Tag Archives: markets

Carbon pricing

I’ve written about carbon credits (here and here); but I never really quite considered them from the perspective of carbon tax, because I generally thought of it as just another instrument that is used to price carbon. In reality, the different mechanisms actually work differently. And even for ‘carbon markets’, where you allow trading (which can take the form of credits or allowances, again slightly different conceptually), the carbon price can take on different meanings depending on the underlying instrument in question.

Singapore’s carbon tax system introduced the idea of allowing carbon credits to ‘offset’ these taxes. And the carbon credits are essentially international carbon credits generated from projects that removes or mitigates emissions in one way or another. This is not new as some other markets have allowed the use of offsets to reduce ETS liabilities (eg. Korea). In Singapore, companies who wish to do so can only have 5% of their carbon tax exposure offset using eligible carbon credits; and there are clear specifications of what works and what doesn’t.

This marriage of carbon taxes and pricing with the generation of quality international carbon credits is something critical to bring the next step of carbon pricing to maturity. Global ‘carbon resources’ in the form of means of removal and sequestration is not uniform, even when we are all sharing the same atmosphere. It is therefore necessary to be able to trade carbon. Technically, because there is negligible transport cost when you ‘trade’ carbon, global pricing of carbon should eventually converge to the same levels. It is potentially as close as it gets to a good that can be pure commodity. Yet because of the whole issue around measurement integrity and the lack of consensus around some of the dodgier types of carbon credit methods, it is going to be very difficult for pricing to converge any time soon. The variations globally in regulating carbon emissions and putting a price on carbon emissions would also serve to slow down global carbon trade.

At the end of the day, there are wider geopolitical and economic considerations blocking stronger climate action. Working along these forces will be necessary since fighting them is rarely an option.

Cutting subsidies

So having ranted incorrectly about energy subsidies, I saw this article about Malaysia and was reminded of this set of principles I suggested to one of the officials at the Single Buyer of Peninsular Malaysia while working with them on a project. These are ideas on how to move towards a regime where subsidies are reduced and does not apply to everyone:

1. Make them transparent: Start by making clear where there is a subsidy; even when there is a blanket subsidy, make sure that the amount of subsidy is clearly shown to those receiving the subsidy, and that the burden of the subsidy is properly attributed, reported, even publicly. Where price controls are used, the implicit subsidy needs to be made explicit.

2. Share a cross-section of the beneficiaries: Often, fuel subsidies are meant to help manage the cost of living for the lower income. But when it is implemented through price controls or blanket subsidies, it disproportionately benefits the largest energy users. By publicising who are the beneficiaries of the subsidy and how much who gets, you can start considering how to reduce the subsidy for select groups of beneficiary that will be impacted the least.

3. Reduce subsidy for beneficiaries not aligned with policy intents: unless the state policy intention is to benefit the fossil fuel industry, there are always some groups benefiting from a blanket subsidy whose profile doesn’t align with the target group you are trying to help.

4. Keep the subsidy only for groups targeted: once the policy intents are clearer and there is social consensus of who the target groups should be, the subsidies can be pared back to be given only to those who need them. This means that subsidies need to shift from producer-side towards consumer-side. This should be aided by improvements in technology, government data-collection, and new channels for disbursing benefits.

The truth is that economics of renewables have improved and could match fossil energy in some cases. Cutting subsidies for fossil fuel will not just help reduce the reliance on them but free up more government resources to accelerate the transition. We should not allow subsidies to stand in the way of the transition.

Single pivot point

To make a change, we need a single pivot point each time. The pivot point is where things are fixed in place and do not change, and all the other changes hinge on it. And then when we make the next change, we can have another pivot point. But with any one change, we need to select a point of invariance to ensure some kind of order for the change.

In our climate transition today, too many people are trying to change things without a pivot point, thinking that the whole world has to transform. Determining what can be kept constant first is probably a good way to use consensus to drive actions. Then you’ll begin to realise what you are trying to keep the same can have far reaching consequences. For example, if you want to keep energy demand constant and start switching out existing demand into renewables, then you’re making it difficult for economic activities to expand. If you want to keep energy cost constant, then you risk keeping things to status quo and banishing adoption of costlier but greener technologies.

Laying out the trade-offs matter but one can consider how we fix certain parameters and move others first before coming back to revisit these. Take energy costs for example; given the cost of living issues and challenges, governments might want to focus on expanding proven, existing low cost green energy sources and pushing through all manner of regulations, and coordination necessary. Capture of landfill gas to be upgraded into biomethane and upgrading the biogas produced in wastewater treatment plants are low-cost sources of renewable gas that can be plugged into the existing system to displace fossil fuels. Malabar’s biomethane injection plant has just received the Greenpower certification and is the first biomethane plant in Australia to do so, ushering in what we hope to see as an era of using market mechanisms to drive renewable gas and fuel growth as it had done so for renewable electricity in the past decade in Australia.

Some may argue that prolongs the life of fossil infrastructure but we are calling them fossil infrastructure only because they are majority driven by fossil fuels as a result of legacy. One day, those infrastructure could be 100% driving renewable fuels.

Pathway to Hydrogen

I keep thinking about the role hydrogen would play in the netzero energy system. It is important because most specialists in the field think it will be incredibly important. But I’m afraid some of them think of the importance not from an energy or thermodynamics perspective but from a technological, socio-economic perspective. I think that is misguided for something that is so nascent and imature.

The solar and battery learning curves cannot be used to project what happens to hydrogen because it is fundamentally a more complex type of project. A lot less plug-and-play compared to solar panels or batteries. For solar panels, the technology takes in light and transform it into power, which in essence is the flow of electrons. There is of course the issue of DC power versus AC power but the inverters will deal with that translation; and you can plug directly to existing electricity grids. Of course, when you have a lot of them the grid must start shifting but at least you get a shot at getting started. And after that you’ve got batteries coming in, again almost ready to work with the existing electrical infrastructure.

Green hydrogen production integrates with the electricity system fine as well; it takes in power, feeds the electrolyser which separates pure water into oxygen and hydrogen, storing away the gas as it is being produced. However, the most valuable output in the process, the hydrogen, needs to be properly stored and transported to where it is needed. And all of these infrastructure do not yet exists! The largest part of the revenue generation problem has not been sorted!

This is why it is so difficult to get hydrogen started, and so expensive to do so even when the technology seem more and more established. The challenge is that a lot of that infrastructure would also serve some of the current fossil gas interests. There are issues of couse with the risks of interest conflicts when the fossil industry push for hydrogen.

The fact that hydrogen is not so plug-and-play to our current system means more evolution is needed before we are ready. Instead of putting direct incentives into hydrogen production, we should be using our resources to solve the problems along the journey to the hydrogen future. A lot of these problems involves collective action, coordination of choices and displacement of swarthe of economic activities that requires proper thought about restructuring.

There is really much more work to do than administering incentives. And this is definitely not an area the government can easily rely on market incentives to accomplish.

Transition fuels

When Blunomy first started out as Enea Consulting in 2007, the world was not that different. We were burning lots of fossil fuels, except a lot more coal and oil. There was also less renewables then. Solar panels were incredibly expensive and people thought wind turbines were so clunky (and expensive for the amount of power it generates) it was not possible for the world to have more wind turbines than combustion turbines.

The period of 2000s saw the mainstreaming of liquefied natural gas (LNG) and gas was broadly touted as the transition fuel as the world cross from coal towards renewables. Emissions from combustion of gas was less than half that of power generation with coal, and gas power plants could fire up faster than coal power plants. Energy transition then was about fuel switching and the metric was more around carbon intensity per unit energy. Unfortunately, there was no regulations to push for shifts in this metric and so when the economics doesn’t line up, it simply was ignored. Coal power continued propagating in the world especially in the developing countries. Even in developed countries, coal plants were continuing to operate or even refurbished to extend their lifespans. Singapore’s Tembusu Multi-utilities complex which burns a mix of coal and other fuels, was commissioned as recent as 2013.

All these meant that as energy demand increased, the mainstreaming of gas especially through LNG was only serving incremental demand and not exactly displacing coal. Today, it gets lumped as ‘bad’ with coal and there are calls for it to be eliminated from the system. In many sense, people are considering gas no longer as a transition fuel but to be leapfrogged somewhat. The leapfrogging makes sense from a carbon intensity point of view. But by most counts, gas is a superior technology even to renewable power generation as gas power can still serve as baseload and is dispatchable unlike wind and solar which do not respond to the beck and call of power demand. Batteries help to overcome this but as long as the economics of renewables-plus-batteries is not superior to coal or gas, it will be a tough sell.

The reason for expansion of LNG was because of the superiority of gas in terms of technology, the way it matches our energy use, and the falling costs in the early 2000s. Projecting the way forward, this is unlikely to be true anymore as exploration in certain jurisdiction have slowed or ceased, existing gas fields are no longer as productive, and material costs have risen to counter the competitiveness. There is also a question of the new generation of engineers bothering to enter into this space if they perceive it as declining.

This is where bioenergy comes in and becomes positioned so awkwardly that it finds itself a little stuck. More on this soon.

GST hike & discounts

As we move from 2023 into 2024, Goods & Services Tax (GST) in Singapore will rise by another 1%. Given the prevailing rate is 8%, the 1% rate increase is actually a 12.5% increase in the consumption tax. No doubt companies will try to convince you to buy stuff before 31 December 2023 to benefit from the lower GST, rather than wait till next year. And if we were to project this logic forward, knowing that GST might eventually be 10%, there is a question of whether we should bring forward some of our purchases even more.

This is more of a psychological trick than anything. Take for example, your interest in an iPhone that may cost you $1000. Buying it before end of the year will save you $10 at the most because of the 1% additional GST that you will need to pay next year. That is hardly a ‘discount’.

Let’s say you got 10% discount from a Black Friday sale instead. Would it compel you to change to a new model rather than stick to your old one? You might. But what if instead of using your existing phone for 1 additional year (eg. 3 years instead of 2 years). If your original phone was also costing $1000, you’d effectively get a discount of 33% just by using it for 1 additional year. Obviously, it goes down if your base time length is longer.

But you get my drift. The biggest discount is when you can use your goods for longer and get more life out of it. There is no point chasing after lower prices of new goods upfront if you keep replacing them quickly. This is an element where sustainability on the consumer end actually lines up with economics but the challenge is psychology.

Electrification Tussle II

This post continues from yesterday’s blog post.

There will be players who cannot electrify their processes, and they will need solutions. Most of them would be using natural gas running through the pipelines. And for them to decarbonize, they would need either a renewable form of natural gas, which is probably the most acceptable solution for them technically. For some of them, burning green hydrogen could potentially work as well, assuming they overcome the issues around the lower energy content of the hydrogen. Let’s consider again the drive to electrify. Using green hydrogen for these industries is equivalent to electrification because green hydrogen production is driven by renewable wind or solar power production. The notion is ultimately to shift the energy demand of these hard-to-abate industries back to the electricity grid, except through green hydrogen. Except, of course, the green hydrogen route is a very inefficient use of electricity because of poor conversion by electrolyzers and then coupled with the fact that more energy might be used to transport or store the hydrogen.

What I’m trying to point to here, is not that green hydrogen isn’t a viable solution – because in due course, with technological improvements, it definitely can and should be used. But in light of the electrification challenges I highlighted in part 1 (yesterday’s post), green hydrogen does not help alleviate the problem. It tends to complicate it and put even more stress on the electricity system when trying to green the grid. The mix of policy stances involving the heavy promotion of green hydrogen, the attempts to accelerate the reduction in gas use domestically, and setting aggressive renewable energy targets (really more like renewable electricity targets) for the grid emissions factor are all putting a lot of pressure on the electricity system while trying to keep electricity cost pressures under control.

Already mentioned in the earlier blog post is that natural gas resources can serve as part of the transition story. Now, there are concerns and worries about an addiction to fossil gas. After all, the economy might actually be addicted to it because it is a very lucrative export for Australia and so even as the country tries to reduce domestic use, it is unlikely to give it up as an export. And the fear is that the addiction would make it harder to decarbonise. This is why the other area for the government to direct its resources and develop policies that channel efforts in the right direction would be to promote biomethane production and displacement of fossil natural gas through the use of biomethane.

It is almost a no-brainer. Yet, there were concerns about the costs of biomethane while the more costly green hydrogen is being subsidised in all directions. There were further concerns about the limits of the resource potential of biomethane when the grid resources for green hydrogen production are even more scarce and expensive.

In providing my opinions, I have not given any figures but assumed that readers can find and discover for themselves the relative costs, and other challenges associated with how the overall policy mix and energy transition conversation is creating needless bottlenecks and distorting the orderliness of the energy transition. I suggest that we direct our efforts as an industry, economy, society and country in a more sensible, coherent, and directed manner to navigate the energy transition. The technically sensible approach is available and on the table, let’s set that as a destination first, and then slowly navigate the political minefield to get to it. This would likely produce better results than to be muddling through the technical solutions while trying to satisfy various political constituents and be none the wiser as to which destination we’re trying to get to.

Just an additional note to say that these entries are purely my personal opinions and do not reflect any views of my employers or any organisations I happen to be affiliated with.

Electrification tussle

The more I observe the energy transition in Australia, the more I realise that its attempts at balancing many different principles and ideas are at odds with achieving an orderly transition. Too often, we cast the energy transition as a technical or economics problem but more often, it’s a policy and political science problem. At the heart of the debate, is the age-old welfare economics issue around winners and losers. And with lobbying, power plays, risk of job losses, and a mix of various different studies, academic and commercial contributing to various perspectives, it can be incredibly confusing for policymakers.

Having worked on the side of government and alongside policy makers when I first started my career in Singapore, I thought that the volume of noise that exists in Australia around the energy transition is startling. I recalled that there were a lot more ‘no-brainer’ type of policy directions and being in the government was a lot more about trying to steer a large, heavy ship towards the destination that we can more or less agree on. In Australia, it almost feels like the policymakers are simultaneously being pulled in a hundred different directions at the same time and trying to achieve it all.

If, at this point, we are seeing that the policy direction is towards electrification, then the actual effort will have to be looking at what can green the grid and focus on that. So there’s been funding towards more solar and wind, as well as batteries to help balance the load in the system. The next big challenge is grid stability and network capacity. This will require extremely large investments and infrastructure build-up that will take time. This means we cannot electrify everyone at the same time, and this phase-in of various functions being electrified will have to be determined and planned carefully. The risk of not working this out is high – the greatest being continually being held hostage by the coal-fired power capacities and unable to shut them down to green the grid because power demand is climbing faster than we can build the grid and renewable capacities.

Gas is a transition fuel for precisely this reason; and it can play its role in the transition in two ways. First, it continues to supply energy to industries that need heat, delaying their need to electrify and hence keeping power demand at bay. Second, it can provide peaking power and supplement or displace coal-fired power in baseload, playing a critical role in taking the most carbon-intensive power source off the grid. Yet this brilliant idea keeps getting drowned out by the fear that once the gas industry is entrenched, it won’t go away. The economic lifespan of combined cycle gas-fired power plants or open cycle ones is about 25 years though their operational life can be extended. This means that they can be introduced immediately and fired up to replace coal-fired power plants and the tail end of their economic life can be more for peaking uses to stabilize the variable renewable energy, deferring investment in batteries that have significant lifecycle carbon emissions themselves.

The earlier we cut coal, the better; by allowing gas-fired power generation, we also defer the need to scale up our network capacity quickly when the electrification drive advances. These actions can mutually reinforce each other and allow battery, wind, and solar capacities to enter the system gradually alongside network upgrades. We observe how energy cost on consumers have increased while trying to green the grid (levellised cost of electricity from solar and wind is not a strong measure given that they are not produced when needed); trying to force the electrification is not going to make things better. Coupled with the strong anti-gas sentiments would only mean costs will keep going up.

Part II of this article continues tomorrow.

Profitable transition

What does it mean if companies declare that they are committed to the energy transition including committing resources towards it, and massive investments, only to make a U-turn when oil & gas turns out to be way more profitable? It tells you that it had always been about the money it makes rather than the transition. Never mind that the fossil fuels continue to drive up carbon emissions and hurting the climate. In fact, maybe climate change would drive up demand for energy – especially in terms of heating or cooling, or requiring more activities in the economy to deal with and mitigate the impacts.

Can the work of accelerating the energy transition be left to the markets? Can profits really motivate companies to support the transition and reduce carbon emissions? Does the market demand understand, appreciate and would be willing to drive and pay for the transition? I don’t think so. Absent regulation, it is unlikely for the markets to drive the emergence of the solution. It is as if we want seat belt manufacturers to drive the messaging around safety and benefits of having seat belts rather than legislate it as a requirement in cars. Or just waiting around for cars to adopt them as the standard feature in a car.

We probably don’t have enough time for all that to make an impact on mitigating climate change. Regulations will be required. To put a price for carbon on the market, to push technologies and options in the market that will reduce emissions. We must also evolve and steer the regulation as our understanding of the technologies and impact on environment advances. We don’t have to get everything right on the first try but we do need to be trying.

Hoarding resources

New York Times just ran an opinion piece about Big Oil and whether the rhetoric about these big international oil companies actually push for the energy transition or not, their contribution to the development was probably not that significant anyways. There is minimal capital redeployment from oil & gas towards renewable energy. The truth is that capital coming into renewable energy is largely from other sources and areas.

The big oil players were in any case just trying to defend their turf when they invest into renewable energy; and in other instances, it was probably just more of a PR exercise. The recent big retreats from the rhetoric around energy transition can only serve to create more climate anxiety amongst the younger ones, and discourage us further about our ability to get the climate transition right. There’s really limited plan B options for us as the human race on earth facing climate change so everyone needs to work together regardless what the big oil is trying to do.

The biggest challenge for the world with the big oil not doing much to withdraw from the fossil fuel business is not about the market, the demand from the energy users but perhaps more about the people who are continuing to work within the big oil’s supply chains and operations. If we are serious about the transition, we need to give oil rig workers something new to work on that can help with the climate transition; we need to get the refinery process engineers to work for some other sort of plants. In general, we need a coordinated effort to transform our economies by making it a mission to do so.

When the world sent people to the moon decades ago, we were creating new industries using taxpayers’ dollars. We were using military spending to drive advancements that would usher in a new era. We could do the same with energy transition. It will take a lot of political will and convincing people but there is enough resources to redirect ourselves from the global warming path that we are on.