1. Energy Management :: 2013/14 Energy Economics Prof. Tânia Sousa taniasousa@ist.utl.pt

2. Energy Management Class # 9 : Energy Economics What are the links between Energy and Economics? (Smil) There is a very high correlation between the rate of energy use and the level of economic performance –During the last century the Gross World Economic Product (GWP) has grown almost at the exact same rate (a sixteenfold increase) that the global comercial Total Primary Energy Supply (TPES).

3. Energy Management Class # 9 : Energy Economics What are the links between Energy and Economics? (Smil) There is a very high correlation between the rate of energy use and the level of economic performance –During the last century the Gross World Economic Product (GWP) has grown almost at the exact same rate (a sixteenfold increase) that the global comercial Total Primary Energy Supply (TPES). –High correlation also for a single country in time

4. Energy Management Class # 9 : Energy Economics What are the links between Energy and Economics? (Smil) There is a very high correlation between the rate of energy use and the level of economic performance –During the last century the Gross World Economic Product (GWP) has grown almost at the exact same rate (a sixteenfold increase) that the global comercial Total Primary Energy Supply (TPES). –High correlation between per capita averages of GDP (PPP adjusted) and TPES (for 63 countries)for the year 2000 Portugal

5. Energy Management Class # 9 : Energy Economics What are the links between Energy and Economics? (Smil) Energy intensity (energy use per unit of GDP): –A measure of the efficiency of a country in using energy –Low values correspond to environmental and economic advantages

6. Energy Management Class # 9 : Energy Economics Energy intensity in time: –EI rises during early stages of industrialization, its peak is sharp and short, and then declines as mature economies use inputs more efficiently –EI for the World rised from 11 MJ/US$ (1990) in 1900 until 1970 and declined to the initial value in 2000 What are the links between Energy and Economics? (Smil)

7. Energy Management Class # 9 : Energy Economics What are the links between Energy and Economics? (Smil) Energy intensity for different countries in 1999: –Most countries have EI between 5 and 13 MJ/$ PPP –EI does not depend on the GDP/capita (e.g., India and Australia have similar EI)

8. Energy Management Class # 9 : Energy Economics What are the links between Energy and Economics? (Smil) Factors that control EI: –Degree of energy self-sufficiency –Composition on primary energy supply –Differences in industrial structure –Country size –Climate HHT MHT Other Electric Uses

9. Energy Management Class # 9 : Energy Economics What are the links between Energy and Economics? (Smil) Problems with EI: –Treatment of Primary Electricity (e.g. Sweden vs. Denmark) – the method of partial substitution will inflate all large-scale producers of electricity HHT MHT Other Electric Uses

10. Energy Management Class # 9 : Energy Economics What are the links between Energy and Economics? (Smil) Problems with EI: –It is misleading if it counts only with commercial forms of energy – animate labor and biomass were the most important forms of energy for most of humankind until middle of the 20th century Greece HHT MHT Mechanical Drive Muscle Work Light LHT Other Electric Uses

11. Energy Management Class # 9 : Energy Economics What are the links between Energy and Economics? Problems with EI: –It is misleading if it counts only with commercial forms of energy – animate labor and biomass were the most important forms of energy for most of humankind until middle of the 20th century Primary energy / GDP (conventional sources - IEA) Primary energy (exergy) / GDP (IEA + food/feed) Final energy (exergy) / GDP (IEA + food/feed)

12. Energy Management Class # 9 : Energy Economics Why are these links important? Higher energy use has higher impact on the environment: –Land use changes (surface mines, large water reservoirs)

13. Energy Management Class # 9 : Energy Economics Why are these links important? Higher energy use has higher impact on the environment: –Pollution of ocean water (seaborne transport of crude oil)

14. Energy Management Class # 9 : Energy Economics Why are these links important? Higher energy use has higher impact on the environment: –Greenhouse gas emissions (combustion of fossil fuels) –Air pollution (combustion of fossil fuels)

15. Energy Management Class # 9 : Energy Economics Why are these links important? Higher energy use has higher impact on the environment: –Accidental releases of radiation (nuclear power plants and storage of radioactive waste)

16. Energy Management Class # 9 : Energy Economics Why are these links important? Some energy forms such as oil are becoming more scarce/expensive

17. Energy Management Class # 9 : Energy Economics Links Energy-Economy-Environment What will the economy in the future look like? More self-reliant local economies and ways of life Global Economy dependent on renewable energies Similar to the present but bigger Models will help us understand the impact of energy supply & technological innovations & policy measures on the environment and the economy?

18. Energy Management Class # 9 : Energy Economics Issues in modeling energy-economy interactions 1.Trade-offs for people between environmental quality ( with the use of energy) and income ( with the use of energy) –GDP: important factors for the quality of life such as inequality in the society, environmental quality are related with GDP but that are not controlled only by GDP (http://www.beyond-gdp.eu/)http://www.beyond-gdp.eu/ –http://thewanderlife.com/human-happiness-and-the- environment-address-by-uruguayan-president-jose- mujica-at-rio-20-summit/http://thewanderlife.com/human-happiness-and-the- environment-address-by-uruguayan-president-jose- mujica-at-rio-20-summit/ –Other macroeconomic measures such as Genuine Savings consider depletion of natural resources and damage caused by pollution.(World Bank) –Measures of social welfare that depend on consumption and on environmental degradation. Social welfare depends on utility of each person

19. Energy Management Class # 9 : Energy Economics Utility functions: a review Utility functions specify the hapiness U of a person or a population as a function of consumed goods X 1, X 2, …: Examples: Issues: Indiference curves (substitutability between goods) Cobb-Douglas Utility Function Linear Utility Function Leontief Utility Function x1x1 x2x2 U(x 1,x 2 ) = x 1 x 2 ;

20. Energy Management Class # 9 : Energy Economics Issues in modeling energy-economy interactions 2.How much can energy be replaced by other productive factors?

21. Energy Management Class # 9 : Energy Economics Production Functions: a review Production functions specify the output Q of an economy as a function of inputs X 1, X 2, …: Examples: Issues: What are the relevant production factors (K, L, E, M, T, ….) How much are they substitutable? Cobb-Douglas Production Function Linear Production Function Leontief Production Function

22. Energy Management Class # 9 : Energy Economics Issues in modeling energy-economy interactions 2.How much can energy be replaced by other productive factors? –Production functions that have energy as a production factor, e.g., LINEX (Ayres):

23. Energy Management Class # 9 : Energy Economics What are the links between Energy and Economics? 2.How much can energy be replaced by other productive factors? –Technology improves efficiencies but there are strict thermodynamic limits to primary-to-final and final-to- useful efficiencies;

24. Energy Management Class # 9 : Energy Economics Aggregated 2nd Law efficiencies Aggregated 2nd Law efficiencies have increased and currently range between 16% - 23% Finland Ireland Belgium Spain Sweden Portugal

25. Energy Management Class # 9 : Energy Economics 2 nd Law efficiencies vs. Final Exergy Uses The The aggregated 2 nd law efficiency of Ireland is lower because it has a higher fraction of LHT and a lower mechanical drive efficiency HHT MHT Mechanical Drive Other Electric Uses IrelandGreece HHT MHT Mechanical Drive Muscle Work Light LHT Other Electric Uses

26. Energy Management Class # 9 : Energy Economics 2 nd Law efficiencies vs. Final Exergy Uses The The aggregated 2 nd law efficiency of Ireland is lower because it has lower 2 nd law efficiencies for LHT, MHT and mechanical drive. HHT MHT Mechanical Drive Other Electric Uses Ireland HHT MHT Mechanical Drive Muscle Work Light LHT Other Electric Uses Finland

27. Energy Management Class # 9 : Energy Economics What are the links between Energy and Economics? 2.How much can energy be replaced by other productive factors? There are no thermodynamic limits to UW/GDP – what about empirical evidence?

28. Energy Management Class # 9 : Energy Economics What are the links between Energy and Economics? Final. Exergy / GDP (MJ/2010 €) Useful Work / GDP (MJ/2010 €) (GDP series from Lains,, 2003, & European Commission)

29. Energy Management Class # 9 : Energy Economics Issues in modeling energy-economy interactions 3.How much are different forms of energy replaceable by each other? –Transport is the most problematic use –Possibility of replacing oil liquids in internal combustion engines by more efficiency, other fossil (coal-to-liquids, tar sands, oil shale) or renewables (ethanol, biodiesel) Electric cars (driving range; Recharge time, 4 to 8 hours, battery cost, bulk & weight) Hydrogen cars (hydrogen infrastructure and cost, cost)

30. Energy Management Class # 9 : Energy Economics 4.What is the energy that really matters (primary, final, useful, productive or useful work)? –During the twentieth century the quantity of final energy taken from one unit of primary energy has doubled or even tripled –The energy that is more intimated related with productivity is the productive energy but this is also the most difficult one to quantify –What about the energy used for non-productive activities? Issues in modeling energy-economy interactions

31. Energy Management Class # 9 : Energy Economics Issues in modeling energy-economy interactions 5.Investment in renewable energies and energy efficiency technologies – Depends on the price of fossil fuels; – Controls conversion efficiencies between primary, final and useful energy; – Controls price of renewable energies;

32. Energy Management Class # 9 : Energy Economics Issues in modeling energy-economy interactions 6.Oil Price – Depends on demand vs.supply – Depends on speculation in financial markets; – Controls behavior of energy firms (e.g., investments in new oil fields)

33. Energy Management Class # 9 : Energy Economics Issues in modeling energy-economy interactions 7.The amount of fossil fuel reserves – Depends on technology (e.g., shale gas) – Energy game changers such as accidents (Japan, 2011) – Reliable information about depletion rates

34. Energy Management Class # 9 : Energy Economics City ON – an energy-economy model Energy (electricity) is the only production factor Electricity has both a productive (industry and services consumption) and non- productive (residential and municipal consumption) role Services and industry produce added-value to the economy as a whole

35. Energy Management Class # 9 : Energy Economics City ON – na energy-economy model The central planner splits income between building power plants, technology development, resources (constant prices) and consumption Households have an utility function that depends on pollution generated by the electricity production sector and useful consumption Transformation between final and useful consumption depends on efficiency A central planner has to keep people happy (high useful consumption + low pollution)

36. Energy Management Class # 9 : Energy Economics City ON – an energy-economy model Power plants can be renewable and non-renewable. Non-renewable power plants pollute & Renewable plants depend on wind, sun and water availability Characterizationof power plants and technology development (& investment) were realistic

37. Energy Management Class # 9 : Energy Economics City ON – an energy-economy model This model was used by Biodroid to develop a serious game to EDP –http://www.cityon.pt/enhttp://www.cityon.pt/en It was applied to Portugal with some adjustments to forecast optimal electricity production & GDP evolution –Supply should have a more relevant role for renewables due to environmental impacts.

38. Energy Management Class # 9 : Energy Economics Energy Wars – an energy-economy model Introduce more production factors

39. Energy Management Class # 9 : Energy Economics Energy Wars – an energy-economy model Introduce more production factors (labor, capital and technology) Introduce energy scarcity to simulate dependence of economic growth on energy

40. Energy Management Class # 9 : Energy Economics Energy Wars – an energy-economy model Introduce more production factors (labor, capital and technology) Introduce energy scarcity to simulate dependence of economic growth on energy Introduce more types of energy (at least oil & renewable electricity) to simulate whether the economy can make a smooth transition between fossils and renewables

41. Energy Management Class # 9 : Energy Economics Energy Wars – an energy-economy model Introduce more production factors (labor, capital and technology) Introduce energy scarcity to simulate dependence of economic growth on energy Introduce more types of energy (at least oil & renewable electricity) to simulate whether the economy can make a smooth transition between fossils and renewables Introduce mechanisms that are relevant for the oil price formation (speculation, decisions on investments by energy firms, decisions of oil consumption by non-energy firms and households)

42. Energy Management Class # 9 : Energy Economics Energy Wars – an energy-economy model Introduce more production factors (labor, capital and technology) Introduce energy scarcity to simulate dependence of economic growth on energy Introduce more types of energy (at least oil & renewable electricity) to simulate whether the economy can make a smooth transition between fossils and renewables Introduce mechanisms that are relevant for the oil price formation (speculation, decisions on investments by energy firms, decisions of oil consumption by non-energy firms and households) There is no central planner to make decisions, i.e., households, the energy sector and the non-energy sector have internal dynamics

43. Energy Management Class # 9 : Energy Economics Energy Wars: The macroeconomic model

44. Energy Management Class # 9 : Energy Economics Were do Energy Companies Invest? Research Oil & Gas Renewables Storage Financial Market Energy Wars – An agent based model for energy firms Companies have to deal with huge investements lags: 7-10 years Hydrocarbons scarcity push Oil&Gas companies to renewables Market Structure: Oligopolist –Very capital intensive industry > Few companies control the market Model : hydrocarbons depletion renewable penetration

45. Energy Management Class # 9 : Energy Economics Energy Wars – An agent based model for the financial market A limited number of intelligent, but boundedly rational financial agents; Agents use different heuristic trading rules to buy or sell oil future contracts; Fundamental rules: use real variables such as change in oil stocks or GDP growth to predict future oil prices Technical rules: use historical price series to predict future oil prices From the mismatch of supply vs. demand emerges a price

46. Energy Management Class # 9 : Energy Economics Energy Wars – Interaction between models Macroeconomic model Agent-based financial model Agent-based energy firms model Oil Price GDP Oil Stock changes Oil Supply Oil Price Interest rate GDP