Assessing the Latvia Energy Sector in the Context of Climate Change Economics

World Bank Prototype Carbon Fund Workshop Riga, Latvia January 24-27, 2000
Gary A. Goldstein, Lorna A. Greening International Resources Group, Ltd. Janis Rekis Latvian Development Agency, Department of Energy

LAA/DoE

Presentation Topics
y Relevance of Latvia MARKAL y Implications of Economic Growth on the Energy System and Carbon Emissions y Evaluating the Value of Latvia Carbon Permits y MARKAL Methodology Overview y Conclusions

LDA

Relevance of Latvia MARKAL

y IFE-Norway Collaboration y Preliminary Results Presented at IEA-ETSAP y MEPRD Report on SO2 y Policies and Measures to Mitigate GHG Emissions and Increase Sinks y Second National Communication to the UNFCCC y Energy Trading and CO2 Mitigation in the Nordic and Baltic Countries

LDA

Latvia MARKAL Baseline Assumptions

y GDP = Optimistic National Energy Program Scenario (1997) y Energy Prices for Imports from International Energy Agency (Other than Electricity) y Individual Power Plants Represented y Technology Progress with Regard to Efficiency Improvements y No Limits on Fuel Imports y No Nuclear Power y Forestry and Non-CO2 GHG are Not Accounted For

LDA

Latvia GDP Forecasts

Forecast for MARKAL (1996) Ministry of Economy (Slow Development, 1999) Latvia National Energy Program (Base, 1997) GDP at average prices Ministry of Economy (Optimistic Development, 1999) Latvia Natioinal Energy Program (Optimistic, 1997)

12000 10000 mill.US$ 8000

438 1 392 5

6000 4000 2000 0

255 7

217 7

219 1

217 3

224 6

243 9

252 6

05

10

25

90

91

92

93

94

95

96

99

15

20

30 20

97

98

00

19

19

19

19

19

19

19

19

19

19

20

20

20

20

20

20

A ll da t a giv e n in a v e r a ge pr ice s o f 1 9 9 3 a t e x cha n ge r a t e 0 .6 7 4 LS/ U S$

LDA

20

35

What are the Implications of Economic Growth for Carbon Emissions?

y Expanded Trade with the EU will Result in GDP Growth Rates Similar to the EU by 2005 y Industrial Structure will Shift to Light Manufacturing and Commercial Services y Carbon Emissions will Increase, but Economy will be Less Carbon Intensive Over Time

LDA

Energy Services According to GDP Growth

World Bank PCF Latvia Workshop

250

200

150 PJ 100 50 0 1994 1999 2004 2009 Years 2014 2019 2024

Base Case

Mid Growth

Low Growth

LDA

Total CO2 Emissions

World Bank PCF Latv ia Workshop

30000

25000

20000

Th. Tons CO2

15000

10000

5000

0 1994 1999 2004 2009 Years 2014 2019 2024

Base Case Low Growth

Base Case -5%CO2 Low Growth -5%CO2

Mid Growth 92% level of 1990

Mid Growth -5%CO2 MoE-Higher Growth

LDA

Potential CO2 Permit Revenue

Cumulative CO2 Emissions Below Kyoto Level (92% of 1990) for 2008-2012
24.9 66.35 Mtons CO2

Permit Price Range

$1.11 - $7.74/TonCO2 ($4.07 - $28.38/TonC)

Permit Revenue Range

$27.6 - $513.6 Million

LDA

Liepajas Project Avoided Emissions (Base Scenario)

Displaces Some Natural Gas and Dual-fired Power Generation Avoided Emissions 2001- 2012 (TonsC)
Methane displaced Power Sector Fuel Switching TOTAL 119.298 16.965 136.263

LDA

Th. Tons CO2

10000 15000 20000 25000 5000 0

LDA

Base Case 1994 1999 2004 2009 2014 2019 2024 Base Case 5%CO2 Base Case Base Case 5%CO2

World Bank PCF Latvia Workshop

Base Case Base Case 5%CO2 Base Case Base Case 5%CO2 Base Case Base Case 5%CO2 Base Case Base Case 5%CO2 Base Case Base Case 5%CO2

CO2 Emissions by Fuel

Peat Natural Gas LPG Heavy Oil Gasoline Disel Coal

Contribution to 10% CO2 Reduction - Base Case

World Bank PCF Latvia Workshop

22000 20000

T h T ons C O 2

18000 16000 14000 12000 10000 1994

EFF IMPROVEMENT MOVE TO RENEW MOVE TO NUCLEAR LESS CO2/FOSSIL REMAINING

1999

2004

2009

2014

2019

2024

Years

LDA

CO2 Intensity (CO2 vs GDP)

World Bank PCF Latvia Workshop

5.0 Th. Tons CO2/ 1995 Mil. US$ 4.5 4.0 3.5 3.0 2.5 2.0 1994 1999 2004 2009 Year 2014 2019 2024 Base Case Base Case -5%CO2 Mid Growth Mid Growth -5%CO2 Low Growth Low Growth -5%CO2

LDA

Total Energy System Cost vs Cumulative CO2 BASE - High Growth

World Bank PCF Latvia Workshop

570 560 M illio n T o n s C O 2 550 540 530 520 510 31.74

31.74

31.74

31.75

31.75

31.75

31.75

31.75

31.76

31.76

Billion 1995 US$

LDA

CO2 Permit Price Range

World Bank PCF Latvia Workshop

10 1995$/Ton CO2 8 6 4 2 0 1994 1999 2004 2009 Year 2014 2019 2024

LDA

Annual Revenue from Permit Sales - Base Case

World Bank PCF Latvia Workshop

Annual Revenue from Permit Sales - Base Case

40 35 30 1995M$
40 35

World Bank PCF Latvia Workshop

25 30
1994M$

20 25 15 20 10 15 5 10 0
5 0

Lowest Permit Price Lowest Permit Price High Permit Price

High Permit Price

1994 1999 1994 1999 2004 2004 2009 Year Year

2009 2014 2014

2019 2024 2019 2024

LDA

Electricity Production - Deterministic vs Stochastic w/ 5% CO2 Reduction

World Bank PCF Latvia Workshop 40

35

30

BASE Det Mid Growth Det Low Growth Det BASE Stoch Mid Growth Stoch Low Growth Stoch

PJ

25

20

15

10 1994 1999 2004 2009 YEAR 2014 2019 2024

LDA

The Forest Sector as a Carbon Sink

Timber Harvesting is Increasing Relatively to 1990 There is an Increase in Plantation Production Latvian Forests will Remain a Net Carbon Sink During the Time Period 2000-2020

LDA

MARKAL Building Blocks

RESOURCES PROCESSES GENERATION ENERGY SERVICES

IMPORT ELECTRICITY REFINERIES HEAT MINING STOCKS EMISSIONS CONTROLS EXPORT DEVICES FUEL PROCESSING END-USE D E M A N D S

What MARKAL Does

y Identifies least-cost solutions for energy system planning y Evaluates options within the context of the entire energy/materials system by: balancing all supply/demand requirements ensuring proper process/operation monitoring capital stock turnover adhering to environmental & policy restrictions y Selects technologies based on life-cycle costs of competing alternatives

What MARKAL Does (cont.)

y Establishes baselines and the implications of alternate futures y Provides estimates of:
y y y y y energy/material prices demand activity technology and fuel mixes GHG and other emission levels mitigation and control costs

MARKAL-MACRO Overview MARKALENERGY SOURCES TECHNOLOGY CHARACTERISTICS ENVIRONMENTAL CONSTRAINTS & POLICIES USEFUL ENERGY SERVICES LABOR GDP CONSUMPTION

MARKAL
ENERGY PAYMENTS

MACRO
INVESTMENT CAPITAL

TECHNOLOGY MIX FUEL MIX EMISSIONS SOURCES & LEVELS FUEL & EMISSION MARGINAL COSTS RANKING OF MITIGATION OPTIONS

Input Form for Resource Supply Option

T e mplate 1a: Spre adshe e t o f ne ce ssary MARKAL data fo r Ene rg y Carrie r Impo rts (e x cluding Ele ctricity )
Energy Resource name: IMPNGA1 : Natural Gas Imports Year = MARKAL Parameter short description [a] [b] Bound on activity: resource technology - (lower (LO) and/or upper (UP), or fixed (FX)) Annual resource cost Total resource availability [d] Annual delivery cost Emissions coefficient/resource capacity Maximum annual growth rate Incremental capacity over and above growth constraint [d] Energy carrier input: resource technology (not export) Energy carrier output: resource technology (not export) Fraction of consumption of electricity by a resource in peak equations Weight for security objective function Start year [d] BOUND (BD)Or COST CUM DELIV(ENT) ENV_SEP(co2) GROWTH GROWTH_TID INP(ENT)r OUT(nga)r PEAKDA(SEP) SECURITY START PJ $m/PJ [c] PJ $m/PJ [c] mt C/PJ /year PJ PJ/PJ 0 or 1 fraction year 2000 1 1 1 MARKAL Parameter name Units Period = 1990 1 2000 2 2010 3

0.025

0.025

0.025

a b c d

See manual for full definition of MARKAL data parameters. () indicates that it is a priority to estimate the appropriate value for this parameter. $m refers to constant 1990 US$m. This is a Time Independent Data (TID) parameter that will not vary over time during the projection period, and, consequently, will have only one data entry.

ANSWER: Integrating RES, Data & Graphcis

What Questions Can MARKAL Answer?

y How do particular technologies and policies affect GHG and emissions of other pollutants? y What are the costs of meeting mitigation targets or the value of carbon rights? y How do demand-side actions affect the supply-side and vice versa? y How do technology and fuel mix changes resulting from environmental policies affect energy prices? y What are the benefits of cooperation mechanisms?

Benefits of using MARKAL for Promoting Regional Energy Strategies

y Builds in-country capabilities while promoting regional dialog and cooperation using a common language. y Enables evaluation of major projects on a regional scale. y Promotes taking advantage of resource diversity. y Facilitates cost-effective & more rapid mitigation. y Encourages for more rapid data gathering and sharing. y Fosters environmentally responsible and sustainable development.

Conclusions
CO2 emissions in Latvia will remain well below Kyoto commitment levels, subject to economic growth. Permit prices are competitive, and should benefit both Latvia and buyers. Substantial gains from permit sales seems likely. Opportunities for further cost-effective CO2 reductions exist via AIJ. Development of hedging strategies encourages planning for high GDP and lower CO2 emissions. Integrated analyses can provide important insights into Climate Change policy and implications.

LDA

Workshop Observations
The difference between concepts and reality Pre-workshop needs
informal email exchange between experts and HC team terminology and key concepts information note for HC team 1st day dialog between experts and HC team Check-list for HC (and IC/II) on documentation needs for determination of the National picture

Workshop Observations (2)

Controlled wider audience (Baltic countries) More work to do on Baseline definition and issues
Additionality vs. Environmental Progress

Definitive success, with a great deal learned by all participants

Workshop Observations (3)

Develop the idea of in-country Sustainable Development Promotion Centers
 Understanding of the principles of UNFCCC/Protocols (and IPCC guidelines) as they relate to the country  Host country knowledge and oversight of their CC assets and opportunities  Compilation of a portfolio of potential projects  Point of contact for interested parties (external and internal)  Tools and the necessary skills  Coordinator of a network internal experts  Guidance through the project development process  Ensuring the quality of the credits