Energy foresight ( vision of the future of energy industry )

1. Energy foresight (vision of the future of energy industry) V.N. Knyaginin CSR “North-West” Foundation May 2010, Paris

2. In 2008-2010,there was a number of events at world energy markets, which indicate that these markets are close to its fundamental modification 2 > Natural gas market transformation due to: а) «gas war» between Russia and Ukraine, and b) the explosive growth of gas production from unconventional sources in the U.S. (shale gas), c) launch of significant volumes of liquefied natural gas on the world market and, through this, unification of American, European and Asian gas markets, and d) growth of spot market gas volumes, and e) reduction of market sector where there are long-term contract prices which are tied to the oil price. 1. Growth of volatility in prices for hydrocarbon fuels. Confirmation of the carbon-based fuels market cycle: less than for one year (2008), oil prices reached their peak and then fell almost 3.5-fold and grown almost in 2 times again. 2. Growth of investments in alternative energy industry. 5 years in a row in the U.S. and already for 9 years in the EU - wind energy industry ranks the second in the amount of new generating capacity input. In 2009, 139.1 billion dollars were invested in the clean energy industry all over the world. In January 2009, 142 States have signed an agreement to establish an International Renewable Energy Agency (IRENA). 3. Appearance of new players from other sectors on energy market. In early 2010, the U.S. Federal Energy Regulatory Commission granted the Google Energy a license to purchase and resell electricity on market. 4.

3. 3 > The uncertainty of future has increased dramatically for global energy markets participants: the polar estimations of unfolding processes, marketing strategies that diverge from its focus 1

4. Fuel and energy market players estimate the future of energy industry in polar ways and therefore build their strategy in different ways. Forecasts constructed in accordance with these strategies, are alternative. 4 > IEA, ВР, Total, McKinsey and ect. OPEC, CERA and ect. Peak oil Passed Is yet to come Major importers (ЕС, US DOE and ect.) Market liberalization Market politicization Exporters (OPEC,GECF, NOCand ect.) Raw supercycle «Green lobby» and technology companies Postcarbon Energy (zero CO2 emissions) Mining companies and traditional energy systems "Carbon" and "nuclear” renaissance, the growth of gas sector, energy efficiency Basic resources of the future Electrification, “digital power”, system flexibility Ultra-large amounts, multiple overlapping Suppliers on “seller`s market” Consumers in the «buyer`s market» The main trend in demand Capacity market for energy production and generation Mining companies and traditional energy systems Technology companies, realtors Fuels and energy market Organization of the market New suppliers, suppliers - customers Traditional power systems and fuels suppliers Decentralized systems,Smart grid+Micro grid+ VPP Centralized systems Organization of the energy system The radical modernization of energy industry is essential There is a possibility of saving the system during the modernization

5. 5 > The forecasts of energy industry future depend on the vision of the future of society and the dominance of traditional or innovative sectors in national economy, as well as on its location in the camp of consumers (the core of world markets) or suppliers (world markets` periphery). Is it possible that the received data is not the result of modeling, but of the faith and political decisions? The share of renewable energy (excluding hydro) in the total electricity generation by 2030 Source: New Energy Finance, IEA, EIA Alternative scenarios for coal mining in the U.S. (1970-2030): depending on environmental constraints the production may either grow by 0,9% per year, or fall by 60% by 2030 Forecast of the highest levels of production of liquid hydrocarbons in the world by 2030 Source: Douglas‐Westwood Source: US EIA

6. 6 > There are two basic ways to answer the challenge of “the zone of uncertainty” expansion. The first is “energy efficiency +": the modernization of the existing energy system with its centralized electrical supply networks, large-scale generation, carbon energy industry, damped its negative elements (the substitution of oil, reducing CO2 emissions, etc.). The second is «new paradigm»: conversion to the new energy industry based on renewable resources and some other energy system`s architecture based on decentralized Smart grid. 2

7. Demographic increase, industrialization No resource constraints Portfolio of the resources, dominated by coal, oil, gas, nuclear fuels Consumers Centralized energy systems Energy and fuels market Major energy companies Technologies of energy generation Economic growth The organization of the city, economic geography The current energy industry with its core elements was formed in the end of XIX – ХХ century 7 > The first hydroelectric power station was run by Siemens in 1881, central DC power stations Edison - in 1882, AC power stations Westinghouse - in 1886. The main technologies in the coal, nuclear energy industries, internal combustion engines and power transmission have been developed around 1980. In the years 1850-1950 the increase of energy consumption in the world amounted to 1.45% per year, the basic fuel was coal. In years 1950-2000 the growth accelerated to 3.15% per year, the basic fuels were oil and gas.

8. The history of economic and technological progress shows that making the process of resources consumption more efficient , we stimulate the growth but not the reduction of these resources’ consumption. 8 > William Stanley Jevons, The Coal Question; An Inquiry concerning the Progress of the Nation, and the Probable Exhaustion of our Coal-mines. London: Macmillan and Co., 1866 Forecasts of increase of energy consumption across countries and industries, QBTU (2020 год) 5 QBTU> X>2 QBTU 2 QBTU> X>0 QBTU X> 5 QBTU X< 0 QBTU Source: McKinsey Global Institute

9. At the same time in a situation when it is necessarily to formulate a principal response for the challenges of modern energy industry (exhaustion of available resources, emissions of CO2, the lack of incentives for consumer self-management of energy production) - there are new solutions, showing that the paradigm of energy development can be possibly changed in general. First of all business processes will be reconstructed, and they will open the way for other technologies 9 > By creating Better Place, Shai Agassi has not just found an easy solution for customers to switch to electric cars (you buy the car, but the battery is leased from the network company’ - "tanker", according to the principle, tested by issuers of plastic cards) and its service (the battery is changed at the petrol station), but also has implemented a restructurization of the market: not kilowatt hours are sold but electricity-miles (the principle of mobile network operator services). Mark W.Johnson and Josh Suskewicz, How to Jump-Start the Clean-Tech Economy // Harvard Business Review, November 2009 In January 2009 г. Better Place announced that it had signed an agreement with HSBC, representing the group of investors (HSBC, Morgan Stanley Investment Management, Lazard Asset Management, etc.), agreement on a new stage of equity financing in amount of $ 350 million. This transaction is one of the largest investment in a campaign of clean technologies. Capitalization of Better Place will reach through this 1,25 billion dollars. " Источник: Better Place

10. 10 > In industrialized countries the transition to the buildings of low and / or zero emission of heat is carried out. The technological solutions for autonomous energy supply that meet the "digital demand" are integrated in these buildings. Facilities (including industrial and transport facilities) become not only the consumers but also the suppliers of energy. The sale item for real estate market is changing: they sell not the building but the facility with a certain set of functions.This way the cities are designed. They acquire a fundamentally new architecture, integrate the electric vehicles as distributed batteries, etc. Requirements for energy efficiency of buildings and facilities in some countries

11. Restrictions on emissions of CO2 and water resources stress, lack of resources «Echo»-boomers, Millennials, «green» consciousness Portfolio of resources, dominated by available in the local place Consumers-Producers Smart grid Capacity market Urban communities, developers IT + energy industry «Smart», stable growth Resources producing cities, Postcarbon City It is possible that we should start to discuss the changing of the whole energy system paradigm - a model of "new paradigm“ 11 > Transformation of energy consumers into energy producers, and of energy buyers in a centralized system into capacity buyers who produce resources allows 1) to increase role of self regulating by consumption, 2) to mobilize technology for decentralized energy generation, and 3) to add value to local resources, fourthly, to go to the Smart consumption, growth, cities.

12. So far, it seems that the choice between two principal models of energy industry (“energy efficiency +“ and "new paradigm") is only to be made. But it is clear that the existing energy system comes into conflict with a number of social subsystems and has no resources for overcoming these contradictions. There is no modernization which is able to correct this situation. 12 >

13. 13 > There are many signs that the scenario of transaction to new energy industry has already become formed.Electrification of the energy demand, increasing share of renewable energy sources (hereinafter - RES) in energy balances, growth of demand for the digital energy (in 2030 in developed countries up to 30%), the transition of the OECD to the buildings with low or even zero consumption of heat toward the 2020-30 years – all this will require Smart grid. Smart grid, in its turn, will set the selective requirements on the architecture of energy system and generating utilities (the maximum flexibility, informatics). If we add to this picture the requirements on the restrictions of water use and CO2 emissions reduction, than we will see the discriminatory profile in a number of generation technologies. Due to the low prices natural gas may become the dominant resource in the transition period.“EU Third Energy Package“(since 2011) creates the necessary legal framework. Are we in a “associated solutions system”? 3

14. «System of associated solutions»: as it is 14 >

15. 15 > There is a high possibility that the transition to a new power industry has already begun, and its relatively complete structure will be formed between the years 2020-2030. This transition will be completed through the efforts of players in the center of the global energy market

16. 16 > 4 Where is Russia’s place in a transition to a new global energy architecture?

17. 17 > A movement in the space of global energy industry for Russia should be converted into a "road map" that has various components: technological, market, resource, environmental and regulatory 1. Technological component

18. 18 > A movement in the space of global energy industry for Russia should be converted into a "road map" that has various components: technological, market, resource, environmental and regulatory 2. Resource and environmental component 3. Regulatory component

19. 19 > What tools does Russia’s Government (or business?) have in order to manage country’s energy system development along the “road map"of global energy? All answers end with "but ...“ Restructuring (liberalization) of internal energy market is to be completed after 2014 (including the liberalization of the retail market), but there is no clarity either in law or in the technological side of this issue. For now it leads to upgrading the old energy industry (centralized networks, traditional generation, etc.). 1. 2. There are national oil companies (NOC) and alliances with exporters of primary energy (OPEC, GECF, etc.). But it delays the liberalization of gas market, puts Russia under increasing pressure of international institutions (eg., the implementation of the EU Third Energy Package). There is no answer to the question of whether there will be a liberal and competitive internal market for gas. If yes, according to which model will it be built? Energy Efficiency Programme. But it is clear that it is just a way to upgrade the existing energy grid. 3. Tariff regulation. But it is typical of traditional centralized energy industry, not dispersed. 4.

20. Electricity energy industry reform was the most ambitious action of the previous stage of energy development in Russia. But it does not give the opportunity to finance modernization of centralized power production system in future. The main problems of electric power are not solved yet:The crisis of generating capacityLack of investment in the industryLack of financial and administrative transparency of the industry  Low efficiency • Electric power industry restructuring (core of the reform): • Specific separation of the companies • Privatization of competitive industry sector • Partial privatization of the natural-monopoly sector • Creation of a competitive market: imposing of free pricing in the competitive sector • - Maintaining the state control over transmission and distribution networks, scheduling and State Corporation “Rosatom” Adoption of № 35-FL «On electrical energy industry » и №36-FL «On the functioning of the electrical energy industry in transitional period» Termination of specific separation of energy companies and the sale of them Creation of wholesale market for electricity and power Full liberalization of prices for industrial consumers Full liberalization of electricity prices Creation of RAE “UES of Russia” Non-payments crises The beginning of reform preparation 1992 2000 2006 2011 1998 2003 2008 2014

21. Oil and Gas Sector: Focusing on the completion of market liberalization would actually lead to the preservation of the existing system. There are no reasons and motives for the restructuring of the gas market. • Current reform - liberalization of the domestic gas market: • phased liberalization of domestic gas prices for industrial consumers • linking the gas tariffs for the population with the needs of producers • ensuring non-discriminatory access to transmission system for independent gas producers • Problems: • Low efficiency • Almost exclusive domestic market (Gazprom - 70%): • Government regulation of domestic gas prices • Depreciation of gas transmission and distribution networks • Growth in domestic consumption along with the exhaustion of resources Regulated market 307 BCM Free market 89 BCM The development of large oil fields, the implementation of major new projects JSC “Gazprom” Production profile Mm tones/year Rospan Yamal projects Uvat HF Kamennoe Brownfields Independent gas producers External suppliers (Central Asia) Oil companies Gas on regulated prices Gas from independent producers Imported gas Associated petroleum gas The planned transition period (calculation of Russia's domestic gas prices by a formula - based on European prices for gas) RF Government Ordinance “On improving the state regulation of gas prices” RF Government Ordinance "On ensuring non discriminatory access to transmission systems" The elimination of state regulation of gas prices for industrial consumers Creation of RAE “Gazprom” 2001 1992 2011-2013 2014 2007

22. Russia's energy strategy postulates the need for gradual transition to the «energy system of future», but does not take into account the strategies of major global players and does not respond to questions concerning the global agenda The main factors determining the development of the Russian electric power industry: • extent of integration into the world energy space • scale of realization of resource-and energy-saving technologies • development of mineral resource base The stated priorities of the strategy:•energy security •improving the efficiency of the fuel and energy complex, energy conservation • improving the financial sustainability and efficiency • minimization of energy producing negative impacts on the environment Comparison of energy policy priorities in Russia, the USA, China Stages and foreign policy in the energy strategy of Russia Terms Overcome the crisis in the economy and electric power industry Improving the energy efficiency of economy and electric power industry , innovative development of oil and energy complex Highly effective use of traditional energyThe gradual transition to the energy system of future Priorities

23. 23 > 5 Why to hold a foresight in Russia in such situation?

24. Foresight is needed during country’s integration into the global energy system’s future’s «schematic design», and to participate in discussions and joint planning (coordinated vision of the future) with the other participants. It is late to appeal to other "future’s picture” while making formal decisions, as inconsistent positions can be reduced only through a "power play" 24 >

25. What questions should the Foresight answer and what is the direction of the Foresight? Non CO2 Carbon • Does Russia participate in the transformation of global energy sector? Cities Transformation terms Digital demand Energy efficient buildings Smart transport ICT Urban renewal • What are the key technologies for Russia? Technologies Smart-grid Networks Production Cheapshale gas NuclearplantsIII+ Generation Upscale of wind- andhelium- generation RESVS «atomic renaissance» Paid ССS Refinement • What should be the next stage of reforming the RF power industry? Renewable Energy Sources Market of Investment in Renewable Energy Sources Coal Increase in Asia Future of the coal Which version of the further energy development scenario it must meet? The corporate structure of the market Rise of value and risksin oil development Oil Markets Sharing of oil and gas market Gas «New» gasmarket Energy Balance of the center and periphery Nuclear Limit of global marketin Nuclear Energy Station • How could the “agendas” for RF and, for example, for EU be coordinated? DIrectedR&D Sustainable development Feed-in tariffs Copenhagen TaxVS emissions trading SET-plan Tax incentives for RE Regulation Security of supply EU Third Energy Package Balance: Cost-reliability-accessibility The concept of supply quality Development in consumption Smart meters Global Agenda: bifurcation points Politics of RF

26. Scheme of the Russian Power Industry Foresight implementation Identifying of the key ideas. Preliminary agreement Creating of a platform for global negotiations. Clarifying of the positions. Developing of coordinated official position Presentation of the official position • Series of international conferences with participation of representatives of key organizations. • Agenda of the International Energy Forum Russian Fuel and Energy in ХХIcentury • Modernization of the Energy Strategy of Russia • Regulatory provision of priority areas realization. • National standards for buildings and facilities • Development and submission of the report “Energy Foresight: the role of Russia in worldwide policy • Discussion of the report • Copenhagen • G8 \ G 20 • IRENA September-October 2012 January-December 2011 May 2010- September 2011

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