Megatrends Of Energy
by Kenneth L. Lay
President and CEO
Enron Corp.
What has the same wingspan and smooth aerodynamic design as an airplane,
but doesn't go anywhere?
What turns wind speed into energy instead of energy into wind speed?
The answer is the modern wind turbine. Enron's turbines have 750 kilowatts of capacity and we will soon exceed that rate. But the winds of history that brought us to this point are less predictable than the breezes that power our turbines. The gentle currents and strong gusts that propel the energy industry have changed direction over the last few decades. They make distant energy forecasts about as accurate as trying to predict the weather, or even the global temperature, a century from now. Casey Stengel was smart to advise, "Never make predictions, especially about the future."
Nevertheless, a few currently active trends have shown enough constancy to allow us to venture some predictions about the next two decades. Enron has surveyed the available forecasts, and weighed their predictions using our own understanding and a firm faith in the long-term attraction of competitive markets. This article describes our vision for how the new century will begin. It is rooted, naturally, in a careful understanding of the century that is about to end.
The Context
As we all know, the Cold War was an economic, intellectual, and frequently military conflict over the future course of world development. While both sides claimed to be democratic, they differed violently on the questions of political, economic and religious liberty. One side argued that a powerful state could not only achieve the best life for its people, but also determine what the best life would look like. The other side argued that free individuals and competitive markets could best create the good life and that no one else could tell them what to value.
The side of liberty won the historic global conflict; the major players on the side of control have dissolved or embraced reform. The power structure was inverted. As the American Ambassador to Czechoslovakia reported in 1991: "All the former prisoners are now the government." But liberty also won the intellectual battle: the forces of control now bear the burden of justifying restrictions of personal freedom. This burden on monopolies gives energy, and energy companies like Enron, the chance to move freely and expand.
It is not quite sufficient to say that the West won the Cold War. The war itself necessarily constrained some of our thinking and living, and even in the heart of the West some championed the value of control. It is no longer interesting to argue that the world is different after the war. But following the trajectory of the victory into the energy future will help us to understand - and to achieve - the potential of the next century.
The Trends
To begin, the Earth's energy demand will grow more quickly over the next couple of decades than in the recent past. Between 1985 and 1995, energy demand grew by 1.4% per year, from 305 quads (or quadrillion British thermal units) to 350 quads. This growth rate was much slower than world GDP growth of 3.4%, partly because the price spikes of the seventies stimulated conservation that extended into the late 80s. Also, the Soviet Union, while producing only 8% of the world GDP, consumed 20-25% of its energy and what happened there between 1985 and 1995 significantly reduced its energy consumption. By 2015, we expect world demand to reach 564 quads by growing at a rate of 2.4% per year. (Fig. 1) This growth will increase all energy sources except nuclear, where decommissioning of nuclear plants in the United States will slightly outweigh new construction in China and elsewhere. Oil and coal will grow modestly, while natural gas and renewables will grow much more rapidly. Electricity demand, which must be generated from these sources, will also grow rapidly. Every area will want more, especially Asia. In fact, China's and India's demand will grow over threefold from 1996 to 2015. Other countries are listed in Fig. 2. Natural gas will probably capture at least a third of this growth and potentially much more.
Most significantly, natural gas will overtake coal as the second most used fuel between 2005 and 2010. Every re-gion of the world will demand more gas: from North America growing at 2.6% per year, to Latin Am-erica growing at more than 7%. (Fig. 3) And this growth will occur in every segment of the economy, from houses to power plants (Fig. 4). Can the energy industry keep up with this demand? We can, for two reasons. The first is the economic attractiveness of gas-fired combined-cycle power plants, whose levelized cost makes both coal and nuclear energy yesterday's expensive technologies (Fig. 5) The second is a supply of natural gas that gets larger every time we look. For most practical purposes, natural gas is a resource that could fairly be described as unlimited.
Consider: proved natural gas re-serves (Fig. 6), which are already available and economical to bring to market total 5,011 trillion cubic feet (Tcf). In 1976 many politicians thought the world was running out of natural gas, but since that year, in spite of heavy production, the proved gas reserves have almost doubled. Like the demand for it, the supply of gas is dispersed around the world, with the Former Soviet Union accounting for two-fifths. These world reserves would last for 65 years at current consumption rates. Consump-tion will increase, but so, we expect, will proved reserves. En-ron predicts that total potential economically recoverable resources are about three times proven reserves, or 15,457 Tcf, a 200 year supply at current consumption rates.
In other words, the natural gas we can reasonably ex-pect to recover would fill a cube 47 miles on a side and this cube is not shrinking. Since 1995, it has expanded by about a tenth.
In spite of increased demand, we expect the price of electricity to decline over the next decade due to better use of surplus capacity and improving technology. In the United States, retail markets will deregulate state by state, with competition spanning the nation by 2005. The result will be a huge, open market for gas, electricity and new energy technologies that will total $300 billion annually. This change is also sweeping across the At-lantic and be-yond. Eur-ope's energy market of $250 billion is opening and growing. The United Kingdom and the Nordic countries already have some choice. Six other nations are making substantial progress: the Netherlands, Spain, Poland, Denmark, Germany and Italy (Fig. 7). The changes in Europe and the United States are excellent opportunities, which companies like ours are pursuing vigorously (we already supply 4% of the electricity in the United Kingdom).
Meanwhile, other parts of the world are privatizing their state-owned monopolies. Over all, emerging markets will see a need for $3.55 trillion in new energy infrastructure by 2010. Deregulation at home and privatization abroad mean that consumers will be able to reap economic benefits of sufficient magnitude to improve their standards of living.
Global Warming
No discussion of energy trends would be complete if it neglected environmental concerns. Preserving the wonder and purity of nature has been an American concern since The-odore Roosevelt and has intensified over the past few decades. Environmentalism has been called a "consumption item of elites," but economic progress creates large new elites and concerns will not disappear as long as problems are perceived. In many places the current concern is the release of greenhouse gases, which include pollutants as well as carbon dioxide. CO2 lingers in the atmosphere for 200 years if it is not inhaled by plant life. Concentrations of carbon in the atmosphere, as recorded by observations and ice core data, show a correlation with anthropogenic emissions (Fig. 8). This is one of the few areas in the global warming debate on which both skeptics and alarmists agree.
There are, of course, serious disagreements about almost every other aspect of the global warming discussion, and strong passions rage on both sides of the Kyoto Protocol. While serious reductions in carbon emissions may be difficult to attain, there are some steps that could achieve lasting environmental and economic benefits. We could take these steps with no regrets.
One is the economic advantage mentioned earlier of natural gas power plants over coal plants. Combined-cycle gas-fired plants cost about half as much to build as coal-fired plants. They can be built in about a third of the time. They also have a better heat rate in converting raw energy into kilowatts. Unlike coal plants, gas plants can operate at 95% utilization. Since these advantages only accrue from new construction, it will be especially useful in areas of rapidly increasing electricity demand. As explained above, this includes every region of the world (but especially developing regions).
Assuming 3.3% per year GDP growth and no carbon emissions reduction treaty through 2015, emissions are projected to increase by half: 33% in OECD countries and 67% in others. If GDP is higher, we could see a 70% increase. However, even if natural gas and renewables entirely substitute for new coal capacity, the carbon emissions will increase by 38% from 1996 levels.
A concrete example of the natural gas advantage is the United Kingdom. (Fig. 9) In the 1980s, the British ridiculed the concept of generating electricity from gas. However, in 1993, Enron began operating one of the world's largest gas-fired combined-cycle power projects, at Teesside, on the east coast of England. When you add coal-to-gas substitutions in other areas, you understand why UK CO2 emissions are declining and are well below 1970 levels. If the United Kingdom can resist the temptation of a gas moratorium, it will have less trouble than its peers complying with a greenhouse gases treaty. This is because natural gas plants emit much less carbon dioxide, nitrogen oxides and sulfur dioxide than coal. (Fig. 10)
Renewable sources, of course, are cleaner still. Al-though wind and solar plants are not yet competitive with natural gas for grid use, solar power is used increasingly for off-grid locations and wind power is closing in on coal. Solar costs have fallen 75% since the early 1980s but remain high; wind costs have fallen 70%. We expect renewable sources to increase to satisfy a tenth of world demand by 2015, but this estimate depends on strong hydroelectric growth, which is controversial among some environmentalists.
We expect to see not only a convergence of gas and electricity, but also a convergence of environmental and economic efficiency. Efficient power is clean power.
Conclusion
This world's rediscovering efficiently. Citizens who once let governments tell them where to buy power and what to pay are now increasing their power by making these choices for themselves. Where people governed themselves inefficiently through states, they now govern themselves efficiently by household. Communities around the world who 10 years ago got their power from regulated monopolies or state-owned power plants, or went without power entirely, are all converging toward real competition and greater access to resources.
What lesson should be drawn from the trends outlined in this article? I would argue that each story teaches that in-dividual choice and competition are the strongest forces for efficiency, value, a cleaner earth, and more reliable energy supplies and services.
Governments, even democratic governments, can have these goals, but only through markets can free peoples achieve them. Free elections confer legitimacy, but not perfect wisdom. What democracy cannot achieve, liberty can.
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