.
Fourth, as we expand the use of renewable energies, EVs and batteries, there was a consensus that the availability and access of more critical materials will be extremely important. The clean energy transition will lead us to less energy density and higher material density. A substantial increase in the supply of critical materials will definitely be required. Many participants were concerned about the emerging energy security challenge resulting from the dependence on China for the supply of those critical materials. Concerted efforts to diversify the sources were strongly advocated. Dr. Lee of IPCC claimed the energy transition to be in fact a materials transition. He stressed the vital importance of the circularity of materials which should not be sacrificed in the realization of carbon neutrality. To address his concern, we need to develop technologies to enhance our resource efficiency, develop alternative materials and strengthen our recycling activities.
Fifth, with the wider introduction of renewable energies, the issue of intermittency was recognized as growing in importance. Many participants stressed the necessity of batteries, but high cost and reliance on critical materials were pointed out as their challenges. The development of transmission lines connecting different regions facing different weather conditions was also mentioned, but this requires substantial additional investment to the need to develop distribution grids. A number of participants mentioned that dispatchable power sources, such as gas, are becoming more essential. Unfortunately, the current liberalized electricity markets discourage investment in dispatchable power. While we expect the wholesale market will be dominated by renewable energies with very low marginal costs, it will become harder for thermal power generation, which could provide dispatchable power, to recover the necessary investment. The current liberalized electricity markets were developed when gas powered power plants were the expected new entrants while renewable energies were still expensive and with little penetration which kept the issue of intermittency negligible. Now under very different conditions, it is time to redesign the electricity markets to ensure investment for dispatchable power.
Sixth, many participants expressed the view that nuclear energy is required to help realize the long-term goal of carbon neutrality as well as enhance energy security. To deal with the intermittency of renewable energies and the need to replace coal, it was widely argued that nuclear was the essential missing piece to decarbonize the energy system. Nuclear can provide heat as well as produce hydrogen. The invasion of Ukraine has created the additional momentum to push for nuclear in order to reduce dependency on Russian fossil fuels. In addition, Dr. Birol of IEA referred to Prime Minister Kishida’s comment to restart 9 nuclear units in Japan as helping to ease the global LNG supply and demand balance in the time of energy crisis. There were some even claiming the “Renaissance of Nuclear”. At the same time, challenges were identified, including the need for streamlined regulation, availability of finance, better market design and the enhancement of competitiveness of Western technology providers.
Seventh, finally, but not the least, we were reminded that by 2050, three more billion people will need to gain access to modern energy, and many others would like to improve their living standards. The need to address the necessities of the emerging/developing countries, which aspire to grow, was also stressed by a large number of participants. The fleet of coal fired power plants of the developing countries is very young and hard to retire early. These countries are more exposed to the record high energy prices and they face the difficulties of accessing the global energy markets when the advanced economies are paying more in their rush to secure their own energy needs. It was stressed that the necessities and the realities of the emerging/developing countries require different paths for decarbonization. Indeed, there should be “different colors of energy policies” depending on the situations of each country. One size does not fit all. The emerging/developing countries will undoubtedly promote renewable energies but they need to secure the financing for them. To meet their strong growth, they will have to introduce other energy sources such as natural gas/LNG which provides dispatchable power. They will continue using their younger coal fired power plants to ensure a sufficient supply of energy at affordable prices. We must find ways to enable the continued use of coal while reducing the CO2 emission as much as possible. In this regard, co-firing with low carbon ammonia could provide a practical path.
I hope this summary provides a sense of the discussions that took place at the IAEE Tokyo Conference. Many issues were identified, but not necessarily resolved. It was confirmed at the end of the conference that the members will continue thinking about these issues to be further discussed at the next IAEE conference which will be hosted by KAPSARC in Riyadh, Saudi Arabia, next February. We at IEEJ are also committed to tackle with these issues. I hope to share with you our findings and thoughts in subsequent Chairman’s Messages.
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