Global primary energy demand is projected to grow by 45% by 2030, driven primarily by coal. The financial crisis is negatively impacting investments in renewable energy, reducing the urgency for energy-efficient technology adoption. Urgent government action is needed to address both the financial crisis and climate change before the Copenhagen talks.

2. World primary energy demand in t he Reference Scenario: this is unsustainable! 0 2 000 4 000 6 000 8 000 10 000 12 000 14 000 16 000 18 000 1980 1990 2000 2010 2020 2030 Mtoe Other renewables Hydro Nuclear Biomass Gas Coal Oil World energy demand expands by 45% between now and 2030 – an average rate of increase of 1.6% per year – with coal accounting for more than a third of the overall rise Office of the Chief Economist

3. The continuing importance of coal in world primary energy demand Increase in primary demand, 2000 - 2007 Demand for coal has been growing faster than any other energy source & is projected to account for more than a third of incremental global energy demand to 2030 Mtoe Office of the Chief Economist 0% 20% 40% 60% 80% 100% Non-OECD OECD All other fuels Coal Shares of incremental energy demand Reference Scenario, 2008 - 2030 0 100 200 300 400 500 600 700 800 900 1 000 Coal Oil Gas Renewables Nuclear 4.8% 1.6% 2.6% 2.2% 0.8% % = average annual rate of growth

4. Power-generation capacity under construction worldwide Over 600 GW of power-generation capacity is currently under construction worldwide & is expected to be operational before 2015, 3/4 of this is outside the OECD Office of the Chief Economist 0 50 100 150 200 250 Coal Gas Oil Nuclear Hydro Wind Rest of renewables GW Non-OECD OECD Total = 613 GW

6. Change in oil demand by region in the Reference Scenario, 2008-2030 -2 0 2 4 6 8 10 China Middle East India Other Asia Latin America E. Europe/Eurasia Africa OECD North America OECD Europe OECD Pacific mb/d All of the growth in oil demand comes from non-OECD, with China contributing 43%, the Middle East & India each about 20% & other emerging Asian economies most of the rest Office of the Chief Economist

7. World oil production by source in the Reference Scenario 0 20 40 60 80 100 120 1990 2000 2010 2020 2030 mb/d Natural gas liquids Non-conventional oil Crude oil - yet to be Developed or found Crude oil - currently producing fields Even if oil demand was to remain flat to 2030, 45 mb/d of gross capacity – roughly four times the capacity of Saudi Arabia – would ne needed just to offset decline from existing fields. Office of the Chief Economist 45 mb/d

8. A sea change: world oil & gas production by company type in the Reference Scenario Almost 80% of the projected increase in output of both oil & gas comes from national companies – on the assumption that investment is forthcoming Office of the Chief Economist 0 20 40 60 80 100 120 2007 2015 2030 mb/d 0 750 1 500 2 250 3 000 3 750 4 500 2006 2015 2030 Bcm NOCs Private companies Oil Gas

9. World natural gas reserves and Gas Exporting Countries Forum (GECF) The 11 members of GECF account for 2/3 of global gas reserves, while just 2 of them – Russia & Iran – account for over 40% . World total: 179 Tcm (2008) Office of the Chief Economist

11. World’s top five energy-related CO 2 emitters in the Reference Scenario The top 5 emitters account for 70% of world emissions; China overtook the USA as the largest emitter in 2007, while India becomes the fourth largest before 2020 Office of the Chief Economist 2007 2020 Gt rank Gt rank China 6.1 1 10.0 1 USA 5.8 2 5.8 2 EU27 4.0 3 3.9 3 Russia 1.6 4 1.9 5 India 1.3 5 2.2 4

12. Energy-related CO 2 emissions from existing & future power plants in the Reference Scenario Although 75% of power sector CO 2 emissions in 2020 are already “locked-in”, investments in the next decade will be critical to a low-carbon future in the longer term 0 2 4 6 8 10 12 14 16 18 2005 2010 2015 2020 2025 2030 Gigatonnes “ Window for action” Office of the Chief Economist Future plants in OECD Future plants in non-OECD Existing plants in non-OECD Existing plants in OECD

13. Reductions in energy-related CO 2 emissions in the climate-policy scenarios While technological progress is needed to achieve some emissions reductions, efficiency gains and deployment of existing low-carbon energy account for most of the savings 20 25 30 35 40 45 2005 2010 2015 2020 2025 2030 Gigatonnes Reference Scenario 550 Policy Scenario 450 Policy Scenario Office of the Chief Economist CCS Renewables & biofuels Nuclear Energy efficiency 550 Policy Scenario 450 Policy Scenario 54% 23% 14% 9%

14. World energy-related CO 2 emissions in 2030 by scenario OECD countries alone cannot put the world onto a 450-ppm trajectory, even if they were to reduce their emissions to zero 0 5 10 15 20 25 30 35 40 Reference Scenario 450 Policy Scenario Gigatonnes Office of the Chief Economist World

15. Key results of the post-2012 climate-policy analysis 550 Policy Scenario Corresponds to a c.3  C global temperature rise Energy demand continues to expand, but fuel mix is markedly different CO 2 price in OECD countries reaches $90/tonne in 2030 Additional investment equal to 0.25% of GDP 450 Policy Scenario Corresponds to a c.2  C global temperature rise Energy demand grows, but half as fast as in Reference Scenario Rapid deployment of low-carbon technologies Big fall in non-OECD emissions CO 2 price in 2030 reaches $180/tonne OPEC production almost 13mb/d higher in 2030 than today Additional investment equal to 0.6% of GDP Office of the Chief Economist

16. Cumulative European Union CO 2 savings with 20% reduction target in 2020 EU cumulative savings over 2008-2020 would represent only 40% of China’s annual CO 2 emissions in 2020 0 2 4 6 8 10 12 ANNUAL 2020 CO 2 emissions Gigatonnes Office of the Chief Economist China EU-27 CUMULATIVE savings with 20% CO 2 emissions reduction target (2008 - 2020)

18. How is the financial & economic crisis affecting energy investment? Difficulties in obtaining credit & higher cost of capital Increased aversion to risk Paralysed credit markets Plunging share values have increased debt-equity ratios Lower prices & cash flows have made new investments less attractive Falling demand caused by economic recession has reduced urgency & appetite for suppliers to invest Office of the Chief Economist

19. Impact on energy security & climate change The crisis is driving down demand & prices for now, but impact on demand, investment, imports & emissions in the medium to long term may be negative Office of the Chief Economist

20. Demand-side investment Financing problems & lower energy prices are discouraging investment in replacing energy-consuming capital stock Will also delay the development & commercialisation of more energy-efficient demand-side technologies Car manufacturers are particularly badly placed to invest because of a slump in car sales & severe financial problems Stronger government policies to support energy efficiency could redress the balance Office of the Chief Economist

21. Implications of oil/gas upstream investment cutbacks Upstream oil projects involving 2 mb/d of peak capacity delayed so far, more to follow? OPEC has announced delays at 35 projects, though no details Cutbacks in spending on producing assets will push up decline rates Demand in near term may fall more than the loss of capacity… … but if demand rebounds quickly with economic recovery, spare capacity may be squeezed in medium term given investment lead times & financing problems LNG liquefaction capacity is set to rise in near term, but no new investment decisions are due to be taken in 2009 Office of the Chief Economist

22. Impact of the crisis on power-sector investment Falling demand & financing problems are driving investment cutbacks (little hard data to hand as yet) Equipment suppliers (turbines etc) report a drop in orders of up to a third Uncertainty about future electricity demand is a key risk factor influencing power-company investment decisions Impact varies depending on the region and on the regulatory regime (much bigger in deregulated markets) Cost of capital has risen sharply due to higher perceived risk Capital-intensive renewables & nuclear especially vulnerable to financing difficulties & lower fossil-fuel prices Renewable projects protected by guaranteed feed-in tariffs in some cases But many wind developers are small (BBB-type rated) & are struggling to raise finance Office of the Chief Economist

23. Impact of financial crisis on global investment in renewable energy Q4 Office of the Chief Economist Investment in renewables has been hit by the rising cost of credit and the fall in oil & gas prices which has reduced the economic incentive for “clean” energy. Source: NEF Investment in Q4 2008 was 24% lower than 2007 and 20% lower than Q3 0 5 10 15 20 25 30 Billion US $ 04- Q1 04- Q2 04- Q3 04- Q4 05- Q1 05- Q2 05- Q3 05- Q4 06- Q1 06- Q2 06- Q3 06- Q4 07- Q1 07- Q2 07- Q3 07- Q4 08- Q1 08- Q2 08- Q3 08-

24. Implications for energy industry structure & ownership All energy sectors likely to see consolidation as large firms with robust balance sheets take over or buy assets from smaller firms New wave of oil & gas deals in offing? Majors, strongest independents & some national companies well placed to acquire assets from distressed operators Chinese national oil companies remain active in investing abroad, including recent deals in Venezuela, Brazil, Iran & Africa Dominance of traditional power companies, with stable grid businesses, could rise as independents struggle to secure finance Some coal companies struggling with heavy debt China’s Chinalco to take 18% stake in Rio Tinto Group in return for $19.5 billion cash injection Office of the Chief Economist

25. Summary & conclusions Energy and geopolitics will be increasingly interconnected We need a major decarbonisation of the world’s energy system – Copenhagen is crucial Addressing environmental issues will substantially improve energy security The financial crisis is undermining investment in low carbon energy – there is an urgent need for governments to respond decisively The Italian G8 Presidency can provide a bridge between the G20 and Copenhagen by calling for the financial crisis to be addressed in “tandem” with climate change