Energy and Climate change – future business concerns

According to KPMG publication “Expect the Unexpected: Building business value in a changing world”, businesses today are operating in an ever more interconnected and globalized world. Supply chains stretch across continents and are vulnerable to disruption. Consumer demands and government policies are changing rapidly and will impact your bottom line if your business does not respond.


Against this background of complexity we face a new set of challenges. For 20 years or more we have recognized that the way we do business has serious impacts on the world around us. Now it is increasingly clear that the state of the world around us affects the way we do business.


The above mentioned publication shows that population growth, exploitation of natural resources, climate change and other factors are putting the world on a development trajectory that is not sustainable. In other words, if we fail to alter our patterns of production and consumption, things will begin to go badly wrong. Intergovernmental treaties are yet to solve the issues and, at a national level, the transition to sustainable growth remains a goal rather than an achievement. The concept of “green growth” has gained ground but we still lack a precise understanding of how we can achieve it along with higher standards of living within the limits of our planet.


Corporations are, of course, not passive bystanders in any of this. The resources on which businesses rely will become more difficult to access and more costly. There will be increasing strain on infrastructure and natural systems as patterns of economic growth and wealth change. Physical assets and supply chains will be affected by the unpredictable results of a warming world. And businesses will be confronted with an ever more complex web of legislation and fiscal instruments.


But this is not the whole story. Consumer and investor values are changing. And as they change more corporations are recognizing that there is profit and opportunity in a broader sense of responsibility beyond the next quarter’s results. The bold, the visionary and the innovative recognize that what is good for people and the planet will also be good for the long term bottom line and shareholder value. Competitive advantage can be carved out of emerging risk.


In its report, KPMG presents a system of ten sustainability megaforces that will impact each and every business over the next 20 years.


Thus, businesses will be exposed to hundreds of environmental and social changes that could bring both risks and opportunities in the search for sustainable growth. First most important topics affecting the business over the next 20 years are “energy and fuel” and “climate change”.


Energy & Fuel


Fossil fuel markets are set to become more volatile and unpredictable because of higher global energy demand; changes in where fossil fuels are consumed; supply and production uncertainties; and increasing regulatory interventions related to climate change. All companies – regardless of sector, size, or location – will find it difficult to plan for and manage energy costs, especially those related to fossilfuel use.


Companies that become more energy efficient and/or use more alternative and renewable sources of energy, however, would be able to lower their exposure to fossil fuel-related risks and improve their financial performance. The Carbon Disclosure Project1 (CDP) two years ago highlighted the link between cutting emissions and financial outperformance.


While some businesses are moving slowly towards alternative and renewable sources of energy, most corporations continue to depend heavily on oil, coal and gas for power, fuel and raw materials. Just three percent of electricity generation came from non-hydro renewable sources in 2010 – including hydro, the total is 13 percent while 81 percent of power is fossil-fuelled. There are few signs that the urgently needed change in direction in global energy trends is under way,” the IEA says in its World Energy Outlook 2011.


Romania has a balanced portfolio of generation capacities comprising hydro, nuclear, coal and gas-fired power plants, with renewables (other than hydropower) representing a small but rapidly growing subsector of the generation market (Figure 1). Abundant domestic resources exist for coal-fired and hydropower generation, while the share of natural gas in the power generation sector is relatively low because a significant part of natural gas consumption is sourced from imports. Due to the draught in 2012, the electricity production from hydrological sources decreased considerably, making Romania a net importer of electricity in: January, March, May, August and September. However, the energy mix shows a slight increase of wind share comparing with 2011 (1.9%).


Energy businesses must prepare for shifts in fuel mix due to policy, supply, and fuel prices. These businesses, particularly those involved in renewable energy, must also remain actively involved in policy debates that will impact both total global energy demand and the fuel mix through carbon or renewable energy policies. But other industries need to pay attention to the issue as well. Fossil fuel-dependent transportation industries such as aviation, shipping and manufacturers that use petroleum as a process input, such as plastic or chemical producers, will need robust strategies and plans to address fuel price volatility and potential shortages. Vehicle and electrical appliance suppliers, manufacturers and retailers must prepare for significant energy consumption increases in the developing world, and adjust product design and development strategies accordingly.


All of these drivers create a market for companies that can help customers to become more energy efficient. Equally, companies that can bring low-carbon power to the world’s poorest people by “leapfrogging” large-scale utility infrastructure are well-placed.


The energy mix is likely to slowly change in coming years, but fossil fuels will continue to dominate world energy supply to 2035 (Figure 2 ), making up 75 percent of the energy mix – and in absolute terms, more fossil fuel will be consumed than today.


“World primary demand for energy increases by one-third between 2010 and 2035 and energy-related CO2 emissions increase by 20 percent,” the IEA2 adds. It also projects that over the next 25 years, 90 percent of the projected growth in global energy demand will come from non-OECD economies. Businesses in the OECD therefore face a situation where the dynamics of the global energy market are increasingly decided elsewhere.



The IMF’s World Economic Outlook in April 2011 stated: “The increases in the trend component of oil prices suggest that the global oil market has entered a period of increased scarcity. The analysis of demand and supply prospects for crude oil suggests that the increased scarcity arises from continued tension between rapid growth in oil demand in emerging market economies and the downshift in oil supply trend growth”4.


Proportionally, oil remains the leading source of fuel, but demand for natural gas is expected to rise most strongly. Nuclear energy is likely to grow by about 70 percent to 2035, led by China, Korea and India5. The relative share of renewable energy sources, led by hydropower and wind, should grow faster than other energy forms but in absolute terms, total supply of renewables – at 18 percent – remains well below the level of any single fossil fuel by 20356.

„The IEA predicts that the price of crude oil will rise to US$120/barrel by 2035.”


The IEA predicts that the demands of transportation in emerging economies will lift oil consumption by 15 percent between 2010 and 2035. World oil  production is predicted to reach 96 barrels per day (m b/d) in 2035, 13m b/d up on 2010 levels, with a growing share coming from natural gas liquids and other unconventional sources. The Middle East and North Africa are set to provide most of  the growth in oil output during this period, while other locations will turn to more costly and difficult sources (Figure 3). The IEA also predicts that the price of crude oil will rise to US$120/barrel (in year-2010 dollars) by 2035.


One reason for the continuing dominance of fossil fuels is energy subsidies, which are large and widespread. Without further reform, the IEA reports that “the cost of fossil-fuel consumption subsidies is set to reach US$660 billion in 2020, or 0.7 percent of global GDP.” Yet all users of fossil fuels need to be aware of the increasing pressure to eliminate fossil fuel subsidies, which totaled US$409 billion in 2010 about US$110 billion more than in 2009 as a result of the increase in oil prices. Subsidies for renewable energy are predicted to continue growing, reaching almost US$250 billion in 20357.


In Romania, electricity generation from primary resources will not increase substantially in future years because of the limited reserves of oil and gas. Romania’s future energy options are oriented towards developing generation units based on coal, nuclear, hydro, wind energy and other renewable resources.


The Romanian generation sector is facing major challenges as a significant percentage of the generation assets are already past their useful technical life, with 30% being approximately 40 years old. Throughout the past 6 years, nearly 3GW of thermal generation capacity have been decommissioned in Romania. Further decommissioning is expected in the coming years as many power plants require refurbishments and modernizations to meet EU requirements.


Romania is planning to keep its lignite capacity at a sufficient level in order to sustain domestic lignite production. Major capacity investments include: 1,330 MW for Units 3&4 of the Cernavoda nuclear power plant (expected commissioning 2020); 860 MW of Petrom’s CCGT development (commissioned in 2012); 970 MW of pump storage Tarnita (expected commissioning 2020); 4,750 MW of wind power capacity expansion, 600 MW of biomass and 260 MW of solar capacity expansion (gradual commissioning); 400 MW of hard coal capacity expansion.


The figure below represents a forecast of generation capacity development in Romania, based on the evaluation of existing and planned new capacities, as well as the expectation that Romania will focus towards achieving the 2020 renewable targets and, as such, enacted legislation that supports renewable.


In terms of future investments, Romania proved to be a fast growing wind market within the European Union, still in an early stage of development. In the last few years, major investments have been carried out within the Romanian energy production sector, and this trend is expected to continue.



Climate Change


Apart of Enegy and fuel, climate change represents one of the elements affecting business development in the next 20 years.


There are six key types of risk to business from climate change: physical risk, regulatory risk, reputational risk, competitive risk, social risk and litigation risk.


These risks include new laws and government initiatives to tackle climate change such as energy efficiency requirements and standards, carbon taxes, emissions cap and trade systems and fuel tariffs. Businesses may also be at risk of damaging their brands if they are seen to do the wrong thing, with the added threat of litigation if they fail to comply with legislation, or to disclose their carbon impacts.


Predictions of annual output losses from climate change range between one percent per year, if strong and early action is taken, to at least five percent a year if governments fail to act.


However, it is developing countries and the businesses that operate in them that are most vulnerable to climate change impacts even as their rapid industrialization increases their contribution to global CO2 emissions.


The physical risks are considerable. The International Energy Agency (IEA) says that we are on course for a long-term global temperature rise of 3.5°C. This could cause ‘irreversible’ impacts including near-total deglaciation in the long term, contamination of groundwater supplies, water shortages for hundreds of millions of people, lower agricultural yields in many places and more malnutrition, infectious diseases and deaths from heat waves, as well as increasingly severe floods, droughts and storms.


Extreme weather events are set to become more frequent and up to one sixth of the world’s population could face disruption to water supplies and an increased risk of flooding from melting glaciers, mainly in the Indian subcontinent and areas of China and South America – regions that are seen as the new driving force for the global economy.


Urgent action is needed to avoid such a global temperature rise, but because energy-related facilities such as power stations, buildings and factories last for many decades, “80 percent of the cumulative CO2 emitted worldwide between 2009 and 2035 is already “locked-in” by capital stock that either exists now or is under construction and will still be operational by 2035,” according to the IEA.


Individual countries have started acting to cut emissions – China, Australia and South Korea plan to create carbon markets by 2015, for example, while many more have carbon reduction targets – but fragmented national responses require business to understand and comply with a complex and unpredictable patchwork of carbon legislation around the world. Meanwhile, international action on climate change has been slow and disjointed. A price on carbon has been established through trading systems such as the EU Emissions Trading System and the UN’s Clean Development Mechanism, but the carbon markets have been dogged by political interference and the economic crisis. Progress was made at the 2011 UN climate conference in Durban, with all the world’s major emitters agreeing that they must cut emissions, but a new global deal – if it eventuates – will not be agreed until 2015 and will not come into force until 2020.


Nonetheless, the need to tackle climate change brings opportunity to innovators. The US$100 billion-a-year Green Climate Fund (GCF) should make it easier to cut emissions and help developing countries to adapt to the effects of climate change. The GCF could lead to the creation of public-private partnerships in developing nations that can build green industries, create jobs, reduce poverty and improve infrastructure as well as tackle climate change.


The energy and climate change legislative package (4 Directives) approved by the European Parliament in December 2008 and published in the EC Official Journal on 5 June 2009, at the EU level, has been adopted also by Romania, and thus the EU targets are also similar for Romania:


• 20% Greenhouse Gases (GHG) emissions reduction by 2020 (2005 baseline year); the installations under EU Emission Trading Scheme Directive (EU ETS) comes to this condition and non-EU-ETS activities should reduce their GHG emissions by 10% in the same period.


• 20% increase in the renewable energy use by 2020.

• Energy efficiency increase by 20%.


The climate and energy package focuses on 4 pathways to reach the 20-20-20 goals:


1. Reform of the EU Emissions Trading System (EU ETS)


Major changes include the introduction, starting 2013, of a single EU-wide cap on emission allowances in place of the previous system of national caps. The free allocation of allowances will be progressively replaced by auctioning. The sectors and gases covered by the system will be slightly widened.


2. National targets for non-EU ETS emissions


In line with provisions of the Effort Sharing Decision, Member States have to assume annual targets for reducing their greenhouse gas emissions from the sectors not covered by the EU ETS.


3. National renewable energy targets


Under the Renewable Energy Directive, Member States have taken on binding national targets for raising the share of renewable energy in their energy consumption by 2020.


4. Carbon capture and storage


The fourth element of the climate and energy package is a directive creating a legal framework for the environmentally safe use of carbon capture and storage technologies.

Recently, the European Commission granted funding to 23 highly innovative renewable energy demonstration projects (about Euro 1.2 billion) under NER 300 program to help stimulate the construction of carbon capture and storage projects (CCS).


As part of the European Union, Romania transposed into national legislation the provisions of this legislative package and is taking important steps to develop an updated version of the National Strategy on Energy.

According to the European Commission report on the state of the European carbon market8, EU ETS will be critical in driving investments in a wide range of low carbon technologies and should play an increased role in the transition to a low-carbon economy by 2050.


The crisis unfolding as of 2008 has significantly altered the carbon market and the ETS has since experienced a surplus of allowances and international credits compared to emissions. The number of allowances that were put in circulation has been increasing every year, as well as the supply and use of international credits, and by early 2012, a surplus of 955 million allowances had accumulated. The pattern of an increasing supply of allowances and international credits, combined with low demand is partially reflected in the observed price evolution since 2008.


In 2012 Romania had a surplus of 300 millions allowances, which 3-4 years before were estimated at about 3 billion Euro.

Supply of allowances increased notably through the forward selling of phase 3 allowances to generate funds for the NER300 programme for carbon capture and storage and innovative renewables, early auctioning to meet power sector demand, and the selling of left-over allowances in national phase 2 new entrant reserves. Early 2013 were launched 2 calls for projects financed under NER 300 to help stimulate the construction of carbon capture and storage projects (CCS). Under the first call, the European Commission granted funding to 23 highly innovative renewable energy demonstration projects (about Euro 1.2 billion).


Romania updated the national legislation in the area of climate change and fully transposed the provisions of EU regulations. One of the latest changes is the update of the Emergency Ordinance no. 115/2011, which now specifies that the Ministry of Public Finance is empowered to auction the emissions certificates allocated to Romania (Romania’s auctioneer for the Union Registry). The amounts obtained by selling the certificates are to be allocated as follows:


• 29 % of the gross amount to the State Budget

• 71 % of the gross amount is allocated to the Ministries implementing environmental projects).


However, by far the most important issue of EU carbon market in phase III remains the imbalance between supply and demand in the short term. As these imbalances are very likely to affect the ability of the EU ETS to meet the ETS target in future phases in a cost-effective manner, EC proposed some pathways of action, which are still under debate.