Technical Factors and The New Wave of Subsidization - Alpcan Efe Gencer

In the complex and artificially constructed markets, such as electricity, the mishandling of regulation could yield dire consequences for the general beneficiaries.

In the case of electricity markets, it’s the general taxpaying public. For all matters concerning the changes in the general structure, the satisfaction of the citizens should always be held in regard as taxpayers will likely have to subsidize the social motives behind the new policies, such as the example of subsidizing investments in renewables. Using the financial markets as a medium for establishing the emissions trading system to limit the release of CO2 emissions by producers is a relatively recent mechanism where the EU has given the markets the responsibility for regulating the pricing of the emissions quotas. Given the low-liquidity in even the best-performing emissions markets, the method is bound to fail as the lack of transactions and motivation by the quota issuer countries will slowly drive out the participants to elsewhere.

The fossil fuels that give purpose for the emissions trading system have a different story evolving in the background. Given the volatile international political economy of oil, the remarks made by some oil-producing nations require some questioning to be done to reveal their underlying motives. Overstating the possible oil production numbers, whether on purpose or not, should most of the time be approached with caution as the two basic factors in an oil field are most of the time inversely related; the production rates and the length of a fields life.

Production can be ramped up in the short term, potentially damaging the well structures, but will play out as shortening the life and health of a field leading to declining efficiency in the medium to long term. As the pressure in a production well decreases, driving the well production lower, new measures such as pumping liquids/gases into the well to increase pressure or drilling new wells within the field is required to sustain the production rates and the life expectancy of a field.

A bigger problem with the current energy mix on top of the environmental costs is the replacement of lost reserve numbers. They have, for the past decade, never been in the positive, and the world is constantly eating away from its available reserves without adding in any excess capacity. The fact that between 75-80% of world daily output being generated from fields discovered more than 25 years ago highlights a time-lapsed trend on oil production.

The oil major’s failure in finding new elephant fields and setting future company-wide strategies based on profitability rather than increasing reserve capacity is a sign of an industry-wide shift in future projections. Following a similar pattern to the development of oil, the new shift to a renewable and natural gas dominated energy mix will entail a lot of the processes to be repeated in establishing functioning markets. In this manner, the regulation of and subsidizing of renewable-based electricity production will need to be done in a manner not harmful to the taxpayers while ensuring uninterrupted energy supplies through the improvements in the natural gas infrastructure and marketplace. The financial instruments that create liquid markets with multiple active participants is a must for the functioning of the physical markets.

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