Reducing Energy Poverty With Natural Gas

The Stanford Natural Gas Initiative (NGI) convened a symposium on May 9 and 10, 2017 entitled Reducing Energy Poverty with Natural Gas: Changing Political, Business and Technology Paradigms. The symposium convened the university’s experts and external leaders to explore ways that natural gas and liquefied petroleum gas (LPG) can most effectively be used to address energy poverty around the world. It welcomed nearly 130 participants from 13 countries, representing Stanford, industry, foundations, and both government and non-governmental organizations.  The final product from the symposium is this action plan that summarizes the main takeaways and recommendations for further efforts.  Excerpts from the paper to follow:

(Stanford National Gas Initiative) – Several themes emerged from the symposium that are different from the prevailing narratives on both poverty alleviation and climate change. Symposium participants addressed the topic of energy access in the context of human development, prosperity building, and socioeconomic development at scale, rather than the less ambitious goals often defined around isolated access to minimal lighting or individual cook stoves.

Sustainable energy access is often discussed in a context that implicitly or explicitly rejects a future role for any fossil fuels. Natural gas and LPG were identified as important fuels with the potential to change energy development paradigms when given the chance. Because the pros and cons of fossil fuels are not created equally, symposium speakers identified the unique health, environmental, scaling, and climate-benefits of gas. The key takeaways that resulted from these discussions are explored further in the following sections and are summarized as follows.

  • Energy access is critical to alleviating poverty.
  • Energy poverty reduction requires more than low-level electricity.
  • Natural gas and LPG meet important energy needs.
  • Economic development, health, and environmental goals must be pursued simultaneously.
  • Natural gas development requires a viable value chain.
  • Companies can participate in developing their future markets.

Energy Access is Critical to Alleviating Poverty

A significant portion of the world’s population still lacks meaningful access to modern energy services. There are currently 1 billion people without electricity, up to 2 billion whose electricity is inadequate and unreliable, and a total of 3 billion that use traditional low-grade fuels like firewood, dung, and charcoal for cooking. Although it is unclear if limited energy access is a cause of or the result of poverty, it is certain that sustainable socioeconomic development requires access to energy. The absence of legitimate energy services limits the prospects for individuals, families, communities, and, indeed, entire economies.

There are many measures that help define energy poverty, but there is no one metric that adequately encompasses the scope of the issue, making the drafting of solutions difficult…. The building blocks of economic development, whether they are goods or services, require energy. Water sanitation, medical care, and education, for example, all serve as gauges for a nation’s developmental progress, and each requires affordable and reliable energy systems. The relationship between societal development and energy consumption is well established, with the human development index (HDI), a composite metric that quantifies a country’s level of human development, showing a strong correlation with energy use.

Figure 1: Annual energy use per capita vs gross national income per capita

 

Samir Saran made a keen observation during his opening keynote, contrasting photos of women carrying energy (such as wood on their backs) and energy carrying women (in a car). This led to an ongoing discussion throughout the symposium of the disproportionate affect energy poverty has on women in many developing regions. This is a reality not often discussed despite the known association between the welfare of women and socioeconomic development. In the end, prioritizing energy access for developing regions will facilitate development. Whether in cities or rural areas, in a residential setting or an industrial zone, improved energy access allows for the transformation of lives, communities, and economies. Providing this energy is a critical component to poverty alleviation and ultimately, human prosperity.

Energy poverty reduction requires more than low-level Electricity

Electrification usually dominates discussions on energy access in the developing world, with many conversations emphasizing one element, such as the importance of providing a single lightbulb to a rural home. While these efforts are important and commendable, symposium participants engaged in a significantly more ambitious conversation about creating the building blocks for serious economic development. In his opening remarks, Todd Moss contrasted the average electricity use in several emerging economies with that used in the United States for Christmas lighting alone.

Figure 2: Energy use per year of emerging economies compared to U.S. decorative holiday lighting in 2007

 

Currently, the most commonly used definition of modern energy access is 100 kilowatthours per person per year for those living in urban environments. This is equivalent to using one lightbulb for five hours per day, as well as a mobile phone charger. In rural areas, the threshold is half of that. As a result, participants were enthusiastic about raising the ambitions of energy access goals to meet higher targets that can offer access to labor-saving devices such as washing machines and economic building blocks such as refrigerators.

Throughout the symposium, an emphasis was placed on other important forms of energy: thermal, such as for heating and cooking, transportation fuels, and feedstock (energy resource) for fertilizers and petrochemicals. In developing economies, cooking alone represents 80 to 90 percent of household energy needs and therefore affords a significant opportunity to improve health outcomes. Additionally, transportation systems are critical for moving goods and people, creating the lifelines for economic development. The Breakthrough Institute’s Alex Trembath stressed that not enough attention is currently being paid to income-generating access like agriculture, industry, and commerce. Modernizing agriculture, for example, can play an important role in feeding a growing population in developing economies by boosting productivity levels and moving beyond subsistence farming. And although it is popular to talk about energy development in terms of individual solar panels and microgrids, understanding that meaningful access to energy in the developing world will require depth, breadth, and scale is critical. This means providing the appropriate energy needed to support commercial and industrial development. Natural gas and LPG can be uniquely versatile fuels with respect to these different applications, as is discussed in the following section.

Natural Gas and LPG Meet Important Energy Needs

Both the first and second panels emphasized the different approaches required to address rural and urban energy needs. In their armchair discussion, Rachel Pritzker of the Pritzker Innovation Fund and Joyashree Roy articulated the disconnect between the perception of energy access needs and the reality. Pritzker relayed a disconcerting story of “solar access” that essentially amounted to holes in the roofs of homes and Roy discussed the absence of meaningful incentives to transition away from coal in India.

Much public discussion on energy access emphasizes “last mile” electrification in rural areas. Thus, most miss three important components. First, distributed last-mile generation often emphasizes inadequate energy quantity and quality required to raise communities out of sustenance living. Second, there is a great migration of people to urban areas; as a result, urban electrification is more critical for meaningful impact. ORF director Sunjoy Joshi and Philip Mshelbila discussed the importance of urban electricity in economies such as India and Nigeria. Third, urban electrification requires another order of magnitude in quality and scale because disruptions affect many economic components of society and inhibit socioeconomic development. This type of electricity production requires a scale not often discussed in the context of energy access, unexpectedly providing entry opportunities for coal.

Advances in technology for extracting gas have resulted in an abundance of affordable energy that can be used to address access at a variety of scales. Natural gas and LPG are clean-burning fuels, with lower greenhouse gas emissions than coal. They are also devoid of any significant amounts of mercury, particulate, and other toxic by-products. This, for example, has led to an increase in natural gas use for power generation in developed economies like the United States. When used as a transportation fuel, natural gas reduces fuel costs and provides air quality benefits in cities. And though transportation-fueling networks require careful planning and investment, these have already been achieved, to a certain extent, in some developing economies, including those of India and Pakistan. Natural gas also contains important feedstock for many industrial processes including the development of steel, plastics, and electronics.

During the symposium, World LPG Association’s CEO and managing director, James Rockall, detailed the multifaceted and vital role of LPG. First, LPG provides an affordable, transportable resource that can significantly reduce household air pollutants. By switching to a cleaner and more efficient cooking fuel, the number of individuals who die from household air pollution each year will decrease. Second, in relevant climates, it can be used for space heating, as it is in developed regions. Third, LPG can serve as a modular precursor to natural gas while creating markets by establishing demand for gas in different communities, eventually being replaced once the appropriate infrastructure is in place. It is well known that natural gas is difficult to store and transport, requiring capital-intensive investments in infrastructure; LPG provides a viable approach to phased growth.

Economic Development, Health, and Environmental Goals Must be Pursued Simultaneously

Discussions about energy access can draw out possible tensions between economic development, human health, and environmental goals. Development goals are critically important, and numerous speakers emphasized that we should not allow them to be deprioritized because of climate concerns. Participants remarked on the limitations placed on project support by financial institutions’ strict guidelines that enable a renewables-only approach. Speakers agreed that climate and other environmental risks pose real and serious concerns, and we must find ways to address them without stunting economic growth in poorer countries. Promoting economic development empowers countries to determine their own prioritization around health, environmental, and climate outcomes. Building infrastructure in education, medicine, and commercial development allows communities to move away from survival to thriving development.

The use of fossil fuels and the reduction of emissions are not mutually exclusive. For example, switching the 3 billion people in the world currently cooking with traditional biomass to LPG would have a negligible impact on global greenhouse gas emissions, but would have significant positive health outcomes. In his talk, Rockall asserted that more people die from exposure to smoke from cooking with traditional fuels than the total that dies from HIV/AIDS, malaria, and tuberculosis combined. Roughly $25 billion is invested annually in fighting these three diseases, while only $400 million is spent on improving access to clean cooking. According to the International Energy Agency, ten percent of what is currently being spent to fight those three diseases annually would be enough to achieve universal access to clean cooking.

At times, the global focus on reducing fossil fuel use and promoting renewables artificially restricts options for energy development and access in a way that hurts both development and environmental quality. For example, countries may feel pressure to focus their “green” efforts on renewables, even while continuing to increase their use of inexpensive coal. Participants emphasized that gas developments may offer better economic, environmental, and health outcomes overall, than other fuels. Properly balancing the pursuit of these three ambitions is critical to improving the quality of life for people in developing regions.

Natural Gas Development Requires a Viable Value Chain

A significant complication associated with natural gas is the need to stitch together a value chain from gas field to transport infrastructure (pipelines or LNG) to final consumers in a sustainable manner. Philip Mshelbila showed how a well-planned gas-to-power value chain fractures at each segment without proactive governance and effective collaboration of different institutions along the way.

Figure 3: Competing unforeseen forces in gas value chain

 

Many of the breaks in the chain shown above are directly related to costs and payments. Transport infrastructure is expensive for gas, and there is not a liquid global market for gas to the same degree there is for oil. Without assurances that the gas will be there, investors will not build gas-consuming facilities like power or petrochemical plants. Without assurances that there are customers who will pay prices over the long term to allow a return on gas infrastructure investments, upstream and midstream developers will not be willing to proceed. Strong governance institutions, defined markets, and appropriate gas pricing are critical to ensuring success. Peter Hughes noted that this dynamic has and will continue to hinder greater gas development. He also indicated that if a different approach is not utilized to make gas more economical that includes smaller-scale technology, for example, gas deployment is not guaranteed.

Symposium attendees cited the need for financially viable end-consumers of natural gas for success. Several countries represented at the conference struggle with the problem of how to build a viable gas value chain when state-owned power companies are unable to pay or to pay a high enough price, for the gas they consume. This is often a result of individual consumers’ inability to pay for power, resulting in the power company’s inability to recover costs. George Amoako-Adjei of the Ghana National Gas Company commented on the importance of investing in identifying credible demand to ensure favorable economics down to the end-consumers. In Ghana, companies make note of the appliances that are powered on the grid and by backup generators in order to gain clarity on what individual households can afford. Then when financing, the initial investment services those who can pay, and is later scaled up. Amoako-Adjei noted that, though an arduous effort, it is worthwhile.

The value chain challenges of natural gas highlight the possible complementary role of LPG in developing gas markets before natural gas is widely available. LPG is easier and relatively cheaper to transport than natural gas, allowing distribution networks to be built out more readily. The generally fragmented character of the LPG industry is an illustration of the low barrier to entry. As a result, LPG can precede and serve as a model for natural gas, creating smaller scale access with modular expansion capacity. Small-scale efforts and distributed infrastructure can get off the ground more easily and allow scaling over time from smaller to larger grids. Scalable business models using LPG can be used to create initial demand for gas and allow the establishment of an appropriate regulatory environment, creating a pathway for increased natural gas use later.

Hamis Ussif, of the Ghana National Petroleum Corporation, commented on the benefit of using public funds to build gas infrastructure projects. Unsuccessful subsidy policies have shown this practice in a negative light, but this does not have to be the case. Careful, proactive planning may be taken to avoid misappropriation. Sound governance is a requirement for many aspects of natural gas development. Corruption, lack of physical security, bad credit (security of payments), conflicting subsidies and misaligned goals can all impede the best-planned projects.

Additionally, incumbent players may resist reform. For example, open access might hurt state-run enterprises by eliminating their monopolies. These entities have significant political power and often a direct say in how policies get drafted. As a result, state-owned entities might be understandably reluctant to give up their prerogatives, especially given their difficulties recovering costs from customers. Sunjoy Joshi asserted that in India, power generation plants are often not able to sign power purchase agreements because state utilities lack the funds to pay. The utilities end up saving more money by not providing power because of high levels of cross-subsidization, an unintended consequence of government regulation. On the other hand, effective government intervention can lead to successes. In India, more than 200 million people achieved access to modern LPG cook stoves within 5 years as a result of proactive, top-down government initiatives.

Stanford researcher Mark Thurber conveyed that in many developing countries, pricing gas has proven to be the most important factor in enabling effective gas utilization. Innovation and discipline around pricing policy are required. Socio-political concerns often negatively affect pricing plans; however, when gas prices are set too low, it disincentivizes production and distribution of natural gas. During the Understanding the Developing Country Demand breakout session, an attendee commented on the desire for universally, highly subsidized energy in Guatemala due to the lack of available funds by many impoverished citizens. But, highly subsidized gas has repeatedly led to unsustainable programs. Thurber noted that subsidies have to be carefully targeted and implemented, and adopted with appropriate exit strategies.

Companies can Participate in Developing their Future Markets

In many instances, countries with a natural gas resource have only been able to effectively develop their export market because of the lack of a domestic consumer base. Tanzania’s acting chief technical advisor for the Oil and Gas Advisory Bureau, Dr. Emma Msaky, described her country’s development challenges, which included balancing exporting gas at a high price, with domestic use, often at a lower price. An important opportunity identified in the symposium for companies along the entire natural gas value chain is to participate in the creation of future domestic markets. Currently, companies largely observe developing economy advancement, timing their market entry with consumer prosperity. Providing energy access and the associated economic development could be a good business strategy if it helps create future customers.

Shell Integrated Gas & New Energies Director, Maarten Wetselaar, articulated how a company’s enlightened self-interest could evolve this dynamic for mutual benefit. Energy developers have not traditionally played this kind of role in unlocking future markets. It requires innovative thinking, planning, financing, and execution. Smaller scale, modular implementation may be required. Based on his own experience, Paul Krishna of XTO Energy noted that it might be best for companies to choose to partner in a consortium so as to share development risk. There may be an opportunity to create a more integrated approach that can help connect the dots from exploration to production, midstream to distribution, and ultimately to final consumers. This may require new business models and other efforts involving previously unconnected stakeholders and commercial partners. Sunjoy Joshi and ExxonMobil’s Seth Levey noted that there are models that remove the utilization risk from the private company, such as U.S. utilities. This involves government participation and building a portfolio of projects that help spread the risk from an individual to multi-project level. The road hybrid-annuity model (HAM) in India is one that has been tested and shown to be successful.

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This article was originally published here on Stanford National Gas Initiative.

Further information can be found at: https://ngi.stanford.edu/publications/whitepapers

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