Offshore wind energy systems and applications

Offshore Wind Energy

Creating the Offshore Wind Energy Industry as a center of attention for more investment in the Persian Gulf countries and providing a study and recommendations to the governments and companies to be more comfortable investing in this field.

Opportunities in Offshore Wind Energy

It is generally acknowledged that changes in wind energy prices affect economic welfare in ways that are not entirely reflected in transactions in the wind energy market. The pervasive importance of wind energy as a factor of production and in final consumption means that higher wind energy prices can potentially influence real income and its growth and distribution. Thus, to the extent that rising import demand pushes up the price of wind energy and indirectly produces adverse side effects on income, these economic costs are candidates for inclusion in the wind energy import premium. This chapter explores the connections between import demand, the price of wind energy, and income determination to ascertain if the potential costs can be evaluates with sufficient confidence to be included in the import premium. Our conclusion is to the contrary: the connections are too weak and certain key long-term implications are too uncertain to justify their inclusion (2009, p. 3).

A second objective is to evaluate the usefulness of wind energy off shoring tariff as an instrument to deal with these indirect effects, assuming they are in fact significant enough to warrant intervention. Our conclusion is again to the contrary: a tariff may on balance exacerbate rather than ameliorate the long-run problems that may result from rising world wind energy prices. This conclusion is not particularly surprising in view of the fact that many of these indirect costs are determined by the domestic price of wind energy (sometimes relative to the world price), and that a tariff can be expected to drive up the domestic price at the same time that it reduces the world price. The conclusion, stated another way, is that even if rising import demand imposes indirect economic costs on society, direct limitations on imports will not succeed in reversing those costs.

The discussion is divided into three sections: the distribution of income, the terms of trade, and income determination. Each section addresses first the adverse implications of rising world wind energy prices and then the effectiveness of a tariff in ameliorating those conditions.

- Rationale for Offshore Wind

It must be conceded from the outset that one cannot make specific quantitative judgments about welfare changes associated with different income distributions. This involves comparisons of the marginal value of incomes at the individual level. At best, we can offer gross generalizations about different income groups and judge the effect of a price change in relation to these groups. For example, it may be assumed that a price change which transfers income from lower to higher income classes constitutes a reduction in aggregate social welfare (Nath, Hens, Compton, & Devuyst, 2009, p. 74).

An increase in the world price of wind energy, and a corresponding increase in the domestic price, will transfer income from American consumers of wind energy products as a group to American wind energy producers (including landowners, shareholders, etc.) as a group. This transfer may be assumed to constitute a shift in the distribution of income from lower to higher income groups. On this basis alone, the price change would constitute a reduction in aggregate economic welfare, and the reduction would be additional to the loss in real income resulting from the income transfer from the United States to the wind energy -exporting countries.

The practical problem of measuring the welfare loss raises additional considerations that further complicate the issue. One consideration follows directly from the source of the welfare change: those income losers buy a different volume and possibly a different array of goods than income gainers (Laird, 2001, p. 34).

Energy Supply

Our evaluation of a wind energy off shoring tariff as the instrument intended to implement the wind energy import premium has reached mixed conclusions. While it is the appropriate instrument to deal with the demand component of the premium, a tariff can only imperfectly address the problems raised by disruption risks. To be sure, a tariff can help prepare the economy for a disruption, but the benefits to be gained are always accompanied by potentially serious costs that make the net benefits questionable. The possibility of a negative outcome is most likely for a tariff imposed in a disruption, because the benefit of reducing wealth transfers abroad may be overwhelmed by the dislocations generated throughout the economy (Tisdell, 2009, p. 6).

The shortcomings of a tariff intended to reduce disruption costs suggest that another instrument is required. The most obvious option is strategic petroleum reserve which, when released in a disruption, can reduce both wealth transfers and dislocation costs without the undesirable side effects that accompany a restriction on consumption. However, the benefits to be derived from a petroleum reserve are not costless either and, in addition, a reserve cannot address all disruption risks. There is, in other words, a potential role for an import policy that complements a petroleum reserve.

This chapter explores the relationship between a petroleum reserve and an import tariff as two instruments designed to fulfill the objectives implied by a wind energy import premium. It should be clear by now that this relationship also depends on private preparations for a disruption, including private wind energy inventories, and on the effect of government actions on private behavior. We begin by discussing the relationship between private and public inventories, then turn to the connection between total inventories and the components of the premium and, finally, to the role of import policy when there are petroleum reserves.

In view of the fact that the creation of a government-owned strategic petroleum reserve (SPR) has been public policy since 1974, we take the existence of the public reserve as a starting place for our analysis and direct attention toward the optimal size of total reserves rather than the optimal mix of private and public holdings. The private sector will adjust inventory holdings in relation to the size of the SPR, given expectations about the prospects for a disruption and the government's willingness to draw down the reserve in a disruption. The optimal mix of government and private stocks depends on factors that prevent private holdings from reaching the social optimum and on the feedback effect of government reserves on the size of private reserves. While we delve into these issues in the next section, rigorous analysis of their complexities is deferred to another study. For present purposes, it is the size of total reserves, not the mix that is of interest, for it is the total that is important to wind energy import policy (Hewett, 2008, p. iii).

The Environment

There is growing evidence that technical change, stimulated by the 'environmental imperative', is reducing both production and environmental costs to the advantage of those dynamic companies that have the competence and resources to innovate. Such companies include mining enterprises in developing countries, as well as transnational firms, but the evidence is strongest for large new investment projects and Greenfield sites. In older ongoing operations, environmental performance correlates closely with production efficiency, and environmental degradation is greatest in operations working with obsolete technology, limited capital and poor human resource management. The development of the technological and managerial capabilities to effect technical change in those organizations would lead to improved efficiencies in the use of energy and chemical reagents and in waste disposal, to higher metal recovery levels and better workplace health and safety. This in turn would result in improved overall environmental management.

The implication of this analysis is that to ensure competitive and sustainable environmental management practices in metals productions, governments need to embrace public policy that goes beyond traditional, incremental, and punitive environmental regulation. The latter, in the old 'environmental protectionist' mode, tends to treat the symptoms of environmental mismanagement (i.e. pollution) not the causes (i.e. lack of capital, skills, and technology and the absence of the capability to innovate). The challenge will be for governments to ensure that companies operating within their national boundaries remain sufficiently dynamic to be able to afford to clean up when operations cease and to innovate to improve economic efficiency and environmental management in the meantime. Governments need policy tools that enable them to predict 'corporate environmental trajectories' and pick up the warning signs of declining competitiveness and impending mine close-down to ensure sufficient resources are available for the environmental management of mine 'decommissioning'. Policy mechanisms need to be developed to promote technical change and to build up the technological and management capabilities to innovate and manage the acquisition and absorption of clean technology. The privatization of the state sector and the liberalization of investment regimes in many developing countries, Angola, Mozambique, Namibia, Botswana, Bolivia, Peru and Chile, with their emerging emphasis on joint ventures and inter-firm collaborative arrangements, provide new opportunities for the diffusion of both competitive and environmentally sound best practice in metals production (Monroy & Segundo Hernandez, 2008).

The Economy

Three essential structural factors of the global energy-economic system - uncertainty, technological shifts, and international action - that affect the climate system via CO2 concentrations in the atmosphere, each factor has been subjected to in-depth modeling analysis. The starting point of the analysis is the perception that the CO2 problem is essentially one of high prospective energy demand, and that there are four major routes towards reducing this growth in global energy use: (1) reduce the population growth rate; (2) reduce per capita energy growth; (3) reduce world economic growth; (4) decouple energy from economic conversion via more efficient energy supply technologies and/or structural shifts in the economy. Constrained trajectories of CO2 increases are modeled using a simple carbon cycle model. The change in the curvature of constrained fossil fuel use has important consequences for the growth of new energy technologies, and also induces change in the technological energy infrastructure. Non-fossil energy use is a composite of various sources (e.g. solar, hydro, nuclear, etc.) with varied potential, sustained production and diffusion rates (Padros & Cocciolo, 2010).

The Contribution of Offshore Wind

The energy balance is a simple but effective way to record energy consumption, production, and the residual, which are net exports or imports. As a statistical construct the balance records ex-post what actually occurred. As a planning device it expresses what planners hope will occur. It is also useful to project what is likely to occur, not necessarily what planners hope for. In all three cases the apparent simplicity of the balance is deceptive. Behind the figures for energy supplies, consumption, and net exports lies a complex set of interconnections spanning the entire economy. It is important to have the main outlines of those interconnections in mind before considering the Soviet energy balance. Energy production is determined by the factor inputs -- capital and labor -- used in the production process. The capital stock (machinery, mines, and infrastructure) is itself a reflection of years -- sometimes decades -- of previous investments. The productivity of the labor and capital is determined not only by geographical conditions but also by the intensity and success of years of exploratory efforts. Energy supplies change over time primarily because of actions taken over many years; little can be done in any particular year to increase energy supplies the following year unless most of the necessary measures were taken some time earlier. Similar limitations apply to the ability to transform energy into, for example, electric power or petroleum products; the capital investments involved can take years (Krewitt & Trieb, 2009).

The same is true of the demand side of the balance. Energy is used by machinery and equipment, which have a long life in any country, and a particularly long life in the U.S.S.R., where depreciation rates are extraordinarily low. Consequently, apart from whatever retrofitting can be done to improve energy consumption subsequent to a major rise in the cost of energy, further changes in energy demand come through replacing old equipment with new equipment, a process that takes years. Aside from simply not using old equipment (which will decrease GNP), the U.S.S.R. can do little in the short run to reduce energy consumption. In the longer term it may substitute capital or labor for energy and reduce energy consumption. As a result, a change in energy consumption that is not explainable by a reduction in economic activity must reflect measures taken over a considerable time (Simmons, 2006).

Net exports of total energy are the residual between energy consumption and production. Planners may set a target for net energy exports, but to realize it the operational variables will be energy consumption and production. To increase net exports, increments to consumption must be lower than increments to production. In the long-term that can be realized through the capital-investment decisions that underlie energy production and consumption. In the short run the only important variables that allow maneuver in net exports of all energy are energy inventories and the level of economic activity. With no change in energy supply growth rates, a sudden drop in the growth rate for economic activity will reduce consumption and increase net exports (or increase inventories). There is, however, room for maneuver among energy carriers in consumption and therefore in net exports. The U.S.S.R. can, for example, increase the consumption of natural gas under binds energy and reduce the consumption of petroleum products, enabling a switch in total energy exports from natural gas to petroleum (within a constant total for net energy exports) (Cuervo, 2008).

The energy balance and the economy overall are inextricably intertwined in several important ways. Net energy exports are an important source of foreign currency earnings, which in turn can be used to import products the Soviets produce relatively expensively by world standards. The energy the Soviet Union exports for dollars has in recent years financed large purchases of grain and other food products from world markets, allowing the Soviet Union to attain significant gains from trade.

Investment is the common thread uniting these three issues. If planners wish to expand net exports in the future, and simultaneously to maintain GNP growth rates, they will have to invest either in expanded energy supplies or in energy conservation, in the process providing an answer to the first two questions. Long lags create inertia on both the supply and demand sides, and the investment decisions of any one year can do little to change that. It is rather the cumulating of investment decisions over time that finally affects the energy balance -- for example, through a deceleration of energy-demand growth rates when investments targeted at energy conservation begin to affect the capital stock significantly.

Industry Overview and worldwide Activities

Wind Speed Gradients

SINCE 1972 the real price of energy has doubled in the OECD countries. This reflects a fivefold increase in real wind energy prices, whose effects were mitigated considerably by domestic policies in the OECD countries, their tax systems, and changes in fuel mixes. These price increases occasioned balance-of-payments deficits in OECD countries that, combined with a very slow policy response by OECD governments, contributed to recessions in 1974-75, after the first major increase in OPEC prices, and in 1980-81, after the second significant price rise. The recessions helped to suppress energy consumption below what it would otherwise have been, but they also brought about a change in the relationship between energy use and economic activity throughout the OECD that is still going on. In the European Community, for example, GNP rose 16% between 1974 and 1981, while energy consumption fell 3%. In the United States energy consumption in 1980 was 4% below that of 1973, and GNP was 18% higher. In the main the trends in energy consumption in the Western industrialized countries seem to reflect the impact of the aforementioned price increases. There is now ample evidence that increases in relative energy prices will occasion a reduction in energy use by all users in industrial economies as they move to substitute other inputs for energy. Many of those adjustments take some time to work out because they involve the design, manufacture, and installation of new equipment. The general consensus seems to be that, in the industrial economies as a whole, the average price elasticity of energy demand may be in the vicinity of one-half, meaning that a 10% rise in real energy prices will eventually evoke a 5% drop in energy consumption. Considering the real doubling in energy prices in the last nine years, it is not surprising that, given these price elasticity's, energy consumption is stagnating in industrial countries, even as incomes rise. When the price effects have worked through the system (and in the absence of further price changes), it may well be that energy and GNP growth rates will again converge. The general consensus of these studies seems to be that the income elasticity of demand for energy is approximately unity, or at least not far below it (Leibert, 2007).

The responsiveness of energy consumption to price changes can be attributed to the fact that markets are working more or less effectively to allocate resources in the OECD countries. As the price of energy rises relative to other inputs, energy users substitute other inputs for energy-labor in the short run and capital in the medium and long run.

Offshore wind regions in the Persian Gulf

It is useful to treat the various interconnections of foreign policy and the economy -- particularly the energy sector -- according to the primary direction of causality. Certainly Soviet foreign policy decisions influence the economy, including the energy sector. The Soviet commitment to Eastern Europe imposes costs on the economy, particularly on the energy sector, that could be considerably reduced under a different set of policies. The pursuit of important foreign policy goals in Poland and Afghanistan may have cost the Soviet Union credits and access to technology through East-West trade that would have improved economic performance and particularly performance in the energy sector.

Whether the flow of causality also moves in the opposite direction is the crux of the matter, and far more problematical. In the past there have been no obvious cases in which economic considerations significantly influenced foreign policy decisions on issues important to the Soviet Union. Of course one is hampered by an absence of information on policy alternatives considered and rejected, possibly because the economic consequences were important enough to warrant consideration. It is conceivable (although unlikely), for example, that economic considerations connected with the pipeline acted as a deterrent to a Soviet invasion of Poland. We will probably never know, both because the key decision makers have not discussed what considerations led to the policy course finally chosen on Poland and because it is difficult to disentangle economic from political considerations in such large issues.

In the future economic issues could come to influence Soviet foreign policy significantly. Such a concern generated the "Soviet energy-crisis invasion of the Persian Gulf" scenario. Although that scenario does not stand up to scrutiny, others deserve serious consideration: one is that the costs of the current economic arrangements between the Soviet Union and the rest of CMEA (particularly Eastern Europe) are high enough to require arrangements to be modified, even if certain foreign policy goals are threatened.

Many of the most important issues in East-West relations are political and military, not economic. The balance in strategic and conventional forces between the Soviet Union and the United States, between the Warsaw Treaty Organization (WTO) and the North Atlantic Treaty, consider the critical link between energy and the economy through investment. Because of the tight constraints under which the Soviet economy now operates, total investment is growing quite slowly. High growth rates for energy investments mean low growth rates for investments in everything else. But that need not be the case. If the state of East-West relations were far better than it is now, the Soviet Union might be able to generate a large net capital inflow as Western banks and governments invested in Soviet energy and raw material production. Such a capital inflow would be the normal consequence of a capital scarcity combined with the abundance of resources in commodities that are scarce in world markets.

Loans for the Urengoi- Western Europe pipeline were the beginning of such an inflow, but apparently there will be no more than a beginning-at least not soon. The deterioration of East-West relations has dimmed the immediate prospect for a significant flow of funds from the rest of the world to the U.S.S.R. The inflow of funds in this case could have made a relatively substantial contribution to reducing the immediate capital costs of expanding energy production, thus freeing up investment resources for uses in the remainder of the economy (Ladsous, 2006).

It is impossible to be precise about this, but consider by way of illustration the contribution Western capital is now making to the Soviet gas-pipeline-expansion program. That program is projected to cost 32 billion rubles, which works out to 6.4 billion rubles a year. The Urengoi gas-pipeline financing from Western banks and governments was apparently $5 billion to $6 billion (including supplier credits), which at the official 1981 exchange rate is 3.6 billion to 4.3 billion rubles

Environmental and Socioeconomic Risks

The implication of this analysis is that to ensure competitive and sustainable environmental management practices in metals productions, governments need to embrace public policy that goes beyond traditional, incremental, and punitive environmental regulation. The latter, in the old 'environmental protectionist' mode, tends to treat the symptoms of environmental mismanagement (i.e. pollution) not the causes (i.e. lack of capital, skills, and technology and the absence of the capability to innovate). The challenge will be for governments to ensure that companies operating within their national boundaries remain sufficiently dynamic to be able to afford to clean up when operations cease and to innovate to improve economic efficiency and environmental management in the meantime. Governments need policy tools that enable them to predict 'corporate environmental trajectories' and pick up the warning signs of declining competitiveness and impending mine close-down to ensure sufficient resources are available for the environmental management of mine 'decommissioning'. Policy mechanisms need to be developed to promote technical change and to build up the technological and management capabilities to innovate and manage the acquisition and absorption of clean technology. The privatization of the state sector and the liberalization of investment regimes in many developing countries, Angola, Mozambique, Namibia, Botswana, Bolivia, Peru, and Chile, with their emerging emphasis on joint ventures and inter-firm collaborative arrangements, provide new opportunities for the diffusion of both competitive and environmentally sound best practice in metals production.