A12 Wednesday, March 9, 2011

THE WALL STREET JOURNAL.

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CERAWEEK 2011

EnErgy StratEgiES for a World of ChangE:

To Readers
Much of the energy infrastructure the world will need in 2030 has yet to be built. This fact poses enormous responsibility and opportunity. How will the future of energy be shaped by the conuence of policy, market forces, technology, climate concerns, geopolitics and the sheer scale of investment required? This weeks special sections, Energy Strategies for a World of Change, focus on how the energy system will evolve to meet the needs of a growing worldand the resulting multiple demands, risks, and possibilities. Today we examine whether a mass market for electric cars will emerge, what we can expect from the smart grid, and prospects for unconventional gas in Europe. Yesterdays special section addressed Iraqs plans to modernize its oil industry; the recent growth in production of previously inaccessible tight oil; the widening spread between two key oil price benchmarks; and the economic impact of oil and gas in the Gulf of Mexico region. We are pleased to partner again in these special sections with the Wall Street Journal and offer its readers thinking and analysis on the challenges ahead, as we embark on the 30th CERAWEEK conference in Houston, Texas. CERAWEEK is recognized as the most prestigious annual meeting for the global energy industry. This years conference will feature presentations and interactive sessions by more than two hundred senior executives, government ofcials, and thought leaders from across the energy spectrum. We anticipate attendance by more than 2,000 participants representing over 50 countries. The conference, which includes expanded Energy Tech Pioneers, will culminate on Thursday evening and Friday with perspectives on The Next 30 Years in politics, economics, and energy. Our CERAWEEK On Demand program will again bring the conference to a wider network of virtual participants. For more information, see www.ceraweekondemand.com. As we mark CERAWEEKS 30th anniversary, we invite you to join us in a dialogue about the energy future through our experts insights in these pages.

The Race to Build the Electric Car

By Tiffany Groode and Levi Tillemann-Dick
global race is now underway. The goal is a mass market electric car. While early entrants, the Chevy Volt and the Nissan Leaf are already here, this is hardly the rst run for the EVthe electric vehicle. Around the world automakers are now betting billions that the EV can break through stubborn cost and performance barriers and create a thriving market.
Why the optimism? Rising oil prices and environmental consciousnessin particular on climate changeare major drivers. So is concern over energy security, especially at times of turmoil in the Middle East. Technological advances have also brought EVs closer. But most crucial is the initiative governments are taking to get EVs out on the road. The IHS Global Auto Scenarios examine the key factors that will determine the future of EVscost, technology, oil prices, government regulation, values, demographics, and others. In the most optimistic of the three scenarios the Meta or high oil price, low-carbon scenariopure battery electric vehicles account for 12 percent of global new vehicle sales in 2020 and 32 percent in 2030. These gures are even more aggressive than they may rst appear. Countries that are price sensitive or lack infrastructureor where governments are not pushing electricationwill see small numbers of EVs on the road. That describes many global growth markets for automobiles. Global penetration of 32 percent means substantial penetration in the worlds largest automotive markets30 percent in the U.S. and 55 percent in both Japan and China. In the least optimistic, economically turbulent Vortex scenario, the world only gets to 10 percent EV penetration by 2030. How to get to Metas high numbers? Advances in batteries will be critical. Lithium ion batteriesthe kind used in cell phones and laptop computershave greatly improved the economics, safety, reliability, and range of EVs. Despite this progress the EV remains at a disadvantage in terms of cost, range, and other aspects of performance. Improving a battery in one realm can create tradeoffs in another. Energy density, charging time, safety, and lifetime are not necessarily independent of each other. Optimizing all these different pieces takes money, time, brains, and perhaps a bit of luck. That means policy has a big role in nurturing this edgling industry. The three largest automotive producers in the worldthe United States, Japan, and Chinaare all promoting EVs, but quite differently. In America the most important driver is a four-letter word: CARB. The California Air Resources Board has been aggressively promoting zero-emission vehicles (ZEVs) for two decades. CARB requires at least 7,500 vehicles with no tailpipe emissions to be sold in California between 2012 and 2014. That number may seem small, but CARB will require many more in subsequent years; and EVs are the least costly option for meeting this mandate. Today California is the largest auto market in the United States. Since carmakers dont want to be shut out of it, almost all major car companies have announced plans to sell EVs in 2012-2014. The Golden State has been a trendsetter for environmental regulations, so ZEV mandates also may come to other states. At the federal level, the Obama Administration is strongly promoting EVs. The Recovery Act and the Advanced Vehicle loan program have put a combined $5 billion into vehicle electricationto build battery manufacturing plants, nurture EV startups, and improve EV technology through R&D. The federal government also offers a tax credit of $7,500 per vehicle for the rst 200,000 units per manufacturer. Other programs fund research on new battery technologies and seek to strengthen the electrical grid. The rescue of Detroit has also, as a byproduct, promoted EV development. But with a Republican House majority and the new focus on the decit, further funding is now uncertain. In Japan, a country famous for industrial policy, strong private consortiums are having a powerful role in developing and deploying EVs. Japans large and established companies have the capital, research abilities and manufacturing expertise to develop cutting edge, world-class EV products at commercial scale (e.g. the Nissan LEAF or Toyota Prius). The Tokyo Electric Power Company (TEPCO) has formed a consortium to develop and deploy a technology standard for fast charging of batteries. But government support for electricity in vehicles, both hybrids and pure EVs, is also quite vigorous (the consumer subsidy is about $9,000). EVs are viewed as a way to reduce oil imports, improve industrial competitiveness and rein in greenhouse gas emissions. Japans policymakers also know that China and Korea are right behind them. In China, the government uses its pivotal role in the economy to stimulate strategic sectors like EVs. Chinas central government will spend at least $15 billion on EV programs over the next decade. On top of Beijings $9,000 incentive, many of Chinas cities also give large tax incentives to EV consumers and producers. Success in deploying EVs would help cities clean up severe local air pollutioncaused, in part, by the proliferating automobile eet that in 2009 made China the largest automotive market in the world. Chinas central government has pulled 16 large stateowned companies together including Chinas three major oil companies, plus critical stakeholders in the electric power, automotive, and aerospace sectorsto develop and deploy comprehensive electric vehicle technology not only for the benet of electric vehicles in China, but also for the benet of all mankind. While China appears to be behind the West or Japan in terms of auto technology, it is determined to become an EV leader. Ambitious schemes, such as its high-speed rail network, have demonstrated Chinas ability to leap ahead of mature economies. That is exactly its goal for EVs. The United States, China, Japan, and Europe all have very ambitious objectives for EV deployment. This push towards electrication is a great race, but even more than technology, sustained robust policy is required. If electrication of automobiles is the goal, policy will be the critical fuel.
Tiffany Groode, IHS CERA Director, leads the research for the IHS Automotive Scenarios. She has a Ph.D. in mechanical engineering from MIT. Levi Tillemann-Dick, a consultant to IHS CERA, is writing a book on electric vehicle policy in China, Japan, and the United States.

Daniel Yergin
IHS CERA Chairman and Chairman of CERAWeek

IHSCERA.com

IHS Cambridge Energy Research Associates (IHS CERA) is a leading global advisory firm providing insight on global energy, markets, geopolitics, and economics. IHS CERAs team of experts is headed by Pulitzer Prize-winning author of The Prize: The Epic Quest for Oil, Money, and Power, Daniel Yergin, IHS CERA Chairman. CERAWEEK has been ranked one of the five most influential senior executive conferences in the world, and the only one focused on a specific industry. CERAWEEK brings together more than 2,000 leaders from more than 50 countries to discuss and debate the global energy future. www.ceraweek.com

CERAWEEK On Demand Participate virtually in CERAWEEK 2011 and gain access to the conferences exclusive insights. Available for individuals or entire organizations. For more information, visit www.ceraweekondemand.com. IHS (NYSE: IHS) is the leading information company with comprehensive content, insight and expertise in pivotal areas shaping todays global business landscape: energy, economics, geopolitical risk, sustainability and supply chain management. Businesses and governments around the world use our products and solutions to make faster and more confident strategic decisions. IHS.com This special section was prepared by IHS CERAs research staff. Editor: Robert Laubacher

Illustrations by Alex Williamson

THE WALL STREET JOURNAL.

Wednesday, March 9, 2011

A13

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What Really to Expect from a Smarter Power Grid

By Lawrence Makovich
Smart Grid is an exciting idea and one of the hottest investment topics in the U.S. power sector today. But the impact is likely to be much different from what is expected. And what it will lead to is not a smart gridbut a smarter grid. The smart grid concept involves adding advanced meters, sensors, and controllers, along with two-way high-speed communication and software, to the existing grid. Many see the smart grid as a disruptive technology ready to transform the power sector. According to this view, the smart grid will unleash pent up efciency, integrate distributed renewable generation, enable electric vehicles, reduce greenhouse gas emissions and, in the process, lower consumer power bills. But this vision in its entirety is too good to be true. It is easy to understand why people are attracted to the idea that turning a dumb grid into a smart grid can address major challengesgrowing greenhouse gas emissions and rising real power pricesthat appear difcult to solve with current technologies. But taking advantage of the real opportunities from the move toward a smarter grid requires separating the true potential from unrealistic expectations. Assessing the impact of new technologies on the grid is not easy. The power grid, so essential to modern life, is often taken for granted. This attitude is not surprising, because the grid operates in the background and seldom failsthe U.S. grid operates over 99.9 percent of the time. The current U.S. power grid is anything but dumbit is a $330 billion network of high voltage transmission lines, substations, and distribution systems, run by integrated control centers that employ real time data and sophisticated software. It constantly simulates a virtual grid to ensure the reliable delivery of a commodity that moves from producer to consumer at close to the speed of light. The U.S. power grid is already intelligent and is continuing its longstanding evolution toward becoming even smarter. enjoy and fear a shift to less predictable and highly variable real time pricing. In the past, two states tried to mandate dynamic prices for residential customers. The backlash was so severe that both programs were abandoned within a year. Two other states already have laws on the books that prohibit mandated dynamic pricing for residential customers. And when time differentiated pricing has been implemented, the price variations eventually approved are quite muted compared to the real time price of electricity. A more realistic outlook for the evolution toward a smarter grid is that it will involve a gradual layering on of smart grid technologiesincremental engineering improvement, rather than a disruptive technology transformation. The impacts of the smart grid are likely to be led from the power supply sideby improved network operation and reliabilityrather than from the demand side through a reshaping of consumer behavior via dynamic pricing. Consequently, smart grid technologies will likely reinforce the traditional industry structure, which features geographically expansive delivery networks and large central power plants. Instead of a technology push to integrate intermittent renewable power generation, expect a technology pull for the smart grid to support electric vehicle deployment initiatives. On the demand side, do not expect a rapid, uniform scale-up. Rather, anticipate a gradual, geographically uneven implementation in the years ahead. The leading demand side application is likely to be for measurement and verication of programs to promote efciency. But such applications will be limited by security and privacy concerns that may inhibit access to and application of data that gets collected across the whole grid. In short, the U.S. power grid is not dumb, and it is going to get smarter in the years ahead.
Lawrence Makovich, an IHS CERA Vice President, is principal author of the IHS CERA study, The Smart Grid Narrative and the Smarter Grid: Revolution versus EvolutionWhich Way Forward?

Prospects for Unconventional Gas in Europe

By Peter Jackson
The unconventional gas revolution has transformed the North American natural gas industry. Will Europe follow suit? IHS CERAs new study tries to answer this question (see sidebar, Breaking with Convention). The study estimates that unconventional gas productive capacity in Europe could, depending on the scenario, reach 6 to as much as 20 billion cubic feet (Bcf) per day by 2025 (annual production of between 60 and 200 billion cubic meters)equal to one-fth to two-thirds of current European conventional production. Despite the promise of material volumes of unconventional supply, Europe will remain a net gas importer, due to steep future declines in existing conventional production. Policy will be as crucial as geology in shaping the future of European unconventional gas. Without regulatory change, unconventional production may be delayed or remain geographically restricted. Large supplies of indigenous unconventional gas have the potential to alter the direction of overall European energy policy. In time, Europe may face a strategic choice between unconventional gasa low carbon energy sourceand more expensive clean technologies.
Peter Jackson is Head of Upstream Research at IHS CERA and project leader for IHS CERAs study, Breaking with Convention: Prospects for European Unconventional Gas.

Breaking with Convention

IHS CERAs new study, Breaking with Convention: Prospects for European Unconventional Gas, examines 55 unconventional gas plays in Europe and estimates likely reserves, anticipated development costs, and the potential commercial impact. For more information contact Roberto.Futuro@ ihscera.com.

At the heart of the current narrative about the smart grid is a conviction that power customers want to be able to manage their consumption in response to different power prices at different times of the day. The idea is that consumers could adjust their usage to take advantage of lower prices during periods of slack power demand. But it is not very likely that varying pricing over the daywhat is called dynamic power pricingwill be the hoped for killer app of the smart grid. Dynamic pricing is not a new idea. Most utilities have offered such pricing schemes in one form or another since

the energy crisis of the 1970s. But only a minority of electricity customers can be exible enough about when they use power to benet from these schemes. And customers with this prolemostly large, electric intensive industrial customershave taken advantage of these arrangements for years. In addition, dynamic pricing is an idea that most consumers dont like. When given a chance to move to dynamic prices in the past, the overwhelming majority of customers chose not to switch. Most consumers seem to prefer the stable and predictable electricity prices they currently