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ENERGY FORUM A QUARTERLY JOURNAL FOR DEBATING ENERGY ISSUES AND POLICIES CONTENTS Issue 81 May 2010 Energy Poverty Robert Bacon Suleiman J. Al-Herbish – page 3 In a world where some regions and in some countries many people are becoming wealthier by the year, if not by the day, poverty still The Credit Crunch and International Energy prevails. As our focus is on energy it is natural that our concern is Markets with energy poverty. Robert Bacon whose work at the World Bank Christopher Allsopp – relates to this important issue, and Suleiman Al-Herbish, the Di- page 9 rector General of the OPEC Fund for International Development Gas Matters (OFID), both contribute to a discussion on this theme. Stephen Bull Robert Bacon reminds us that effective attention in the interna- Armelle Lecarpentier – page 13 energy poverty affects a very large tional debate despite the recent number of people, not only in the King Abdullah Energy for the Poor Reforming UK Electricity third world. Recent estimates put the Initiative endorsed by the G20 and Markets number of people who lack access to the International Energy Forum. The John Rhys – page 20 electricity at 1.5 billion; and the num- fight against energy poverty does not ber of those who rely on biomass for have a champion on the world scene Letter – page 23 cooking and heating at 2.5 billion. as many other causes do. There is poverty, including in energy, Asinus Muses – page 24 in rich industrialised countries. In his contribution, Christopher Allsopp asks the important question More significantly, the size of the where do the world economy and the problem will not diminish in the international energy markets stand years to come unless a very ambitious after the credit crunch? Put differ- remedial programme is designed and ently: are we facing the possibility implemented. Energy poverty, which of a W-shaped recession or are we is about the lack of access to clean out of the woods? Allsopp reminds modern fuels, or inability to afford us of an ignored fact: the USA and them when technical or commercial other economies were slowing down access is available, is detrimental to before the onset of the financial crisis. health and education and more gener- The response of the central banks ally to human wellbeing. was to offset recessionary forces by Suleiman Al-Herbish believes pas- cuts in interest rates. Initially there sionately in the need to reduce the was confidence that policies will numbers of those who presently solve the recessionary problem. The suffer from energy poverty. Business failure of Lehman Brothers destroyed as usual policies will only condemn this confidence. Yet, the recession the energy poor to be deprived of although very deep was V-shaped. the use of cleaner and more efficient The recovery began in early 2009 fuels. The issue is not receiving thanks to the dynamics of the stock OXFORD ENERGY FORUM MAY 2010 cycle, monetary and fiscal policies adopted by major the recent deregulation, continue to dominate the countries and the cumulative effects of budget defi- gas supply structure in Europe. Looking ahead, cits that enabled de-leveraging by the private sector. the trend seems to lead to a situation where spot prices become the major, if not the unique refer- The recovery, however, will depend on the timing ence for the pricing of gas supplies. The current co- and scale of measures that governments may be existence of two gas price regimes may not survive minded to apply to solve the public debt problem. forever, but its demise is not imminent. We cannot dismiss entirely the possibility of fall- ing once more into recession. On this issue the Recent excitement about the new production of prospects for the UK are perhaps bleaker than for unconventional gas in the USA is an interesting the USA for example. Allsopp is fundamentally an story. It reveals that important phenomena in the optimist; I tend to be pessimistic. Nevertheless I energy world that are sometimes predictable are hope that events will prove him right. not predicted, and also reminds us that Malthusian Natural gas considered in the past as oil’s ‘little views about resources scarcity should be received brother’ can no longer be dismissed in this, or in with great caution. Over-pessimistic promoters any other way. Its importance has been continually of the peak oil theory are being reminded by the increasing over the past three decades not only gas example that both geology and technology can because of increases in its share of total energy spring major surprises. use but because of its dominant position in power Forum is interested in the complex problem of generation. Natural gas developments throw out electricity markets and their regulation. We are important issues for research and debate. lucky to have in this issue a contribution by John We have two contributions on aspects of these Rhys whose expertise acquired over a number of developments. Armelle Lecarpentier addresses the decades is remarkable. He addresses the problem complex problem of gas pricing in Europe, and of reforming the market structure in the UK, a Stephen Bull reflects on the emergence of new sup- problem that is concerning the regulator OFGEM. plies of what is labeled as ‘shale gas’. In a wide-ranging article Rhys examines critically, among other things, the benefits accrued in terms The gas pricing system in Europe involves two dif- of costs and prices under the liberalised regime, the ferent regimes: spot prices in market transactions problem of securing the investments necessary to and prices indexed on oil in transactions undertak- meet capacity objectives and low carbon sustain- en under long-term contracts. This co-existence is ability. Rhys has a proposal: a central purchasing obviously problematic; the system is coming under agency which will ensure the implementation of the pressure of competitive forces and oil-indexing objectives while maintaining valuable competitive is increasingly losing ground. market structures. Initially, in the 1950s and 1960s, the discovery of two major fields – Groningen in the Netherlands and West Sole in the UK – led the companies Contributors to this issue involved to seek security of supply in the new markets gas was penetrating and a continuous Christopher Allsopp is Director of OIES flow of returns to the huge capital invested. To achieve both objectives they entered into long-term robert bacon is a consultant at the World contracts with the buyers of gas and invented the Bank Take-or-Pay concept. In such contracts indexation stephen bull is Commercial Leader for Statoil’s to crude oil or petroleum product prices was gen- Marcellus Asset erally adopted. suleimAn J. Al-herbish is Director General of The liberalisation of the UK gas market completed the OPEC Fund for International Development in 1998 had a significant impact on the market structure and the price regime. The UK national Armelle lecarpentier is the Chief Economist hub (NBP) is used by producers for indexing gas at CEDIGAZ, IFP prices. Although several other hubs have emerged in Europe, the long-term contracts, agreed before John rhys is a Senior Research Fellow, OIES 2 OXFORD ENERGY FORUM MAY 2010 Energy Poverty Robert Bacon fuel poverty – a household is fuel heating, and this in turn is linked to a poor if it is unable to afford to number of adverse health effects. discusses definitions purchase sufficient energy (although The use of biomass or coal for of energy poverty and it has access). In the European Union cooking and heating is extremely considerable attention has been paid widespread and occurs over a very policies to reduce it to fuel poverty where low-income wide income range in developing households are too poor to purchase countries. The alternative fuels for sufficient fuel for heating during cold cooking include LPG, kerosene to a winters. For example, in 2006, it has What is Energy Poverty? small extent, and natural gas in a few been estimated that 12 percent of countries where there is an urban gas Globally, energy poverty is extremely households in England were fuel poor, network (such as Pakistan). Electricity widespread, and projections suggest with comparable levels in some other is used for cooking and heating only that, without aggressive policies to northern European countries. at the highest income levels outside of counter it, the level of energy poverty the industrialised countries. Biomass will remain high for many years to Why is Energy Poverty a Special includes charcoal, firewood, straw, and come. A commonly accepted and Concern? dung whose use depends on availabil- simple definition of energy poverty In developing countries the domi- ity and costs (direct and indirect). is that a household without access to nant use of electricity among poor electricity or clean modern fuels is households that are connected is for energy poor. However, even in this lighting, with television being the next definition the notion of access differs “currently about 1.5 billion commonest use. At higher incomes between users. Access to an energy other appliances using electricity people in developing source is generally understood to may be purchased (such as fans, or mean that the infrastructure to deliver countries lack access to refrigerators). However, it is rarely that source exists in the neighbour- electricity, and for cooking used for cooking or heating even at hood of the house (e.g. there are relatively high incomes. Without a or heating about 2.5 billion electricity connections in the village or connection to and use of electricity, neighbourhood). rely on biomass and 400 households are very limited in the million rely on coal” However, data related to this defini- amount of lighting they can use.