The Economic Impacts for Irelandof High Oil and Gas PricesPathways to risk mitigation and a low carbon futureA research pr...
ContentsTable of ContentsPathways to risk mitigation and a low carbon future THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL ...
ForewordForewordPathways to risk mitigation and a low carbon future THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS P...
Oil and Gas Prices and their DeterminantsChapter 1.Oil and Gas Prices andtheir DeterminantsThis opening section of the rep...
evidence in this case illustrates quite clearlythat shocks – both acute and protracted– have occurred in recent history.Sh...
Oil and Gas Prices and their Determinantsevents and changes in expectations. Bothcan change quickly as illustrated by ther...
Baseline Scenario 2025Chapter 2.Baseline Scenario 2025This study models the economic effectof a series of high oil and gas...
Baseline Scenario 2025rate. As a result of lower levels of outputin the building, manufacturing and marketservices sectors...
Economic and Social Impacts of three Oil and Gas Price ScenariosChapter 3.Economic and Social Impacts of threeOil and Gas ...
Economic and Social Impacts of three Oil and Gas Price Scenariosresults show that by 2019 output in the USwould be around ...
pressure on the price level which negatessome of the upward pressure causedby higher oil prices. The impact ofhigher consu...
%changerelativetoBaseline2010 2012 2014 2016 2018 2020 2022 20244. deflatorFigure 15...
Scenario. In real terms, the second priceshock peak of the camel scenario representsthe highest oil price assessed as part...
%changerelativetoBaseline2010 2012 2014 2016 2018 2020 2022 20244. deflatorFigure 21...
Ireland‘s dependence on Oil and GasChapter 4.Ireland,s dependence on Oil and GasThe previous chapter presentsoutcomes of t...
Figure 24: Indigenous energy production shares, 1990-20080%10%100%80%90%70%60%50%40%30%20%1990 1995 2000 2001 2002 2003 20...
with approximately 63% of the oil useshare and little change anticipated in theBaseline shares out to 2025. The industryan...
Options and actions to reduce exposure to High Oil and Gas Prices18 THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS P...
For each of the Focus Areas presented,we offer a qualitative examination of eachagainst four evaluative criteria as presen...
Options and actions to reduce exposure to High Oil and Gas Pricesa strong contribution to the developmentof the green econ...
to deliver a low carbon economy and helprealise the UNFCCC’s target of 450ppmalready exist38. However, at current lowcarbo...
significant and challenging sectors tomanage nationally with respectto greenhouse gas emissions andtransboundary air pollu...
Table 6: Parameters for 101MW case studyParameter	 Value	 Source		Site Location	 Sligo	 Study AssumptionWind conditions 	 ...
Summary, Conclusions and RecommendationsThis study has examined some of theeconomic and social costs that wouldbe incurred...
range of energy efficiency related measuresand supporting the uptake of electricvehicles into the national transport fleet...
Summary, Conclusions and Recommendations26 THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES	 Pathways to risk m...
2010 Kelly work example   Analytical report for Siemens - High oil and gas price impacts
2010 Kelly work example   Analytical report for Siemens - High oil and gas price impacts
2010 Kelly work example   Analytical report for Siemens - High oil and gas price impacts
2010 Kelly work example   Analytical report for Siemens - High oil and gas price impacts
2010 Kelly work example   Analytical report for Siemens - High oil and gas price impacts
2010 Kelly work example   Analytical report for Siemens - High oil and gas price impacts
Upcoming SlideShare
Loading in...5

2010 Kelly work example Analytical report for Siemens - High oil and gas price impacts


Published on

Published in: Business, Economy & Finance
  • Be the first to comment

  • Be the first to like this

No Downloads
Total Views
On Slideshare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

2010 Kelly work example Analytical report for Siemens - High oil and gas price impacts

  1. 1. The Economic Impacts for Irelandof High Oil and Gas PricesPathways to risk mitigation and a low carbon futureA research project commissioned by Siemens Limited
  2. 2. ContentsTable of ContentsPathways to risk mitigation and a low carbon future THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES 01Foreword 03Chapter 1.Oil and Gas Prices and their Determinants. 04Chapter 2.Baseline Scenario 2025. 07Chapter 3.Economic and Social Impacts of three Oil and Gas Price Scenarios. 09Chapter 4.Ireland’s dependence on Oil and Gas. 15Chapter 5.Options and actions to reduce exposure to High Oil and Gas Prices. 18Chapter 6.Summary, Conclusions and Recommendations. 24Endnotes and References. 27This publication is a management summary of a more in depth analysis presented by theresearchers. The full report is available on request from Siemens Limited.
  3. 3. ForewordForewordPathways to risk mitigation and a low carbon future THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES 03Oil and gas prices have been thesubject of considerable interest inthe wake of a particularly volatileyear in 2008 which saw a nominal peak ofover $140 per barrel in July of that year,with a subsequent collapse to just under$40 dollars per barrel by December1. Thescale of the price swing and the rapidity ofthe change stand out from real and nominalprice trends over the past two decades andserve as a timely illustration of the power ofthe unexpected.As a small open economy, Ireland isheavily dependent on world demand forIrish exports and also on our competitiveposition within the global marketplace.Any shock to the global economy that hasa negative impact on global growth willreduce the demand for Irish exports andtherefore domestic output. AdditionallyIreland’s dependency on imported oil andgas for the operation of the economy andsociety is particularly high and this adds tothe level of national risk exposure.In this report we examine the macro-economic impacts for Ireland of threehigh oil and gas price scenarios for theperiod from 2010 to 2025 and consider thechallenges Ireland may face in the event ofsuch developments.The focus is principally on the economicexposure Ireland and the world maintainwith respect to oil and gas price volatilityand how and to what extent, we caninfluence the rate of dependency on thesefuels in order to mitigate the correspondinglevel of impacts.The report is structured into three coresections:1. The development of three high oiland gas (HOG) price scenarios outto 2025.2. An estimation of the macroeconomicimpacts for Ireland for each of thethree HOG price scenarios as comparedwith the most recent national Baselinefrom the Economic and Social ResearchInstitute (ESRI).3. An outline of strategic options thatcould reduce Ireland’s reliance on oiland gas.Siemens is grateful to Dr AndrewKelly of AP EnvEcon Limited for hiscontribution to this report. We would alsolike to acknowledge the support and inputof the ESRI. Siemens sees itself in thevanguard of the drive for sustainability.This report, together with our previousstudies, represents part of our contributionand commitment to help stakeholderstake informed decisions – decisions thatcould have economic and environmentalramifications for generations to come.Dr Werner KruckowCEO Siemens LimitedDublin, IrelandJuly 2010
  4. 4. Oil and Gas Prices and their DeterminantsChapter 1.Oil and Gas Prices andtheir DeterminantsThis opening section of the reportdeals with oil and gas prices and hasfed directly into the design of thethree HOG price scenarios tested as part ofthe macroeconomic impact analysis. Thepurpose of this review is not to identifythe most likely path for oil and gas prices.Shocks, by their nature, are rarely a featureof such exercises and as a result, suchan endeavour would no doubt yield amoderate and steady outlook linked to thecurrent situation.2However, the recent andunprecedented economic crisis serves asan unfortunate and timely reminder of thedistinction between the unlikely and theimpossible. As such we choose to highlightthe unlikely. We identify the principal pricedeterminants, examine historical evidenceof change, and consider long and short runprice outlooks from major internationalanalytical sources. In essence we gatherevidence for ‘what could be’ and therebyuse this information to set boundariesfor our HOG price scenarios without theconstraint of an international consensus on‘what seems most likely’.Determinants of priceOil is an important global commodityand its price is broadly determinedby the fundamental principles of supply,demand and market expectations.3There are numerous market agents,however the dominant roles are arguablyheld by a handful of operators. OPECis the most influential player on the supplyside while the OECD countries are seenas the most influential group on thedemand side. Additionally, emergingeconomies, principally China and India,account for the majority of the increasein global energy consumption and havethereby evolved into important drivers ofdemand and price change in the global oilmarket.These players and a set of possible04 THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES Pathways to risk mitigation and a low carbon futureTable 1: Examples of oil price influencing eventsSUPPLY SIDE EVENTS DEMAND SIDE EVENTSInternational conflicts and terrorism Population growthOPEC production rate adjustments Accelerated growth of developing countriesRevisions to national reserveinventories Revisions to internationally viable oil stocksand production ratesMarket efficiency Speculation and exchange ratesRenewable penetration Other technological changeUnconventional oil and gas Shifts in demand of energy servicesNatural disastersThe unknownIncreased penetration of oiland gas powered technologiesFigure 1: Annual average crude oil price 1970-2010‘events’ are highly influential in theevolution of oil price. Some illustrativeexamples4of such major price driver eventson both the supply and demand side arepresented in Table 1 below.Historical evidence of changeFigure 1 presents the historical free marketprices of Illinois crude in both real andnominal dollars per barrel from 1970 to2010. The most striking events are the2008 peak and trough where a threefoldchange in price was experienced within thesame calendar year and the significant andextended shock of the late 70’s and early80’s during the Iran/Iraq conflict period. The$120$100$80$60$40$20$0197019721974197619781980198219841986198819901992199419961998200020022004200620082010Nominal Price Real PriceAnnual Average Crude Oil Price (US $)
  5. 5. evidence in this case illustrates quite clearlythat shocks – both acute and protracted– have occurred in recent history.Short-term price outlookIn Figures 2 and 3 we present short (1 year)price outlook confidence intervals fromthe Energy Information Administration(EIA) with a view to illustrating theperceived volatility in the market priceeven on this time horizon. Figure 2 is takenfrom the time of the oil price peak in July2008 whereas Figure 3 is taken from thesame publication one year later in July2009 (when prices had collapsed and werecomparatively stable). In these figures,the red line represents the upper boundexpectation for oil price, whilst the greenline indicates the lower bound.Figure 2 gives us a clear indication ofhow significant changes in the currentprice can lead to far greater uncertaintywith respect to price outlook. In thiscase indicated by the particularly largegap between upper and lower boundexpectations. Figure 3 then movesthe same methodological assessmentforward one year and shows how the falland apparent stabilisation in oil prices,along with the shorter price outlook timeframe allow for a much reduced angle ofdivergence between the upper and lowerbands. It is also of note, that when lookingback at the actual price path in Figure 2,we see that from the July peak of 2008,prices actually dipped well below the lowerstatistical bound over the course of thefollowing year.Whilst this is only one outlook on price,it serves to illustrate how outlooks andexpectations for ‘plausible’ energy pricescan shift dramatically in a short period oftime– in this case because of the financialcrisis and the following Great Recessionthat took almost everybody by surprise.In the context of our developed HOG pricescenarios the point here is to note thatunforeseen spikes and collapses in pricecan occur and they can do so within a veryshort space of time. Additionally, we makenote of how price volatility can debaseconfidence in the stability of future pricesand can thereby create an environment ofmajor uncertainty surrounding future priceevolutions.Long-term price outlookForecasting long-term oil prices ischallenging and arguably futile. Forecastscan respond quite dramatically to current350300250200150100500Jan2006May2006Mar2006July2006Sept2006Nov2006Jan2007Mar2007May2007July2007Sept2007Nov2007Jan2008Mar2008May2008Sept2008Nov2008Jan2009Mar2009July2008May2009July2009Sept2009Nov2009Actual to July 08HistoricalLower BoundUpper BoundWTI$/BIFigure 2: EIA NYMEX WTI 95% confidence intervals in July 08Figure 3: EIA NYMEX WTI 95% confidence intervals in July 09250200150100500Jan2006May2006Mar2006July2006Sept2006Nov2006Jan2007Mar2007May2007July2007Sept2007Nov2007Jan2008Mar2008May2008Sept2008Nov2008Jan2009Mar2009July2008May2009July2009Sept2009Nov2009Actual to July 09HistoricalLower BoundUpper BoundWTI$/BIFigure 4: International energy outlook: world oil ($2007) for reference cases in 2008/20090.0140.0100.0120.$($2007)perbarrelPathways to risk mitigation and a low carbon future THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES 05
  6. 6. Oil and Gas Prices and their Determinantsevents and changes in expectations. Bothcan change quickly as illustrated by therevised EIA International Energy Outlook(IEO) for world oil prices presented inFigure 4.The trend lines represent the changein the ‘reference case’ world oil price($2007)outlook between the IEO 2008 and IEO2009 reports. In the space of a year theprice projection – not its confidenceinterval – has altered significantly, witha near doubling of the real oil price($2007)in 2025 under more recent analysis5.Adjusting values to nominal prices wouldresult in a nominal price forecast for 2025of approximately $220 per barrel from the2009 outlook, as compared with a nominalprice of over $120 per barrel from the 2008analysis6.Figure 5 draws on the associatedliterature and presents the EIA high andlow world oil price scenarios which framethe reference case. These alternate priceprojections present a real oil price($2007)lowof just $50 and a high of just under $200in 2025.The boundaries of the high pricescenario described here have been usedin developing the HOG Price scenarios torestrict the impact of ‘events’ in a givenyear to the comparable high price scenariorange. In no case or year do the HOG pricesexceed the EIA high price scenario peakreal value of $200($2007)per barrel. Thehighest real oil price($2008)reached being06 THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES Pathways to risk mitigation and a low carbon futureapproximately $175 in the second peakof the ‘Camel’ HOG price scenario which ispresented later.Conclusion on price outlookThe primary conclusion on price outlookis simply that both moderate change andextreme shifts are possible and changes inprice can occur within a very short spaceof time. There are numerous factors whichmay combine to deliver short and sharpprice shocks, as well as more persistentcombinations that could deliver prolongedchanges in price. Similarly, expertinternational outlook on price can changedramatically and quickly for both the shortand long-term.Into the future, it seems likely thatsustained pressure on available resourceswill ultimately lead to increased pricevolatility with implications for the marketprice. Therefore, we conclude that thereis both precedent and growing potentialfor price changes of the scale described inthe HOG price scenarios in Chapter 3 overlonger time frames.Figure 5: Annual energy outlook: Reference, high and low price ($2007) oil scenarios to 2025200.00150.00100.0050.000.00ReferenceHigh PriceLow PriceReal$($2007)perbarrel19801982198419861988199019921994199619982000200220042006200820102012201420162018202020222024
  7. 7. Baseline Scenario 2025Chapter 2.Baseline Scenario 2025This study models the economic effectof a series of high oil and gas pricescenarios on the Irish economy.However, oil and gas prices are justone component of the macroeconomicmodelling exercise and need to bemapped against a broader perspectivecomprising the many different parametersand assumptions relating to the structure,interactions and development of the Irishand world economies. For this purpose, wehave adopted the ESRI’s Baseline forecast forIreland out to 20257as the scenario againstwhich the HOG price scenarios are tested.Baseline Scenario descriptionThe ESRI Baseline 2025 scenario (hereafter,Baseline Scenario) takes a lead from theRecovery Scenarios for Ireland report thatwas published by the ESRI in May 20098andspecifically the World Recovery Scenario(WRS) described therein9. The principalassumption is that global economiesrecover from recession by the middle of2010 and then proceed to grow at ratesnearing potential from 2011 onwards10witha corresponding recovery in world demandfor Irish exports. The forecasts for the keymacroeconomic aggregates of this WRSscenario for Ireland are presented in Table2 with the principal statistic for averageGNP growth of 3.3 per cent over the period2015 to 2020 and more moderate growthaveraging 2.7 per cent over the period2020-2025. An ESRI ‘storyline’ for this scenariois presented under the next heading.Scenario StoryWeak domestic demand and the recessionin the international economy leads to asubstantial fall in output in themanufacturing and market services sectorswith overall GNP expected to fall by 9.0per cent in 2009 and by almost 2 per centin 2010. The increase in unemploymentassociated with the contraction inPathways to risk mitigation and a low carbon future THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES 07economic activity over the period 2008-2010 is expected to lead to significantwage moderation in both the public andprivate sectors. The macroeconomic modelsuggests that nominal wage rates in theeconomy as a whole could decline by 6.6per cent in the period 2009-2011. As a resultof the world recovery and the improvementin competitiveness, GNP growth is expectedto resume, averaging 5.5 per cent inthe period 2010-2015 (i.e. the averagegrowth experienced in each of the fiveyears 2011-15).The high degree of responsivenessof the Irish economy to changes in worldactivity could give rise to a strong recoveryfrom 2011 onwards, assuming the economyregains competitiveness. However thisrecovery would imply a restoration of onlysome of the losses sustained over the period2008-2010. As a result of the recession, by2015 output would be around 15 per centbelow where it would have been withoutthe global economic crisis.On public finances, the lower levelof economic activity is likely to reducegovernment revenue from a range oftaxes while at the same time governmentexpenditure is expected to rise due toincreased welfare and national debtinterest payments. As a result the generalgovernment balance as a percentage ofGDP is expected to remain very high at12 per cent in 2010, taking into accountthe fiscal measures for 2009 and Budget2010 announced to date. The resumptionof economic growth after 2011 wouldbring about an improvement in the generalgovernment balance which on the basis ofthis benchmark scenario is forecast to fall to3.9 per cent of GDP in 2015.The deterioration in the economyis expected to lead to a dramatic rise inunemployment and the unemploymentTable 2: World Recovery Scenario Major Aggregates 2009 2010 2010-15 2015-20 2020-25 Annual % Growth Rate Average Annual Growth RateGDP -7.8 -2.3 5.2 3.3 2.6GNP -9.0 -1.9 5.5 3.3 2.7Total Employment (PES basis) -9.2 -5.8 2.8 1.5 1.0Output, industry -9.2 -3.9 8.3 4.0 2.2Output, market services -4.6 -1.2 5.2 3.0 3.0Consumer Prices(Personal Consumption Deflator) -1.0 -0.2 2.5 2.7 2.2Non-agricultural Wage Rates -3.2 -1.8 3.1 4.6 3.2Personal Savings Ratio 9.9 10.4 7.9 6.4 5.4General Government Balance, % GDP -12.3 -11.6 -3.9 -1.2 -1.0General Government Debt, % GDP 61.0 74.8 81.2 67.8 58.0Balance of Payments, % GNP -2.2 1.0 5.2 6.7 4.5Unemployment Rate (ILO basis) 12.7 16.5 6.6 4.9 4.0Net Emigration (thousands) 30.0 40.0 -8.3 -24.7 -18.2
  8. 8. Baseline Scenario 2025rate. As a result of lower levels of outputin the building, manufacturing and marketservices sectors total employment isexpected to fall by 9.2 per cent in 2009and a further 5.8 per cent in 2010. Theunemployment rate is expected to peakat 16.5 per cent in 2010. In line with theanticipated recovery in economic activityfrom 2011 onwards, employment growthis expected to resume and average 2.8 percent over the period 2010-2015. This isexpected to result in some moderation inthe unemployment rate which is projectedto fall to 6.6 per cent by 2015.Emigration is assumed to peak at 50,000in 2012. The cumulative net emigrationof 152,000 over the period 2009 to 2015represents a significant reduction in thelabour force as a result of the recession. Ofcourse the likely response of migration tothe current recession is highly uncertain.If migration were not to resume to theextent assumed here this would lead to alarger rise in the unemployment rate and aslower recovery in the labour market thandescribed.The combination of the bursting of thehousing bubble and the world financialcrisis has had a substantial impact on theendowment of labour and capital in Ireland.This has served to permanently reduce thepotential output of the economy. While theMedium-TermReview2008-2015publishedin Spring 2008 suggested that the potentialoutput growth rate for the Irish economyover the period 2005-2020 was around3.6 per cent a year, today we feel that itis closer to 3.0 per cent a year. Over thelonger-term we anticipate average GNPgrowth of 3.3 per cent over the period2015 to 2020 and more moderate growthaveraging 2.7 per cent over the period2020-2025.Specific scenario assumptionsFuel price assumptions in the BaselineScenario are as follows:• Gas prices fall from €25.8 per MWhin 2008 to €17.7/MWh in 2010, thenclimb steadily to €31.5/MWh in 2025.• Similarly, oil falls from €56.4/MWh in2008 to €44.9/MWh in 2010 beforeincreasing to almost €58.2/MWh by2025.• Coal prices increase from €8.1/MWh in2008 to €14.0/MWh in 2025.• We assume no growth in real peat pricesover the period.• Carbon taxes increase from €13.8/tonne08 THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES Pathways to risk mitigation and a low carbon futureen implemented according to thetimetables announced by the relevant systemoperators.12Note on alternative scenariosIt is noted that the Baseline Scenariois the less ambitious of the two mainenergy scenarios developed in Irelandat the end of 2009. The more ambitiousscenario is the ‘White Paper plus’ scenariowhich incorporates assumptions such asgreater penetration of renewables, higherproportions of electric vehicles and meetingall of the targets established within theNational Energy Efficiency Action Plan(NEEAP)13.We believe that the targets of the“White Paper plus” scenario and othersimilarly ambitious scenarios will requireconcerted national action and investmentover the next 15 years and there aremany challenges yet with respect toinfrastructure, investment and technologythat must be considered. It is in the contextof this challenge that this report hopesto support further debate on the risks weface, the options available and the meansof progression. It is for this reason thatthe Baseline Scenario is adopted as ourreference case.14 2010 2016 2020 2025 Baseline 65.5 212.2 401.2 637.4Table 3: Electricity savings in MWh250300200150100500200820102009201120122013201420152016201720182019202020212022202420232025$/blFigure 6: Baseline oil price scenarioCO2in 2009 to over €40/tCO2by 2025.Figure 6 illustrates the specific oil price forthe Baseline Scenario. The price path dipsfrom 2008-2010 in response to the currentglobal recession before assuming a steadylinear growth path out to 2025, reaching anominal price of $185 dollars per barrel in2025 or just under $100 in $2008 prices.The Baseline oil price scenario thereforeassumes a steady and moderate increasein oil price with no price shocks anticipatedover the next 15 years.Electricity demand in the BaselineScenario has been adjusted to take accountof recently implemented measures whichhave not yet had a substantial impact(further details in DCENR’s National EnergyEfficiency Action Plan, 2009-2020)11butwill lead to savings over the period to 2025.Energy demand is reduced by the amountsshown in Table 3, and changes linearlybetween the reference years.With respect to energy infrastructure,plant commissioning and decommissioning inthe modelling exercise has be
  9. 9. Economic and Social Impacts of three Oil and Gas Price ScenariosChapter 3.Economic and Social Impacts of threeOil and Gas Price ScenariosRelative to the Baseline oil pricepresented in the last chapter, we havemodelled three alternative oil pricescenarios known as – “Accelerated growth”,“Root” and “Camel”15along with an impactassessment for each of the scenarios. Ineach impact assessment we interpret theresults to explain the outcomes and theirlinkage with the oil price variable16.HOG Price Scenario 1: “AcceleratedGrowth”The accelerated growth scenario (Figure7) presents a steady but rapid increase inglobal oil prices from the recovery year of2011. The most rapid growth occurs inthe eight years subsequent to the 2011recovery, with a slowed rate of growththen from 2019 to 2025, where real pricesactually fall and level off. The scenario isillustrative of an aggressive price path whereglobal demand, supply and associatedpolitical constraints combine over thenext ten years to drive available resourceprices significantly higher before ultimatelymoderating somewhat as markets adjust.Internationally, the impact of a rise in oilprices on output and inflation varies acrosscountries and depends on the response ofmonetary authorities. An oil price shock ofthis size would have a substantial effect oninflation. Figure 8 shows the percentagechange in the price level compared to theBaseline Scenario for the US, the UK andthe Euro Area. In this simulation monetaryauthorities react by increasing interest ratesto negate some of the upward pressure onthe price level. The results suggest thatby 2015 interest rates in the US would bearound 13/4 percentage points above theBaseline Scenario and that interest ratesin the Euro Area and UK would be around11/5 to 11/4 basis points above the BaselineScenario.This higher level of interest rateswould increase the cost of capital in thesecountries and have a negative effecton output. In addition, the Euro wouldappreciate by around 3 per cent againstboth the Dollar and Sterling in the longterm, having a negative effect on Euro Areacompetitiveness. The effect of the oil priceshock on the levels of GDP for the US, UKand Euro Area are shown in Figure 9. ThePathways to risk mitigation and a low carbon future THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES 09250300200150100500200820102009201120122013201420152016201720182019202020212022202520232025Nominal$/blAccelerated GrowthBaselineFigure 7: Accelerated Growth scenario5943876210%changerelativetoBaseline2010 2012 2014 2016 2018 2020 2022 2024US Euro Area UKFigure 8: Accelerated Growth Scenario - Impact on Price Level in International Economies
  10. 10. Economic and Social Impacts of three Oil and Gas Price Scenariosresults show that by 2019 output in the USwould be around 4.5 per cent below theBaseline Scenario and that output in theEuro Area and UK would be 3.75 and 3.3per cent, respectively, below the BaselineScenario. Over the medium to long term,the impact on output is strongest in theUS as they have a higher oil intensity ofproduction. After that, the decline in outputcontinues but not at the same pace as thisscenario assumes that the increase in theoil price post-2019 is more modest than inearlier years. Overall the adverse effects areless marked in the UK economy as it hasdomestic oil reserves.This type of shock would affect Irelandthrough three main channels. Firstly, theappreciation of the Euro reduces Irishcompetitiveness by leading to an adversemovement in our terms of trade and thisresults in a loss in income. Secondly, theincrease in interest rates would havea negative effect on investment andtherefore output. Finally, the slowdownin the international economy reduces thedemand for Irish exports. The effects of thisshock on the Irish economy are strongerthan on the international economy. Thisarises not necessarily because the Irisheconomy is more sensitive to oil prices butrather because of its greater sensitivityto a slowdown in international output,changes in interest rates and changes in itscompetitive position.Figure 10 shows that there would be asharp reduction in the level of Irish GDP asa result of this oil price scenario. Our modelindicates that the level of output in 2025would be around 7.5 per cent below theBaseline Scenario. In terms of the effecton GDP growth rates, this oil price scenariowould knock around 1.4 percentage pointsoff the average growth rate between 2010and 2015. The average growth rate between2015 and 2020 would be around 0.6percentage points lower and the averagegrowth rate between 2020 and 2025 wouldbe around 0.2 percentage points lower. Theshock to world output would substantiallyreduce the demand for Irish exports andconsequently reduce output in the industrialand market services sector. By 2019, outputin both the industrial and market servicessector would be around 6 per cent belowthat in the Baseline Scenario.The impact on the price level in Irelandis more muted than on the internationaleconomy. The effect on the consumptiondeflator is shown in Figure 11. The morenegative impact on output puts downwards10 THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES Pathways to risk mitigation and a low carbon future0-0.5-1-1.5-2-2.5-3-3.5-4.5-4-5%changerelativetoBaseline2012 2014 2016 2018 2020 2022 2024US Euro Area UK2010Figure 9: Accelerated Growth Scenario - Impact on Output (GDP) in International Economies0-1-2-3-4-5-6-7-8%changerelativetoBaseline2012 2014 2016 2018 2020 2022 2024GDP2010Figure 10: Accelerated Growth Scenario - Impact on Irish GDP4.504.003.503.002.502.001.501.000.500.00%changerelativetoBaseline2010 2012 2014 2016 2018 2020 2022 2024Consumption DeflatorFigure 11: Accelerated Growth scenario: Impact on Irish Price Level
  11. 11. pressure on the price level which negatessome of the upward pressure causedby higher oil prices. The impact ofhigher consumer prices would lead to asubstantial fall in real personal disposableincome. This has a marked negative effecton consumption and, in turn, has anegative impact on sectoral output thatis driven by domestic demand (e.g.distribution). The rise in interest rates wouldhave a negative effect on investment inIreland with total investment being around5.5 per cent below the Baseline Scenario inthe long run.Given the impact on consumer prices,we would anticipate knock-on effects ofhigher inflation on wage rates as employeesbargain to protect their real after-tax wage.However, the simulation results indicatethat wage rates could actually be belowthat of the Baseline over the long term. Thisarises because the effect on the demandfor Irish exports (due to the slowdown inthe international economy) is so severethat the only way firms can negatesome of this impact and try to regainsome lost competitiveness is to reducewage growth. The results show thatemployment could fall by 2 per cent belowthe Baseline in the long-run and that theunemployment rate would be on averagearound 0.5 percentage points above theBaseline Scenario. These effects are likely tobe stronger if wage rates do not fall belowthose in the Baseline Scenario.HOG Price Scenario 2:” Root”In the Root Scenario (Figure 12), the oilprice is low for an extended period of timebefore jumping to above $150 per barrel.The price then reaches a bumpy plateauwith no sustained return to sub-$150prices. In real terms, the price by 2025 isonly marginally higher than that of theBaselineScenario.Thescenarioisillustrativeof a major short-term price shock whererevisions to global supply and accessibilityforce a rapid increase in oil price to a newplateau. This plateau is sustained and theprice mitigates over the years in real termsas markets adjust and new supply sourcesare exploited at the higher costs.In this Scenario, the impact on the pricelevel in the international economy is verystrong over the medium term but the effectbegins to diminish in the longer term (seeFigure 13). Over the medium term monetaryauthorities respond to the strong increase inthe price level by raising interest rates whichhas a further negative effect on output.250300200150100500200820102009201120122013201420152016201720182019202020212022202420232025Nominal$/blRootBaselineFigure 12: Root scenario543876210-1%changerelativetoBaseline2010 2012 2014 2016 2018 2020 2022 2024US Euro Area UKFigure 13: Root Scenario - Impact on Price Level in International Economies0-1-2-3-4-5-6-7-8%changerelativetoBaseline2012 2014 2016 2018 2020 2022 20242010US Euro Area UKFigure 14: Root Scenario - Impact on Output (GDP) in International EconomiesPathways to risk mitigation and a low carbon future THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES 11
  12. 12. %changerelativetoBaseline2010 2012 2014 2016 2018 2020 2022 20244. deflatorFigure 15: Root scenario - Impact on Price Level for the Irish Economy%changerelativetoBaseline2010 2012 2014 2016 2018 2020 2022 2024-3.5-4.00-2.5-3-1.5-2-0.50-1GDPFigure 16: Root Scenario - Impact on Output (GDP) for the Irish EconomyEconomic and Social Impacts of three Oil and Gas Price ScenariosFigure 14 shows the effect on output asa result of this shock. Output falls steadilybelow the Baseline Scenario in the US, theUK and the Euro Area until the latter halfof the decade; it then falls by less as the oilprice moves back closer to where it is in theBaseline. By 2025, output is between 1.5 to2.5 per cent below the Baseline in the US,UK and Euro Area.As before, the results for the Irisheconomy follow a similar pattern to those inthe international economy. The inflationaryimpact of the oil price increase results inthe Irish price level being around 4 percent above the Baseline Scenario in themedium term (see Figure 15). This effectweakens over the longer term and pricesactually end below the Baseline by 2025.This seems counter intuitive but in this casethe downwards pressure on the price levelas a result of the negative effect on output,outweighs the upwards pressure caused byhigher oil prices at the end of the period.As a result of this shock, output inIreland falls sharply relative to the Baselineout to 2016 (see Figure 16). Despite thefact that the impact on the internationaleconomy is slightly more moderate overthe longer term, GDP remains around 3.5per cent below the Baseline as Ireland ismore sensitive to shocks in the internationaleconomy. The simulation results indicatethat output in the industrial sector wouldbe around 31/2 per cent below the BaselineScenario in 2025 while output in themarket services sector would be around41/2 per cent below the Baseline Scenario.In this Scenario the effect of higher interestrates leads to a fall in investment of around21/2 per cent in the long run relative to theBaseline Scenario.In terms of labour market impacts,when the oil price increases sharply(between 2013 and 2016) wage ratesinitially increase above the BaselineScenario as workers demand higher wagesto compensate for their loss in purchasingpower. However, as in the AcceleratedGrowth Scenario, in the long-term firmstry to regain some lost competitiveness sowage rates fall below the Baseline leavingworkers considerably worse off. In thisScenario, total employment is around 1 percent below the Baseline in the long run.HOG Price Scenario 3:”Camel”The “Camel” scenario (Figure 17) incorporatestwo major and sustained price shock eventsone year apart with an ultimate reversion toa trend comparable to that of the Baseline12 THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES Pathways to risk mitigation and a low carbon future250300200150100500200820102009201120122013201420152016201720182019202020212022202420232025Nominal$/blCamelBaselineFigure 17: Camel Scenario
  13. 13. Scenario. In real terms, the second priceshock peak of the camel scenario representsthe highest oil price assessed as part ofthe study – at a level of $175 in 2019. Thescenario is illustrative of a highly uncertainfuture oil price market where majorsequential and persistent conflicts lead todramatic market responses.In this Scenario there are two transientoil price spikes in 2014-2015 and 2018-2019. As a result, in the simulation resultsthere will be stronger effects during thesetwo time periods. Figure 18 shows theimpact on the price level in the internationaleconomy. In this Scenario, as oil prices andthe price level follow a more unsteady pathand so too do interest rates. Monetaryauthorities respond to this type of shock byincreasing interest rates sharply during thetwo price spikes but lowering them whenthe price level starts to come down again.In this scenario there is some appreciationof the Euro against the Dollar and Sterlingbut the effect is much smaller than in theAccelerated Growth Scenario and the effectsare strongest when the price spikes occur.The effect on the level of output in theinternational economy is shown in Figure19. As mentioned above, the impact onoutput is not smooth over time because ofthe nature of the shock. For each countrythe impact on output is considerably smallerthan in the Accelerated Growth Scenario.Figure 20 shows the impact on thelevel of Irish GDP and Figure 21 showsthe impacts on domestic price levels. Theimpacts reflect the patterns shown for theinternational economy. As in the previousScenario, the effect on Irish output isstronger than the effect on internationaloutput. In the long run output is around 3.5per cent below the Baseline Scenario; morethan half the long run effect reported inthe Accelerated Growth Scenario. By 2025,industrial output is around 3.4 per centbelow the Baseline Scenario and outputin the market services sector is around 4.5per cent below the Baseline Scenario. Asthe interest rate differential (compared tothe Baseline) is not smooth, neither is theresponse of investment to such a shock.Although the impact on investment isnegative, it is more marked during theperiods of the oil price spikes. For example,total investment is around 4 per cent belowthe Baseline Scenario during the second oilprice spike but is around 2 per cent belowthe Baseline Scenario in the long run.Similar to the Root Scenario, wage ratesinitially rise above the Baseline Scenario%changerelativetoBaseline2010 2012 2014 2016 2018 2020 2022 2024103246587US Euro Area UKFigure 18: Camel Scenario - Impact on Price Level in International Economies%changerelativetoBaseline2012 2014 2016 2018 2020 2022 2024-2.5-3-1.5-2-0.50-12010US Euro Area UKFigure 19: Camel Scenario - Impact on Output (GDP) in International Economies%changerelativetoBaseline2012 2014 2016 2018 2020 2022 2024-3.00-4.00-2.50-3.50-1.50-2.00-0.500.00-1.002010GDPFigure 20: Camel Scenario - Impact on Level of Irish GDPPathways to risk mitigation and a low carbon future THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES 13
  14. 14. %changerelativetoBaseline2010 2012 2014 2016 2018 2020 2022 20244. deflatorFigure 21: Camel Scenario - Impact on Price Level for the Irish EconomyEconomic and Social Impacts of three Oil and Gas Price Scenariosvalues when the spikes in the oil price occurand then fall below the Baseline Scenario inthe long-term. As a result of the lower level ofactivity in the economy, total employment isaround1percentbelowtheBaselineScenarioin the long-run and the unemployment raterises by around 0.3 percentage points abovethe Baseline values.For each of the prior price scenarioswe have described the modelled economicimpacts. However, whilst these broadereconomic indicators are a core componentof this report, it is important to be awarethat there are further additional impactswith associated value that are not explicitly,or in some cases even implicitly, capturedwithin such analytical systems. We identifysix such impacts in this study.Table 4 presents a qualitative summaryof these six impact areas to be considered inthe context of what high oil and gas priceswould mean for Ireland.14 THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES Pathways to risk mitigation and a low carbon futureDESCRIPTIONIMPACTHigher energy costs will impose a greater financial burden on the poor relative to the rich. Inthis way the exposure to higher energy prices poses a greater potential cost to those least ableto afford the change. This can lead to negative welfare implications.Related to the distributional impact, higher fuel and energy costs will push more individuals fromthe margins into a position of energy and fuel poverty. This is a situation where a householdspends more than 10% of its income on trying to heat and light a home to an adequate level.The costs of this shift include reduced welfare, poor health and excess winter mortality.Increased fuel prices will add to travel costs and constrain travel decisions. This may lead toreduced emissions, an outcome similar to that of a carbon tax for transport. However, unlikea tax which would at least generate revenue for investment, exposure to rising internationaloil prices would simply increase costs. Whilst the very poorest may not have access to a car,the dominance of private transport in the Irish market would suggest the impact would be feltwidely with reduced travel for leisure and additional cost for commuting.Energy price volatility associated with high oil and gas prices creates a situation of marketuncertainty. This makes planning difficult, can generate financial problems for business andindividuals, hinders investment decisions and creates a poor environment for economic growth.On a positive note however, such volatility can also serve as a strong incentive for alternativeenergy sources for those who do choose to invest. The indirect taxes on final energy demand offeranother mechanism to mitigate price volatility, although there are constraints in this regard.Within Europe, Ireland already has comparatively high electricity costs and fuel costs. WhilstIreland lacks the major energy-intensive industries to have competitiveness severely impactedby oil and gas prices, the cost of energy and fuel is a factor in relation to the operational costsof business and associated investment decisions.Thecostnationallyofimportingoilandgaswouldbeexpectedtoriseunderthehigherpricescenarios.Whilst demand may drop somewhat, the lack of alternatives and strong energy requirements insociety would likely see the national energy import bill rise. Statements from Minister Ryan suggestedIreland currently spends approximately €6 billion per annum on imported fossil fuels.Table 4: Summary table of non-modelled impactsDistributional impact Energy and fuel poverty Mobility reduction Price volatilityCOMPETITIVENESSENERGY IMPORT COST
  15. 15. Ireland‘s dependence on Oil and GasChapter 4.Ireland,s dependence on Oil and GasThe previous chapter presentsoutcomes of the HOG price analysiswithrespecttothepotentialeconomicand social impacts for Ireland. The purposeof this exercise has been to explore possibleprice scenarios, identify the potential risksand consider national and internationalexposure. In this chapter we considerIreland’s reliance on energy imports andthe corresponding dependence of specificsectors and key activities on these imports.This review incorporates both historical andbaseline scenario forecast values.Energy security and exposure to pricefluctuationsEnergy security of supply and exposureto price fluctuations are topics of concernwithin the European Union. The EU 27 isa net importer of energy, importing overhalf of its energy needs. Of this share,approximately 60% are oil imports and 26%are gas. The bulk of oil is imported fromOPEC and Russia, while Norway and Russiaprovide the major share of the EU’s gasrequirements. A long term concern lies inthe availability of oil and gas reserves withinthe EU 27, which are expected to be severelydepleted by 202517(unless Europe’s shaleresources can be commercially exploited).The general ambition of the EuropeanCommission with respect to energy securityis to become more efficient and to diversifyboth our energy sources (types) and energysuppliers (origin).For Ireland specifically, dependency onimported oil and gas for the operation of theeconomy and society is particularly high.This is shown in Figure 22, which displaysthe forecast energy shares out to 2025according to the ESRI Baseline Scenario18.In this chart we see that oil and gas accountfor over 80% of primary energy demand19in Ireland with the remaining fuels (i.e.coal, peat and renewables) accounting forthe remainder.The overall share of energy importsby fuel type is presented in Figure 23historically from 1990 to 2008 andforecasted then out to 2025. Forecastvalues are based upon the ESRI Baselineenergy scenario and information fromthe Commission for Energy Regulation.It illustrates the historical and expectedPathways to risk mitigation and a low carbon future THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES 150%10%100%80%90%70%60%50%40%30%20%2008 2010 2012 2014 2016 2018 2020 2022 2024Peat Renewables Coal Gas OilFigure 22: Ireland’s primary energy demand share by fuel, 2008-20250%10%100%80%90%70%60%50%40%30%20%1990199520002001200220032004200520062007200820092010201120122013201420152016201720182019202020212022202320242025Coal Gas OilFigure 23: Fuel shares in energy imports into Ireland, 1990-2025
  16. 16. Figure 24: Indigenous energy production shares, 1990-20080%10%100%80%90%70%60%50%40%30%20%1990 1995 2000 2001 2002 2003 2004 2006 20082005 2007Natural GasRenewables PeatFigure 25: Final consumption of oil by sector, 2008-20250%10%100%80%90%70%60%50%40%30%20%2008 2010 2012 2014 2016 2018 2020 2022 2024Losses Agriculture Services Power Industry Household TransportIreland‘s dependence on Oil and Gas16 THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES Pathways to risk mitigation and a low carbon futurefuture dominance of oil and gas in Ireland’simported fuel mix.Ireland is part of a handful of EU 27countries with greater than 80% energyimport dependency. SEI (Energy in Ireland,2009) state that imported oil and gasaccounted for 81% of energy supply in2008 and overall import dependencywas running at 89%. This is estimated torise to approximately 91% by 2025 underthe ESRI Baseline Scenario. In terms ofindividual import rates, both coal and oilare at 100%. Gas stands at 89% (in 2008)and although this will fall as Corrib comesonline, we would expect this to rise againto 95% by 2025 in the absence of anyfurther significant finds and an increasingshift towards gas fired power generation.In short, our indigenous energy use willremain dominated by imported fuels in theBaseline Scenario.Furthermore, if we examine oursuppliers, we note that Ireland is entirelydependent on the UK for its gas importsand similar to many of the EU 27, is entirelydependent on outside EU imports of oil.With respect to gas, the Commission forEnergy Regulation suggests potentialscenarios for Irish gas supply (CER, 2009)involving various assumptions of newsources and storage capacity. Principally, itis noted that the Corrib gas field could meetover 60% of Irish demand in the mediumterm. However, the production capacity ofCorrib is expected to decline rapidly to lessthan 50% of its peak after 6 years. Liquefiednatural gas (LNG) imports (e.g., from shalegas) may offer the potential to diversify oursuppliers further over the medium term,however, the price of such imports is likelyto be influenced by transport, extractionand environmental costs.In terms of indigenous production ofenergy, Figure 24 presents the growingshares of peat and renewables and a declineof natural gas production up to 2008. Inabsolute terms, indigenous productionremains small and the relevance of highimport dependency rates become moreapparent when we refer back to the overallconsumption and dependency on oil andgas in Ireland. Looking forward, growth inindigenous energy production of significantscale is only likely to be achieved throughfurther development of renewable energysources.The breakdown of oil and gas by sectorin the Baseline is displayed in Figures 25and 26, respectively. For oil, the transportsector remains, by far, the dominant sector0%10%100%80%90%70%60%50%40%30%20%2008 2010 2012 2014 2016 2018 2020 2022 2024Losses Agriculture Services Power Industry Household TransportFigure 26: Final consumption of gas by sector, 2008-2025
  17. 17. with approximately 63% of the oil useshare and little change anticipated in theBaseline shares out to 2025. The industryand household sectors account for muchof the balance. With regard to gas,the power generation sector utilisesthe greatest share of gas in Ireland, at 63%in 2008 but this share is expected to dropto 51% by 2025. In absolute terms thelevel of gas used in power generation outto 2025 changes little under the BaselineScenario, however an increase in demandfrom households and industry reducesits share.This chapter has illustrated a cleardependency within the economy onimported oil and gas. Virtually everysector of our economy is to some extentdependent on oil or gas for its normaloperation - a common situation indeveloped countries. Understandably thisreliance contributes to the fact that shocksto the price of fossil fuels can thereforehave pronounced economic and socialimpacts. Rather more unfortunately, themodelling analysis within this reportsuggests that Ireland is particularly sensitiveto such shocks and their outcomes, andas a result would suffer more pronouncedeconomic impacts and a slower recovery ascompared with other countries. The nexttopic addressed in this study is to considerbroad actions that could be taken to reducenational dependence on oil and gas and todiscuss the drivers and motivators for actionin this regard.Pathways to risk mitigation and a low carbon future THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES 17
  18. 18. Options and actions to reduce exposure to High Oil and Gas Prices18 THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES Pathways to risk mitigation and a low carbon futureThe previous chapter shows the cleardependency within the economy onimported oil and gas. As illustrated inthe earlier sections, this dependency amongIreland and our core trading partners createsan economic exposure to high oil and gasprices.But what actions can mitigate theexposure to this risk and these impacts?The international dimension of the impactswould likely require concerted actionamongst Ireland and its trading partnersto reduce our collective reliance on oiland gas if we seek to mitigate the extentof the potential impacts (e.g. tradeslowdown). However, in this piece we focusChapter 5.Options and actions to reduceexposure to High Oil and Gas Priceson Ireland and in this regard there remainmany options which could contributetowards a reduced exposure toward anumber of the identified impacts in thereport.The options for action presentedhere are extracted from a position paperentitled Ireland in the New Electricity Age20presented by Siemens Limited.In this position paper, Siemens proposesfour ‘pillars’ for a sustainable energy systemin Ireland, as set out in Table 5, namely :Pillar 1: Maximising electricity generationfrom renewable sources.Pillar 2: Grid upgrade and integration intothe European grid.Pillar 3: Increased energy efficiency andconservation.Pillar 4: Maximising electricity usage inend-use applications.In the following pages we considerthree “Focus Areas” from these pillarsand discuss the drivers and motivatorsfor action in each Focus Area. The FocusAreas addressed are as follows:Focus Area 1: Renewable energygeneration from wind.Focus Area 2: Improvements in energyefficiency and conservation.Focus Area 3: Electrifying the transportsector.DESCRIPTIONPILLARRapid implementation of the existing pipeline in onshore wind along with fast tracking of offshoreprojects. Additionally, in order to maximise the efficiency of wind farms, deploy storagetechnologies to capture off-peak renewables energy. Explore the opportunities from ocean energy.Develop and optimize the national grid for renewable energy, including the:• Development of the national grid infrastructure on an all island basis.• Extension of 400 kV and 220 kV network to facilitate transmission from key renewable locations.• Implementation of “smart systems” to manage future load-to-generation matching.Significantly increase the number and capacity of interconnectors to UK and mainland Europe inorder to be able to export surplus renewable energy and benefit from a European/global super grid.Apply the technical solutions available today to improve the energy efficiency of, inter alia:• Buildings.• Domestic appliances.• Motors and drives in industry.• Public lighting.• Expanding the use of e-cars and hybrid cars .• Improving the energy efficiency of diesel public buses through hybrid electric drives andregenerative braking power.• Replacement of fossil fuel driven heating by ambient or geothermal heat pumps.• Electrifying the national rail network in Ireland.Pillar 2:Grid upgrade andintegration into theEuropean gridTable 5: Four pillars for a sustainable energy system in IrelandPillar 1:Maximising electricity generationfrom renewable sources Pillar 4:Maximising electricityusage in end-useapplications Pillar 3:Increased energyefficiency and conservation
  19. 19. For each of the Focus Areas presented,we offer a qualitative examination of eachagainst four evaluative criteria as presentedin Figure 27, namely:(a) Contribution to the Green Economy: Creation of green employment, greenbusiness opportunities and a greenmarket place.(b) Impact on the Environment: Contribution to emissions reduction andimproved international environmentalperformance.(c) Influence on Competitiveness: Impact upon the level of costcompetitiveness of Irish businessesand the country’s internationalattractiveness for investment.(d) Mitigation of Energy Risk: Reduction in energy price volatility andenergy supply risk in the Irish market.This chapter concludes with a quantitativecase study that connects the analysisconducted in this report with the businesscase for investment in a 101 MW onshorewind farm in Ireland. This case studyillustrates how the varied factors ofinflation, interest rates and fossil fuelprices could combine to influence theinvestment return under both the Baselineand Accelerated Growth scenarios. Thepurpose being to illustrate how a HOG pricescenario may influence the investmentdecision in one of the ‘options’ for change.Focus Area 1: Renewable energygeneration from windThis first option refers to the progressivescaling up of Ireland’s wind energygeneration capacity from both on andoffshore large scale projects. Ambitiousplans are in place in this regard21in Irelandand in this section we examine some of thereasons to maintain a sustained effort toreach these goals, as well as some of thechallenges that must be overcome to besuccessful.(a) Contribution to the Green EconomyWhile Ireland presently does notpossess an indigenous wind turbine andcomponent manufacturing industry, theprogressive scaling up of Ireland’s windenergy generation capacity represents animportant employment opportunity for thegreen economy. Wind energy employmentcan be broken down into direct andindirect employment. Wind turbine andcomponent manufacture are responsiblefor the majority of direct wind energy jobs(59%, European Wind Energy Association[EWEA] 2009).22Other direct employmentincludes jobs created in the initial phase ofgetting a wind energy project operational;wind farm development, wind turbine andcomponent installation, employment ofrelevant financial and consultant personneland RD, all employment positions thatmay be created within Ireland.Other employment from wind farmsrefers mostly to jobs associated with windturbine and wind farm operation andmaintenance once a wind energy projecthas entered its full operational cycle. Theseare longer term positions that would offerfurther employment creation opportunitiesin Ireland.According to EWEA, the wind energysector employed 154,000 in the EU in 2007.This figure is forecast to surpass 325,000by 2020. EWEA figures show that in 20071,500 people were directly employed bywind energy companies in Ireland. EWEAhighlight that 15.1 jobs are created in theEU for every MW of installed wind capacity.The development of this sector wouldalso support reductions in the nationalenergy import bill for fossil fuels (estimatedat approximately €6bn per annum) andcould stimulate the development of greatermarketable national expertise for export.However, the decision to invest inrenewable energy technology deploymentwill be heavily influenced by prevailingmarket conditions. Significant start upcosts, access to capital and the expectedmarket return for electricity generated arefundamental considerations for investors.With respect to this issue it is possible forgovernments to create the right conditionsto encourage investment. This can beachieved through the introduction ofpolicy support mechanisms. One of themost common policy mechanisms usedto encourage the adoption of renewableenergy sources and increase the useof renewable energy technologies inelectricity production is the use of renewableenergy feed in tariffs (REFIT). Renewableenergy investors and developers supportthe introduction of such tariffs as theyprovide a form of investor certainty. Likemany other international governments,the Irish Government has opted for thispolicy support mechanism. In 2006 theIrish government launched the REFITscheme which has become the main toolfor promoting RES-E and wind energydevelopment. The REFIT scheme providessupport in the form of a fixed feed in tariffto renewable energy projects over a 15year period thereby providing renewableinvestors with a degree of short to medium-term market certainty. In the case studypresented later, we will illustrate how theAccelerated Growth high oil and gas pricescenario may be expected to change theinvestment case for a 101MW on shore windfarm as fossil fuel prices add upward pricepressure to the market price of electricity.However, whilst high oil and gasprices and supports such as REFIT can beimportant in the decision to invest, furtherchallenges persist in terms of access tostart-up finance, the speed of planningprocedures and the characteristics andavailability of the overall grid infrastructure.All these challenges must be addressed ifwind energy is to achieve a greater share ofthe electricity generation market and makePathways to risk mitigation and a low carbon future THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES 19Contribution to theGreen EconomyCleantech JobsImpact on theEnvironmentTargets LegislationInfluence onCompetitivenessEnergy Price CostMitigationEnergy RiskSupply, Stability PriceFigure 27: Four evaluation criteria for actions
  20. 20. Options and actions to reduce exposure to High Oil and Gas Pricesa strong contribution to the developmentof the green economy.(b) Impact on the EnvironmentWind is a clean renewable energy insofaras there are no emissions associated withthe generation of energy from the windturbines. Thus wind generation can forma key part of the solution for countriesseeking to reduce national emissionsassociated with energy generation.Government targets and legislation canprovide an added stimulus in this contextfor the scaling up of national wind energygeneration. A recent renewables targetassigned to the Government under theEuropean Commission’s 2008 Climate andEnergy Package requires Ireland to reacha renewable energy share of gross finalconsumption of energy of 16% by 2020.Prior to this, in 2007 the Governmentlaunched its Energy White Paper (Deliveringa Sustainable Energy Future for Ireland)which included a number of ambitiousrenewable targets. Targets includedrenewables achieving a 15% and 33%share of electricity generation by 2010and 2020 respectively, with the lattervalue subsequently being raised to 40% inDecember 2008.Wind energy is not withoutenvironmental cost however and turbinesthemselves require materials, manufacturingand transport which give rise to a levelof emissions that may be considered aspart of a lifecycle analysis. Furthermore,the mass deployment of wind farmsimposes a degree of cost on society in theform of visual disamenity.(c) Influence on CompetitivenessWith respect to competitiveness, two factorsare identified which may contribute to anincreased energy cost in Ireland. The first,as discussed in this study, is the potentialfor high oil and gas prices to increase ininternational markets. Changes in thefuel input cost to oil and gas fired powergeneration in Ireland would be expectedto increase the market price of electricity.Secondly the introduction of “full allowanceauctioning23” within the EU emissionstrading scheme from 2013 onwards to thepower sector will also raise the cost baseof fossil fuel power generation. The degreeto which carbon raises the cost base willdepend on the price fossil fuel producershave to pay for allowances at official EUallowance auctions as well as the prevailingprice for allowances in the EU carbon20 THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES Pathways to risk mitigation and a low carbon futuremarket. Interim technologies such asCarbon Capture and Storage may offer analternative to allowances but will similarlyintroduce their own costs to the mix.Development of wind generationcapacity in Ireland would reduce theexposure to such energy cost increases inIreland, as wind generation has neitherfuel input costs nor a carbon cost. Clearlythe balance of energy sources in thepower sector is an important considerationand in the short-term, wind energy maystruggle to compete with gas and coalfired power generation on a direct basis(i.e. particularly if there were no supportingREFIT tariff). However, over the longer termas technologies and the grid become moreefficient, the renewable energy componentof our energy supply should support lowerprices than would otherwise prevail wherefossil fuel and carbon prices are rising.(d) Mitigation of Energy RiskEnergy risk as defined in this contextencompasses both the potential for a supplyinterruption and/or particularly unstableand volatile prices. The scaling up of Ireland’swind energy generation capacity can offsetsome of the risk to supply interruption aswind generation would be an indigenousand nationally managed energy sourcewith no fuel dependencies. Furthermore,the absence of a fuel input cost allows windenergy to deliver energy at a reasonablysteady marginal cost of production. Thislimits the potential for supply side drivenprice increases or price volatility.However, there are constraints andin order to maximise Ireland’s windenergy potential and improve security ofsupply significant transmission networkdevelopment and capital investment arerequired. The ability of the transmissionnetwork to absorb large amounts ofelectricity produced from renewable sourcesis one of the most significant barriers tothe successful deployment of high ratesof renewable energy24. A strategy for thestorage of wind energy and managingintermittency will become an importantpart of the renewable penetration plan.There are many factors to consider withregard to storage including the additionalcost, the maturity of the technologyadopted and the feasibility of the option in agiven location. A recent and comprehensivereview of storage technologies for windgeneration concludes that there is not oneideal individual solution. Instead effortsto closely integrate renewables with theelectricity, heat and transport sectors isnoted as offering great potential as the firststage for increasing renewable energy useand this approach can then be augmentedand made more flexible with individualstorage technologies, particularly pumped-hydro electric or flow-battery energystorage (Leahy et al, 2010)25.The potential of high levels of renewableenergy penetration was examined in the2008 report on an all island grid by theDepartment of Communications, Energyand Natural Resources (DCENR, 2008)26.This study identified a number of nationalgrid developments and capital investmentsthat need to occur in order for Irelandto achieve a high level (30%-40%) ofrenewable energy penetration. In the firstinstance DCENR note that the national griddevelopment that is required is extensive.The report notes that while the cost relatedto development are in “acceptable ranges(0.8 – 1.2 €/MWh)”, the developmentswill require considerable resources to bedeployed by transmission owners andoperators in addition to the work necessaryto implement the east-west and north-south interconnectors and other extensivetransmission infrastructure developmentrequired to accommodate non-renewablegeneration and growth in demand. In orderto connect wind energy into the grid some4,000 – 5,000km of new transmissionlines will need to be built27. Another factorto be considered is the potential for aninterconnection to Europe as part of aEuropean super-grid.Focus Area 2: Improvements in energyefficiency and conservationThis option refers to increased energyefficiency and conservation throughconsumer and business investment inavailable technologies. Specific energytechnology investments include investmentsin building energy efficiency, energyefficient home appliances, lightingefficiency and smart lighting. A reportcommissioned by Siemens (2009)28outlined a number of such technologicallevers in the context of their potential todeliver CO2abatement across a range ofsectors in Ireland. This earlier report offersa useful perspective on the types of energyefficient investment options available.In terms of policy direction, on a nationalscale, ambitious plans have been definedas part of the National Energy EfficiencyAction Plan (2009), whereby Ireland hopesto achieve 20% energy efficiency savings
  21. 21. to deliver a low carbon economy and helprealise the UNFCCC’s target of 450ppmalready exist38. However, at current lowcarbon prices and without governmentsubsidy or other support many of them arenot yet commercially viable.Once again, it should be noted,Government action with regard to ‘greenprocurement’ and supporting transitionsto new efficient technologies could alsoprovidesignificantsupporttothemorerapiddevelopment of national energy efficiencyby delivering business for suppliers andleadership for consumers.(c) Influence on CompetitivenessImproved energy efficiency in industryand the services sector can contribute to areduced and more stable operational costbase. The savings associated can improvethe competitiveness of an operationand release funds for reinvestment anddevelopment. However, clearly not allinvestments will deliver a suitable returnand fuel costs would influence the scaleof potential gains to be made in each case.Thus caution and guidance is required tomake sound investments in appropriateefficiency and conservation options.Indeed, the barriers to the increaseduptake of efficiency related measures caninclude a lack of awareness of the potentialsavings and expected return on investment,and connected to this, limited access tocapital for such investments. Continuedefforts are therefore required to informbusinesses of the sensible investmentsin efficiency and conservation that areavailable to them.(d) Mitigation of Energy RiskIncreased energy efficiency and conservationoffers greater protection from the cost ofenergy price volatility but does not offerprotection from a supply interruption. Ingeneral however, the simple advantage ofincreased efficiency and conservation isthat the operation requires less energy toachieve the same output as previously.Focus Area 3: Electrifying the transportsectorThis option refers to supporting shifts inthe structure of the national transport fleetexamining specifically an increased rate ofdeployment of electric vehicles. In addition,it is noted that besides electric vehicles,Ireland needs to invest in railbound cityinfrastructure and also to electrify thenational rail 202029. Here we examine some of themotivations for these goals and some ofthe barriers to progress.(a) Contribution to the Green EconomyWhilst many energy efficient technologiesmay be developed and/or manufacturedabroad, the deployment of thesetechnologies will create installation andmaintenance jobs in Ireland. In parallelit could be expected that the emergenceof increased national investment levelsin energy efficiency technologies wouldcreate an attractive market place whichprovides a suitable test bed and incentivefor indigenous manufacturing andengineering sectors to engage in this area,potentially leading to further job marketcreation, innovation and exports to thelarger international markets.Perhaps the greatest challenge withbroad nationwide energy efficiencyimprovements is overcoming the initialinertia that can prevent investment. Thiscan be based on a lack of incentive to changebut can also simply be the result of longpayback periods for the investment whichrender them less attractive. Initiatives suchas the ‘pay as you save scheme’30in the UKare an example of innovative approacheswhich may overcome the challenge ofsecuring these initial investments.Indeed financing models are an integralcomponent of the strategy to deliverefficiency changes in the market place.The desire to change can be constrainedby the capacity to invest particularly intimes of restricted credit availability. In thisrespect new financing and business modelsare needed. One example of possiblesupport to this market would lie in a shiftin public procurement policy. Public sectorinvestment in energy efficient optionscould provide a significant source ofbusiness to the developing market as well asleadership to households and businesses.(b) Impact on the EnvironmentEfficiency is generally a “win-win” situationwith respect to the environment. Increasedefficiency contributes to both reducedemissions and resource use, both of whichare core components of sustainability.However, while improvements innational energy efficiency are encouragedfrom a climate change and economicperspective, due consideration needs tobe given to the so-called “rebound effect”that can arise from improvements in energyefficiency. Brannlund et al. (2007)31andGreening et al (2000)32highlight thatpotential emission reductions arisingfrom improvements in energy efficiencymay be reduced by the existence of therebound effect. Brannlund et al note howthe rebound effect can be described asthe direct and indirect effects, such assubstitution and income effects, inducedby a new energy-saving technology.In this regard, the state can play arole in terms of complementary policiesand legislation, such as incentive leviesor a carbon tax. For example, in Ireland,whilst the Government’s scrapping of itsproposed levy on traditional incandescentlight bulbs prevented a significant switchin consumer behaviour towards moreenergy efficient CFL or LED light bulbs, thisproposed levy was an example of how theGovernment can legislate to encourageinvestment in energy efficient technology.While CFL and LED bulbs are more efficientand economical in the long run, their initialpurchase price is higher than the traditionalincandescent light bulb. The Government’splan to legislate for an environmental levyon incandescent bulbs would have reducedtheir price advantage and encouragedconsumers to switch to CFL or LED bulbs.According to the Government, the sole goalof the levy was to alter consumer behaviouras opposed to generating revenue (DoEHLG,2006).33Similarly, a carbon price can serve toprotect some of the environmental gainsachievable through increased efficiencyand energy conservation. A recent reportby the UK Environment Audit Committeehighlighted the important role that carbonprices have to play in the deployment ofrenewabletechnologiesandenergysources.The report emphasised how high carbonprices are needed to deliver substantialgreen investment (UK Environment AuditCommittee, 2010)34and how they arenecessary to curb the demand for fossilfuels and reward the development ofrenewable technology. According to the UKEnvironment Committee and the FinancialTimes (2009)35current carbon prices inthe range of €10-20 per tonne of carbondioxide are too low to drive investment ingreen technologies and energy efficiency.Euractiv (2010) note that the carbon pricewould have to be at least €100 per tonne ofcarbon dioxide in order to trigger enoughinvestment for a shift to a truly low carbonsociety36. Indeed, the International EnergyAgency (2009)37has highlighted that manyof the renewable technologies necessaryPathways to risk mitigation and a low carbon future THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES 21
  22. 22. significant and challenging sectors tomanage nationally with respectto greenhouse gas emissions andtransboundary air pollution. A shifttowards electric vehicles charged by a cleanrenewable energy source would contributesignificantly to the emission reductionsfrom this sector. This would in turn supportnational efforts to meet internationalgreenhouse gas emission reduction targetsand also efforts to meet national emissionsceilings for transboundary air pollutantemissions. There could also be noticeablereductions in noise pollution associatedwith road transport as the share of electricvehicles in the fleet grows.With respect to related environmentaltargets and ambitions, this shift wouldalso support national obligations to therenewable energy for transport target(RES-T) which calls for renewable energyto account for 10% of transport energy by2020, with interim targets of 2% by 2008and 5.75%39by 2010. The move towardselectric vehicles would also clearly benecessary if the Government is to fulfilplans outlined in November 2008 to have10% of all vehicles in the transport fleetpowered by electricity in 202040.Whilst the environmental gains ofsuch a change in the transport fleet areOptions and actions to reduce exposure to High Oil and Gas Prices(a) Contribution to the Green EconomyIreland does not have an indigenous motormanufacturing industry yet the necessarychanges for the increased penetration ofelectric vehicles into the national fleet willprovide an opportunity for job creation.The successful introduction of electricvehicles into the Irish transport sector willbe heavily dependent on the provision ofthe appropriate infrastructure. This refersprimarily to the adequate and convenientavailability of battery recharging orreplacement facilities. The initialinstallation and continued maintenanceof such facilities will provide a job creationopportunity. Furthermore, although Irelanddoes not have an indigenous motormanufacturing industry, there are first andsecond tier suppliers who will also benefitfrom sales in electric vehicles.A potential longer term benefit fromelectric car deployment with respect tothe green economy is the support thatthe electric car may deliver to the windenergy sector, by providing an additionalstorage medium for renewably generatedelectricity – particularly at off-peak timesi.e. overnight charging.(b) Impact on the EnvironmentTransport has proven one of the most22 THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES Pathways to risk mitigation and a low carbon futurepotentially significant, it is important tostress that the environmental ‘credentials’of the shift are in part determined by theform of power generation used to providethe electric charging. Furthermore, thebattery components of electric vehiclescould create further environmental issuesif proper management and recyclinginitiatives are not put in place.(c) Influence on CompetitivenessIreland’s small size is well suited to thereduced range currently offered byreasonably priced electric vehicles. As aresult, one of the most frequently citedconstraints to their widespread adoptionmay be less relevant in Ireland.Furthermore, by switching to electricvehicles, users (including business, privateand public service providers) will be ableto lower their operational costs for theirvehicle or fleet. Savings will accrue in termsof the fuelling cost of vehicles relative tooil driven vehicles, as well as considerablereductions in vehicle road tax. EnergyMinister Eamon Ryan notes that the costof driving an electric vehicle for one yearequates to one month’s petrol bill for aregularly fuelled vehicle41.However, whilst there are operationalcost savings, investment in a new vehicleThis section builds on the broader discussionof large scale renewable wind generation tolook specifically at how changes from ourAccelerated Growth (AG) oil and gas pricescenario may influence the business casefor investment in a 101MW onshore windfarm relative to the Baseline Scenario.Table 6 presents the key parametersand assumptions for the financial analysis.There are twin sets of parameters for certainvariables which vary under the Baseline toAG scenario conditions. These relate toinflation, interest and revenue streams.For simplification the average annualvalues have been used and presented inthis table for inflation and interest rates.In practice these would vary year to yearand alter the cash flow development yearto year. Using the annual average valuesmoothes payments over the 25 yearinvestment life. Another set of assumptionsfor Year 1 includes the return of 50% ofexpected annual income in Year 1 and nomaintenance but only operational costs inYear1.Operationalcostsforthispurposeareassumed to be 20% of the expected annualoperation and maintenance costs. A finalassumption has been to ignore the REFITtariff in this assessment. The reason for thishas been that where the REFIT tariff is used,a guaranteed market price for electricitygeneration is in place that would not allowthe assessment to capture the change in themarket price stimulated by higher oil andgas prices. As an interpretative note, thestudy recognises that the REFIT tariff wouldimprove the returns in both scenarios, up tothe point where the REFIT tariff falls belowthe market price of electricity otherwiseavailable to generators.Thus in conducting this analysis,simplifying assumptions have beennecessary and clearly projections overa 25 year lifecycle entail uncertainty.Nonetheless, the study illustrates therelative difference between the twoscenarios and also the sensitivity of theresults to some key parameters – inflation,interest rates and the market price ofelectricity as influenced by rises in fuelinput costs42. Results are presented for thefinancial analysis in four forms, Net PresentValue (NPV), Internal Rate of Return (IRR),Profitability Index (PI) and the Simple PayBack (SPB) year (when cumulative net cashflow becomes positive). A further pointto consider in examining the results isthe potential continuation of Section 486Corporate Tax relief which offers an 18%reduction in taxable income for eligibleprojects. This has not been factored into thefinancial analysis directly, however, undereach scenario this would further improvethe after tax profitability.The overall results are presented inTable7.UndereachcriteriontheAGscenariooffers the most favourable conditionsfor the investment. The NPV for the AGscenario is over €33 million as comparedThe impact of HOG on investment decisions: Case study- A 101 MW Wind farm
  23. 23. Table 6: Parameters for 101MW case studyParameter Value Source Site Location Sligo Study AssumptionWind conditions Average annual 7.3 m/s Met EireannTechnology Siemens AN Bonus 2.3MW Technical literatureLifecycle of wind farm 25 years Study AssumptionOnshore capacity factor 31% International literatureMWh from 101MW farm 274,819 MWh Study calculationOnshore capital cost per MW €1.233m per MW AIGS WS 1*Onshore Operation and Maintenance per MW €51,900 per MW AIGS WS 1Onshore grid connection costs €1m Adapted study estimateInflation average baseline to 2035 2.5% per annum Adapted study estimateInflation average AG to 2035 2.6% per annum Adapted study estimateDebt interest rate BL 4% per annum Adapted study estimateDebt interest rate AG 5% per annum Adapted study estimateOnshore feed in tariff BL Variable market price43 Adapted study estimateOnshore feed in tariffs AG Variable market price44 Adapted study estimate*All Island Grid StudyTable 7: Results of 101MW financial case study Baseline Scenario AG Scenario NPV €12,420,014 €33,850,027IRR 5.4% 7.7%Payback year of 25 Year 17 Year 13Profitability Index 9.9% 27.0%Figure 28: Cumulative net cash flow of 101MW onshore wind farm over 25 yearsunder the Baseline and AG HOG price scenarios1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26- �150,000,000- �50,000,000- �100,000,000�0�100,000,000�50,000,000�200,000,000�150,000,000CumNCFAG CumNCFBLPathways to risk mitigation and a low carbon future THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES 23requires funds and the relative value ofthe change will be connected to the ageand performance of the vehicle or vehiclesbeing replaced. It is also noted, that as ofyet, electric options for heavy duty vehiclesare extremely limited (though there maybe potential to explore a hybrid dieselfleet), with most examples constrained tovery specific purposes not suitable for roadhaulage.(d) Mitigation of Energy RiskPrice changes in the transport sectorfeed quickly through to the end-useras oil prices change. This can create anunstable price in a somewhat captivemarket with consequences for individualsand businesses. Whilst in the longer termindividuals and businesses may change theirtravel patterns and modes in response, thevolatility can impact the sector noticeably inthe short run. Electric vehicles would reduceexposure to such price fluctuations as theycan potentially be fuelled at a far lower costthrough the grid. Whilst oil and gas pricechanges may influence the market cost ofelectricity somewhat, the effect would bemoderated by the presence of renewablegeneration sources and the far lower initialbase cost of ‘fuelling’ an electric car relativeto an oil powered vehicle. to approximately €12 million under theBaseline. IRR also compares favourablyat 7.7% to the Baseline 5.4%. In terms ofpayback year, the investment is repaid inYear 13 for the AG scenario and Year 17for the Baseline. Finally, the profitabilityindex is seventeen percentage pointshigher under the AG scenario. A visualcomparison of the cumulative net cashflows for each is presented in Figure 28.The principal conclusion here isthat even with the higher interest andinflation rates, the AG scenario shiftin the market price of electricity forthe increase in the fuel input cost ofoil and gas creates a more favourableinvestment prospect relative to theBaseline Scenario tested. More dramaticchanges in power sector infrastructurewould themselves influence the marketprice of electricity and as such theseresults represent only the micro-scalecase study.
  24. 24. Summary, Conclusions and RecommendationsThis study has examined some of theeconomic and social costs that wouldbe incurred under certain high oiland gas price scenarios. The results of thisanalysis suggest there is cause for concernshould oil and gas prices rise in a mannercomparable to any of the developed HOGprice scenarios. For example, under theAccelerated Growth Scenario there wasan estimated fall in Irish GDP of up to7.5% below the Baseline conditions in2025, alongside a host of other identifieddistributional and societal impacts. Inthis chapter, we present conclusions withrespect to high oil and gas prices, theirimpacts on the economy and societyand actions to reduce these impacts.These are then followed by the studyrecommendations.Oil and Gas PricesIn our examination of oil and gas prices weillustrated how the outlook for price canchange dramatically for both the short andlong-term thereby reflecting the inherentuncertainty of both the near and far future.It is reasonable to assume – although notfree from dispute – that the price of oiland gas will ultimately rise as resourcesare depleted and new sources becomeincreasingly costly to exploit. Interveningevents such as conflicts and naturaldisasters may also be expected to create amore uneven path to future price levels.The three scenarios presented havebeen constructed within plausibleboundaries of future prices on a timeframe from 2010 to 2025 as the basisfor our analysis of impacts. They reflectalternative paths with more aggressivepressures on price. These are scenariosand not predictions and thus their focusis on illustrating plausible alternativefutures that may be triggered through oneor a combination of numerous events ordevelopments.24 THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES Pathways to risk mitigation and a low carbon futureA notable assumption of the study is thatoil and gas prices are paired for the purposeof the analysis, despite some emergingevidence to suggest a stronger divergencebetween the two. This divergence may berelevant for shorter term policy decisions,however, in the longer time frame oil andgas supplies are finite and will becomeconstrained either sequentially or intandem. Furthermore, as these fossil fuelresourcesaredepletedandsovereigncontrolis strengthened over what remains, pricescan be reasonably expected to become bothhigher and increasingly volatile. Whethersuch changes occur in 2010, 2020 or 2030is relevant to the timing of action but notthe need for change.The principal conclusion in respect ofprices is that nobody can offer certainty onfuture price levels but that the modelledHOG price scenarios all fall within currentfeasible international analysis ranges.Economic and Social ImpactsInternational economic impacts wereassessed as well as the specific economicand socio-economic impacts for Ireland.On the international front, the modelledresults indicate that the USA, UK and Europewould all be expected to suffer pronouncedand prolonged economic downturnstriggered by:• The inflationary effects of the HOGprices.• The interest rate response frommonetary authorities.• The corresponding falls in investment,output and trade.Drops in GDP for these three areas rangedup to 3%-4.5% in 2025 under the variousHOG price scenarios45.In Ireland, as a small open economy,the drivers of the impacts are the same.However, the scale of the trade impact isparticularly severe contributing to a drop inGDP of between 3.5% – 7.5% in 2025 underthe defined HOG price scenarios. Socio-economic and other ‘non-modelled’ impactsfor Ireland were also identified as partof the study. These impacts included thedistributional effect of higher energy costs,the corresponding rise in energy and fuelpoverty, restriction of mobility, increasedmarket uncertainty from the price volatility,reduced competitiveness for firms and ahigher national energy import cost.The principal conclusion in respect ofimpacts is that the international impacton output for Ireland and our majortrading partners would be significant andprolonged. Ireland would endure a greaterfall in GDP than the other regions and anumber of linked socio-economic impactswould exacerbate the costs and challengesfaced nationally.Options to reduce the impacts of HOGpricesThere are options available to reduceexposure to the impacts described and aselection of actions have been discussed.On the international front, Ireland maynot have it within its control to noticeablyinfluence the drop in national outputassociated with the HOG price scenarios.This is due to the strong influence of aslow down in international trade onnational GDP. In this case however, actionin our core trading partner markets (EU,USA and the UK) to reduce their combinedexposure to high oil and gas prices wouldbe expected to mitigate the extent ofthe economic downturn and impactsexperienced by all.However national action is far fromirrelevant and would have a direct influencein mitigating the socio-economic and non-modelled impacts detailed for Ireland. Theoptions considered included the delivery ofa high share of indigenous renewable windenergy generation, adoption of a broaderChapter 6.Summary, Conclusions andRecommendations
  25. 25. range of energy efficiency related measuresand supporting the uptake of electricvehicles into the national transport fleet.The rationale for action on these optionsas well as associated constraints andconcerns were discussed under headings ofprospective contributions towards the fourevaluative criteria, namely:• Contribution to the green economy inIreland.• Progress towards and impact oninternational environmental targets.• Influence on the competitivenessand relative attraction of Ireland forbusiness.• Mitigating national risk exposure tohigh oil and gas prices and supplyinterruptions.The principal conclusion in respect ofoptions is that there are a number ofactions that can be pursued nationally toreduce dependence on fossil fuels, withassociated benefits under the identifiedcriteria. However, a number of constraintsassociated with these options have alsobeen identified – generally relating tofinancing and infrastructure. Mechanismsand efforts to remove these barriers arevital in supporting a shift of scale towardsthe available options.Recommendations of this studyThere is change underway in Irelandand efforts are being made to meetthe environmental and new economicchallenges we face. There are ambitionsbeing stated, actions being taken andachievements being made. Indeed on abroad level the direction and ambitionis relatively clear in terms of energy andenvironmental policy – improved efficiency,lower cost and reduced emissions. Thisdirection can arguably be attributed to bothinternational obligations and a generalsocietal acceptance that it is better to bemore efficient, less wasteful and kinder tothe environment. The issue is not so muchdirection: rather the questions we face arethe rate and extent of change necessary,how to overcome the barriers to changeand deciding which technological paths tofollow.This study has highlighted and analysedthe extent of the impacts from one specificrisk factor, namely high oil and gas prices,as a support to this broader decisionmaking process. The results illustrate thatthe current motivations for change couldbe significantly altered under high oil andgas price scenarios that present additionaland substantial risks to both economicgrowth and societal welfare. The speedand extent of the necessary change are to apoint determined by government decisionson balancing risk against investment, aswell as the presence or absence of incentivesand barriers to change for investors. Therecommendations of this study are groupedinto international action, national actionand specific comments on the facilitationof change.International ActionRecommendations from the study focuson actions within Ireland. However, ageneral recommendation from the studywould be to examine the value of broaderinternational action across the US, EUand UK with regard to mitigating theexisting exposure to HOG price conditions.Whilst the scale of costs and benefitsis varied, many of the reasons for action,as well as the costs of inaction that areidentified for Ireland, are common toeach of these regions also. In this regard,co-ordinated international action wouldprovide this extended community witha further buffer against energy priceincreasesorsupplythreatswhichcandeliversuch damaging blows to their respectiveeconomies.General National ActionThe challenge with plotting a course ofaction under conditions of uncertainty isthat there is a risk of both doing too muchand too little. Each may carry additionalcost. Conclusions and recommendationsfrom the Siemens (2009)46study onreducing GHG emissions in Dublin by 2025offer a useful reference of specific technicaloptions. A number of levers are identifiedfor emissions abatement across a range ofsectors in the report, as well as informationon abatement costs and the requiredinvestment. Whilst the focus was on carbonemission reductions, the direct linkagebetween fossil fuels and carbon emissionsmean the report is equally relevant in thecontext of this HOG price analysis. Indeedone of the advantages of the decisions tobe made with respect to fossil fuel usage isthat there are many parallel benefits fromaction that may mitigate the risk of doingtoo much, including:• Reduced GHG and transboundary airpollutant emissions.• Increased efficiency and less resourceuse.• Potential for market leadership inenvironmental services and technologies.Broader national recommendations wouldbe to pursue policy packages that contributetowards the following five objectives forIreland:• Stable energy prices.• Secure energy supply.• Reduced environmental impacts.• Efficient and competitive economy.• Engagement and development ofexpertise in growing environmentalmarkets.Specific National ActionIn terms of specific national actions, thisstudy has identified a number of options(“Focus Areas”) where Ireland could reducePathways to risk mitigation and a low carbon future THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES 25
  26. 26. Summary, Conclusions and Recommendations26 THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES Pathways to risk mitigation and a low carbon futureexposure to oil and gas price changes.National actions in this regard would notremove us from the economic impactsof oil and gas price changes entirely, asconditions in global markets are, as shown,critical to Ireland’s small open economy.However, our actions are not irrelevant inthe context of all impacts considered aspart of this study.Beyond the discussed actions, ifIreland is to move towards the desiredbalance, it will require effective and timelyimplementation of a range of policies andmeasures, including:Supply side policies• Sustained support for increasedexploitation of nationally accessibleenergy providing resources – principallywind and ocean generation.• Development of appropriate marketconditions to support this transition– feed in tariffs, supportive planningprocess for new investments.• Prioritising grid improvements –faster connections to the grid, smartgrid development, and increasedinterconnection to Europe.• Rolling out of green procurementinitiatives to support new investmentsin green technology• Aiding the business case for investmentswith a clear strategy and the abovementioned supports so as to facilitateaccess to capital for investors.Demand side policies• Tackling the major sources of householdenergy demand by supportingconsumers to improve insulation,domestic heating efficiency andappliance energy efficiency.• Seeking a closer integration ofrenewables into the electricity, heat andtransport sectors.• Continuing to support increased energyefficiency in business as a means todampen overall energy requirements,thereby delivering improvedcompetitiveness for business.Closing remarksPolicy should consider the economicand social exposure to high oil and gasprices, the security of supply implicationsof potential international shortages orprice volatility, our high dependencyon imported fossil fuels (particularly fortransport and power generation) andthe challenges faced with respect toclimate policy and other internationalenvironmental commitments. Beneficialprogress can be made to limit the risksfaced and to support broader nationalobjectives.Policymakers must balance the costsand benefits of action against the costs andbenefits of inaction, all under conditionsof considerable uncertainty about thefuture. The risk examined in this studyis that oil and gas prices may increase onunexpected pathways and supply maybecome constrained. The cost and impactsestimated in this study are considerableboth for Ireland and the internationalcommunity.Options have been discussed thatare available to mitigate these potentialimpacts and there are certainly synergiesto be exploited between energyand environmental policies. There arehowever, barriers to progress that canin many cases be addressed throughGovernment actions. Table 8 outlines a‘wishlist’ which Siemens would urge publicpolicymakers to rapidly adopt.The greatest question howeverremains in regard to balance and speed.How much of a reduction in risk exposureis enough and what rate of changeis fast enough? A definitive answer tothese two questions may never beagreed yet the risk exposure identifiedin this report, in balance with theidentified synergies to be exploitedfrom pursuing risk mitigation actionswould add urgency to the case for actionwhilst allaying fears that we risk doing toomuch.Table 8: A Public Policy ‘Wishlist’A ‘WISHLIST’ FOR PUBLIC POLICY MAKERS Develop a high level 2050 strategic plan with a measurable roadmap for the energy system in Ireland, coveringthe four pillars47for a sustainable energy future in Ireland.Develop a “carrot and stick” approach for business and the public sector on energy savings andgreenhouse gas emissions. Support investment with tax incentives and favourable financing models.Electrify the transport sector. Deliver the rail related projects48in Transport 21, run hybrid buses in Dublin,speed up the implementation of electric cars and related infrastructure. Electrify the national rail network.Position Ireland as an attractive test-bed for sustainable pilot projects and encourage industry and the publicsector to participate and lead.Modernize the public procurement process by implementing a green public procurement policy that takes intoaccount full life cycle costs and supports the quick roll-out of projects in the sustainability area.12345