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Energy Economics
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The increasing speed with which our
valuable energy resources are depleting, is causing concern all over
the world. Experts from all fields have come together to research and
find ways and means of utilizing the existing resources to the maximum
and efficiently without causing irreparable harm to the environment.
And this is the area which is covered under the field of Energy
Economics.
Energy economics is the field that studies human utilization of energy
resources and the results and consequences of that utilization. In
scientific terms, energy is the capacity for doing work while chemical
energy (e.g., oil, natural gas, coal, biomass), mechanical energy
(e.g., wind, falling water), thermal energy (geothermal deposits),
radiation (sunlight, infrared radiation), electrical energy
(electricity), or nuclear energy through nuclear reactions (uranium,
plutonium) are the different types of energy used by humans for their
various activities.
The field of Energy economics is based on two fundamental laws of physics: 1) Energy is neither created nor destroyed. Rather, it changes forms and can be converted from one form to another.
2) All energy comes from the physical environment and ultimately is released back into the physical environment.
The use of energy by humans is based on the first law, according to
which energy simply changes form and is never destroyed. Let us take a
look at some very simple and common conversion processes used by us in
our daily life. Fire provides heat and light to us, but is basically
produced when chemical energy stored in the fuel, wood or coke or gas
is converted to thermal energy and radiant energy. Similarly, chemical
energy stored in wood is the result of photosynthesis in which plants
convert energy in sunlight to chemical energy. And when we eat food
cooked using fire, the carbohydrates in food are converted within the
human body to thermal energy and mechanical energy, providing body
warmth and movement.
When we study economics, we study the forces of demand and supply.
Thus, in energy economics, the experts not only discuss the various
energy resources but also their demand and supply equations based on
the natural reserves of the world. In each of the cases discussed
above, efficiency of energy conversion also determines the typical
demand for that energy source.
In general, energy conversion equipments used by mankind are:
automobiles, air-conditioning units, refrigerators, televisions,
computer systems, furnaces etc. We as consumers choose the kind of
equipment we buy based on our need. For example, people living in
colder areas would prefer to buy geysers, hot plates etc. while those
living in hot areas would go for refrigerators and air conditioners.
And such choices significantly influence energy demand.
Actually, energy demand is also influenced by the cost of the energy.
For example, high natural gas prices can motivate consumers to invest
in home insulation. Some energy services can be provided by several
different energy resources. We can use electricity, natural gas, oil,
or wood, for heating our houses since each can be converted to thermal
energy. Similarly, electricity, natural gas, propane, wood, or
charcoal–all can be used for cooking purposes. We can, thus, say that
different energy resources are economic substitutes for one another.
And, the increasing demand for energy can be accommodated by using
alternative sources of energy.
World commercial energy demand, overall, is well over 90% based on
non-renewable and environmentally damaging fossil fuels (only 8% is
hydropower based, while capital intensive nuclear power depends
entirely on non-renewable uranium, thorium and other minerals). But
there is a catch here. Although energy sources can be easily
substituted, the conversion technologies are not that easy to
substitute. For example, automobiles are currently run on gasoline.
Efforts are on to have automobiles which can run on solar power or
electricity or hydel power. But the technology is not advanced enough
to produce such automobiles in mass production, as also to offer such
automobiles at affordable prices.
The current ‘oil price crisis’ in reality reflects an emerging and
permanent supply crisis for oil and gas (which currently provide about
65% of world commercial energy). According to experts, within at most
ten years, both oil supply and natural gas supply will enter into a
constant and terminal decline, due to physical depletion of this
resouce.
Renewable and Non renewable Resources of Energy
The non-renewable energy sources are the ones which once used cannot be
produced or replaced again. For example, crude oil, coal, natural gas
etc. cannot be replaced once used. Their renewal speeds are so slow
that they are generally viewed as made available only once by nature
That is why there is global concern over these depleting energy
resources. On the other hand, wind, sun or water are considered
renewable resources of energy. Renewable resources are those which can
self renew within a specific time scale, especially within the human
time scale. Renewable resources can be further sub-divided into
storable or non storable resources. Storable renewable resources are
those which can be used and can also be stored, for example, biomass,
hydro power etc. can be stored and used later. While Non storable
renewable resources are wind, solar radiation etc. and as the name
suggests this kind of energy cannot be stored.
Since early times, all human energy use was dependent on renewable
resources such as sun, wind, and biomass, for food, heat,or light. It
is only after the industrial revolution in the second half of the 19th
century that the non renewable resources such as coal and natural gas
became important sources of energy. Infact, coal fueled the industrial
revolution in the 19th century. With the advancement in the automobile
sector, oil became the dominant fuel during the twentieth century.
Moreover, the stabilizing prices further stimulated its demand. But
soon after, the oil prices started increasing and experts started
looking at other options to fulfill the energy demand. Crude oil and
natural gas became single most important energy source which could
supply large quantities of energy continuously to our industries. But
the rapid use of these resources has not only caused irreparable damage
to our environment, but has also depleted the reserves of these
resources at an alarmingly high speed.
Renewable energy is becoming increasingly important. In Denmark, for
example, over 20% of power usage today comes from wind power alone. In
Germany, over 6% of total usage comes from wind. In comparison to the
US, the EU as a whole has over five times the US capacity of renewable
energy (about 30,000 MW).
Economies of alternate energy sources
The economic cycle for both renewable and non-renewable energy
resources is complex. The economic cycle basically refers to the
discovery of the resource, the innovations and the requirements to
harness that source in a way that can be effectively utilized by
humans. The changes and improvements in help in improving the economic
viability of harnessing a resource, but companies or organizations
doing it also need to make this option economically viable for them.
And since the magnitude and location of the resource base remains
unknown and exploration is required to identify resource deposits, the
costs are high. Adding to the costs are activities associated with
commercial conversion of energy from one form to another, particularly
to electricity. But energy conversion is never 100% and some input
energy is always lost into the environment. Thus, for economic
viability, the energy conversion industries have to sell their product
at a price higher than the cost of energy source used as inputs, plus
per unit capital and operating costs of the facilities.
The identification and popularity of eco-friendly renewable energy
resources has given rise to a new term called the “eco-energy
planning”. But the fact is that all renewable energy sources are not
on equal standing. Some are more viable economically while some are
more environmentally viable than others. Moreover, they are also not
prevalent everywhere in equal quantities. For example, solar energy may
be a good option in areas near equator, whereas wind energy may be a
better option in more windy areas, as also coastal areas.
Although solar powered homes and industries seemed a very good idea
till very recently, but a deeper study has shown that harnessing solar
energy is not that easy. The first and foremost is the issue of day and
night. Moreover, the energy is quite dilute. This means that lots of
solar collectors need to be installed which are quite expensive.
Similarly, hydro-power is now not considered a good alternate
source because of the intense damage it causes to rivers, oceans,
freshwater fish populations and other aquatic life. Moreover, it
usually changes the natural flow of the water that damages adjoining
areas and wildlife. The flooding of large areas of land means that the
natural environment is destroyed. Moreover, the building of large dams
can cause serious geological damage. For example, the building of the
Hoover Dam in the USA triggered a number of earth quakes and has
depressed the earth’s surface at its location.
Geothermal energy is generated from the earth's heat that is found in
high temperature water below the earth's surface. Wells are drilled
through sedimentary or fractured rock, allowing hot steam or water to
flow upwards to ground level. Geothermal resource has been termed as
non-renewable as it has limited capacity and cannot give a regular
output.
These days wind power is gaining popularity as one of the best
source of renewable energy. But again, as with other sources, it has
its share of problems. As per some environmentalists, the wind farms
are obviously noisy and require large tracts of land. And they may
prove to be harmful to birds, including endangered species.
But environmentalists also point that, though there are problems
with each energy resource, they are still much cleaner than our
traditional fossil fuels.
Environmental factor
Let us look at the environment costs of using high amount of fossil
fuels. Many important environmental damages stem from the production,
conversion, and consumption of this form of energy. Although most of
the experts feel that it is not possible to assign an economic value on
the effect of the energy use on environment, it is nevertheless
important to look at it for an overall assessment.
The most important or main problem is the release of gases such as
carbon dioxide to the atmosphere which leads to green house effec,t
casusing adverse effect on world climate. Acid rains are caused by
sulfur coal combustion which emits oxides of sulfur, which undergo
atmospheric chemical reactions to create acidic rain. Similarly, petrol
and diesel combustion in automobiles release oxides of nitrogen and
other organic compounds in the air, which combine with sunlight and
other dust particles in the atmosphere, result in smog. The heated
water that is released into lakes or oceans left over after electric
heating facilities causes major imbalance and damage to the ecosystem
by destroying aquatic life and flora and fauna. And the extraction of
oil in the on shore or off shore drilling locations also cause major
disturbance to the immediate neighborhood and also cause subsidence of
the land overlying of the extracted deposits.
What can be done?
Till now our emphasis has been on the technical issues of fuel
utilization and efficient conversion of energy. But it is time that all
factors are taken into consideration for formulating policies in this
regard. Needless to say, energy issues are not unilateral issues to be
solved by individual countries. A global effort is needed to sort out
the energy issues harmoniously between all countries at one end, and
with environment, on the other. And for this, a proper knowledge of
facts and of all the options available is essential.
As is done in general for any economic analysis, both operating costs
and capital expenses need to be considered. The major operating costs
are those of the fuels. The capital costs will come from the energy
conversion devices such as automobiles, power plants or, for that
matter, any electrical device such as an electric razor or an iron.
Since the world economy is generally calculated in terms of dollars, a
commonly used cost is expressed in dollars per million BTU. Experts
have taken care to ensure that the BTU units to be compared need to be
of the same kind (such as thermal, or electric, or mechanical). Besides
the cost of fuel there are many other components of energy costs such
as operational and maintenance costs and the fixed (capital) cost. All
these costs are dependent on energy supply and demand and the state of
the economy.
One of the most important factors in our fuel and energy considerations
is the OPEC factor It is at the root of all energy issues and
influences the economy of the world greatly. OPEC countries are the
petroleum exporting countries. The group was created in 1960 by Saudi
Arabia, Venezuela, Kuwait, Iran and Iraq, in response to unilateral oil
price cuts by major international oil companies. There was an
oversupply of oil in the 1950s, which continued till the early 1970s.
When oil embargo was imposed on the Arab oil by US, the oil prices shot
up dramatically by 500%. Although this also triggered off the
exploration and discovery of oil in non-OPEC countries and intensified
development of alternative energy sources, the OPEC countries responded
by cutting production levels rather than decrease the oil price.
The problem is that most of the OPEC countries are highly dependent on
‘petro-dollar’ revenues for everything from food to household goods
and items. Around mid 1980s, Saudi Arabia decreased its oil price and
increased the production of oil and caused a drop of 200% in the price
of oil. Thus, this unpredictable nature of Middle-East politics have in
past caused many a oil shocks and turned the international economy
upside down. In future also it will keep on doing the same and thus it
becomes all the more imperative that this over reliance on oil and
fuels is reduced and alternative and clean energy fuels used in future.
The next important factor is the utilization of energy and consumption
patterns of energy in developing countries. Although it is unfair to
assume that the developing countries should cut down on their
consumption or usage of energy while the developed countries who have
caused the maximum damage do nothing, it is nevertheless true that
unless the developing countries also come forward to take some of the
share in the energy crisis, it will not be resolved easily.
The Indian Way
Let us take an example of Indian economy. Energy is the sine qua
non of development for developing countries like India. We, in
India with over a billion people, produce only 660 billion KW of
electricity and over 600 million Indians, a population equal to the
combined population of USA and EU, has no access to electricity and
limited access to other clean, modern fuels such as LPG and kerosene. Enhancing
energy supply and access is now a key component of the national
development strategy.
But there is a lesson here. The reduced energy intensity, at the relatively low level of
India’s per-capita GDP, has been made possible by a range of factors
which can be adopted by high energy consuming developed countries. The
first and foremost is India’s historically sustainable patterns of
consumption, food habits and re-cycling processes, pro-active policies to
promote energy efficiency, and more recently, the use of the Clean
Development Mechanism to accelerate the adoption of clean energy
technologies. The specific GHG emissions from food production and processing are much
lower in India than in developed countries. The high ratio of re-cycling
in India and the lower demand for material such as steel, aluminum and
copper, as, compared to that of other major economies, has also limited
the growth in energy use.
The energy efficiency in Indian industry is increasing rapidly and
steadily since last ten years. In the major energy-consuming industrial
sectors, such as cement, steel, aluminum, fertilizers, etc., average specific energy consumption has been
declining because of energy conservation in existing units, and (much
more) due to new capacity addition with state-of-the-art technology.
In addition to that, India has shown remarkable character and foresight
to focus on alternate energy resources quite early in its developing
state. The policies to promote energy efficiency and renewable energy
are already in place and there is s full fledged ministry in Indian
government which caters to renewable energy sources. The Ministry of
New & Renewable Energy, the Bureau of Energy Efficiency, and the
Technology Information, Forecasting & Assessment Council, with
specific mandates to promote climate friendly technologies, are some of the prime bodies working for energy efficiency in India.
Some of the steps taken by India are:
1. The Electricity Act 2003–This requires State Electricity Regulatory Commissions
to specify a percentage of electricity that the electricity
distribution companies must procure from renewable sources. This has
contributed to an acceleration in renewable-electricity capacity
addition, and since 2006, about 2,000 MW of
renewable-electricity capacity has been added in India every year,
bringing the total installed renewable capacity to over 11,000 MW. Of
this, a little over 7,000 MW is based on wind power. India now has the
fourth largest installed wind capacity in the world. The National Hydro Energy Policy has resulted in the accelerated addition
of hydro-power in India, which is now over 35,000 MW. In almost every
industrial sector, some of the world’s most energy-efficient units are
located in India.
2. Using clean cola technologies to enhance efficiency of Power Plants:
Coal is the mainstay of India’s energy economy, and coal-based power
plants account for about two-thirds of the total electric generation
installed capacity of about 135,000 MW. In addition, the Electricity
Regulatory Commissions are also linking tariffs to efficiency
enhancement, thus providing an incentive for renovation and
modernization. New plants are being encouraged to adopt more efficient
and clean coal technologies, and four new plants under construction
have adopted the more-efficient super-critical technology for power
generation.
3. Creating awareness amongst consumers by Introduction of Labeling
Programme for Appliances: An energy labeling programme for appliances
was launched in 2006, and comparative star based labeling has been
introduced for fluorescent tubelights, air conditioners, and
distribution transformers. These labels provide information about the
energy consumption of an appliance, and thus enable consumers to make
informed decisions. Almost all fluorescent tubelights sold in India,
and about two-thirds of the refrigerators and air conditioners are now covered by the labeling programme.
4. Launch of ECBC (Energy Conservation Building Code): An Energy
Conservation Building Code (ECBC) was launched in May 2007, which
addresses the design of new, large commercial buildings to optimize the
building’s energy demand. Commercial buildings are one of the fastest
growing sectors of the Indian economy, reflecting the increasing share of the services sector in the economy. Nearly one
hundred buildings are already following the Code, and compliance with
it has also been incorporated into the Environmental Impact Assessment requirements for large buildings.
5. Energy Audits of Large Industrial Consumers: In March 2007, the
conduct of energy audits was made mandatory in large energy-consuming
units in nine industrial sectors. These units, notified as “designated
consumers”, are also required to employ “certified energy managers”, and
report energy consumption and energy conservation data annually.
6. Accelerated Introduction of Clean Energy Technologies through the
CDM: The Clean Development Mechanism has accelerated the diffusion of
renewable energy and
energy efficient technologies by mitigating some of the risk associated with the
adoption of new technologies Over 700 CDM projects have been approved
by the CDM National Designated Authority, and about 300 of these have
been registered by the CDM Executive Board. The registered projects
have already resulted in over 27 million tones of certified CO2
emissions reductions, and directed investment in renewable energy and
energy projects by reducing the perceived risks and uncertainties of
these new technologies, thereby accelerating their adoption.
Thus, it is high time the global countries and developed countries also
take the necessary steps to ensure decrease in energy consumption
patterns and show their resolve in solving the energy crisis which
looms large over the whole world. What is needed is an integrated
approach such as that shown by India.
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