EDI Quarterly Vol. 4 No. 2+3 Industrial Symbiosis and Energy Security by Energy Delta Institute

EDI Quarterly Volume 4, No. 3, October 2012

Editor’s Note

by Jacob Huber Welcome to the October edition of the EDI Quarterly! The June edition of

Contents

our publication was skipped in favor of this double issue celebrating EDI’s 2nd lustrum and featuring contributions on industrial ecology (with a focus

EDIAAL 2

Industrial Symbiosis and Ecology

on eco-industrial parks) and energy security. We are proud to announce

Outcomes of IWCAIS

Industrial symbiosis: Creating economic and environmental value through interfirm collaboration

Utilizing excess heat

A Brief introduction to the Eco-Industrial Park Concept

One Company’s Waste is another Company’s Gold

Energy-transition Park Midden-Drenthe

Eco-Industrial Parks in China

Key characteristics of Eco-industrial Parks in South Korea

that the Quarterly has been chosen to disseminate the proceedings of the first International Work Conference on Applied Industrial Symbiosis. Related contributions include introductions to the concepts of industrial ecology, industrial symbiosis and eco-industrial parks, as well as the associated business and organizational impacts. Eco-industrial park initiatives from around the world (including Korea, China, the Nether lands, Denmark, Austria and Japan) are presented and lessons learned are discussed. In the section on energy security contributions discuss topics

EDI 29

Will Hub Pricing Guarantee Security of Supply for Import Dependent Europe?

Russian gas in European gas markets: a reality check

The evolution of EU security of gas supply policy

effect of energy transition topics (renewables, smart grids, energy

Challenges in the definition of protected customers, a Northern European perspective

efficiency, etc.) on the conventional energy paradigm. Should any of our

Managing the EU’s Gas Security of Supply: Not without Ukraine

Opportunities and Obstacles for European Alternatives to Russian Natural Gas

Liquid Markets: Assessing the Case for U.S. Exports of Liquefied Natural Gas

ranging from the effect of hub pricing on energy security to the implications of Russian gas and the shale gas revolution in the US for energy security in the EU. The themes of the next Quarterly include natural gas spot markets and the

readers be interested in making a contribution in either of these areas please contact us at the address that you can find below. We hope that you enjoy all of the informative contributions in this issue. quarterly@energydelta.nl

General 49

EDI’s Upcoming Courses

Upcoming Conferences

Recent Publications

EDIAAL Industrial Symbiosis and Ecology - Inspiration for Sustainable Industrial Systems As the editorial “Greening Growing Giants” in the most recent Journal of Industrial Ecology notes ”if another 80% of the world population joined in with the material consumption patterns of the 20% of the world population currently in wealthy industrial countries, this would not only be disastrous for the climate, but also for the supply of world resources… finding another more sustainable development pathway would constitute an entirely new challenge for industrial ecology.” The pursuit of the current fossilfuel based paradigm of industrial development of the 20% by the 80% clearly implies a level of resource use and environmental impact beyond what is sustainable. The concepts of industrial ecology (IE) and industrial symbiosis (IS) as well as those of socioeconomic metabolism yield insights regarding not only the ways in which developing economies could avoid the dirty development paths taken by industrialized nations, but also the ways in which these industrialized economies can dematerialize themselves.1 As the editorial indicates, finding another, more sustainable development pathway is the challenge facing IE, and the concepts briefly presented in this introduction are intended to provide a foundation for the discussion to follow. In response to concerns regarding the availability and price of energy and raw materials, as well as the sustainability of the current industrial paradigm, natural systems are increasingly being examined as inspiration for novel solutions. These systems are characterized by efficiency and circular flows of materials, resources and energy as the wastes of one process are used as the feedstock for others. The study of natural systems and application to industrial systems is embodied in the concepts of IE and IS. IE involves the study of material and energy flow through industrial systems, while IS applies the concepts of IE in the sharing of services, utility and byproduct resources among industrial actors to add value and reduce costs and pressure on the environment. Symbiosis in a natural system is related to the concept of mutualism, where at least two unrelated species exchange material, energy, or information in a mutually beneficial manner.2 Similarly, industrial symbiosis consists of place-based exchanges among different entities that yield a collective benefit greater than the sum of individual benefits that could be achieved by acting alone (Chertow 2008). Applying these concepts achieves much greater levels of efficiency when the perspective

Jacob Huber Energy Analyst Energy Delta Institute huber@energydelta.nl

is shifted from examining single processes and factories to examining factories and systems of different industrial subsectors in the context of the industrial system and even the economy as a whole. Such a concept of “Circular Economy” is characterized by circular flows of materials and cascading energy flows, and such concepts have had a large influence in China’s efforts to reduce pressure on the environment.3 China’s “Circular Economy Promotion Law” and related efforts are described in the contribution titled “Eco-industrial Parks in China,” later in this issue. In addition, the report “Summary Report from the International Working Conference on Applied Industrial Symbiosis” provides an update on the current state of IS, detailing the barriers it faces and approaches to overcome these barriers. IE is an interdisciplinary field focusing on the sustainable combination of environment, economy and technology and its concepts have produced integrated strategies to increase energy and resource efficiency in industrial settings even before the coining of the formal term in 1989 (Frosch et al. 1989). The Journals of Industrial Ecology (since 1997) and Progress in Industrial Ecology (2004) as well as the International Society for Industrial Ecology (2001) have worked to provide inspiration for innovative, integrated solutions to complicated and interconnected environmental problems and facilitate communication among scientists, engineers, policymakers, managers and advocates who are interested in better integrating environmental concerns with economic activities. The central idea of this concept is an analogy between natural and sociotechnical systems and its defining characteristic is the modification of the current linear nature of our industrial system where raw materials are used and products, by-products, and waste are produced (and rejected to the environment) to a cyclical system where waste is reused as energy or raw material for another product or process. The term industrial ecology was first coined around 1970 in the municipality of Kalundborg, Denmark and became increasingly important in the 1990s as the awareness of environmental problems and the need for a systems perspective increased (The Kalundborg Symbiosis is further described in “One Company’s Waste is Another Company’s Gold,” later in this issue). It was here at Kalundborg that such a welldeveloped network of dense interactions (i.e. energy and waste exchange) among firms was first encountered, achieving high levels of environmental and economic efficiency as well as the realization of other

1 Socioeconomic metabolism essentially refers to the manner in which a society “ingests” resourcwes and “excretes” waste, in the manner of a single organism. Just as an organism requires food, a society requires resources, and the analysis of a society’s metabolism enables identification of opportunities to increase efficiency and transition toward sustainability. 2 For example, a human’s intestines provide an attractive environment for certain bacteria which in turn aid digestion and their human host. 3 An simple example of this would be the use of waste heat from one process to run another requiring a lower temperature. This would have the effect of maximizing exergy use. Taking a wider systems perspective would allow such cascades not only within a single factory, but also among systems of factories, increasing the potential for energy-savings in the system.

less tangible benefits involving personnel, equipment, and information sharing (Chertow 2008). Currently there is no single, generally accepted definition for IE. However, there are several attributes that are generally accepted (Chertow 2006; Chertow 2008; Indigo Development; Worell 2009). These include: - A systems view of the interaction between industrial and ecological systems; - The study of material and energy flows and transformations; - A change from linear (open) processes to cyclical (closed) processes, so that the waste from one industry is used as an input for another; - An effort to reduce industrial systems’ environmental impact on ecological systems; - The idea of making industrial systems emulate more efficient and sustainable natural systems; - The engagement of traditionally separate industries in a collective approach to competitive advantage involving physical exchange of materials, energy, water, and/or byproducts. A wide variety of IE concepts inspire solutions leading to these benefits, and each of these concepts inspires IS strategy on different levels to achieve social, environmental and economic benefits. In the creation of a product, for example, resources are used for the extraction of raw materials, transportation, primary and secondary manufacturing, distribution, and disposal. The total amount of energy and materials used is the amount “embedded” in that product and is known as “embedded energy and materials.” By reusing byproducts IS allows materials and energy to be preserved longer within the industrial system, thus increasing the level of resource efficiency. Reusing waste heat with a combined heat and power system provides an example of this concept (See “Utilizing excess heat: from possibility to realization on the basis of industrial symbiosis,” later in this issue, for further discussion of the issues associated with exploitation of waste heat). An interesting case of waste heat use takes place in the Rotterdam harbor where the Gate LNG terminal uses heat from an EON power plant in the process of regasification. Cascading, a related concept, occurs when a resource is used repeatedly in different applications and with successive use becomes of lower quality, level of refinement, and/or value. This is a common strategy for industrial symbiosis due to the fact that firms producing a used resource can save on treatment or disposal, and may even gain revenue in exchange for the resource. A prime example of cascading takes place in Kalundborg, where the refinery takes in surface water for cooling which is then used in the power plant for steam production. This is an example of both water and energy cascading, as the power plant does not need to pre-heat the water before using it. The economic impacts of this particular exchange have been significant and include indirect savings: the refinery was able to postpone extension of its wastewater treatment facility, for instance. Benefits of cascading in general include all those associated with greater resource efficiency: reduced use of virgin resources, avoided impact of resource extraction, and reduced deposition of waste into the environment (Chertow 2008). Similar to cascading, loop closing takes place when resources, rather than being used in a degraded form, appear in their original form. For example, instead of crushing glass and melting it to make new containers, bottles may simply be washed and returned for reuse.

Life-cycle Analysis (LCA) is another IE-inspired tool that can aid in the evaluation and identification of opportunities for industrial symbiosis. It aims to quantify the environmental burden imposed by an industrial product or process and characterize the environmental impact of products. LCA enables a deeper understanding of a product or processes’ lifecycle from its conception through its design and manufacture all the way through service to disposal. Once the system is analyzed, it can be optimized to minimize energy consumption, environmental impacts and other undesirable effects throughout its lifecycle (Ekvall et al. 2004).4 Several concepts and tools can be used to identify potential for industrial symbiosis, including tracking material flows, industrial inventories, and input/output matching. Tracking and accounting for material flows allows identification of loop closing, cascading, and unidirectional flow opportunities. Once an area has been identified as a candidate for industrial symbiosis, industrial inventories can be used to identify local businesses, resources, utilities and other institutions relevant to IS, and data collected from stakeholders can be used in input/output analysis to make links across industries and identify specific opportunities. Stakeholder processes can then be conducted in order to seek information regarding the context of a local eco-industrial project. The economic and environmental benefits of principles such as cascading, loop closing, have been known for some time and the associated tools (LCA, tracking material flows, etc.) have identified numerous benefits in industrial and energy systems worldwide. Thus, one of the largest challenges in the IE field is not necessarily to demonstrate that such benefits exist, but to ascertain the most effective manner in which important stakeholders can be identified and engaged so that these benefits may be realized. The piece “Industrial symbiosis: Creating economic and environmental value through interfirm collaboration” (later in this issue) provides a contribution in this regard in its discussion of industrial symbiosis as a proven method to create firm- and policy-level economic and environmental value via interfirm collaboration. One of the practical implementations of IS is known as an eco-industrial park, similar to a traditional industry park where the concepts of IE and IS are applied. This concept is further explained in “A Brief Introduction to the Eco-Industrial Park Concept,” the case of Kalundborg Ecoindustrial Park is described in “One Company’s Waste is Another Company’s Gold,” South Korean eco-industrial parks are discussed in “Key Characteristics of Eco-industrial Parks in South Korea,” Chinese initiatives in this regard are presented in “Eco-industrial Park in China” and the Dutch concept of Energy-transition parks is discussed in “Energy-transition Park Midden-Drenthe.” Eco-industrial parks and other applications of IE and IS clearly have an important role to play increasing the efficiency of industrial systems, and decreasing their environmental impact. There is much to be learned from natural systems and much inspiration can be drawn from their study and applied as part of humanity’s bid to achieve sustainability.

4 The importance of a life-cycle perspective can be realized when considering the relationship between the industrial and transport sectors. Industrial process changes affecting the mass of freight transported will feedback in transport energy use., and the use of lighter materials, such as the substitution of plastic for glass containers, may not only result in decreased energy consumption in the industrial sector but in the transportation sector as well, as fabrication and transportation of plastic containers is less energy intensive than glass.

References

- Brunner, P. H. (2007). Reshaping urban metabolism. Journal of Industrial Ecology, 11(2), 11-13. Retrieved from http://web.mit. edu/shutkin/OldFiles/MacData_1124b/afs/athena.mit.edu/dept/ cron/project/urban_metabolism/ARTESSA/References/2007_ Brunner.pdf - Chertow, M. (2006), Preventing Pollution Through Industrial Symbiosis. Paper presented at the 10th Canadian Pollution Prevention Roundtable, Halifax, Nova Scotia. - Chertow, M. (Lead Author); Reid Lifset (Topic Editor) “Industrial symbiosis”. In: Encyclopedia of Earth. Eds. Cutler J. Cleveland (Washington, D.C.: Environmental Information Coalition, National Council for Science and the Environment). [First published in the Encyclopedia of Earth February 27, 2008; Last revised Date February 27, 2008; Retrieved July 30, 2012 from: http://www.eoearth.org/ article /Industrial_symbiosis - Coelho, D., & Ruth, M. (2006). Seeking a unified urban systems theory. The sustainable city IV: Urban regeneration and sustainability, 179–188. Retrieved from http://books.google.com/ books?hl=en&lr=&id=LW7P8B-UzLkC&oi=fnd&pg=PA179&dq=S eeking+a+Unified+Urban+Systems+Theory&ots=GRowSapKM2&s ig=kxRKnHmTbyhbqkvydAy-Z-cK9Ho - Decker, E. H., Elliott, S., Smith, F. A., Blake, D. R., & Rowl, F. S. (2000). Energy and Material Flow Through the Urban Ecosystem, Annual Review of Energy Environment 25 pp. en.scientificcommons. org,. Retrieved from http://en.scientificcommons.org/42761151 - Ehrenfeld, J., & Gertler, N. (1997). Industrial ecology in practice. J. Industrial Ecology, 1(1), 67-79. Retrieved from http://tarantula. bren.ucsb.edu/academics/courses/282/Readings/EhrenfeldGertler-1997.pdf

- Ehrenfeld, J., & Gertler, N. (1997). The evolution of interdependence at Kalundborg. Industrial Ecology, 1(1), 67-80. - Frosch, R.A.; Gallopoulos, N.E. (1989). “Strategies for Manufacturing”. Scientific American 261 (3): 144–152. doi:10.1038/ scientificamerican0989-144 - Gillingham, K., Newell, R. G., & Palmer, K. (2009). Energy Efficiency Economics and Policy. Retrieved from http://arjournals. annualreviews.org/doi/abs/10.1146/annurev. resource.102308.124234 - Development, I. (2006). Eco-Industrial Parks. Retrieved May 1st, 2010 from http://www.indigodev.com/Ecoparks.html - Ekvall, T., & Weidema, B. P. (2004). System boundaries and input data in consequential life cycle inventory analysis. The International Journal of Life Cycle Assessment, 9(3), 161-171. Retrieved from http://www.springerlink.com/index/0832126W012U2188.pdf - Kennedy, C., Cuddihy, J., & Engel-Yan, J. (2007). The changing metabolism of cities. Journal of Industrial Ecology, 11(2), 43-59. Retrieved from http://dandelion-patch.mit.edu/afs/athena/dept/ cron/project/urban_metabolism/ARTESSA/References/2007_ Kennedy.pdf - Thollander, P., Danestig, M., & Rohdin, P. (2007). Energy policies for increased industrial energy efficiency: Evaluation of a local energy programme for manufacturing SMEs. Energy Policy, 35(11), 57745783. Retrieved from http://linkinghub.elsevier.com/retrieve/pii/ S0301421507002856 - Worrell, E., Bernstein, L., Roy, J., Price, L., & Harnisch, J. (2009). Industrial energy efficiency and climate change mitigation. Energy Efficiency, 2(2), 109-123. Retrieved from http://www.springerlink. com/index/062l622866w12726.pdf

Outcomes of IWCAIS: Positive Action for Green Growth Summary Report from the first International Working Conference on Applied Industrial Symbiosis Executive summary

This report sets out the findings of the first International Working Conference on Applied Industrial Symbiosis (IWCAIS), held in Birmingham UK 12-14 June, 2012. The conference was convened by International Synergies Limited, and co-hosted by Birmingham City Council, to highlight the ability of industrial symbiosis to address current sustainability challenges - economic, environmental and social. Despite decades of experience with various industrial symbiosis models across 5 continents, the industrial symbiosis approach has not yet permeated mainstream business or policy. Industrial symbiosis has been recognised by the European Commission and the Organisation for Economic Co-operation and Development (OECD) as a highly innovative way to improve resource efficiency; the goal of IWCAIS 2012 was to produce recommendations for how to best apply industrial symbiosis to achieve the sustainability goals of energy security and climate change mitigation, eco-innovation and green growth, materials security, and regional economic development. This conference was carbon neutral through implementation of an innovative industrial symbiosis synergy with Betts EnviroMetal enabled through research with the University of Birmingham.

Introduction and Conference Overview

Janez Potočnik, Commissioner of the European Commission’s Directorate General Environment, opened the first International Working Conference on Applied Industrial Symbiosis (IWCAIS) by emphasising the pressing need to evolve toward a circular economy as modelled by natural systems (where everything is returned to use by various cycles)1. He further identified natural boundaries and resource scarcities as a major limit on the future growth possibilities of all economies at all stages of development. As such, resource efficiency decoupling growth from resource use - is central to social and economic development, poverty reduction, conflict avoidance, and climate action. Industrial symbiosis (IS) is an innovative way to improve resource efficiency and a recognised part of achieving a low-carbon, circular economy, hence its inclusion in the European Commission’s Roadmap to a Resource Efficient Europe2. Secretary General Ban Ki Moon recently observed that society “cannot continue to burn and consume its way to prosperity.” Industrial symbiosis (IS) is a systems approach to a more sustainable and integrated industrial economy which identifies business opportunities to improve resource utilisation (materials, energy, water, capacity, expertise, assets etc.). Globally, IS delivers economic and social benefits alongside environmental; to date, however, IS has not been fully integrated into mainstream business or policy, thus its potential has not yet been realised. The vision of the first IWCAIS was to identify where and how IS could be effectively applied to drive forward the challenges in each of the four interlinking theme areas - areas where an IS approach has delivered lesser known, but equally as impressive, results.

Rachel Lombardi and Peter Laybourn International Synergies Limited September, 2012 rachel.lombardi@international-synergies.com

IWCAIS 2012 convened experts in the field of applied IS to work alongside experts in - eco-innovation & green growth, - energy security & climate change, - material security, and - regional economic development. Following three days of intense debate alongside key presentations from organisations including the UK Committee on Climate Change, the European Commission’s Directorate General Enterprise & Industry, South Korea’s Industrial Complex Corporation, and McKinsey & Company, delegates identified those aspects of each theme’s agenda where IS is relevant, and produced recommendations for how to best apply IS to achieving the theme goals. A summary of the key recommendations is presented here, by theme and across themes.

Shared learning: Global challenges and lessons in IS

The conference was attended by leading businesses, policy makers and industrial symbiosis experts (known as practitioners) from six continents, together representing 14 countries. As many attendees were expert in the theme areas rather than in IS specifically, practitioners from the UK, Denmark, S. Korea, USA, China, and Germany shared their experiences of delivering IS, summarizing both the keys and barriers to success in their various models. Many of the lessons resonated across continents and delivery models: - An extensive, diverse network of companies and organisations is critical to success, engaging businesses, government, research/academia and the community. Each group makes its own unique contribution to a successful IS network, bringing new ideas and brainstorming value, knowledge transfer for benchmarking and best practice sharing, and raised awareness to stimulate further engagement. - Businesses engage in IS when the business case for doing so is clear - current and historical economic returns have been demonstrated in many countries. The increasing attention to sustainability and materials security issues further drives business engagement, as does top management support and/or a champion within the organisation. The right IS liaison in the organisation is familiar with the organisation’s processes and cost structure, with sufficient seniority to take decisions. A consistent point of contact is preferred to facilitate communication and continuing projects. - Policy makers and regulators are critical to creating the market conditions that incentivise IS and resource efficient behaviour; policies and regulations that clarify definitions and responsibilities provide predictability and reliability for companies to plan. Currently around the world, uncoordinated policies across departments send inconsistent messages regarding resource management: tightly regulated disposal for health and safety may preclude resource recovery for materials security and green growth, for example. A joined-up, flexible approach focused on the desired outcome enables businesses to respond in efficient ways.

1 Commissioner Potočnik’s full address can be viewed at https://dl.dropbox.com/u/70489338/Is%20FINAL2.wmv 2 http://ec.europa.eu/environment/resource_efficiency/

- Conditions that enable new innovation and provide a broad base of technology support IS. A diverse network engaging business, research and the government has proven to foster knowledge transfer and demand-led innovation by bringing together the companies with real problems and the researchers able to address and sometimes resolve them. In the UK’s NISP experience, over 70% of synergies have been shown to involve some form of innovation: 50% cross-sector knowledge transfer and best practice, and 20% new research and development deriving from close links with universities. - The IS practitioners play the critical role of facilitating and coordi nating the contributions of the various stakeholders. Their technical expertise is valued by the other stakeholders as is their enthusiasm and commitment to support the network. Long term relationships and facilitation enable the stakeholders to develop new ways of thinking and doing business, fostering the long term culture change necessary for transformation to a new economic model.

Theme 1: Eco- Innovation and Green Growth Recommendation: Foster demand-led innovation through IS networks

Industry has recently seen historic rising commodity prices and increased volatility, not only in materials but also in energy and water, impacting the productive economy. In the past as labour costs have risen, innovation has increased productivity. Such innovation - in technologies, markets, and behaviour - is now required to decouple growth from resource use. Eco-innovation refers to innovation in products, services, processes, and business models that result in reduced environmental impact. According to current thinking, eco-innovation is key to achieving the transition from business as usual to a sustainable economy, and is a facilitator of the other 3 interlinking themes of IWCAIS 2012: energy security, materials security, and regional economic development. The OECD recently cited IS as a form of systemic eco-innovation ‘vital for future green growth’, recognising its role as a catalyst for demand-led business innovation, helping to bring novel and innovative products, processes and technologies to market. Demand-led innovation creates opportunities in critical areas such as energy technologies, environmental technologies, alternative fuels, rare earth elements and precious metals, design-forenvironment and cleaner production systems. The challenge: Industrial activity, responsible for wealth and job creation, faces a sustainability challenge: to decouple economic growth from adverse environmental impact. The Europe 2020 policy framework prioritizes smart, sustainable and inclusive growth - growth that fosters innovation, efficiency, and high employment. However, support for this transformation is currently lacking: clear policy signals, market signals and incentives, and information and knowledge. A new strategic vision for IS would incorporate joined-up thinking and a systemic approach to support the necessary transition. Next steps: Incorporate IS into existing networks to foster innovation and demand-led R&D. The activities necessary to foster innovation and bring scientific research to the market are generally described in stages known as the innovation value chain: - knowledge sourcing (education and research), - transformation (bringing scientific research to the market as new products, services, processes, and business models), and - exploitation (fostering entrepreneurs, facilitating business investment in innovation). Industrial symbiosis has been demonstrated to foster activity specifically around transformation and exploitation - challenging stages that require knowledge exchange between distinct sectors (research, business,

government). The IS network convenes businesses of different sectors and sizes, together with the research community. IS networks provide the communication vehicle for researchers to learn about the pressing problems being faced by businesses, and to bring their research to bear on addressing these challenges (transformation). Incubator companies are a valuable part of an IS network as they introduce new technologies as possible solutions; IS networks help entrepreneurs to connect with their potential markets and provides a network of support (exploitation). The result is demand-led innovation, and rapid delivery to market. Incorporating an IS approach into existing business networks (including: SME, business, recycling, chambers of commerce) will help member organisations to realise business opportunities through systems thinking and cross-sector networking. A network that over-emphasizes short-term targets may stifle the innovation that brings transformational change: focussing on broader goals, such as reducing carbon emissions and engaging the industry supply chain, fosters knowledge transfer and demand-led innovation.

Theme 2: Energy Security and Climate Change Recommendation: Incentivise carbon reductions through IS credits

Governments and companies around the world are focused on addressing energy concerns, both by improving efficiency (of generation, distribution, and processes), and by decarbonising through fuel substitution. An additional approach to reducing carbon footprint is to cascade resources through multiple uses. This keeps materials circulating in the economy, and reduces their carbon footprint by reducing the level of activity (and investment) in extraction, refinement, transport and processing. Industrial symbiosis enables carbon reduction through many innovative pathways: efficiency improvements, novel fuel substitution, process innovation, heat recovery, avoided transport energy, and avoided virgin material extraction. The challenge: Setting national goals to keep climate change as near to 2°C as possible requires enormous reductions in carbon dioxide, for example an 80% reduction for the UK by 2050. The proposed strategies for achieving this target focus on action across the economy, with different targets for different sectors. Industry sector emissions are seen as the hardest to reduce. Proposed short term strategies require efficiency improvements; longer term strategies (2020 and beyond) incorporate a combination of carbon capture, electrification, fuel switching and product substitution. Many of these strategies are already being implemented through industrial symbiosis. Next steps: Develop carbon accounting methodologies that accredit savings through resource efficiency The Greenhouse Gas (GHG) Protocol Corporate Standard, used by trading schemes worldwide, specifies three scopes of emissions: Scope 1 (direct emissions from a facility’s activities), Scope 2 (emissions from purchased electricity), and Scope 3 (other indirect emissions, for example from the extraction and production of materials). The production of renewable energy and increasing energy efficiency (focusing on Scope 1 and 2, as per current UK strategy) are encouraged by a worldwide framework of incentives centered on Kyoto and various national initiatives. Arrangements based on a price for carbon emissions (whereby reducing carbon emissions generates a financial incentive) have mobilized a positive business response. Efficient use of physical resources (such as materials and water) also substantially reduces carbon emissions (Scope 3); however reductions here do not have an equivalent incentive in current accounting and trading schemes. There are penalties for disposal of resources which vary by country, but these are typically an order of magnitude smaller than incentives available in the energy arena for the same amount of carbon saving.

Current methodologies do not quantify the reduction in global warming potential resulting from avoided or reduced material usage. Accounting or trading schemes applied to the recovery of physical resources - that is, applicable at the point of return of the material to use - will provide the incentive to mobilize an extremely positive business response. The incentive structure could be financed by extended penalties on disposal (for example the UK Landfill Tax escalator, or a penalty on incineration) and/or scaling disposal penalties to reflect carbon content rather than just weight, encouraging waste separation at source. Such an incentive structure should be cognizant of the Kyoto framework by extending to Annex 1 countries only (industrialised countries and those in transition), and reflecting the price of carbon implicit in arrangements for energy.

Theme 3: Materials Security Recommendation: Move materials up the waste hierarchy through IS innovation

Materials security concerns ensuring a supply of those materials deemed critical to the economy. Security of supply encompasses physical availability as well as economic and political access, as export quotas and tariffs can determine a resource’s availability. Government and industry seek to manage any risk to supply of critical resources, in part through managing demand, and in part through resource recovery at end of life (thus, increasing supply). Resources that are currently under pressure may be targeted for material substitution where this can be found. Even where innovative technologies appear to be a solution, if they themselves rely on materials of limited supply, they may bring their own material security issues. Challenge: McKinsey & Company’s recent ‘Resource Revolution’ work on meeting the world’s energy, materials, food and water needs calls for an integrated approach resulting from the linkages between resources: needing energy to create water, needing water to grow food and create energy, needing materials to generate energy and grow food, and so on. Costs, regulations and technological advances are central to shaping the market response and value creation. As in the Eco-Innovation and Green Growth theme, four broad areas are identified for action: adopting an integrated approach, strengthening market signals, addressing other market failures, and creating long-term resilience through business opportunities and changing mindset. Next steps: Make visible material flows with standard classification through regulation and policy. The waste hierarchy (reduce, reuse, recycle, dispose) is meant to communicate the priorities for extracting the greatest value from a resource while minimising the amount of waste created and disposed. An industrial symbiosis approach has been demonstrated as an effective means to move resources up the waste hierarchy: it reduces the use of virgin materials through substitution, identifies novel reuse and recycling opportunities for existing waste and by-products (which both diverts materials from the waste stream as well as avoids virgin material use), and prevents waste generation through best practice sharing. Keeping resources circulating in the economy for longer (through reuse and recycling) reduces demand for new material, and may reduce its associated carbon footprint. An IS approach can be used strategically to target critical materials. As the critical material content in wastes and residues is made visible (for example, platinum and palladium from automotive catalytic converters in road sweepings, and high value proteins in dairy waste), an IS network can focus attention and innovation on their recovery. To enable reuse, and move up the waste hierarchy, two steps help make the opportunities accessible: a) Identify available materials (resources): Various data sources contain relevant information, albeit not generally in a comparable form:

economic input output data, sector-specific material flow data, and energy and waste flows. National metabolism flows have been developed for some countries, although the level of aggregation may be more conducive to setting strategic priorities than to identifying specific opportunities. Ecological footprinting (public and private) is another internationally recognised tool that may be relevant. b) Consistent policy and regulations (i.e., standardised data classification) may facilitate use of the data. Across the European Union, the European Waste Code (EWC) classification describes the process yielding the ‘waste’ as well as the material itself. From an IS perspective, it is useful to know about the process yielding the flow as it implies certain technical specifications. However, this system is limited in its applicability as it does not provide classification for non-waste resources such as equipment, redundant stock, and furniture; nor does it address intangibles such as logistics, excess capacity and expertise.

Theme 4: Regional Economic Development Recommendation: Close local loops through IS planning

A city’s organization in relation to infrastructure, energy, production, and transport determines how it mobilizes resources, and thus its sustainability. Regional economic development that draws on existing key industrial activity and resource streams (materials, energy, water, technological innovation, capacity, logistics, expertise) can lower the carbon footprint of development, while strengthening local economies, and improving material and energy security. As material security issues become more pressing, they are increasingly seen as an important driver of future economic development - for example, as industry locates to specific sites based on availability of material supply. Challenge: Historically, regional development progressed with little attention to pollution or resource exploitation. Alongside broader sustainable development issues, recent changes derive from strengthening environmental regulations and material security concerns reflected in increasing prices. In response, eco-industrial development recommends a comprehensive and integrated framework, to enhance economic gains and environmental efficiency for both industry and the local community. Next steps: Widespread integration of IS into spatial planning systems, via regulation and policy. Some regional and local governmental bodies are implementing best practice in IS as a means to attract and retain businesses in their region - as in Birmingham UK, where an IS approach has been integrated into the economic development plan to reinvigorate the Tyseley Environmental Enterprise District. Further, regional and local governmental bodies are using IS to attract and retain businesses in their region through incentives such as low interest loans for infrastructure development (S. Korea) or tax breaks for firms using recycled or recovered materials (China). Local and regional plans can encourage the adoption of IS by limiting access to virgin resources: in Puerto Rico, a call for proposals for a new coal-fired power plant specified the use of wastewater for cooling, required co-location with a steam user for cogeneration.

Cross Theme Recommendations

Across the themes, a number of common recommendations arose many suitable for immediate action.

Cross-theme: An integrated approach

The importance of an integrated approach to resource management was emphasised across themes. IS programmes and resource management are generally under the domain of environment; there is currently no natural home for programmes that deliver cross- departmental

objectives. The European Commission has recognized the broad applicability of IS by integrating it into policy across Directorate Generals: Enterprise & Industry, Regions, and Environment; coordination across policies would provide a more consistent direction. An Office of Resource Efficiency at the Ministerial level has been proposed by politicians and stakeholders in the UK and South Korea.

Cross theme: Communications plan to support public investment in IS

Commissioner Potočnik said at Green Week 2011 that “industrial Symbiosis… should be standard procedure by 2020.” Across the world, IWCAIS participants have demonstrated that relatively small public investments produce economic, social, and environmental benefits for participants and substantial economic return for government’s investment. Despite high-level support for IS and notable success delivering on the low carbon/ green growth agenda, the uptake by mainstream business and policy is still limited. Further development of the following communication elements is suggested. Elevator pitch: Academic definitions of industrial symbiosis abound, and practitioners have various ways to describe IS. A proposed elevator pitch is: Industrial symbiosis is a systems approach to a more sustainable and integrated industrial economy which identifies business opportunities to improve resource utilisation (materials, energy, water, capacity, expertise, assets etc.). Targeted message: Both the business case for individual participants of IS, and the return on investment in IS programmes for government, have been clearly documented in many countries. However, these data are not widely known. The communication of benefits must be targeted to the audience, with messages on return on investment for government versus the business case for individual synergies for businesses. Raising awareness: Incorporating IS into mainstream standards (ISO for example), and building support amongst high-profile champions from the political and business arena, were identified as means to raise awareness of IS. Some form of visual communication (as per the success of the waste hierarchy as a communication tool) would be constructive, in addition to training professionals who advise and support industry such as lawyers and insurers (on risk), mainstream investors (on finance & investment), accountants (on profit/cost), and venture capitalists (on innovation).

Cross-theme: Roll out best practice in regulation and policy

The uneven progress of IS in different nations highlighted the ability of certain regulations and fiscal instruments to effectively foster industrial symbiosis across the themes. The following regulatory and policy instruments were highlighted as good practice that can be rolled out in short order: - Waste (resource policy) to drive supply and demand of “repurposed” resources: legislation at the local (Mexico City) and national (China) level is requiring companies to identify uses for their waste and by-products. - Procurement policies to support demand for recovered materials (NB these have to be carefully crafted to avoid perverse incentives such as companies deliberately creating more scrap to re-use in order to meet recycled content). - Fiscal instruments (taxes, trading schemes) as a driver for innovation and behavioural change. - Waste classification, with an eye toward international standardisation to facilitate trans-boundary opportunities.

Summary and conclusion

IWCAIS 2012 was convened to highlight the success of industrial symbiosis in delivering on today’s sustainability challenges. Industrial symbiosis experts from five continents presented compelling evidence and success stories from across the globe. Throughout the conference we not only sought to identify key policy recommendations (above) but also to distill the success factors across different models of industrial symbiosis that make it so relevant to green growth and ultimately a more sustainable economy: - Industrial symbiosis is a proven driver of demand-led innovation for the transition to green growth. - Industrial symbiosis networks are an effective springboard for business engagement. - Industrial symbiosis networks operate at scale with great efficiency: linked programmes can communicate with each other to accelerate development, replication, and innovation. - Industrial symbiosis operates trans-nationally, independent of international agreements. - Industrial symbiosis ‘practitioners’ (experts) fulfil the critical role of facilitating and coordinating the contributions of various stakeholders. - The case for government investment in industrial symbiosis to address market failure has been well-established: investment is small compared with other public sector investment to achieve a comparable return, and a mature network provides a return on investment to government. - Facilitated industrial symbiosis helps moves from what is theoretically possible to actual achievement. - By working holistically, industrial symbiosis delivers on all aspects of sustainability. IWCAIS 2012 was timed to inform discussions at the United Nations Rio+20 Conference on Sustainable Development, and the second Global Green Growth Forum, to shape positive actions today. As reported by Commissioner Potočnik in his opening address, UN Secretary General Ban Ki Moon said that Rio +20 was a generational opportunity to hit the reset button for sustainable development. The IWCAIS 2012 findings strongly support the Commissioner’s position that “Industrial symbiosis is one of the most promising and innovative ways of making our resource use sustainable - and in doing so, in generating wide economic, social and environmental benefits.” International Synergies Limited gratefully acknowledges the support of the IWCAIS 2012 organizing committees who helped shape the theme agendas: Professor Paul Ekins of University College London (UK), Adrian Whyle of Plastics Europe (UK), Peter Börkey of the Organisation for Economic Cooperation and Development (France), Professor Edward Chlebus of Wroclaw University (Poland), Peter Lowitt of Devens Enterprise Commission (USA), Professor Yong Un Ban of Chungbuk University (South Korea), Martin Andersen of Kalundborg Symbiosis (Denmark), Keith Riley of Veolia (UK), Ralph Hepworth of MERC Consulting (UK) and Dr. Rachel Lombardi of Industrial Ecology Consulting (UK) We are grateful to our keynote speakers for providing informative overviews of the theme areas: Commissioner Janez Potočnik of the European Commission’s Directorate General Environment (Belgium), Adrian Gault of the Committee on Climate Change (UK), Professor Yong Un Ban of Chungbuk University (South Korea), Patrick O’Riordan of the European Commission Directorate General Enterprise (UK), and Marc Zornes of McKinsey & Company (UK). We also thank our staff who delivered this conference on top of their usual responsibilities.

Industrial symbiosis: Creating economic and environmental value through interfirm collaboration Business and policy leaders seeking to balance economic and environmental concerns often seem to turn to the promise of future technology and infrastructure investments. Yet, meaningful approaches for addressing these concerns already exist. Industrial symbiosis, which involves firms sharing and exchanging wastes or other excess resources from one firm and converting it as for input for another, is one way firms can successfully balance economic and environmental concerns. Below, I discuss industrial symbiosis as a proven approach for creating firm and policy-level economic and environmental value through interfirm collaboration. I also offer guidelines for policy makers interested in designing ways to support industrial symbiosis development [1-3]. Industrial symbiosis can be viewed as the industrial application of the popular saying ‘one man’s trash is another man’s treasure.’ Firms collaborating on industrial symbiosis projects can often simultaneously create economic and environmental value through a combination of reduced waste disposal and material acquisition costs, replacing virgin materials with reprocessed ones, and creating new revenue streams through the sale of resources previously discarded as ‘waste.’ Two UK-based examples illustrate this potential: Terra Nitrogen Ltd and John Pointon & Sons Ltd. Terra Nitrogen Ltd sought out productive ways to manage its waste CO2 and steam heat from ammonia production while a nearby farm, John Baarda Ltd, sought to expand its growing operations. Joining together, Baarda built a new 38-acre greenhouse which used Terra Nitrogen’s excess steam heat to warm the greenhouse and 12.5K tonnes/year of excess CO2 to speed plant growth. By redirecting its waste heat and CO2, Terra Nitrogen reduced its environmental impact while simultaneously allowing Baarda to expand its operation, including the creation of 80 additional jobs and establishment of a domestic supply of tomatoes year-round to a large UK grocery chain. In a second example, John Pointon & Sons Ltd produced meat and bone meal (MBM) as part of its animal rendering services, a highly calorific material which was historically sent to landfill. With the help of an outside firm Pointon explored using MBM as an alternative fuel source for cement kilns. When this venture proved successful, Pointon began supplying up to 150K tonnes/year of MBM to nearby kilns instead of landfilling it. In addition, using MBM over traditional fuel sources resulted in 277K tonnes/year of CO2 emissions reduction among the cement kilns and Pointon also added 10 new jobs to manage this aspect of its business [cf, 2 for more detail on both examples].

What does industrial symbiosis mean for firms?

As regulatory and consumer pressures around environmental issues have increased, so have firms’ focus on balancing economic and environmental action through changes within the firm. However, by only focusing on internal changes, firms likely miss additional opportunities which come only through interfirm collaboration. By collaborating around industrial symbiosis and integrating systems, firms can often create value which is only evident from this interfirm perspective. .

Raymond Paquin John Molson School of Business Concordia University, Quebec rpaquin@jmsb.concordia.ca

What does industrial symbiosis mean for policy makers?

Industrial symbiosis has already received attention globally at all policy levels as a strategic tool for economic development, green growth, innovation, and resource efficiency. For policy makers, industrial symbiosis offers the potential to simultaneously create firm-level financial value and broader environmental and social value extending beyond the firms. From this perspective, developing appropriate policy around industrial symbiosis can help policy makers support development which is both economically and environmentally beneficial [3, 4]. Both the European Union (EU) and the Organisation for Economic Co-operation and Development (OECD) have recognized the value of industrial symbiosis in helping create systemic and holistic changes towards sustainability in industrialized countries. As the examples above show, interesting and perhaps previously unnoticed opportunities exist for those willing to look beyond their firms’ boundaries. However, previous attempts by policy makers to support industrial symbiosis have often failed. This point can sometimes be overshadowed when showcasing successful examples such as the Rotterdam shipping harbor, Kalundborg Industrial Park in Denmark, or the United Kingdom’s National Industrial Symbiosis Programme. The benefits of industrial symbiosis, combined with the high rate of previous failure in trying to develop it, point to the need for policy makers to consider how to successfully support industrial symbiosis development. Best practices can be distilled by studying successful cases of IS networks; one such case is the United Kingdom’s National Industrial Symbiosis Programme (NISP) [5-8]. United Kingdom’s National Industrial Symbiosis Programme (NISP) NISP is a notable example of a successful industrial symbiosis development program. Formally launched in 2005 as the world’s first national level industrial symbiosis development program, NISP evolved from a grant-funded pilot project begun in 2002. By 2010, NISP had worked with over 12,500 organizations on more than 5000 industrial symbiosis projects. These exchanges resulted in economic benefits including £331.18 million to the involved firms (through cost savings and new revenues), the creation and safeguarding of the equivalent of over 8700 full time jobs, and environmental benefits including the reduction of over six million tonnes of CO2 equivalent emissions and diversion of over seven million tonnes of material from landfill. NISP’s success also extends beyond the UK as over a dozen other countries have created or are in discussions to create NISP-like programs [2, 8].

Supporting industrial symbiosis development

As I noted above, despite its seemingly obvious benefits, practitioners and policy makers often fail to effectively support industrial symbiosis development among firms. However, best practices for future efforts can be distilled through the study of successful cases. As the above figures suggest, NISP is a notable success. Having studied NISP and industrial symbiosis development as part of ongoing research, I distill some of my findings into seven actions for policy makers to consider when supporting industrial symbiosis development [see 7, 9 for details]. These actions are to create certainty, create performance targets which align with policy, create regional orientation, generate broad awareness, work with the willing, build relationships, and leverage learning.

Create certainty

Within the broader business context, there needs to be certainty concerning future regulatory changes imposed on firms. While not always popular, well-defined and applied environmental regulations motivate firms to make necessary investments and other changes. In the absence of certainty, however, many firms will instead take a ‘wait and see’ approach, even when such investments and changes may be profitable to them. Within the UK, this certainty came from a combination of a steadily increasing landfill tax on industrial wastes and the ongoing implementation of EU-wide environmental directives. These changes created certainty for firms and opportunities for programs such as NISP to work with businesses in new ways, such as through industrial symbiosis.

Create specific performance targets which align with policy

Once firms have regulatory certainty, any programs developed to help firms adjust should have their performance targets aligned directly with relevant regulatory policies. For NISP, its targets were set within the triple bottom line approach of creating economic, environmental, and social value. Specifically, it had the following targets: 1 Economic: create cost savings or additional sales for the businesses; 2 Environmental: reduce landfill use, CO2 emissions, virgin materials use, hazardous waste, and water usage; 3 Social: increase the number of new jobs created, jobs saved, new businesses created, and businesses supported. A point to note here is that, in practice, certain targets were more important than others. Early on, NISP focused more on projects which involved landfill diversion, in part due to firms’ concerns over rising landfill costs. Later, as CO2 became a more prominent concern, NISP adjusted its efforts towards projects with larger CO2 reductions. As this shows, having clear and aligned performance targets which support policy goals, even when they may change over time, helps support programs prioritize their efforts. In turn, their focused efforts likely influence the types of projects pursued and impacts developed.

Create regional orientation

Industrial symbiosis projects often occurs between relatively nearby firms, but not necessarily within industrial parks of smaller industrial settings [10, 11]. Thus, having a broader regional orientation, rather than simply within an industrial estate, is likely necessary for maximum impact. As an example, though a ‘national’ program, NISP focuses its efforts regionally within the UK. To support its regional orientation, NISP create regional Programme Advisory Groups (PAGs) to act as steering committees for NISP`s efforts. PAGs consisted of 10-12 representatives from well-regarded firms, plus regional representatives of the UK Environment Agency and other regional business support organizations. PAG members provided NISP with guidance and feedback on regional-level issues which may influence how NISP engages firms within the region. Through its PAG relationships, NISP gained valuable insight into each region and also additional support and legitimacy within the regional business communities making it easier to engage firms around industrial symbiosis.

Generate broad awareness.

Generating broad awareness is crucial because managers are often not familiar with the concept of industrial symbiosis or its potential, in spite of its economic and environmental viability. Awareness occurs on two levels: general knowledge about industrial symbiosis and its value to businesses. For NISP, creating general knowledge involved leveraging PAG members’ own connections with firms to introduce NISP and industrial symbiosis as valuable interfirm action. As one NISP manager stated, this allowed NISP to leverage others’ ‘networks to basically send out our

message.’ NISP’s message to firms is that industrial symbiosis can create financial value while helping to address the increasingly expensive issue of managing firms’ wastes. Discussing real projects with real impacts tends to resonate with firms’ managers. To help managers further understand how industrial symbiosis can create value to their businesses, NISP regularly hosts networking workshops for managers to learn more and explore potential collaborations based on their firms’ resource concerns. Here, NISP staff facilitates discussions around firms’ particular waste and resource concerns, seeking to generate potential projects directly within the workshops. These discussions often leave positive impressions; as one firm manager recalled, ‘132 [potential projects] came out of the workshop… when we didn’t think there would be any.’ From these potential projects, both NISP and the firms themselves can begin choosing which projects to pursue.

Work with the willing

It is important not to waste one’s efforts when developing new industrial symbiosis projects. A key point here is to work with managers on projects which interest them rather than prescriptively telling managers which projects they should pursue. Rather than being prescriptive, NISP staff collaborated with managers based on their firms’ resource concerns. Often this knowledge came from NISP’s workshops and from developing relationships with key managers. With the two goals of keeping firms engaged and showing meaningful results, NISP works with firms to identify ‘low-hanging fruit,’ or those projects requiring little technical or organizational change (‘small wins’). One example, as described by a NISP staffer: There is a waste company [with a biogas program]not too far away … and they are trying to source all kinds of organic materials … there was 20K tonnes of food pulps [from a nearby firm] that are currently going to landfill and it was a quick marriage to get them together.

Build relationships

Positive and rewarding relationships drive success in all realms of business, including developing industrial symbiosis projects. Therefore, when possible, build relevant relationships with firms based their resource concerns. While a specific project’s financial implications are important, failing to take the relationship into account can kill an otherwise solid project opportunity, as stated by this pharmaceutical manager discussing a project scuttled with a nearby tobacco manufacturer: We are passionately, passionately anti-smoking… If they were any other business, if they were an arms manufacturer…that would be different. But cigarettes… we just feel that [this project] would be totally the wrong thing for us to do. (emphasis original) From a related view, developing larger projects often requires strong positive relationships. As one NISP staffer said, ’larger [projects] don’t tend to drop out by one visit, you need to put in a lot of time and effort… it takes longer to nurture.’ As relationships build, so does trust, which additionally facilitates future projects. As one NISP executive stated, ’as trust develops… more and more potential resources will come up [as projects] that start up one way often end up being quite different.’ As shown above, failing to understand an exchange in context of the firms involved can thwart even seemingly straightforward exchanges. Additionally, building and nurturing strong relationships will support the development of larger and more impactful projects over time.

Leverage learning

Over time, as NISP developed projects, it learned how to do so more effectively. It also gained expertise in many related areas such as environmental permitting, liaising with local authorities, business development and research coordination, to name a few. In particular,

NISP became well-known in the construction sector for developing projects around commercial construction developments. As one NISP manager stated, ‘construction companies come back to us time and time again when they are working on something new.’ NISP’s expertise also allowed it to become involved in more complex projects, which might otherwise not have developed. These projects often involve some level of innovation through knowledge transfer or creation and require some combination of research collaboration, business strategy, permitting and regulatory guidance, and material or processing expertise. A key longer term advantage of developing an industrial symbiosis support program is the opportunity to acquire skills which can further support industrial symbiosis development more broadly over time.

Closing thoughts

Industrial symbiosis, which involves firms sharing and exchanging excess or waste resources from one firm and their conversion into production input for another, is a key way firms can continue to develop interesting and perhaps previously unnoticed opportunities for value creation. For policy makers, industrial symbiosis offers the potential to develop both firm and regional level environmental and economic gains. Through successfully supporting industrial symbiosis development, policy makers support their own policy-level goals around economic, environmental, and social value creation. When considering how to support industrial symbiosis development these seven actions can help align policy decisions with industrial symbiosis success.

References

1 Chertow, M.R., Industrial symbiosis: Literature and taxonomy. Annual Review of Energy and the Environment, 2000. 25: p. 313-37. 2 Laybourn, P. and M. Morrissey, National Industrial Symbiosis Programme: The pathway to a low carbon sustainable economy, 2009, International Synergies, Ltd: Birmingham, UK. p. 91. 3 OECD, Eco-Innovation in Industry: Enabling Green Growth, 2010, OECD Publishing. 4 European Commission, A resource-efficient Europe - Flagship initiative of the Europe 2020 Strategy, 2011, http://ec.europa.eu/ resource-efficient-europe/ accessed August 1, 2012: Brussels. 5 Chertow, M.R., “Uncovering” Industrial Symbiosis. Journal of Industrial Ecology, 2007. 11(1): p. 11-30. 6 Gibbs, D. and P. Deutz, Reflections on implementing industrial ecology through eco-industrial park development. Journal of Cleaner Production, 2007. 15(17): p. 1683-1695. 7 Paquin, R.L. and J. Howard-Grenville, The Evolution of Facilitated Industrial Symbiosis. Journal of Industrial Ecology, 2012. 16(1): p. 83-93. 8 Laybourn, P. and D.R. Lombardi, Industrial Symbiosis in European Policy. Journal of Industrial Ecology, 2012. 16(1): p. 11-12. 9 Paquin, R.L. and J. Howard-Grenville, Facilitating regional industrial symbiosis: Network growth in the UK’s National Industrial Symbiosis Programme, in The Social Embeddedness of Industrial Ecology, F.A. Boons and J. Howard-Grenville, Editors. 2009, Edward Elgar: London, UK. 10 Jensen, P.D., et al., Quantifying ‘geographic proximity’: Experiences from the United Kingdom’s National Industrial Symbiosis Programme. Resources, Conservation and Recycling, 2011. 55: p. 703-712. 11 Shi, H., M. Chertow, and Y. Song, Developing country experience with eco-industrial parks: a case study of the Tianjin EconomicTechnological Development Area in China. Journal of Cleaner Production, 2010. 18(3): p. 191-199.

Utilizing excess heat: from possibility to realization on the basis of industrial symbiosis One of the unintended “products” of intensive energy using production processes is excess heat, also called waste heat. Excess heat can for instance be found in the chemical, cement, iron and steel making, and pulp and paper industries. The constantly growing demand for energy and resulting climate change effects are reinforcing interest in the application of excess heat, while increasing knowledge about industrial symbiosis makes facilitation easier. The growing costs of energy and the big loss of waste heat is the basis for the fact that recovering of waste heat is the most promising and cost effective option to reduce the world-wide amount of industrial energy consumption (International Energy Agency 2010). Waste recovery and reuse also provide financial savings, reduction of CO2 and NOx, and innovation by quality improvement of processes and products. Besides a single company’s internal improvement of excess heat recovery, the concept of industrial symbiosis provides a basis for waste heat exchange between companies, as examples in the Netherlands and Sweden illustrate.

Leo Baas Linköping University, Sweden leenard.baas@liu.se

leftover heat can supply it to the system and companies in need of heat can be supplied from the system. Figure 1 shows a drawing of the Botlek loop and the projection of the pipeline where the dotted line has to be constructed to connect preexisting pipelines.

Examples of excess heat application in the Netherlands

The Industrial EcoSystem (INES) project in the Rotterdam harbour and industry area started in 1994 at initiative of the industry association Deltalinqs (Baas 2005). An inventory of the material and waste streams in the area showed that waste heat was an important topic for many respondents. There were companies that needed heat and companies that emitted heat in the industrial area. The total excess heat emissions in the Rotterdam harbour and industry area were estimated at more than 5,000 MW in the mid 1990s (2,200 MW in air emissions, 3,000 MW in water emissions). As this amount was equal to 35% of total Dutch electricity use, attention paid to the application of waste heat must be high. However, waste heat utilization was not a new idea: earlier attempts of application in a neighbouring city stranded in the late 1970s. The application of waste heat was not acceptable for the municipality board and they qualified it as the “dirty heat of the industry” so the issue subsequently lost attention and momentum. In this context, renewed attention for waste heat in the INES project in the mid 1990s was not easy to realize. The first option was that the waste heat available should only be applied in the companies in the Rotterdam harbour and industry area. The geography of the industrial harbour and industry area - a rectangle of approximately 45 by 2 kilometres - did not provide an optimal structure for a pipeline loop for heat exchange. The costs would be € 112.7 million and the question of who should fund the infrastructure that was needed to distribute this renewed source of energy within the industrial region remained unanswered, meaning that construction was not economically feasible for the industry. Also, a project with heat exchanges in 8 bilateral combinations of companies was economically unfeasible. After that, the “Botlek loop” project started as an inventory of both the technical feasibility of waste heat exchange as well as the commitment of companies in 2004. The Botlek area is a geographical territory in the older part of the Rotterdam harbour and industry complex with about 20 chemical companies and refineries, with a mixture of companies that have excess heat and companies that are producing heat themselves. A pipeline loop with terminals in each company provides a closed system of warm water. The companies with

Figure 1. The projected Botlek loop (source: Deltalinqs)

One of biggest challenges for the Botlek loop project was not related to technical issues, but the coordination of the requirements/wishes and commitment of all potential companies. This has been a time-consuming process for building trust in the Botlek loop system and even now, the start of the Botlek loop will be in phases. A grid management organization started linking the excess heat of a waste incinerator with a chemical company that needs heat in 2012. The hope is that this realized link will challenge other companies in the Botlek area to connect to a growing network of excess heat and cooling exchange in the near future, and forms the basis of the business model. Another example in the Netherlands is the model that is applied in the Eemshaven area in the province of Groningen. There is a unique link of a 4 kilometre pipeline between a waste incinerator and a chemical company in a two-way exchange: during the day the chemical company delivers electricity on the basis of waste heat to the waste incinerator and during the night this process reverses.

Examples of excess heat application in Sweden

Traditionally, several Swedish pulp and paper factories have been exploring cascade flow management and integrated diversification for efficient resource use (older semantics for industrial symbiosis). An inventory of the existing exchanges of material and energy in the Swedish forest industry illustrates that industrial symbiosis in the form of by-product exchange networks exist in the forest industry sector: more than a third of the investigated companies have some kind of material or energy exchange with adjacent entities (Wolf and Petersson 2007).

The Swedish forest industry example of the Mönsterås network demonstrates an integrated industrial symbiosis application in business practices in Figure 2 (Wolf 2007), where excess heat from the pulp mill is delivered to a saw mill and pellet production plant, and to the district heating system of the municipality of Mönsterås.

The Swedish examples illustrate another phenomenon, namely connection to the regional economy. District heating systems are locally developed applying the waste-to-energy concept and in several cases the feedstock for the district heating power plant must be transported from other regions. This forms a growing basis for energy plants to orient themselves on industrial symbiosis links with companies that have excess heat.

Conclusion

The Swedish application of excess heat and its potential for extension shows that excess heat can be the source for 10% of the heat in the district heating systems. Given the industrial structure in the Netherlands, a similar potential is present. In Sweden, uncovering industrial symbiosis links provide examples for commercial applications in other regions. Energy companies with access to grids are becoming interested in the distribution of excess heat. In the Netherlands, planned industrial symbiosis projects are needed to bring excess heat to the market. As a new infrastructure for the application has to be constructed in most cases, it is mainly bigger industrial areas and their surroundings that are suitable for such industrial symbiosis application.

References Figure 2. Mönsterås network (source: Wolf 2007)

The share of excess heat in district heating in Sweden is 6 to 7% (Klugman 2008, www.fvb.se 2010), and there is potential for increasing excess heat from industries to the district heating systems. Significantly, the use of industrial excess heat is beneficial for pulp mills and it does not necessarily conflict with process integration since higher temperatures are needed within the mills than for district heating ( Jönsson et al. 2007). Another interesting example is the Södra Timber Kinda sawmill unit in Kisa and surplus heat of their boilers. This heat system is linked to the district heating system in Kisa, a town of approximately 4,000 inhabitants and waste heat is also delivered to the Swedish Tissue industry unit in Kisa. This example has overcome the traditional barriers of industrial symbiosis application such as a lack of understanding between the companies and the perception that one is dependent on another company. Jönsson et al. (2007) also found that the necessary prerequisites for cooperation are social in terms of common goals and good communication to a larger degree than technical or economical. It is also necessary that the companies agree on profit and investment cost division.

- Baas L. 2005. Cleaner Production and Industrial Ecology; Dynamic Aspects of the Introduction and Dissemination of New Concepts in Industrial Practice. Eburon: Delft (NL) - International Energy Agency. October 2010. Industrial Excess Heat Recovery; Technologies & Applications. Paris (F) - Jönsson J, Ottosson M, Svensson L-I. 2007. Excess heat from chemical pulp mills - a socio-technical analysis of internal and external potentials for application. Arbetsnotat Nr 38, Energy Systems Programme, Linköping (S) - Klugman, S. 2008. Energy systems analysis of Swedish pulp and paper industries from a regional cooperation perspective - Case study modelling and optimization. Gävle/Linköping (S) - Wolf A. 2007. Industrial Symbiosis in the Swedish Forest Industry. Ph.D. thesis Linköping University: Linköping (S) - Wolf A, Petersson K. 2007. Industrial symbiosis in the Swedish forest industry. Progress in Industrial Ecology, An International Journal. 4(5): 348-362

A Brief introduction to the Eco-Industrial Park Concept

Abstract

In recent years, sustainable growth strategies have become a global trend. Assessment of sustainable growth is reflected in three dimensions: economic, social and environmental. Incorporating the concepts of ecology and symbiosis in the industrial sector is considered an innovative approach to achieve sustainable growth in a flourishing economy and harmonious society while simultaneously maintaining environmental protection. The implementation of these concepts of ecology and symbiosis in an industrial cluster has been termed an ecoindustrial park (EIP). In this paper, a brief introduction of main concepts related to EIP is given and three cases in different countries are introduced.

Introduction

According to Chertow (2000), industrial symbiosis, which falls within the field of industrial ecology (IE), illustrates the mutual relationships between different industrial entities for resource exchange resulting in economic, environmental, and social benefits. In the study of IE, researchers attempt to investigate the potential for sustainable growth in industry by applying an analogy of ecological systems to industrial systems. The essence of industrial ecology is a development that originates from efforts to deal with impacts on the local environment. Rather than attaching importance to cleaner production and ecoefficiency at the level of a single firm, an eco-industrial park is an application of the combination of these two concepts (industrial symbiosis and industrial ecology) in the field of industry (OECD, 1998, Lovins et al, 1999) to optimize resource efficiency and minimize environmental impacts at the level of industrial clusters. The following definition of an EIP is provided by Indigo Development: “An EIP is a community of manufacturing and service business seeking enhanced environmental and economic performance through collaboration in managing environmental and resource issues, including energy, water, and materials. By working together, the community of business seeks a collective benefit that is greater than the sum of the individual benefits each company would realize if it optimized its individual performance only”. Cote and Cohen-Rosenthal (1998) contend that EIP aims to improve the economic performance of the participating companies while minimizing their environmental impact. The major benefits of EIPs include a reduction in natural resource inputs(primary materials), pollution, energy use and disposal of wastes. In addition, the value of non-product outputs can be increased, providing improved economic benefits. According to Ehrenfeld et al., EIPs have five major characteristics. First, they exhibit material, water, and energy flows among companies. In addition, companies are often “collocated,” or exist with a close proximity to each other in order to facilitate their interactions (although some parks exist across countries or regions). Strong informal ties often exist between plant managers in order to coordinate activities and take advantage of synergies. Minor retrofitting of existing infrastructure is often required , for instance to transport waste process heat from one company to another. Finally, one or more anchor tenants tend to exist in an EIP. The key of EIP is achieving economic, social and environmental values at the same time; if any one of these three components is neglected, the idea of EIP cannot be considered effective. Due to characteristics of EIP mentioned above and trend of globalization

Z. Biao Assistant Researcher Energy Delta Institute bbiodoor@hotmail.com

resulting in increasing resource consumption, implementation of EIP is becoming popular both in developing countries and developed countries, since the success of Kalundborg EIP in Denmark provided momentum to the EIP concept.

EIPs in different countries Kalundborg Eco industry Park in Denmark When discussing EIP, Kalundborg EIP cannot be disregarded. Located in a small town in Denmark, the Kalundborg symbiosis is considered one of the most salient implementations of the industrial ecology concept. It is an industrial ecosystem, in which residual products of one company are supplied to others as energy or raw material. Rather than being designed or planned, it has been developed automatically and gradually from a normal industrial park initiated both by needs of effective use of by-products between companies and environmental protection. The initiative of Kalundborg EIP began when Statoil Refinery needed cooling water in 1961. Later, in 1972, Statoil made an agreement with Gyproc, a wallboard producing firm, for the supply of residual gas. Throughout the last five decades of operation, more companies have entered into the system. The symbiosis network now at Kalundborg consists of local city administration, a power plant (Asnaes Power Station), a fish farm, a pharmaceuticals plant (Novo nordisk), a refinery (Statoil Refinery), and a wallboard producer (Gyproc) as the chart below shows.

Figure 1: Industrial Symbiosis between different entities at Kalundborg (Drawn by D.B.Holmes based on information from various sources, including L.K.Evans , N.Gertler, and Y.Christensen.)

The power plant transfers excess steam (normally waste to be rejected in the process of electricity generation) to a fish farm, a pharmaceuticals plant, and the community. The sludge from pharmaceutical processes and fish farms is used as fertilizers, making up large portion of the exchange network at Kalundborg (over 1millon tons per year in total).

Fly ash from the power plant is turned into raw material for a cement company, while the power plant supplies gypsum to a wallboardproducing company after the process of desulphurization. This network of reusing and recycling reduces air, water and soil pollution, conserves natural resources, and creates new stream of economic benefits for the entities in and outside the park. In 1993 (Indevgo), by investing $60 million in infrastructure for transferring by-products, $120 million in revenue and cost savings were gained at Kalundborg. And also, according to Chertow (2004), waste exchanges contain 2.9 million tons of material per year, collective water consumption has declined by 25% and 60% of used water is recycled. TEDA industry Park in Tianjin China Established in 1984, Tianjin Economic-Technological Development Area (TEDA) is one of the top three demonstration EIPs in China. It is composed of nine pillar industries: telecommunications, automotive, bio-pharmaceutical, food & beverage, new energy & new materials, equipment manufacturing, petro-chemical, aviation and modern service. TEDA has attracted 4485 foreign investment firms with a total value of US$ 40 billion between 1984 and the end of 2007 (Shi, 2010). At the same time, 9527 domestic companies were registered in this area with a total turnover of 60 billion RMB (Shi, 2010). The concern about reducing pollution and creating additional economic value by increasing the rate of by-product exchanges within the TEDA arises due to the large industrial scale of the TEDA. With this backgrounds, TEDA established independent environmental regulations for the first time among the economical-technology zone in China. Then, in 1990, TEDA created the TEDA environmental bureau, and in 2000, TEDA obtained ISO-14001 (the environmental protection system). TEDA was also designed by SEPA (State Environmental Protection Administration) as one of the demonstration zone in China in the same year. The following provides introduction of industrial symbiosis activities in the main industrial sectors in TEDA:

Excepting by-products exchange between different industrial clusters, activities such as reducing water consumption and solid wastes are being operated by public utilities. For instance, TEDA Eco-landscaping Development Co, Ltd. invented an innovative technology to extract new soil out of from three solid wastes: Bohai Sea sediments, caustic soda sludge, and fly ash from the TEDA Thermal Power Plants. In addition, TEDA Shuanggang Municipal Waste Energyâ&#x20AC;&#x201C;Recovery Incinerator converts about 400,000 tons of municipal solid waste into 120 GWh of electricity per year. According to Professor Shi (2010) 81 symbiotic exchanges have been observed within two years, composed by energy exchanges (9%), water exchanges (15%) and material-based exchange (76%). Eco town in Japan Japan is a country whose economy mostly relies on export with a high density of population and highly developed industries. In 1997, Japan faced a serious problem: not enough landfill space to abandon waste. If no measures would have been taken, the existing landfill for industry would have been full within 37 months. Even worse, in Tokyo, it would only take 9 months. Also, in the same period, Japan was experiencing economic stagnation. Mainly in the response to these two problems, a scheme of constructing eco towns in Japan was initiated by the Japanese government. According to Tsuyoshi Fujita (2006), by 2006 26 eco town plans were approved by the responsible local authority. Reusing waste from the community and industrial production is the major idea of an eco-town. In contrast to previous EIPs, the main issue is increasing the utilization of by-products and wastes between different companies within the EIPs. Contrary to the conventional idea of an EIP, participants in eco-towns are not only government and industries; the community living in the town plays much more important role and the utilization of residential waste is the main goal of the Eco-Town project. There are several types of eco-towns which can be distinguished by different geographic target areas. One type includes metropolitan areas such as

Table A: By-products exchanges in different clusters

Electronic cluster: Motorola Sumsung Electronics Co., Ltd General Semi Conductor Co., Ltd Tianjin Fujistu Ten Electronics Co., Ltd Food and beverage cluster: Tianjin Tingyi International Food Co., Ltd Tianjin Nestle Co., Ltd Kraft Tianmei Food Co., Ltd Tianjin Tingyuan Food Co., Ltd Tianjin Ringfung Starch Development Co. Ltd. Tianjin Chia Tai Feeds Technological Co., Ltd. Biotechnology & pharmaceutical cluster: Novozymes Biotechnology Co., Ltd. Automobile & machinery cluster: Toyota auto Between Tianjin Tong Yee Industrial Co., Ltd. and Tianjin TOHO Lead Recycling Co., Ltd Tianjin Toyotsu Aluminium Smelting Technology Co., Ltd

Reuse and recycling CRT glass, waste oil, and silver extracted from electroplating residues

Sell flour scraps from instant noodle production to nearby pig farms Supplies starch scarp to a local coal briquette factory Fatty acid and lecithin to food producers Converting wastes to organic fertilizer Supply 20,000tons of NovoGroÂŽ annually for TEDA Land reclamation and farmland fertilization Closed-loop recycling of sheets and aluminium Closed-loop lead recycling Supply Aluminium to Tianjin FAW Toyota Engine Co., Ltd

Chiba, Kawasaki, Kitakyushu, Osaka, Sapporo and Tokyo. In these big cities, the main focus is on setting up recycling infrastructure for different urban waste streams, such as household recyclables, commercial and demolition waste, etc. For other types of eco towns, consisting of small towns and villages, a general objective is to achieve economies of scale by bringing together waste handling and recycling at the regional level. The third type of eco-town in islands is represented by Hokkaido and Naoshima. It turns out that the Eco-town project in Japan

has been quite successful up until now. For example, 61 innovative recycling plants have been established with total cost of approximately 1.65 billion USD, attracting subsidy of approximately 36% on average. In addition, the influence of the Eco-town program has also contributed to further diversification and sophistication of recycling technologies. The Japanese experience can be applied to other countries, especially for those that are highly industrialized with high growth rate of population growth.

Figure 2: Recycling network in Styria (Drawn by E.J. Schwartz and K. W. Steininger)

Recycling network in Styria Considered an expanded version of EIP in Kalundborg, the recycling network (RN) in Styria has always been introduced as an impressive example. Compared to the Kalundborg EIP, the RN in Styria is more diversified and complex. This area was a mixed zone of heavy industry and manufacturing, and after a big slump in 1980s due to international competition, the Austrian government set radical policies to enhance the competitiveness of the regional economy in Styria. As the result of aggressive economic boosting policies, Styria revived as an industrial center in Austria. This achievement could not be realized without application of IS. With the application of IS, the industrial participants in Styria have reduced not only huge amount of material and transportation costs but also the use of landfills normally needed for waste disposal. At present, Styria focuses on traditional heavy engineering and specializes in high-grade automotive steel and paper mill machinery. In addition, industry in Styria consists of mining, agriculture, food processing, plastics, textile, paper, chemistry, metal processing, timber, construction and various waste processors and dealers. Similar to Kalundborg EIP, the RN in Styria has also developed automatically by the demand for cost reduction. However, a surprising fact is that the participants in the network were not aware of existence of the RN. This gives a deeper insight that the initiative of constructing the recycling network was mainly from financial gains from by-product trading between suppliers and recipients and savings in landfills. Styria started to attract public attention since the research implemented by Erich Schwartz. In the beginning, his research only traced by-product inputs and outputs of two companies, but it ended up discovering the existence of the recycling network consisting of 50 participants. By-products traded among the 50 different participants in the network include paper, gypsum, used oil, tires, iron scrap etc. Among industrial participants in the network, waste processors and dealers are focal points and play key roles in RN. The whole network is mainly composed of focal points such as waste dealers, waste suppliers and waste recipients. The focal points make by-product circulation of the whole recycling network more efficient by providing information about by-products to suppliers and recipients. Further, by gathering divergent waste supplies and distributing waste to the recipients, both reusal rates and the total volume of recyclable waste are increased. Both of these facts lead to the maximization of ecological and economic benefits. The figure 2 below gives a direct instruction to the recycling network in Styria.

Conclusion

Cases in countries as different as Denmark, China, and Japan demonstrate that the implementation of EIP is compatible both with the idea of globalization and sustainable growth. Transforming existing industrial parks into EIPs is a rational solution in developed countries or for those countries that already industrialized. On the other hand, the countries just starting industrialization or whose industries are growing at a dramatic pace, can apply designed EIP to minimize the energy and natural resource consumption and pursue maximum economical and social benefits.

References

- Shi H, Chertow M, Song Y. 2010. Developing country experience with eco-industrial parks: a case study of the Tianjin EconomicTechnological Development area. Journal of Cleaner Production 18, 191-199. - Berkel R.V, Fujita, T, Hashimoto S, Geng, Y. 2009. Industrial and urban symbiosis in Japan: Analysis of the Eco-Town program 19972006. Journal of Environmental Management 90, 1544-1556. - Chertow M.R. 2000. Industrial symbiosis: literature and taxonomy. Annual Review of Energy and Environment 25, 313-337. - Chertow M.R. 2004. Industrial symbiosis. Encyclopedia of Energy 3, 1-9. - C么t茅 R.P, Cohen-Rosenthal E. 1998. Designing eco-industrial parks: a synthesis of some experiences. Journal of Cleaner Production 6, 181-188. - Cohen-Rosenthal E. 1996. Designing eco-industrial parks: the US experience. UNEP Industrial and Environment (OctoberDecember), 14-18. - Lovins A.B, Lovins L.H, Hawken P. 1999. A road map for natural capitalism. Harvard Business Review (may-June), 145-158. - Organization for Economic Cooperation and Development. 1998. Eco-efficiency, Paris, OECD.

One Company’s Waste is another Company’s Gold

Energy is necessary for the functioning of the economy and industry and it also contributes directly to a variety of environmental impacts such as GHG emissions, air and water pollution. In this context sustainability is a key concern, and with a world population surpassing 7 billion, the international community is experiencing a growing scarcity of and an increasingly fierce competition for resources. A high quality of life for all humans depends on the development of sustainable production and consumption patterns and the efficient use of resources. Therefore, solutions that secure both sustainable human and economic development need to be found.1 One solution combining the principles of both economic growth and sustainability is Industrial Symbiosis. In Kalundborg the KINEC project focuses on greening the local power plant with a focus on the use of biomass for energy purposes. The Kalundborg Symbiosis is not only a technical model but also a model embracing innovative economic models such as the circular economy. An Industrial Symbiosis (IS) engages traditionally separate industries and organizations in a network to foster innovative strategies for more sustainable resource use, including materials, energy, water, assets, expertise, logistics, etc.2 In the context of the academic discipline, Industrial Ecology (IE), IS rejects the concept of waste. Even though most dictionaries define waste as useless or worthless material nothing is eternally discarded in nature; in various ways all materials are reused generally with great efficiency. By implementing principles of IS in the production of electricity, heat and steam, efficiency will increase and companies will experience more environmentally friendly production as well as economic benefits. Therefore, materials and products that are defined as ‘waste’ should be defined as ‘residues’ and it should be recognized that wastes are residues that our economy has not yet learned to use efficiently.3 The Kalundborg Symbiosis in Denmark is the world’s first working IS and is a textbook example within IE, displaying how the mindset of an integrated and closed loop system can generate not only minimized costs regarding waste handling and resource purchases for all partners in the IS, but also major environmental benefits in reduced intake of virgin materials and re- and downcycling of materials within the system.

Kalundborg Symbiosis

The initial steps towards what has become known worldwide as the Kalundborg Symbiosis began in the 1960s4 as a result of lack of water resources for the very water intensive industrial companies in the area. The Statoil refinery (then Esso) wanted to increase production and therefore needed more water, and as a result the municipality bought surface water from another municipality located nearby. By recycling this

Hans Berndt Jespersen and Camilla Klindt Hansen 2012, Project Advisors, Kalundborg Symbiosis, Denmark berndt.jespersen@kalundborg.dk

water and re-circulating it between the symbiosis partners, the pressure on water supplies diminished, and the companies saved money. Today, the Kalundborg Symbiosis is of mutual benefit for all companies involved, and the residual product of one enterprise is used as a resource by another enterprise in a closed cycle. The Symbiosis celebrates its 40th anniversary this year and more than 30 different conduits now connect Kalundborg Municipality and eight companies in the IS, i.e. Novo Nordisk (insulin and medical manufacturer), Novozymes (manufacturer of industrial enzymes), DONG Energy (power plant), RGS90 (cleaning and recycling soil), Statoil (refinery), Gyproc (gypsum manufacturer), Kalundborg Utilities (water and heat station) and KaraNoveren (recycling centre) (Renssen 2012).5 The Kalundborg Symbiosis is engaged in 14 water projects, seven energy projects and 12 waste product exchanges. In the Kalundborg Symbiosis, ash from the combustion of coal is used in the cement industry for manufacturing cement and concrete; gypsum from the power plant is utilized in the production of plasterboards; and waste fractions from insulin production (NovoGro) is used as fertilizer on nearby farms (see Figure A). These are examples of how waste is converted into resources in an IS. One of the projects in the energy area is the steam project, helping to improve resource efficiency and minimize the use of fuel and reduce CO2 emissions via coproduction of electricity, heat and steam (see conduits 6, 7, 8, 9 and 26 in figure A). Significantly increased resource efficiency results in an increased profit for the companies involved in the symbiosis. The Kalundborg Symbiosis reduces annual GHG emissions from the companies involved by 275.000 tons, which corresponds to the annual CO2 emissions from the electricity consumption of more than 80.000 single family houses. In addition, Kalundborg Symbiosis reduces combined water consumption by approximately 3 million cubic meters annually. It is important to note that every exchange in the system has been initiated primarily due to the profitability of the individual project, e.g. tax savings on energy consumption and remediation of waste fractions.

A green industrial centre

At present the municipality is seeking to attract innovative companies to Kalundborg Symbiosis and create new co-operation efforts that can further improve energy efficiency. The municipality is also looking at the possibility of extending the network with alternative energy sources. Although Kalundborg is a relatively small town, with a population of 49.000, eight to nine percent of Denmark’s ETS6 CO2 emissions come

1 2 3 4

European Commission: Sustainable Industry: Going for Growth and Resource Efficiency National Industrial Symbiosis Programme: The Pathway To A Low Carbon Sustainable Economy. International Synergies Ltd 2009 Graedel, T.E. and Allenby, B.R., 2002. Industrial Ecology (2nd edition), p. 19 In the 1960s Kalundborg Symbiosis consisted of the municipality supplying Statoil with water from a neighboring municipality. Only in 1972 did more companies become involved in the Industrial Symbiosis and an actual symbiotic exchange of materials was initiated. Marian Chertow defines an Industrial Symbiosis as ‘at least three different entities must involved in exchanging at least two different resources (…), the 3-2 heuristic begins to recognize complex relationships rather than linear one-way exchanges’, Journal of Industrial Ecology, Vol. 11, nr. 1 2007 5 Renssen, Sonja Van (2012): Waste not want not. Nature Climate Change, Vol. 2, June 2012 6 EU Emissions Trading System

Figure A: Kalundborg Symbiosis 2012

from this area. Therefore, the potential for improving energy efficiency and increasing sustainability is considerable and Kalundborg Municipality has chosen, in collaboration with the enterprises in the IS, to launch a number of activities in the area of climate, environment and energy (Ministry of Foreign Affairs 2011).7 One of these activities is the KINEC project.

First, REnescience focuses on better waste sorting, more recycling and cleaner combustion processes with high electricity efficiency levels. This is done by a breakthrough technology that uses enzymes to liquefy biodegradable material in MSW (municipal solid waste). The project enables companies to capture and recycle renewable resources from waste and to achieve increased electrical efficiency.8

Greening from within - the KINEC project (Kalundborg INtegrated Energy Concept)

Second, Pyroneer is the name of a new technology for the thermal gasification of biomass. It is a process that can convert low cost biomass and waste fraction into a combustible gas that can be used to replace fossil fuels such as coal and natural gas. Due to the low temperature, phosphorus and alkaline materials are maintained in the ash, and can be reused as a fertilizer product.9

The principles of sustainability and resource efficiency form part of an ambitious plan to make Kalundborg Denmarkâ&#x20AC;&#x2122;s new green industrial municipality in 2020. The challenges of the future include new energy sources in the symbiosis corporation, such as biomass, biogas, solar energy or geothermal energy. These challenges are bringing new life to the environmental aspects of Kalundborg Symbiosis. A group of the participants has initiated a pioneer project to explore possibilities for greening the power plant, DONG Energy, in order to provide climate friendly heat, electricity, and steam to the Kalundborg area and the companies in the IS. The KINEC project is a new activity area in which the focus is on technology for the processing and use of biomass for energy purposes. DONG uses waste from Novo Nordisk and Novozymes and gasifies slurry and the use of this bio-energy will result in projected CO2 emission reductions of 700.000-800.000 tons by 2020. KINEC is based upon new technologies such as: REnescience, Pyroneer, Inbicon and other innovative solutions (see figure B) using local biomass and waste products.

Third, Inbicon focuses on the commercialization of 2nd generation bioethanol. The project embraces the dream of clean, renewable energy made from the leftovers of the harvest, which is now a reality. The technology applied in Kalundborg has been developed in several stages bringing it to the current scale with a 4 t/hr biomass-to-ethanol plant. The demonstration plant is capable of converting 30.000 tons of wheat straw annually.10 It can be argued that these innovative projects embrace cradle-to-cradle thinking, as the projects seeks to improve the productsâ&#x20AC;&#x2122; resource efficiency.

7 Ministry of Foreign Affairs of Denmark: How do we get there?. Special Issue 2011 8 DONG Energy: www.renescience.com 9 DONG Energy: www.pyroneer.com 10 DONG Energy: www.inbicon.com

Figure B: The KINEC Project

Cradle to Cradle Concept

The companies’ activities have moved to include aspects of a circular economy, embracing the cradle-to-cradle concept, which refers to the improvement of products and their lifetime resource use without hampering functionality.11 Circular economy embraces the cradle to cradle concept which decreases the use and waste of resources on an economy-wide scale. This is achieved through the re-design of products in a way that the waste decreases on a lifecycle basis. In other words, the ‘waste’ can be sent back to the producer or to nature without negative environmental impact. A key tool is a close cooperation between a number of industries, waste management companies and utilities, which can turn waste products or by-products into something commercially useful. One company’s waste thereby becomes another company’s starting material, helping to lower production costs and reduce the burden on the environment and climate (Ministry of Foreign Affairs 2011).12

Systems make it possible, people make it happen

The managers’ close relationship and effective communication at Kalundborg demonstrates that the close collaboration between the participants in an IS is to a large degree responsible for the functioning of the system. From the first symbiotic relationship, the Kalundborg Symbiosis has evolved and expanded over time. This continuous development has been possible because the benefits have grown year by year, both economically and environmentally. The industrial potential is dependent on the fit between differentiated companies; and the close geographical location and the economic incentives in each project were instrumental factors in achieving success in this IS. However, the pivotal element in the foundation of Kalundborg Symbiosis has been effective communication and fruitful cooperation between the participating industries. The Kalundborg Symbiosis came into being because of the close networks between the companies and personal relationships between managers. These close relationships have helped improve the systems of waste separation at their source, as it has been an important element and common goal for the managers to improve industrial symbiosis and increase the efficient use of material.

This has been achieved through the installation of effective waste management systems and appropriate infrastructure, based on bottom-up solutions managed by the companies.

Concluding remarks

In the previous section the potential of IS as a possible solution for both economic and environmentally sustainable growth has been demonstrated. The innovative energy project, KINEC, gives participants the opportunity to gain a competitive edge as well as achieve a sustainable growth path. KINEC is also an art version 2.0 of Kalundborg Symbiosis and the ‘green environment’ has an independent priority. Based on decades of experience from the Kalundborg Symbiosis the many projects in the thriving municipality hold great prospects for the future’s sustainable society and production. The ambition for the future is to facilitate the development of new symbiosis projects, as a possible solution for sustainable and green production.

About the authors

Hans Berndt Jespersen is project advisor at the Symbiosis Center. He has a master in engineering, specialized in energy. He has worked with innovation for more than 30 years. Camilla Klindt Hansen is an intern from Copenhagen Business School. She is specialized in English and organizational communication and is therefore engaged with communication at the Symbiosis Center. The IS in Kalundborg aims to contribute to a development in a green and industrial production and thereby reach future commercial sustainable businesses and societies by initiating and facilitating new symbiosis projects and communicating the thinking behind the principles of IS. Moreover, the Symbiosis Center aims to retain and create new jobs through new projects. Finally, the mission is to share the mindset behind the IS in Kalundborg with external parties and thereby become the entry point to IS in Kalundborg, in Region Zealand and throughout Denmark.

11 European Commission: Sustainable Industry: Going for Growth and Resource Efficiency 12 Ministry of Foreign Affairs of Denmark: How do we get there? Special Issue 2011

Energy-transition Park MiddenDrenthe

The Energy Valley approach on industrial symbiosis and eco-industrial complexes, a practical case study. Energy-transition Parks

A Energy-transition Park is a regular industry park or industrial complex, in which interconnections are manifold, where stakeholders team up to prepare themselves for more efficient and sustainable production; a green industry park so to say. Firms in industry parks or complexes are often (inter)connected with regard to the transport, use and exchange of utilities (being gas, electricity, heat and water) in order to run their business efficiently. There is, however, an ever increasing necessity to optimise these businesses with regards to process and energy efficiency as we observe a tendency towards the greening or “sustainabilisation” of business. This is certainly not an easy task. In the so-called Energy Valley region in the northern provinces of the Netherlands a concept term “Energy-transition Parks,” or ETPs, is being put into practice.

Patrick Cnubben Manager Bio-energy & Gas Energy Valley Foundation cnubben@energyvalley.nl

development potential plays a role. Public parties may be interested to invest upfront in energy or other utility infrastructure (gas, electricity, heat, water) thereby creating a interesting foundation upon which to build a business and aiding businesses whose investments create employment. Also, the active involvement of NGO’s must be enabled. The interesting situation occurs when new green or sustainable businesses are of interest to NGO’s although their activities often have a industrial signature (and the associated emissions). And let’s be clear: NGO’s are a force to be taken seriously. The involvement of knowledge institutions is often necessary due to the fact that new technologies coming from lab or demonstration situations must be pushed through the learning curve, so a healthy mix consisting of sound public-private cooperation gives the recipe for success.

This article gives insight in the opportunities which are opened when the step is taken to become an ETP. This is illustrated with regards to the first ETP: Energy-transition Park Midden-Drenthe (province Drenthe, the Netherlands). Especially interesting is the local/regional situation as this complex is surrounded by national parks and other environmentally sensitive areas. This task to realise an ETP is no cake walk, but the key to success is the formation of tight, pro-active and goal oriented publicprivate cooperation involving industry, government and academia.

Backgrounds

The creation of ETPS or the repositioning of an existing industry park/ complex into an ETP is actually nothing more than a roadmap toward the future. Significantly, not every industry park or complex can be ‘retrofitted’ into an ETP. In the Energy Valley region the starting point actually was the Dutch energy transition experiment in the early 2000’s, aimed at the “sustainabilisation” of the Dutch energy household. It’s goal was to increase energy efficiency, increase energy production from renewable resources and reduce climate and environmentally burdening emissions while also increasing the economic potential and significance of these developments, or put in simple words, combine energy, sustainability and economic development. The transition has led to the initiation and development of a great number of innovations which require demonstration in a commercial setting to be put to test, and an ETP offers the perfect environment to facilitate these developments. By confronting novel (energy) technologies with practical requirements an acceleration in the learning curve as well as commercialisation of the technologies is achieved. Examples are seen in the industrial scale use of residual heat to power by novel industrial players such as Noblesse Proteins, as well as in the realisation of industrial-scale green gas production, not only the scale of the green gas production followed by the injection into the gas grid but also including the refinery of the digestate into feedstock for biofertilizers.

Public private cooperation key to success

The successful realisation of an ETP depends on the strength of cooperation between public and private partners, and the starting point is of course a robust business case. However, in situations where the technology is new or not extensively proven, the business case will be affected and here public parties can provide support mechanisms. The spectrum of support can vary from legislative and permitting procedures to subsidies or even participation in the projects. Here, the economic

Case study - Energy-transition Park Midden-Drenthe

Some 30 kilometers south of the city of Assen in the municipality of Midden-Drenthe the Energy-transition Park Midden-Drenthe is evolving from a greenfield industry park into the most sustainable industry park of the Netherlands and perhaps even the surrounding regions. The park is located next to the energy-from-waste facility of Attero, an incinerator with a capacity of approximately 54 MW injecting electricity into the grid.

Availability and application of industrial residual heat

Residual heat generated by the incineration process was not used until 2011 when a novel Dutch agro-industrial industry, through mediation of Energy Valley, focused on this location due to the availability of high quality residual heat. The process of Noblesse requires a huge amount of heat to dry and process agro-industrial feedstock into the final product. The conditions were crystal clear: energy prices show a tendency to increase, and are a major and thus unstable factor in the business case of Noblesse. Through the discussions with Attero an attractive deal was made that heat was to be delivered to Noblesse from Attero through a new steam grid. Steam from Attero powers the internal process of Noblesse and condensate is returned: loop closed. Consequently, more connections were made: process water from Attero is used in the process of Noblesse which returns it to the waste water treatment facilities of Attero. The dimensions of the steam grid are such that they are oversized to be prepared for future businesses to be established at the Energy-transition Park and there is the possibility that low quality heat from Noblesse can be delivered to newcomers in the park following the heat cascading principle. The business case works superbly for Noblesse and Attero, but also for the community because the carbon footprint is minimal. The system of connecting heat producers and heat consumers is also a subject of investigation by the

project FlexiHeat. In FlexiHeat, a industrial consortium led by the Hanze University of Applied Sciences in Groningen is researching the potential of connecting various industrial heat sources to heat consumers. The scale of the activities at the ETP provides an ideal test case for development of methodologies to increase the use of residual heat. Discussions are ongoing with several heat-intensive industries to establish production facilities for they recognise the high potential of the Energy-transition Park Midden-Drenthe.

Green Gas Hub as foundation for green gas production

Next to the Attero’s energy-from-waste plant, another facility has upgraded landfill gas into natural gas quality for the last 20 years. In the Netherlands this gas is known as green gas and is injected into the regional gas grid. In 2011 Attero passed the milestone of injecting 100 million cubic meters of green gas, and it is here that the story of the Green Gas Hub starts. There is a huge demand for green gas in the Netherlands and ambitions are such that Dutch national green gas production must reach an annual production of 300 million cubic meters around 2015 and even increase to 3 billion cubic meters towards the middle of this century, a formidable task. The fact that all the required elements of green gas production on a large scale are available made this location one of the first Green Gas Hubs. The production of green gas through the digestion of biogenic industrial and household waste streams fills in the concept of waste as a resource. The largest industrial size digester to process biogenic household waste separated from the waste bin will become operational from the second quarter of 2012, and plans to construct a large scale industrial digester specifically for household vegetable, fruit and garden waste are underway on this very location.

Biogas Plant of the Future, game changer for the green gas industry

A novelty is that, on 10 September 2012, a consortium consisting of Energy Valley, Noblesse, the Dutch Union of Poultry farmers and DSM, a Dutch multinational announced plans to investigate the development of the “Biogas Plant of the Future.” The concept of the “Biogas Plant of the Future” will be a game changer in the green gas industry as it uses a compact digestion system enabling very efficient carbon conversion into green gas, combined with production of biofertilizers from the digestate. This concept is perfectly suited to increase green gas production abroad, in the large agricultural areas of eastern Europe, for example. This undertaking is supported strongly by the province of Drenthe, and a Green Deal was even signed between the parties providing another example of the strength of public-private cooperation.

Green gas infrastructure

With all these initiatives, green gas production will increase towards a minimum of 30 million cubic meters, being equivalent to 10% of the national target. Due to the fact that the gas must be evacuated through the gas grid, infrastructural connections have been extended: the Green Gas Hub of Attero is now being connected to the regional gas grid in the municipality of Hoogeveen some 10 km away. The connection is very special for it is exclusively intended to transport green gas, and is also connected to Green Planet, a sustainable gas station for consumers and commercial parties. It will be the first gas station where physical green gas can be tanked in vehicles. The realisation of the green gas interconnector is supported by the Dutch national government and the province of Drenthe, and on 10 September 2012 a subsidy of € 4,8 million was given to support the green gas infrastructure providing another example of public private cooperation. All the relevant aspects along the green gas value chain are also investigated in the FlexiGas project by an industrial consortium led by the Hanze University of Applied Sciences. This approach deserves repetition in other industrial areas.

Lessons learned

The developments at the Energy-transition Park in Midden-Drenthe are in the beginning stages, so only intermediate lessons learned can be given. In the very essence it revolves around the vision of companies such as Attero, Noblesse Proteins and the province of Drenthe in close cooperation with the Energy Valley Foundation which embraces the opportunity of sustainability as a new business generator and offers a proactive attitude in approaching industries, governments and academia. The industry in its turn sees the potential opened up by the facilities on the Energy-transition Park Midden-Drenthe and this public-private approach is being repeated in an even stronger manner in other areas of the Netherlands. The recipe is simple: Think green and act green. Please come and visit us!

Eco-Industrial Parks in China

China is now an industrial giant in the world after a 30 year transition from a planned to market economy. Being one of recent “policy pioneers,” industrial parks play an important role in the transition process, first in the form of the Economic & Technological Development Areas (ETDAs) in 1984 and then with the High-tech Parks (HTPs) in 1988. Currently, China has around 300 national industrial parks including 131 ETDAs and 88 HTPs. Though enabling achievement of remarkable progress in economic development, industrial parks encounter ever-increasing challenges regarding resource consumption and environmental burden. Now, industrial parks have another opportunity to be policy-reforming pioneers in the form of eco-industrial parks (EIPs), which are considered strategic niches for sustainable transition. China began with the implementation of EIP initiatives around the year 2000. Some sector-specific industrial parks seek alternative pathways to balance industrial development and environmental burdens, such as chemical parks in the Yangtze Delta Area and sugar-making parks in Zhujiang Delta Area. After 2004, some leading EDTAs and HTPs joined the pilots, including Tianjin Economic and Technological Development Area (TEDA) and Suzhou Industrial Park. Currently, 63 EIPs pilots have been established under the co-approval of three ministries, the ministry of Environmental Protection (MEP), the ministry of Commerce (MOC), the ministry of Science and Technology (MOST), and 15 of them have been named after the national EIPs. EIPs have now become part of the solution for transition to sustainability and are increasingly being implemented voluntarily by industrial parks, especially after a series of challenges in recent years including land development rectification, reform of the tax system on foreign investment, issue of a labor law and continual environmental events. A typical transition example is the Yixing Economic Development Area (YEDA). YEDA is located in the upstream area of Taihu Lake in Jiangsu Province. It was upgraded from two small industrial parks in 2006, with the dominating sectors being chemicals, textiles and machinery. In 2007, the drinking water was polluted in Wuxi City which takes the water from the Taihu Lake. This incident resulted in a serious wave of command and control on industrial parks in Taihu area. Responding to regulations, YEDA took the following measures: 1) Closed about 50 small polluting companies, most being chemicals or textiles; 2) Upgraded the industrial structure by recruiting PV-solar, LED and precision machinery; 3) Encouraged cleaner production audits and certification of ISO14001. There are currently about 56 companies that have carried out audits and 30 companies received certification; 4) Supported leading enterprises as national or provincial circular economy pilots. For example, YixingUnion, a manufacturer of citric acid and electricity, was listed in the second batch of pilot enterprise of national circular economy in 2007. The company realized the cascading utilization of energy and cyclic utilization of rubbish for thermoelectricity and biochemical energy by introducing bio-desulphurization technology from the Dutch Paques Corporation. After 2008, YEDA realized that it should take a more integrated approach to sustainability. Thus, it invited Tsinghua University to help to formulate an EIP master plan which provides a blueprint for industrial development, infrastructure building and management.

Shi Lei SEPA Key Laboratory on Eco-industry, School of Environment, Tsinghua University, Beijing 100084, China slone@tsinghua.edu.cn

At a national level, we can observe three main achievements from the ten-year history of EIP initiatives (Shi & Wang, 2010). The first is the emergence of industrial symbiosis success stories. Industrial symbiosis engages traditionally separate industries in a collective approach to competitive advantage by implementing waste exchange, cascading usage of energy and water, utility sharing and other measures. Almost every EIP case has implemented or planned waste exchanges, especially for metal scraps, waste plastics, paper or wood scraps, ash and sludge. Some special synergies have also been implemented; for example, a company was recruited to recycle iron-containing sludge in Fuzhou park, a special pulp making process was developed to recycle cellulose in bagasse in Guitang park and a recycling process was established to recover copper from wastewater in Suzhou park. Water reuse is required with 40% as the minimum in the EIP regulation for an area of water shortage. Utility sharing is also a common thing: taking Zhuhai park as the case, steam pipelines were established to network the power plant and users, resulting in the replacement of 36 boilers in 18 companies and leading to 582t/h of fuel oil savings and a reduction of 22,000 tons of SO2 emissions annually. The second achievement of EIP initiatives is the creation of a new development model for industrial parks. An industrial park can be considered a living organism with three entwined elements: land development, infrastructure building and industrial development. To make industrial parks sustainable, the three elements should be operated in quantitatively interdependant way and in rigorous time series. Mismatch or disorder may bring about some unexpected problems, such as water pollution due to lack of wastewater treatment, air pollution or high energy costs due to imperfect energy infrastructure, etc. By planning and operating in an ecological manner, EIPs change traditional construction patterns, usually from centralized to decentralized patterns for water and energy systems. Decentralized patterns make water and energy systems more reliable, cleaner and efficient. The third achievement is the contribution to institution building. Inspired by EIP initiatives, the China Circular Economy Promotion Law formulates an article for industrial parks: “industrial parks of various types shall organize the enterprises inside to carry out waste exchanges, cascade utilization of energy, intensive use of land, classified and recycle water, and share infrastructure and other facilities. New and reconstructed industrial parks of various types shall carry out environmental impact assessments in accordance with the law and take measures to ensure their environmental quality”. EIPs now act as a platform for innovative environmental management, including master planning, reasonable industrial layout, environmental risk control, environmental performance reporting, etc. All this leads to the transition of environmental management of industrial parks from the end-of-pipe treatment paradigm to a system-oriented one. For example, the Industrial Symbiosis Innovative Technology Alliance was established for the purpose of improving technology innovation ability, with members from enterprises, academies, research institutes and other organizations. Though EIPs goes rather smoothly in China, the problematic nature of the EIP experimentation still exists, just similar with observations from

Gibbs (2011). For example, an industrial park located in western China has two large plants, coking plant and methanol plant. The by-product hydrogen from the coking plant can be sent to the methanol plant to produce methanol, which could be a win-win scheme. However, the synergy does not happen just because one plant belongs to a state-owned company and the other is a private company. In an additional example, fly ash from a very large power plant fails to be sold to a neighboring cement plant because of issues of trust. Even in the success case of TEDA, some problems still remain, such as the disorder of waste recycling market, lack of waste recycling infrastructure, low capacity for eco-innovation and weak economic policy supports. Different from western observations, there exists a special problematic phenomenon in China EIPs, the “small but complete” industrial system. In some parks, power plants, iron-making plants, coking plants, cement and other plants constitute industrial symbiosis systems, highly-linked but small. For these systems, scale economy is hard to achieve and, more seriously, they may become the harbors of polluters. The main reason for this lies in the fragmented markets and local protectionism. Being one of typical planned EIP models by Chertow (2007), we can find that government plays a large role as an enabler, both at national level and park’s level. After several years of experimentation, the Ministry of Environmental Protection decided to jointly carry out the promotion and implementation of national eco-industrial parks, together with the Ministry of Commerce and the Ministry of Science and Technology. The three ministries jointly issued a notice on national eco-industrial parks, forming a leading group responsible for the review, approval and coordination of national eco-industrial demonstration parks. A number of standards and guidelines were also issued, including technological standards for sector-integrated parks, sector-specific parks and recyclingoriented parks. To encourage the management of EIPs in a more scientific and standardized manner, some modifications or updates are carried out in the following policies or systems: 1) differentiated environmental policies to promote the long-term development of EIPs; 2) business incentive policy to enhance competitiveness; 3) technological support policies to enhance innovation capacity; 4) a standard and management system to promote the scientific development of parks; 5) an evaluation and audit system to ensure a fair development environment.

The key point to understanding EIPs in China is the park’s governance and its development mechanism. In almost every industrial park a special government organization, the management council, exists. The core task for the council is to keep the park in continuous operation by taking responsibility of land development, infrastructure building and enterprise recruitment. Unlike general local government, the council in fact also acts as the development company. Only some core departments remain in the council, including the Departments of Recruitment, Economic Development, and Planning and Construction (social departments are usually excluded). This institutional structure and mechanism result in higher economic efficiency but worse social performance. Enterprises can be recruited in a more integrated approach, infrastructure can be rapidly built, but trust and other social embeddedness issues are ignored. This leaves large space for improvement for industrial symbiosis in most industrial parks. In the future, we believe EIPs can move to the mainstream of industrial development from the current status of strategic niches in China. To enable this transition, the following recommendations are made: 1 Government should still act as the enabler, but be careful not to overreach in its roles; 2 Spaces for experimentation should be provided continuously, including institutional innovation, technological development and business models; 3 Path dependency should be looked at more closely and some lock-ins should be avoided, such as the clustering of polluters and the “small but complete” industrial symbiosis model; 4 Last but not the least, social embeddedness should be fostered to strengthen regional competitiveness.

References

Chertow MR. Uncovering industrial symbiosis. Journal of Industrial Ecology, 2007, 11(1): 11-30 Gibbs D. Eco-industrial parks and industrial ecology: strategic niche or mainstream development? In Boons F, Howard-Grenville J, eds. The Social Embeddedness of Industrial Ecology. Chletenham: Edward Elgar, 2009: 73-102. Shi L, Wang Z. Eco-industrial Parks in China (2000—2010). Journal of China University of Geosciences: Social Sciences Edition, 2010, 10(4): 60-66.

Key characteristics of Ecoindustrial Parks in South Korea

This article describes the key characteristics of the eco-industrial park (EIP) initiative in South Korea. Contrary to spontaneously developed industrial symbiosis networks, this article highlights the relevance of a systematic design approach to stimulate the transformation of conventional industrial complexes into EIP in Korea. The barriers and challenges are discussed at the end.

Hung-Suck Park and Shishir Kumar Behera Center for Clean Technology and Resource Recycling, University of Ulsan, Ulsan 680 749, Republic of Korea parkhs@ulsan.ac.kr

resource scarcity problems. Nevertheless, after the Rio Earth Summit in 1992, a comprehensive approach was taken to improve the environmental, social and business performance in Korean industry by applying the concepts of cleaner production and industrial ecology. Industrial environmental policy has drastically changed after the Ministry of Knowledge Economy (MKE) (erstwhile Ministry of Commerce, Industry, and Energy) enacted APEFIS (Act to Promote Environmental Friendly Industrial Structure) in December 1995. Based on the APEFIS, the MKE established an institutional system for cleaner production (CP) and an environmental management system (EMS) based on ISO 14001 as an implementing tool. The first comprehensive master plan for environmentally friendly industrial development was made and operated based on APEFIS. This plan includes: streamlining the supporting system, CP transfer and dissemination, promoting environmental industry, and stimulating environmental management. The CP transfer and dissemination deals with technology transfer, international collaborative projects, supply chain environmental management (SCEM), EMS and eco-industrial parks (EIP). Benchmarking of advanced CP policies and action plans and, establishment of an integrated information system to support development and dissemination of cleaner technology was assigned during the first phase of cleaner production technology development project (Lee et al., 2004). The ultimate objective for achievement of sustainable industrial development by 2020 is as shown in Table 2.

Introduction

The growth of industrial sector in Korea is the principal stimulus to economic development of the country. However, the activities in industrial complexes have resulted in the consumption of enormous amount of resources, and thus generated massive amount of wastes and pollutants. As shown in Table 1, industrial complexes consumed 64.4%, 56.5% and 58.0% of oil, electricity and natural gas, respectively, and generated 46.7% of total industrial waste and emitted 63.2% of total greenhouse gas emissions from industries (Chae et al. 2010). Considering their level of waste generation and pollutant emission, industrial complexes bear high potential of environmental problems and associated risks to member industries and neighboring communities (KICOX, 2002). Industrial complexes of early days installed environmental infrastructure to manage environmental problems. However, the adoption of the endof-pipe approach was inefficient in terms of pollution prevention or

Table 1: Energy consumption, waste generation, and green house gas emissions from industrial complexes (as of 2009) Classification

Oil consumption (1000 TOE)

Electricity consumption (GWh)

Natural gas consumption (1000 TOE)

Waste generation GHG emissions (ton/day) (million t CO2)

National (A)

100,549

368,605

18,865

328,952

599.5

Industry (B)

55,628

186,252

5,200

110,970

222

Industrial complex (C)

35,831

105,254

3,014

51,823

140.4

C/A

35.6%

28.6%

16%

15.8%

23.4%

C/B

64.4%

56.5%

58%

46.7%

63.2%

Source: Korea Energy Management Corporation (KEMC)

Table 2: Master plan for Cleaner Production (MKE, 2002) Phase

Phase I (1995-2001)

Phase II (2002-2010)

Phase III (2011-2019)

Phase IV (2020 onwards)

Goal

CP at company level

CP at industrial complex level

CP at regional level

Sustainable industrial development

Nil (self-reliance)

Government support 0.2 (billion US$) Source: Ministry of Knowledge Economy, 2002.

Aside from the adoption of CP at the industrial complex level, development of EIPs through industrial symbiosis among companies may result in minimizing energy consumption and waste material emission. This includes not only the construction of environmental friendly industrial complexes, but also renovating the industrial structure by adopting CP technology and environmental management tools. This indicates that the development of Korean EIPs comes from the systematic application of CP rather than mere resource recycling at a company level. The Korean EIP model is characterized by a cluster of inter-networking businesses which perform individual and collective cleaner production programs prior to by-product exchange, within an EMS framework (Chiu, 2005). As most of the Korean industrial complexes have become superannuated by more than 40 years, retrofit of existing industrial complexes was seen as a wiser option than the construction of new ones. In addition to environmental benefits including GHG emissions and waste reduction, development of EIPs will not only bring economic benefits from reduction of waste treatment costs and revenue increases, but also social benefits such as a job creation, and image improvement. The blueprint agenda 21 of Rio Earth Summit in 1992 and the economic crisis in Korean industries lead industry to adopt a comprehensive approach for improving their environmental, economic and social performance. In 2005, Korea initiated an ambitious 15-year three-phase EIP project under the leadership of the Korean National Cleaner Production Center (KNCPC) (Park and Won, 2007). Subsequently, in late 2006, the ownership of this project was transferred to Korea Industrial Complex Corporation (KICOX), affiliated to the Korean Ministry of Knowledge Economy. A total of eight demonstration regions were selected under this project, five (Banwol-sihwa, Ulsan Mipo-onsan, Yeosu, Cheongju, and Pohang) in the first phase and three (Busan, Daegu and Jeonbuk) in the second phase. The first phase (2005-2009) of the project was aimed to perform pilot studies, whose prime objective was to shift the conventional industrial complexes to EIPs by systematically understanding the material and energy flows among the industrial complexes, collecting data on inputs and outputs of raw materials, products, by products and waste in the five demonstration sites (Park and Won, 2007). The second phase (2010-2014) was aimed at providing conceptual ideas and disseminating the understanding of the designed concept to eight hub (selected demonstration sites) and 30 spoke (associated) industrial complexes. The third phase (2015-2019) was meant to review the successes and failures during the first and second phases and revise the overall strategy, if required, and to perform an overall performance analysis and identify missing components (Park and Won, 2007).

- Research and development into business (R&DB) as the enabling framework to facilitate the implementation of industrial symbiosis. - Participation of the companies through both top-down and bottom-up approaches. Identification of networking opportunities through both the topdown and bottom-up approaches helps in screening and selecting the potential synergy opportunities for feasibility investigation and commercialization. - Economic incentives to participating industries (Cost reduction or creation of new revenue through by- or waste product exchanges) - Strong support for innovative environmental technology accelerates resource synergy in the industrial complexes. - Institutional support from the government for efficient transition of conventional industrial complexes toward EIP.

Achievements

In terms of project identification, remarkable performance was shown by Ulsan, followed by Yeosu and Pohang. Banwol-Sihwa and Cheongju showed relatively lower performance probably due to the difficulty in data collection and scattered dispersion of SMEs. In addition to the number and size of industries, composition of industries often plays a critical role in the identification of synergy projects. The higher performances of Ulsan and Yeosu might be attributed to higher percentage of chemical industries located in these industrial complexes. The Korean EIP initiative emphasizes the successful commercialization and implementation of the identified symbiotic networks. The R&DB framework (Behera et al., 2012) adopted in the Korean EIP project, to promote symbiotic transactions among companies for retrofitting conventional industrial complexes to EIPs, has resulted in providing well-built business case for symbiotic investments, which have been observed to develop pro-active and systemic solutions to the challenges faced by the industrial complexes rather than relying on autonomous/ self-organized/serendipitous symbiosis networks. As of 2012, a total of fifty ‘designed’ symbiosis networks have been developed in all the EIP demonstration sites, which have resulted in an estimated economic benefit of 170.83 million US$/y with a R&D support of 7.5 million US$ and a new investment of 167.8 million US$. In addition, the networks also resulted in environmental benefit in terms of 563,863.2 ton/y of CO2 emission reduction (KICOX). The strength and resilience of Korean style symbiosis networks are seemed to be durable and resilient as the EIP project is supported by a robust management structure including a champion and supporting staff for each EIP center, and the businesses are made by carefully considering the company’s perceptions of issues, needs, resources, and opportunities.

Key characteristics

The key characteristics of the Korean EIP project are as outlined below: - National policy in favor of EIP initiative Environmental policy viz. “Environmental Vision 21” and policies promoting eco-friendly industrial structures such as APEFIS (Park et al., 2008) - Organizational hierarchy The well-established organizational management structure under the leadership of KICOX plays a critical factor for the success of the Korean EIP project. - Catalytic role of EIP centers It is observed that a facilitator such as the EIP center act as the embodiment of industrial cooperation that is ideally placed to collect and synthesize industrial operational knowledge into identified opportunities for local/regional material and energy efficiency, consequently contributing to the sustainable development of the industrial complexes.

Figure 1: Comparative performance analysis of five EIP pilot projects (BS: Banwol-Sihwa, C: Cheongju, P: Pohang, U: Ulsan, Y: Yeosu) selected during the first phase of EIP project.

Lessons learned

Despite the successes achieved, various challenges are faced by the project and the barriers to be overcome are as outlined below. Barriers - Lack of comprehensive co-ordination between MKE and Ministry of Environment seems to be a barrier to bring the present environment regulations and standards in line with the EIP approach - Policies favoring waste exchange is needed - Flexible regulatory framework is needed Many regulations and standards viz., the Industrial Park Management Law (1975), the Industry Location Law (1977), and the Promotion of Industrial Clusters and Factory Establishment Law (2002) intersect in the management and operation of industrial parks (Park and Won, 2007). - Transparency of data and reluctance to release information from companies - Lack of comprehensive baseline site assessment information (required to provide information and identify opportunities existing in the industrial complexes). Challenges - Investment for infrastructure development during commercialization. - Design and implementation of optimized networks in specific categories (e.g. steam) - More active participation among companies.

Conclusion

The viability of R&DB model for ‘designed’ symbiosis networks in terms of triple bottom line benefits have been demonstrated in Ulsan and other EIP demonstration regions in Korea. This program is very much flexible and transferable to other countries as well. Overall, the experiences gained from the Korean EIP demonstration program reveal that policy instruments like national EIP programs, the presence of facilitators such as an EIP center, and enabling frameworks such as the R&DB approach might serve as the critical factors for transformation of conventional industrial complexes into EIPs.

Acknowledgement

Financial support (Grant No. 2005-B029-01) for this research was received from KICOX (Korea Industrial Complex Corporation) and the Ministry of Knowledge Economy, South Korea for the EIP transition in Ulsan Mipo-Onsan national industrial complexes.

References

- Chiu, A.S.F., 2005. Training Package for NCPC on CP/ Environmental Management of Industrial Estates. Ver 3.3. UNEP/ InWEnt. Paris, France. <http://www.uneptie.org/pc/ind-estates/ event> - H.-S. Park, J-Y. Won, Ulsan Eco-Industrial Park - Challenges and Opportunities, Journal of Industrial Ecology, 11(3): 11-13, 2007. - H-S., Park, E.R., Rene, S.M., Choi, A.S.F., Chiu, Strategies for sustainable development of industrial park in Ulsan, South Korea From spontaneous evolution to systematic expansion of industrial symbiosis. Journal of Environmental Management, 87: 1-13, 2008. - K. Lee, S.-W. Moon, T. Lee, H. Cho, J.-S. Choi, S. Kim, M. Kwon, Construction of Eco-Industrial Park for Establishing Infrastructure of Cleaner Production in Korea. Korea National Cleaner Production Center, 2004. - Korea Industrial Complex Corporation (KICOX), Status report up to second year of the second phase EIP project (In Korean), 2012. - S.K., Behera, J.-H. Kim, S.-Y., Lee, S. Suh, H.-S. Park, Evolution of ‘designed’ industrial symbiosis networks in the Ulsan Eco-industrial Park: ‘research and development into business’ as the enabling framework. Journal of Cleaner Production, 29-30: 103-112, 2012.

About the Authors

Hung-Suck Park is a Professor in the Department of Civil and Environmental Engineering, Director in Ulsan EIP center, KICOX and Director in the Center for Clean Technology and Resource Recycling, University of Ulsan. Shishir Kumar Behera is a post-doctoral researcher in the Center for Clean Technology and Resource Recycling, University of Ulsan.

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Will Hub Pricing Guarantee Security of Supply for Import Dependent Europe? Recently I am being asked regularly to comment on the statement that oil-indexed prices are a “thing of the past” and that it is only hub-priced gas that Continental Europe needs. The idea is that, as a result of adopting a new pricing model, Continental Europe would “get flooded” with gas coming from various destinations. Producers from all over the globe would vigorously compete with each other and as a result prices would drop to levels similar to those currently enjoyed by North American natural gas consumers. It would then in return be an intransigent Gazprom that distorts this shiny futuristic picture, while holding on to old-fashioned oil-indexation. But, as many believe, it is only a question of time before the major supplier of gas to Europe will be persuaded to change its stance. Contrary to that dominant view, I will try to prove below that Gazprom’s current position is sound and realistic because it is based on a deep understanding of the unique nature of the European gas market. When you reform, you need to know exactly what you are reforming - a plain rule which is unfortunately ignored by many European commentators who seem to be obsessed with the idea that any supply-demand pricing model, even if malfunctioning, would be better than the existing one. But inevitably, reality will hit in a destructive manner. We have seen it already - and continue to experience it - with the Euro crisis. Grand designs motivated by the very best of intentions, but without adequate knowledge, bring results that contradict these intentions. As always, the devil is in the details. What I will try to do is to do at least part of the “homework” that European reformists should have done themselves: study the potential negative consequences for energy security resulting from the market reforms as they are planned. In other words, I will focus my attention on the regulatory threats to Europe’s energy security.

The unique European gas market

The belief in the American market model has resulted in calls for replacing oil-indexed prices with hub-prices. The reasoning is that spot markets equal low prices, like in the US. This demonstrates a serious misunderstanding not only of the European hybrid market, but also of the American market. The European gas market is very different from the American and Asian markets. In fact, it represents a combination of oil-indexed long-term contract gas and short-term hub-priced gas. Most important is that in Europe, these two different pricing methods do not exist in parallel worlds, but are closely interconnected. The European pricing model is best described as “hybrid” - a term originally coined by the Dutch Clingendael Institute in 2008. Unfortunately, the good start made by the Clingendael Institute was not continued: no dedicated research of the hybrid market model or any major attempts to understand its mechanisms were carried out ever since. We have the impression in Gazprom that there is a tendency for Europeans to experience a self-imposed “inferiority complex” when comparing their existing pricing model with that of the liberalised American or British variants. The meaning of the word “liberalised” is, in itself, key to understanding this complex. This word implies that the hybrid pricing system is archaic and outdated, because the new “liberalised” sub-system within it is immature.

Sergei Komlev Head of Contract Structuring and Price Formation Gazprom Export

This is not true. Continental Europe has developed a unique hybrid pricing system based on the symbiotic co-existence of oil and gas indexation and this is the best fit for the import-dependent continent. Under the existing model, oil-indexed prices play a leading and dominant role, while hub prices play a balancing and subordinate role. As a result of this dominance prices on European hubs, like in the UK and The Netherlands, are derivatives of Gazprom’s and other major suppliers’ oil-indexed prices. But, that does not prevent the European gas market from being an ideal stage for arbitrage and balancing. In addition, it needs to be made clear that oil-indexation does not rule out competition. On the supply side, there has already been much competition between Russian, Norwegian, Algerian and Qatari gas. We fully understand our clients who tell us that they do not care about theoretical pricing models, but prefer spot-priced gas, because it is cheaper today. However, when we tell them to buy more from hubs to lower the average price of their portfolio, they say that they cannot fully rely on hubs as their source of supply, and would still prefer to get gas from us, but at a hub-indexed price. This was further illustrated during the recent cold snap in February when everyone turned to Gazprom for additional supply, while hubs were unable to accommodate the increased demand; prices rose significantly and additional gas was simply unavailable. It is clear that Europe needs long-term contracts for its supply security, as it cannot rely on hubs as a source of supply. Gazprom views the demand for hub-linked prices within existing longterm contracts as unjustified, because we sell more than just a commodity. Our supply contracts are a service, its prices including security of large volume shipments and flexibility of daily and monthly deliveries, which spot markets do not and cannot provide. Another drawback of the Continental hubs is that they do not represent a balance of the total European supply and demand, but only a small fraction of what is left after a major part of the demand is met by longterm oil-indexed contracts. “Paper trading” on the Continental hubs is also not sufficient enough to support any price hedging, as available on the American hubs. It needs be noted, however, that even though Europe’s spot markets are not nearly as liquid as the American, they are already mature and liquid enough to perform balancing and arbitrage functions.

Unintended consequences of European reforms

Today, long-term contracts provide Europeans with the security of supply and predictability of oil-indexed pricing, secured from any abuse. At the same time, they provide producers with security of demand, which is necessary for the continued investment cycle. However, this basis of Europe’s energy security is under threat. What we are witnessing now is a concerted attempt to replace oil-indexed prices with hub-indexed prices and, as a result, demolish the existing hybrid pricing model. There are two different strategies to bring oil-indexation to an end - one strategy could be named ‘pull’ and the other ‘push’. The ‘pull’ strategy is evolutionary, suggesting that transformations of the hybrid pricing model could be carried out in a steady way, simply by means of increasing the share of the spot component in long-term contracts at the expense of oil-indexation. The ‘push’ strategy employs arbitration as means to put an end to oil-indexation forever. Supplier obligations would

remain the same under these “re-engineered” long-term contracts that are linked to gas hubs rather than oil. What will happen to European supply security if the hybrid pricing model collapses in the course of market reforms? Indeed, if hubs are liquid enough, there really is no need for long-term contracts. If anything, these long-term contracts should then be loose enough from the supplier point of view. They should, for example, contain rerouting clauses, seller options, and rights to source gas directly from hubs if prices do not meet producers’ expectations. All these adjustments mean that, if prices are determined by supply and demand, the shipper could not be deprived from the right to directly affect pricing on hubs, an option that is not available to Gazprom at the moment. However, if you need long-term contracts for security of supply, you must adhere to the existing hybrid model. We understand the desire of buyers to have the best of two worlds, but you will not find a producer consenting to take all the price risk and provide security and flexibility of delivery at the same time. Existing long-term contracts are specifically designed for oil-indexation, and displacement of oil-indexation by hubindexation changes a fragile balance of risks between buyer and seller in favour of the buyer. Most reformers recognise this and claim that Europe needs a pure spot market model with hub-priced gas and direct sales by natural gas producers. However, such a transition to the American model is not a suitable option for Europe. Europe’s indigenous reserves are depleting and the continent is therefore becoming increasingly dependent on imports from third parties. Under these conditions, a US-model spot market cannot be replicated in Europe. It would leave European consumers at the mercy of the largest suppliers: long-term contracts, if any, would no longer guarantee security of supply and oil-indexation would no longer protect consumers from price manipulation by dominant market players. The European gas market is a “different beast” than the US market and must therefore be treated in a way that allows long-term oil-indexed contracts and spot gas to complement each other. It is not a choice between oil-indexed or spot gas, it should be both.

Disincentive to invest in additional export pipelines

The second threat to supply security comes from the inadequate development of incoming export pipelines. Theoretically, increasing competition in capacity hoarding by suppliers lowers prices to the enduser, which is the rationale behind the Third Energy Package. The side effect of this, however, is that it discourages investment coming from probably the most interested party for new pipeline construction, the shipper. In practice, a supplier deciding to bring additional volumes of gas to Europe has to build a pipeline that is twice as large as he needs for his own gas, in order to meet Third Party Access requirements. This, although with the best intentions, does not take into consideration supply realities and therewith discourages investment. Will Europe need new pipelines, the most secure way to deliver gas to Europe? Gazprom Export collected all gas demand and endogenous production forecasts for the next 20 years, made by leading global forecasting agencies in the last 24 months. Their collective wisdom indicates that demand will continue to rise, while the indigenous production in Europe will continue to fall. A consensus forecast indicates that there will be an approximate 400 bcm gap between European demand and domestic production by 2030. Assuming that all existing exporters will bring the same volumes of gas as in 2011 (260 bcm), Europe will need 140 bcm of additional imported gas and the corresponding infrastructure to deliver it. Even with all the LNG in the world, it will be difficult for Europe to fill this gap without the construction of additional pipelines.

At the same time, we at Gazprom did our homework following the incidents of January 2009. Firstly, it has become very clear to us that we cannot make ourselves dependent on transit monopolies. We must invest in the diversification of supply routes to mitigate dangers from political interventions, technical failures, natural catastrophes, or even terrorist attacks. This is in the joint interest of suppliers and customers and it makes perfect business sense for us: we lost a lot of money when Ukraine closed its transit routes for our gas and must insure ourselves against such risks in the future. The Nord and South Stream pipeline projects are our contribution to this. In the meantime, however, Gazprom is already facing regulatory hurdles regarding Nord Stream where formal application of one supplier restriction on access to the pipeline prevents us from the efficient operation of OPAL, which is an integral part of Nord Stream. European and national authorities do not allow us to use all the capacity, even when there are no other bidders for this capacity! This does not make any economic sense. On ideological grounds, half of the pipelines will remain empty, as third-party gas will not physically appear from anywhere. We do not want to believe that Third Energy Package’s aim is to put discretionary tool at the hands of the European Commission to be able to hold up the South Stream pipeline project if needed to get a TransCaspian pipeline.

Issue of the flexibility of the market

Vanishing flexibility of delivery at a time of growing demand volatility is another regulatory threat to security of supply. At present Gazprom is selling something more than gas: security of deliveries as well as a highly valuable product for the whole industry namely flexibility of the deliveries. In many cases flexibility implies revision of the daily nominations 3 to 4 times over a gas day, depending on the volatility of demand. With the new legislation in place, all market participants need to adapt to the new environment. Vertical disintegration leads to competition for transit capacity. “Use-it-or-lose-it” procedures and bundled capacity products are instruments rendering access to pipelines easier. But a shipper, as a consequence of loosing guaranteed access to pipelines, is forced to decrease flexibility of supply contracts or introduce minimum daily floors in order not to lose the previously booked capacity.

Unfair competition

Finally, competition enhancement policies have so far only divided European gas market participants. There are market participants who are able to source small volumes of gas on the hubs. These market players have no import contracts, bring no gas to Europe under longterm arrangements, and are not responsible for gas storage and delivery structuring. Most ridiculously: European reformists refer to these market dwarfs as price-makers. Advantages without responsibilities for this group of players results in unfair competition. It seems as if market reformists have the implicit aim of pushing importers out of business.

Conclusion

Europe has to do its best to make its market attractive to producers from third countries. Gazprom is not against structural reform aimed at increasing supply security, but this should be done in full understanding of the realities of the European gas market, in order to mitigate unintended side-effects. Perfect markets only exist in textbooks and the blind aspiration for an American-style hub model will undermine European supply security with catastrophic results for the EU’s economy. We need smart reforms.

Russian gas in European gas markets: a reality check

Over the past several decades the trade in natural gas between Russia and Europe has yielded benefits for all stakeholders. It enabled Europe to limit its use of coal (and thus carbon dioxide emissions), diversify its energy supplies, and satisfy increasing energy demand. For Russia, Europe was and still remains the largest gas export market. However, in recent years the ‘gas-relations’ between these parties have become a subject of great debate and distrust, caused by single events of gas supply disruption and changes in European energy legislation, unilaterally modifying the rules of the gas business. This article provides insight into the current developments in the European gas sector, positioning the role of current and future Russian gas supplies in European gas markets and illustrating the interdependence of both parties.

Nadja Kogdenko Energy Analyst Energy Delta Institute Kogdenko@energydelta.nl

The most important message from Figure 1 is the fact that all scenarios project an increase in global primary energy demand. In addition to Figure 1, Table 1 shows that fossil fuels (oil, coal and natural gas) will still remain the dominant sources of energy in 2035.

European gas supply trends

No matter how strong the wish to reduce energy demand, implement energy efficiency measures and limit the role of fossil fuels in the power generation sector, one thing is clear from existing forecasts: global energy demand will continue to grow.1 Every year the International Energy Agency (IEA) publishes the World Energy Outlook (WEO), including the most recent projections concerning global developments in the energy sector. With regard to energy demand, it is interesting to examine the three existing scenarios of the IEA (Figure 1) most applied by policymakers.

Table 1. World primary energy demand by fuel and scenario.1

European demand for natural gas has significantly increased over the last decades to 471 bcm in 2011, and is expected to reach 650bcm in 2020 and 680bcm in 2030. This increase is associated with the European Commission target of achieving a 20% reduction of the EU’s greenhouse gas (GHG) emissions by 2020, compared to the 1990 level. When used for power generation, natural gas emits only half as much CO2 emissions as coal and therefore its increased use can potentially contribute to reduction of GHG emissions (assuming that it replaces more carbonintense sources of fuel). Furthermore, the role of natural gas is expected to increase as one of the most efficient sources of back-up/supplemen tary power supply for intermittent renewable energy generation technologies, such as wind power. According to Rogers (2010), growth in natural gas demand was mainly based on domestic gas supplies and complementary imports via pipeline since the 1980s (with a major contribution of Russian gas supplies) and in form of liquefied natural gas (LNG), see Figure 2. By 2008 pipeline imports represented 39% (excluding Norway), and LNG imports 10% of the European gas supplies. (Editor’s note: EDI offers Quarterly sub scribers a 10% discount on the upcoming course “Master Class LNG Chain.” To request your discount please contact Thiska Portena: portena@energydelta.nl.)

Figure 1. World primary energy demand by scenario.1

These three scenarios from the WEO, namely ‘Current Policies Scenario’, ‘New Policies Scenario’ and ‘450 Scenario’, are based on differing assumptions and therefore yield different results. However, all these scenarios contribute their own messages to policymakers, analysts and other stakeholders. Due to limitations of this article, the details of each scenario will not be discussed. You can read more about the analysis of various energy related scenarios in Klaas Kwakkel’s article in the December edition of the Quarterly.

Figure 2. Europe’s natural gas supply from 1970 to 2008

However, indigenous production of natural gas in Europe is predicted to decline in the face of increasing demand. Statistics of the IEA indicate that, of the 22 European OECD members, only Norway, Denmark and the Netherlands still possess sufficiently large gas reserves to cover domestic demand. This indicates that Europe is facing an increasing dependency on intercontinental gas import, which is expected to reach 80% by 2030.6 Based on the European gas import trends in the last couple of decades, Russia is more likely to play an important role in securing Europe with natural gas supplies even though the share of nonRussian imports is also predicted to increase.

Russian gas in Europe

According to the IEA’s WEO 2011, Russia holds 26% of world’s recoverable natural gas resources. Even though reserves are often located in remote regions with harsh climates, total Russian gas production is expected to increase from 637 bcm/year in 2010 to 690 bcm in 2020 and 860 bcm in 2035,1 emphasizing the lasting role of Russia as a major energy producer and exporter in the global energy arena. In 2010, Russian gas production represented about 20% of global production, and it accounted for about 18% of world’s gas export.5 The EU currently is one of the world’s largest energy markets, and it is still Russia’s most important gas export market. Besides Norway, which is the second-largest pipeline gas supplier (covering close to 20% of European gas consumption), Russia is the largest gas supplier to Europe. In 2010, Russian production accounted for 34% of European gas imports, but this share has steadily declined from 50% in just one decade.1 This is related to the diversification of gas supply routes to Europe (i.e. increase in LNG supply in Europe), European gas market liberalization and reduced industry needs for natural gas as a result of economic recession. Even though Europe and Russia share mutual benefits with regard to natural gas import/export, ‘gas-relations’ between these parties have become rather strained in recent years. On one hand, there were several gas supply disruptions from Russian side, as a result of various disputes between Russian gas supplier Gazprom and Ukrainian oil and gas company Naftogaz over natural gas supplies, prices and debts. More specifically, in 2005 Russia claimed that the Ukraine was not paying for delivered gas, but diverted it from the volumes intended to be exported to the EU via its transit pipeline. At first the Ukraine denied this accusation, but later admitted that some gas supplies intended for Europe were used for domestic needs. As a result Russia cut off gas supply passing though Ukrainian territory on January 1, 2006. After four days a preliminary agreement was achieved between Russia and the Ukraine, and supply was restored. The situation was stable until 2007, when new disputes over Ukrainian gas debts began. This disagreement reached its culmination in 2009, resulting in a major drop (up to complete cut-off) in gas supplies to 18 European countries receiving Russian gas though Ukrainian transit routes.7 Notably, Europe also made a contribution to the exacerbation of the ‘EU-Russia gas relationship’ through changing its energy legislation and modification of the ‘rules of the game’. European gas markets are currently undergoing major restructuring driven by EU legislation aimed at enhancing competition, security of supply, ownership unbundling* and lowering the barriers to entry with the ultimate goal of integrating all national markets into a single European gas market.8

According to Jong et al. (2009), both pipeline gas and LNG are supplied to Europe mainly through long-term contracts (where Russia plays a significant role) priced-indexed to oil products. However, in the last couple of years the share of so-called spot markets (i.e. short-term flexible trade, imposing freedom of contracts) is steadily increasing. These spot markets operate next to the ‘traditional’ pipeline and LNG markets creating a so-called ‘hybrid market’. In such a ‘hybrid market’ structure, spot prices currently represent a relatively small part of the wholesale market, while oil-indexed prices account for the rest of the market.8 Mr. Komlev discusses this issue of a hybrid pricing market in more detail in his article in this edition of the Quarterly. In spite of the changes in European gas markets and the EU ambition to enhance its security of supply, 13 European countries** still heavily rely on one single gas transit route and a total of 17 countries receive more than 80% of their gas imports from Russia. Even though some central and south-eastern European countries may gain access to alternative pipeline supplies from the Caspian region, LNG supplies and begin domestic production of shale gas (discussed later), so far the EU failed to ensure even the basics for the liberalized and secure gas market: sufficient gas transport infrastructure. Strangely enough, even with this situation in place, it seems as though the EU often ‘uses’ Russia as its ‘last resort’ supplier. In this context, the EU’s Third Energy Package (EP) plan contained a so-called “Gazprom Clause” demanding that companies from non-EU countries wishing to invest in the EU gas sector should comply with the same unbundling requirements in their ‘home land’ as those placed on EU companies.9 A violation of this provision could result in penalties for the investor country and has a direct impact on the costs and risks the external supplier must take into account. This clause has a particular impact on Russia, since it controls an increasing amount of gas infrastructure in Europe. Russia is currently trying to open a dialogue with the European Commission about how Russian interests could be respected within the current EU legislation, however these talks have so far not resulted in an agreement. As a result of this situation, it is questionable to which extent Russian-EU gas cooperation could expand in the future.10

Diversification of Russian gas supplies

In addition to developments in the European gas sector it is also interesting to examine ongoing activities in the Russian gas sector with regards to Russian gas supplies to the EU. The Russian Unified Gas Supply System (UGSS), owned by Gazprom, is the world’s largest gas transportation system and is comprised of 159,500 km of gas trunk pipelines. With regard to gas exports, all Russian gas reached Europe (historically) via transit countries, as mentioned earlier. Based on recent gas supply-disruption events, Russia took measures with the aim of diversification of its gas export routes to Europe in order to diminish dependence on the Ukraine as the key transit country. Starting in the beginning of 1999 with the launch of new pipelines though Belarus (Yamal-Europe) and across the Black Sea to Turkey (Blue Stream), the share of Russia gas transiting the Ukraine has decreased from over 90% to about 70% today. With the commissioning of the Nord Stream project in 2011/2012 (bringing gas to Europe through the Baltic sea and Germany) this share will fall even further. Considering the growing need for natural gas in Europe and a willingness to eliminate the risk of disruption events, Russia proposed another project aiming at diminishing Ukraine’s role as the transit

* Ownership unbundling is one of the core elements of the Third Energy Package of the EU, which is a legislative package for an internal gas and electricity market in the EU. Adopted in August 2009, the Third Energy Package included terms and conditions (with regard to gas markets) for the co-operation of national regulators and mainly for the unbundling of gas supply and production from transmission activities.4 ** Based on WEO (2011) data, countries relying for more than 80% on Russian gas are: Armenia, Belarus, Bosnia and Herzegovina, Bulgaria, Czech Republic, Estonia, Finland, Latvia, Lithuania, FYROM, Moldova, Serbia and the Slovak Republic.

country even further: the South Stream pipeline. This pipeline is planned to run under the Black Sea from the eastern Russian Black Sea coast to the Bulgarian coast. If built according to the schedule announced by project sponsors there would be a major shift in the pattern of gas flows to Europe,1 eliminating the use of existing routes though Ukraine and possibly decreasing utilisation of transit routes via Belarus (see figure 4). Figure 4 also shows that, besides the creation of ‘diversification alternatives’, these new routes will increase Russian export capacity.

Figure 4. Projects gas flows from Russia to Europe and potential growth in gas-export pipeline capacity*.1

It is evident that Russia is making large efforts and investments to provide Europe with more secure supplies of natural gas, and retain its position in European gas markets. Europe, on the other hand, often sees the situation from a different perspective and perceives supply route diversification from the Russian side as a threat. However, politicians in Europe should recognize the fact that their constituents require stable and secure gas supplies (especially in cold winters as experienced in February 2012) and that cooperation with Russia via different supply routes yields mutual benefits. From an ‘outside-Russia’ perspective, there are several discussions ongoing regarding the potential impacts of American shale gas on European gas markets. With indigenous production of shale gas in America, dozens of LNG cargoes that were originally destined for the US market are now redirected to Asia and Europe, resulting in increased gas volumes on spot markets. The question is, however, how reliable are these supplies and for how long will they last? One might forecast that the US will turn into a natural gas exporter, delivering its shale gas to global energy markets, but others argue that Europe is about to begin production of its own shale gas. However, based on the analysis of various literature sources, it can be concluded that the development of shale gas in Europe will take longer than in the US, and the occurrence of European shale gas revolution is still questionable. This is partly due to the time needed to gain expertise, but there are a variety of other challenges including geology, significant equipment and infrastructure shortages, high population density, lack of regulations and public opposition with regard to the environmental impacts of hydraulic fracturing. Shale gas exploration activity is ongoing in Europe but the results obtained so far are not very promising.

Last but not least, European ambition to diversify its supply routes through efforts such as the proposed Nabucco project does not imply significant reduction of risk related to gas supplies. This is mainly due to the fact that the new gas sources are located in politically unstable regions, such as the Middle East, Persian Gulf and Africa, and because there are great uncertainties regarding the amount of gas that can be expected from new suppliers (either though a pipeline or as LNG).11 No gas volumes are contracted yet between Europe and these regions, and no investments will be made prior to actual agreements. There is another important thing Europe should be aware of: even though it is still the largest gas export market for Russia, it is not the only market. Russia is showing an increased interest in Asian markets, particularly in China. According to the WEO 2011, the share of Russian gas in the Chinese energy import mix is projected to rapidly grow after 2015, reaching 10% in 2020 and 35% in 2035 (representing 15% of total Chinese gas consumption in 2035) and providing Russia with diversity of markets and revenues. In order to justify further investment in Europe, Russia must first have some clarity about the EU’s long term strategy. The main gas fields in Russia are nearing their production decline and in case Europe is to remain Russia’s key export market this decline will need to be compensated by investment in the development of new fields and increased production. Considering the many uncertainties for Russia with regard to EU legislation and future gas demand, Russia has set its current strategic priority to “maintain its position on the European market while decreasing its proportional dependence on European customers by increasing the share of its exports going to Asia”. The latter may have large implications on European gas supplies in the future. Taking into consideration all the issues discussed above, Europe should carefully consider its current standpoint with regard to the role of Russian gas supplies in European gas markets.

Concluding remarks

European gas markets are undergoing restructuring and changes, and Russia is frequently seen as a supplier of ‘last resort’. Europe is running out of its own gas supplies, while the demand for this commodity is expected to increase in the future. Based on historical events and gas supply disruptions, Europe is searching for new gas suppliers and supply routes and has hope for the indigenous production of shale gas. Nevertheless, this does not reduce risks associated with security of gas supplies and involves a high range of uncertainties. Russia remains the only country in the world with a large gas resource base. By diversifying its own gas supply routes to Europe, Russia is likely to play a crucial role in meeting the anticipated growing gas demand of the EU with increasing security of supply and it seems rather obvious that cooperation between Europe and Russia is of mutual interest.

* The dates for commissioning of South Stream are the planned dates indicated by the project consortium and are not IEA projections. ** Projected gas flows are from the New Policies Scenario and include exports to the European Union, to other OECD Europe and southeast European countries, but exclude Ukraine and Belarus.

References

1 International Energy Agency (2011). World Energy Outlook 2011. 2 Eurogas (2012). Press release: More customers, consuming less gas, in 2011. Available at http://www.eurogas.org/uploaded/Eurogas%20 press%20release%20on%20More%20customers,%20consuming%20 less%20gas,%20in%202011.pdf 3 CERA (2010). Multi-client study. Natural gas long-term supply and demand outlooks to 2035. Cambridge Energy Research Associates. 28 October 2010 4 Rogers, H.V. (2010). LNG trade-flows in the Atlantic Basin: trends and discontinuities. Oxford Institute for Energy Studies. March 2010. 5 IEA Statistics (2011). Natural Gas Information ÂŠ OECD/IEA, 2011. 6 Bentek (2010). US Natural Gas Market Outlook: Technology Transforms and Industry. Presented to International Gas Union, Strategy Committee on February 26, 2010 in London. 7 Pirani, S., Stern, J, & Yafimava, K. (2009). The Russo-Ukrainian gas dispute of January 2009: a comprehensive assessment. Oxford Institute for Energy Studies. February 2009.

8 Jong, D, de., Linde, C, van der & Smeenk, T. (2009). The evolving role of LNG in the gas market. Published in the Global Energy Covernance: The New Rules of the Game. Global Public Policy Institute, Berlin. 9 European Parliament (2009). Third Energy Package gets final approval from MEPs. Available at http://www.europarl.europa.eu/ sides/getDoc.do?type=IM-RESS&reference=20080616FCS31737& language=EN 10 Eurasia Energy Observer (2011). The 3rd Energy Package and the concerns of non-EU gas producers. An interview with Dr. Andrey Konoplyanik. Available at http://www.eurasia-energy-observer.com/ news/new/interview-with-andrey-konoplyanik 11 Fattouh, B. (2011). Natural gas markets in the Middle East and North Africa. Oxford Institute of Energy Studies.

Fundamentals of Gas Strategy During this 5-day programme the participants will gain knowledge on strategy development and how to apply it in their organisation. After an introduction about the latest developments along the gas value chain, the participants will study strategic value and risk management tools. Besides theoretical lectures there will also be plenty of time to work on practical application of gained knowledge in case studies. This course is intended for professionals with a minimum of two years working experience in the energy industry who want to take a step further in strategic thinking and strategic development. Earlier editions proved to be very successful with participants from Chevron, Gazprom, RasGas, Sasol, E.ON Ruhrgas, PGNIG, DONG Energy, Gasunie, Nord Stream AG and many more. The next edition will take place 19 - 23 November in Groningen, the Netherlands. For information please contact Richard Sanders, sanders@energydelta.nl

The evolution of EU security of gas supply policy

Disclaimer: the views expressed in this article are those of the author and do not engage whatsoever the European Commission. Summary

Security of gas supply has gone a long way from initially appearing in 2000 as an element of the internal energy market to become a more fundamental pillar of the energy policy as developed in the March 2006 Green Paper and the March 2007 conclusions of the European Council. Although domestic crisis response mechanisms constitute the core of this policy, the existence of a meshed European gas transmission system and a coherent approach towards external suppliers are two other essential tools to ensure security of supply at national and European levels. Following a major gas supply disruption in January 2009, fortunately occurring during a period of lower demand due to the economic crisis, Member States finally recognized the need for a robust European approach based on adequate risk assessments, preventive action plans and emergency plans, duly concerted with their neighbours. This has been enshrined in the Regulation 994/2010 of the European Parliament and the Council, repealing the meaningless directive 2004/67. The regulation is now actively implemented by all the Member States and its positive results have been seen during the 2012 cold spell which stretched the EU supply situation more acutely than in January 2009. However, the current gas supply security architecture will need to be further strengthened to address the stronger need of flexibility of gas use particularly for power generation, together with increased sources of renewable energy, new uses of gas particularly in transport and the need for diversification of supply of some parts of the Union.

The development of the gas market in the Union and the need for security of supply

Although natural gas had been part of the European economy for 40 years, the intention to address gas security of supply on a harmonised European level appeared only in the early 2000s1. The Green Paper “Towards a European strategy for the security of energy supply”2 in 2000, was the first document to outline the core elements of a future European energy policy focusing mostly on demand reduction and the challenges posed by climate change, driven by Europe’s increasing import- and fossil fuel dependence. Security of supply considerations did not constitute a standalone policy. They were introduced along the lines of the internal energy market (liberalising the market, building up stocks), infrastructure (Trans-European Networks and interconnectors) and external relations (stable relationships with supplier countries and diversification). Directive 2004/67/EC itself was originally proposed with a strong emphasis on the internal energy market, considering security of supply

Peter Pozsgai Policy Officer European Commission, DG ENER peter.pozsgai@ec.europa.eu

as a tool to complete and ensure the functioning of the market. This approach completely changed3 through the adoption process and security of supply was “decoupled” from the tools of achieving an integrated energy market. In fact, it was the internal market that became the basic building block for supply security. The Directive however, could not create a level playing field and a coherent framework on the EU level. Diverse national security standards and instruments, varying roles and responsibilities of authorities and market players and different emergency measures were developed by Member States. Furthermore, the Commission had practically no power and could only monitor the situation based on national reports and convene the Gas Coordination Group in case of a major supply disruption. Member States were still not ready to accept regional coordination and an EU-level oversight and therefore security of supply remained exclusively in the national dimension. The inappropriateness of this approach was proven in the 2009 gas crisis. It was only in 2006, in the Green Paper on “A European Strategy for Sustainable, Competitive and Secure Strategy”4 where security of supply was identified in itself - along with competitiveness and sustainability as a cornerstone of European energy policy and became associated with solidarity and emergency response. The Green Paper and the subsequent Strategic Energy Review5 focused on the internal dimension of security such as crisis solidarity mechanisms, increased (strategic) gas stocks, physical security, new European gas hubs and investments in infra structure. In parallel, the objectives in the external dimension of energy security - such as diversification or partnerships with neighbouring, supplier, transit and main consumer countries - were further pursued. The Second Strategic Energy Review6 (SSER) examined the five main areas of the Action Plan7 via the prism of security. The core of security of gas supply became the internal measures to prevent and/or tackle a disruption, such as protecting physical security, fuel switching, interrupting interruptible consumers, releasing strategic stocks or maximizing imports. This was complemented by two more pillars: infrastructure development, and external relations. Today’s policy developments in the security of gas supply should be examined through the evolution of these three dimensions. The SSER took stock of the shortcomings of Directive 2004/67/EC and called for more harmonized security standards, predefined emergency measures, improved crisis response coordination, clarified compensation mechanisms and a more suitable threshold that would trigger EU action, briefly: a revised legal instrument on security of gas supply. After many years and numerous attempts to Europeanize the policy, two major events occured and made the Member States realize the merits of having coordinated action on the European level. Firstly, the economic crisis which intensified in the autumn of 2008

1 This is without prejudice to a Commission Communication (COM (95) 478) that can be regarded a forerunner, much ahead of its time. This Communication took stock of the gas sector supply-demand outlook, external relations, market developments and security of supply. Its proposals for EC level cooperation such as EC Emergency Guidelines, Mutual Assistance Agreements and Security Targets aiming for an overall level of security in the EC were ideas that materialized only 15 years later. 2 COM(2000) 769 3 While the original Commission proposal included 16 references to the internal market, the adopted version had only 6. 4 COM(2006) 105 5 COM(2007) 1 - An Energy Policy for Europe 6 COM(2008) 781 - An EU Energy Security and Solidarity Action Plan 7 These were infrastructure needs and diversification, external energy relations, stocks and crisis response mechanisms, energy efficiency and making the best use of the EU’s indigenous energy resources.

prompted the Commission to introduce the European Economic Recovery Plan8, which was endorsed by the European Council of 11-12 December 20129. Energy was identified as one of the strategic sectors that should receive stimulus to finance measures that rapidly address both the economic crisis and energy policy objectives. Within the framework of the European Energy Programme for Recovery (EEPR)10, the Commission financed 12 projects in the electricity sector and 31 in the gas sector, a total of €2.3 billion. Some of these projects, for instance new interconnections between Bulgaria and Romania or Bulgaria and Greece, or physical reverse flows from Austria and the Czech Republic to Slovakia, are “life-saving projects” for those Member States who depend on one single supplier and have no alternative supply routes. The swift and successful implementation of the EEPR projects strengthened the confidence in the Union’s infrastructure policy. The other - and even more important - driver was the gas crisis of 2009, which led to a full disruption of supplies for two weeks in January depriving EU Member States of 20% of their gas supplies (30% of imports). This demonstrated that Europe’s gas infrastructure was still not adequately interconnected, national measures were not efficient enough or did not exist at all to mitigate a disruption and that the EU was still too weak to defend its interests vis-a-vis third countries. The 2009 March European Council took a significant step and called for strengthening all three pillars of security of supply in line with the provisions of the SSER. The Commission was invited: - to propose an “EU Energy Security and Infrastructure Instrument”; - to put forward revised legislation regarding the security of gas supply and; - to present proposals for concrete actions for the development of the Southern Gas Corridor. Furthermore, it was the March 2009 European Council that endorsed the establishment of the Eastern Partnership - a vital tool to improve relations with gas suppliers and transit countries of Eastern Europe and the Caucasus - and urged the Council and the Parliament to conclude an agreement on the Third Package. The follow-up of the 2009 March conclusions was full and productive. The Commission presented its Energy Infrastructure Package11 and as its follow-up proposed a revised TEN-E instrument12, with the aim of signaling Europe’s immense investment needs in gas and electricity networks, to remove all barriers to building infrastructure and to mobilise private capital with Union funding and innovative financing schemes. Work started in 2012 in the regional groups to identify possible Projects of Common Interest that benefit more than one Member State. A new regulation for security of supply13 was proposed in July 2009, which was adopted in record short time, in first-reading in October 2010. As regards the external dimension, the Commission presented its communication on security of energy supply and international cooperation14 and a proposal for setting up an information mechanism with regard to intergovernmental agreements between Member States and third countries in the field of energy15. Because of the limited scope of this article only the regulation on security of supply is examined in detail.

The 994/2010 regulation as the first coherent binding framework for an EU level security of gas supply.

The Regulation entered into force on 2 December 2010 and it is currently the main tool within the Union to address security of gas supply concerns. During the negotiations memories of the 2009 crisis helped to achieve revolutionary improvements such as provisions directly applicable to natural gas undertakings, for instance the supply standard, or an obligation to notify the Commission about inter governmental agreements related to energy with third countries and the commercial agreements with third country suppliers in an aggregated format. Still, many proposals especially regarding Commission powers, which could have seemed justified by the experience of the crisis, were weakened or removed due to Member States’ reluctance. What are the main elements? The Regulation created a mandatory and common minimum level of preparedness for Member States with the infrastructure and supply standards. This helps to avoid free-riding by bringing Member States’ standards closer together and to establish a common, basic crisis response capacity. The obligation to carry out Risk Assessments, Preventive Action Plans and Emergency Plans guarantees that all countries systematically analyse their weaknesses and examine the possible mitigation options and remedies, should a disruption take place. The transparency of the Plans will ensure that all impacted countries as well as market players will be aware of the possible actions to be taken by a Member State and the roles and responsibilities of the different actors (government, national regulatory authority, natural gas undertakings etc.) in times of a crisis. The optimal balance of gas infrastructure capacities is encouraged via the N-1 standard and the development of physical bi-directional capacities at interconnection points between Member States is facilitated. This measure significantly contributes to the completion of the internal energy market by 2014 and connection of isolated markets to the common European system by 201516. Since the entry into force of the Treaty on the Functioning of the European Union, solidarity is explicitly invoked as a guiding principle in which Union policy on energy, including security of supply, should be developed. The first step towards solidarity should mean that no Member State takes actions that harm another Member State and furthermore, that national authorities and market players work together to ensure that their measures are mutually reinforcing each other instead of weakening them. The Regulation specifically addresses this by invoking checks and balances to prevent a Member State from unilaterally taking measures that harm its neighbours. In fact, neighbouring and possibly impacted Member States are consulted in the initial stage of drafting the Plans to ensure consistency and minimize the adverse effects of national measures. The Commission is also involved in consultation and has certain powers to verify the justification of the planned actions. A further - and more courageous - step in future solidarity would explore how, in an emergency, a Member State could temporarily relax its supply standards or actively use alternative fuels in order to free up gas supplies for its neighbour17.

8 COM(2008) 800 - A European Economic Recovery Plan 9 17271/1/08 REV 1 10 Regulation (EC) No 663/2009 of 13 July 2009 establishing a programme to aid economic recovery by granting Community financial assistance to projects in the field of energy 11 COM(2010) 677 - Energy infrastructure priorities for 2020 and beyond - A Blueprint for an integrated European energy network 12 COM(2011) 658 - Proposal for a Regulation of the European Parliament and of the Council on guidelines for trans-European energy infrastructure and repealing Decision No 1364/2006/EC 13 COM(2009) 363 14 COM(2011) 539 - Security of energy supply and international cooperation - „The EU Energy Policy: Engaging with Partners beyond Our Borders” 15 COM(2011) 540 16 EUCO 2/1/11 REV1 http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/119175.pdf 17 This however, should never mean endangering one’s own consumers or providing supplies below its market value. Solidarity comes at a price.

Testing the new framework during the February 2012 cold spell

The beginning of 2012 saw extremely cold weather conditions all over Europe for a prolonged period of two weeks. Gas consumption in six Member States reached historic levels18 and approached them in another six. Electricity demand also hit peaks. In parallel, supply limitations such as the problems with unloading LNG ships in Italy due to bad weather conditions or moderate slumps in gas supplies coming from Russia tightened the supply-demand balance, and the EU gas network and gas market proved its resilience. Italy and Poland declared “alert” level19, and only Greece declared “emergency”. for a limited period of time because of a simultaneous appearance of adverse conditions20. Market-based mechanisms all around the EU such as using reverse flows, swaps among TSOs and between shippers, increased withdrawals from underground gas storage and optimization and reshuffling of gas purchases within shippers’ portfolios generally maintained the supply-demand balance. Gas prices reacted promptly and in an adequate manner.

(Source: European Commission Market Observatory for Energy, DG ENER)

The scope of this article does not allow for an in-depth analysis of the cold spell, however the lessons learnt can provide valuable guidance for the future. An integrated, functioning and liquid internal energy market is essential for energy security, in which natural gas undertakings can react to price signals and gas can flow to areas with the highest demand. The solidity of a 500 bcm gas market outweighs the potential of any national measure that can be mobilized for security of supply. The infrastructure projects implemented since 2009 have already improved preparedness but interconnection capacities should be further increased. Gas and electricity security of supply are becoming increasingly interconnected. With the increasing role of gas in electricity generation, suppliers and TSOs must be prepared for sudden consumption spikes.

Transparency of information is essential to assess where shortages excist and how they can be resolved. Clear and public information on flows and available capacities can prevent panic both on the commercial and political level. National measures can seriously impact security of supply in neigh bouring countries. The coordination between Member States is therefore essential and should take place if an emergency is likely to happen. Working level contact among crisis managers in national regulatory authorities and ministries should be established and maintained.

Conclusions

There is remarkable progress in all the three pillars of the Union’s gas security of supply policy. Regulation 994/2010 includes all the actions that should be realized in the next 5-10 years, therefore it must be implemented in full and on time. The effects of the measures could be amplified with stronger regional cooperation, for instance, as it takes place within the Pentalateral Forum or going even further, i.e. drawing up joint regional risk assessments and plans, an initiative that currently exists only in the Baltic States. An agreement on the renewed TEN-E instrument should pave the way for building all the missing links in the coming decade that would lead to increased liquidity on the European market and the elimination of internal bottlenecks. The work should continue on the field of external relations. The decision on the exchange mechanism regarding intergovernmental agreements between Member States and third countries in the field of energy will contribute to ensuring the compatibility of IGAs with Union law and coordination among Member States. Further political steps are needed if the EU wants to become a global player in energy. National external energy policy ambitions will need to take into account the Union position. This could lead to ultimate solidarity, where the combined weight of the Union could foster better representation of the interests of those who have less potential vis-a-vis third countries. In parallel to the political ambitions, the existing partnerships with third countries should continue and improve. We must not forget that all these measures address the challenges of the past and partly the present. They are in no way adequate to ensure security of gas supply of tomorrow, with an increasing level of renewable energy, a changing nature of gas use in electricity generation or potentially in transport. The focus will not be on strategic issues such as major pipelines or other infrastructure, or political relationships. More day-to-day problems such as efficient trading, adequate forecasting of fluctuating within-day gas demand and new products offered by suppliers will dominate the agenda. The gradual divergence between flows and commercial transactions will raise new challenges, i.e. it will be more difficult to have an exact overview of the gas flows and the utilization of different parts in the system or to track possible supplies to a Member State. These will mainly have to be tackled by market participants and policy makers will need to guarantee an appropriate regulatory framework (such as market transparency rules, prohibition of insider trading, measures to prevent cartelisation among suppliers), all elements now being developed through the network codes and the implementation of REMIT, within the known framework of the third package and the EU competition rules.

18 The actual peak gas demand overtook the 1-in-20 forecasts in Austria, Belgium, Greece, Hungary, Luxembourg and Poland. 19 As set out in Article 10 of Regulation (EU) 994/2010. 20 These included simultaneous record high demand in both gas and electricity, tight electricity supply in the region and problems with mobilizing alternative sources (low hydro levels and blocked transport of solid fuels) and reduced gas flows from Turkey.

Challenges in the definition of protected customers, a Northern European perspective Introduction

As a direct response to the Russian-Ukraine gas dispute of 2009, which revealed a lack of flexibility and solidarity in the European gas market, the European Commission created regulation No 944/2010 to provide new internal safeguards to protect EU Member States in the event of short term gas supply crises. The main purposes of this regulation are twofold; firstly it has been created to impose solidarity clauses on Member States, and secondly to enhance the level of interconnection between Member States.

Commission Influence

The regulation has given the European Commission a much greater influence on security of natural gas supply policy throughout Europe, and presents some interesting challenges to Member States regarding its scope and the unintended consequences in the event of a gas supply crisis. It has imposed a single standard upon all Member States regarding security of supply, but there are strong reasons to suggest that such an approach may not be conducive to improving the level of security of supply in Europe, and that Member States should have a greater influence on setting the supply standards that they adopt in the event of a supply crisis. The regulation has set two principal standards for Member States, an infrastructure standard and a supply standard. Regarding infrastructure there is an obligation for Member States to ensure that by the 3rd of December 2014, in the event of a disruption of the single largest infrastructure, they are able to satisfy total gas demand during a day of exceptionally high gas demand. It also requires reverse flows to be established in all cross border interconnections between EU countries by the 3rd of December 2013.1 Although the debate generated by these common infrastructure standards would provide an interesting topic for evaluation, this article is more concerned with the supply standard that has been imposed on Member States and the definition of a ‘protected customer’ in the regulation.2

Supply Standard

The regulation states that gas companies must be able to supply the country’s ‘protected customers’ under severe conditions in the event of a seven day temperature peak and for at least 30 days of high demand, as well as in the case of an infrastructure disruption under normal winter conditions. The aim of this regulation is to ensure that a Member State is in the position to supply protected consumers, identified as household and basic social services, for 30 days should the main import source be disrupted. Ramboll has, through its work with the Danish transmission operator Energinet, directly worked in the interpretation and imposition of the regulation in Denmark. It is the definition of a ‘protected customer’ adopted by the Commission that has caused debate and is the focus of this article. There was considerable negotiation between the Commission and the Parliament

1 2 3 4

Andrew Mcintosh Energy Economist Ramboll adm@ramboll-oilgas.com

on the definition of a protected customer, with the Commission eager to ensure that only household customers were protected in the event of a crisis. The definition was eventually extended to include small and medium sized enterprises, essential social services and district heating installations provided that they were unable to switch to alternate fuel sources. The regulation makes it optional for each individual Member State to adopt the extended definition or stick to the lowest common denominator of the household customer’s only definition. The definition of which customers remain protected in the event of a gas supply crisis has effectively split the European gas market with no additional provisions for disruption for electricity and industrial sectors in the event of a gas crisis, sectors that each account for 29% of European demand.3 This may provide Member States with considerable difficulties in their practical implementation in the time of a crisis.

Differing Interpretations, Same Customers

European countries have typically adopted quite differing definitions of who are protected customers and who are not. The built-in optionality of the regulation as well as the scope for varying interpretations of key terms by Member States has lead to a situation where the level of protection that is afforded to gas consumers is dictated by what side of the border they are on. Such an arbitrary level of protection for customers that may be the same in all respects other than what side of the border they are on cannot be what the Commission had envisaged when initially setting the regulation against the background of the Russian-Ukrainian gas dispute of 2009. Interesting examples are provided in the case ofß Denmark and Sweden, two countries who have traditionally opted for alternate levels of security of supply in their respective gas markets. Denmark, given the strategic role of gas in the country’s overall energy mix, has historically emphasized a higher level of security of supply through the provision of legal emergency supply rights to the Danish consumers. Only a minority of customers in Denmark chose an interruptible supply via voluntary auction based agreements. In Sweden gas only plays a regional or even local role in one corner of the country. In addition, the Danish electricity, heat and gas systems are more closely coordinated than that of the Swedish system, where gas plays a very limited role in the energy system and in power generation in particular. The gas supply infrastructure of both countries is fairly slim compared to many other European countries. Not surprisingly, Denmark has chosen, under the new legislative framework, a highly inclusive definition of a protected customer which effectively protects more than 50% of the Danish gas market, whereas Sweden in comparison has chosen a more limited definition of security of supply, with only household customers protected thus protecting less than 5% of the Swedish gas market.4 The differences in the protected and non-protected customers in the Danish and Swedish case highlight the challenges that the EU will have in harmonization of the gas system with such varying practices of applying the EU-regulation adopted and varying conceptions of who is to be protected in the event of a crisis.

Regulation (EU) No 994/2010 of the European Parliament and of the council of October, 2010 See Ensuring Success for the EU regulation on gas supply security, University of Cambridge Electricity Policy Research Group, 2010 Eurogas, Statistical Report, 2011. Gas in Denmark, Security of supply and development, Energinet.dk, 2011

Administrative burden

There has also proven to be challenges on the behalf of the Member States to find out how exactly individual customers are designated as protected or non-protected customers. Adam Elbaek, chief economist at the Danish transmission operator Energinet, says that the process of identification of protected customers is a complex one with a significant amount of information and evaluation potentially needed for each individual customer. The administrative effort that has been required to segment the consumers has been significant. In Denmark all 400,000 natural gas customers had to be evaluated and decisions based upon extensive analyses, including consultations with industry organizations and selected individual customers about their gas use, had to be taken about whether the customer was to be considered protected in the event of a crisis. In order to get this decision right a considerable amount of data is needed to guarantee the validity of the decision. Elbaek further remarks that in a country such as Denmark this administrative burden is considerable, but in larger countries such as Spain and Germany with millions of gas consumers the administrative burden must be extreme to make sure that secure decisions are made.

Practicality of imposition

There are also serious questions regarding the practicality of the regulation to be enforced in the event of a crisis. To monitor and possibly physically interrupt the individual customers that have been identified as unprotected in the event of a gas crisis, where the rapidness of the response is vital, is not a straight forward process. Elbaek comments that the effort needed in Denmark to ensure that the regulation could be practically undertaken in the event of a crisis was considerable. For the regulation to be enacted in the event of a crisis hourly metering data for all unprotected customers must be made available on-line to the responsible authority and technicians need to be on standby to physically turn the valve off for consumers that do not voluntarily interrupt their consumption when called upon. It is imperative that all unprotected customers are remotely metered to get the on-line data stream up and running within hours. Voice-response systems need to be set up to automate individualized mass communication in a stressed situation. This is laborious but manageable in a Danish context with approximately a hundred or so large unprotected industry customers. It would certainly be more complex in a setting with hundreds of thousands, or even millions of unprotected customers to enforce the regulation in the required level of detail and required rapid response time, thereby effectively securing the legal rights of the protected customers in the Member States own countries as well as in the neighboring EU member states.

Interdependence of energy forms

A final point on the supply standard remains the fact that, at present, the regulation does not include electricity generation as a protected sector in the event of a gas crisis, which can be challenging for countries based on the composition of their energy mixes. Natural gas is set to play an increasingly important role as a bridging fuel with future higher penetration of renewable energy in the electricity supply. Countries such as Denmark, the United Kingdom and Germany will have an increased supply of renewable energy in the form of wind power production in their electricity supply and natural gas will be used increasingly as a backup supply fuel for variable renewable power production. Natural gas power production is well suited to this function as it can be turned on and off quickly to balance intermittent wind power and provides an essential function in its flexibility for electricity generation. In the event of a gas supply crisis the availability of back up gas electricity supply generation may be jeopardised. This problem may become more acute considering the shutting down of older inefficient coal power production facilities and the limited availability of expensive fuel oil stocks in the event of a crisis.5 Under the present regulation gas powered electricity generation could be limited and this may put constraints not only on the gas market but also the electricity market, for if brownouts were allowed to occur these would render security of supply standards useless. Hardly any contemporary gas consuming device can operate without power to run the computerised control systems. The interdependence of each form of energy means that energy supply regulation should be considered from a more holistic stand point. Indeed, in response to the unexpected interruption of gas supply from Russia to Germany in February of 2012, the German Bundesnetzagentur (Federal Network Agency) claimed that in the event of a gas supply disruption the uninterrupted supply to gas powered plants must be guaranteed and that the shutdown of generation capacities in Southern Germany makes the situation regarding the regulation’s inflexibility more serious.6

Conclusion

It seems that the regulation will provide considerable challenges for Member States, not only in their evaluation of which consumers are deemed interruptible, but also in the practicality of enforcing the regulation in the event of a crisis. The definition of a protected customer should take into account each country’s own special situation and consideration will be needed regarding the role that gas has to play in each country’s energy supply. Fundamentally, the precondition of who is to be protected in the event of a security of supply crisis should be evaluated in cooperation with each Member State in order to account for the individual role of gas in each country’s energy market and mitigate potential risks in electricity supply. The position of Germany in stating that it deemed its gas power production as non-interruptible may be one of the first challenges to the regulation, but it may not be the last.

5 The majority of new combined-cycle gas turbines require middle distillate fuels in the alternative operation mode creates an additional economic hurdle for dual power generation and the supply of this type of distillate is also limited in Europe at present. 6 Report on Energy Supplies in Winter, Bundesnetzagentur, May 2012.

Managing the EU’s Gas Security of Supply: Not without Ukraine Abstract

Despite the EU’s growing gas import dependency the outlook for its gas security of supply (SoS) looks rather sound. However, and in contrast to the public perception, a significant risk stems from gas transit through the Ukraine, whereas Russia as source country of EU imports represents only a limited risk. Many EU policy makers ignore the fact that the construction of new pipelines alone will not suffice to manage the transit risk. A more active engagement with both Russia and the Ukraine is needed. In addition, the relatively high vulnerability of the EU’s Eastern member states in terms of SoS is often neglected.

Introduction

Although the EU’s gas import dependency is expected to reach 80% in the coming decades,1 its SoS looks rather safe. This is due to the fact that more than 80% of global natural gas reserves are located in areas that allow EU gas imports through pipelines.2 In addition, the rise of liquefied natural gas (LNG) offers the EU new opportunities for pipeline-free gas imports. Other recent developments such as the US shale gas revolution or the global financial and economic crisis strengthened the EU’s SoS even more, since they increased the amount of available LNG supplies while reducing the EU demand for gas in the short term.3 Thus, the EU will not run out of natural gas in the foreseeable future. However, the growing import dependency by nature implies that the EU will have to manage the risks to its SoS more actively in the future. Therefore, it will become increasingly important for the EU to evaluate different risk dimensions in order to be able to manage them successfully. The present article focuses on the external risks to the EU’s gas SoS, not denying that there are also considerable internal risks.

The security of gas supply and risk dimensions

According to Stern, gas security of supply is defined by source risk, transit risk, and investment and facility risk.4 Source risk is determined by factors such as the import dependency of a country, as well as the number and reliability of its gas suppliers. Also, diversification within the gas sector itself (pipeline gas, LNG, or shale gas) plays a significant role. Transit risk is a function of the number of transit countries and the divergence of interests of exporting, transiting, and importing countries. The lack of an overarching legal framework to resolve transit disputes may increase transit risk even further. Finally, investment and facility risk relate to the sufficiency of investments in the export, transit and import infrastructure necessary to ensure the long-term adequacy of gas supplies.

Anselm Ritter College of Europe anselm.ritter@coleurope.eu

Risk analysis

(1) Source risk: despite its growing import dependency, the EU faces only very limited source risk. Its main gas suppliers (Russia, Norway, and Algeria) can all be described as reliable and safe partners.5 As there have not been any serious supply shortages from either Norway or Algeria, the only existing source risk stems from Russia. However, both the current gas glut in Russia and its pipeline connection with the EU allow some optimism: “Russia really has nowhere else to sell its gas and certainly no other such rich market”.6 LNG imports are in general less prone to source risk compared to pipeline deliveries, as cancelled LNG cargoes can be easily compensated by other LNG supplies. Looking at EU member states individually, it is rather obvious that they all face different degrees of source risk since the origin of their gas imports and the share of their LNG imports vary significantly. Thus, while overall source risk to the EU is rather low, some individual member states in Eastern Europe face considerable source risk.7 (2) Transit risk: around 80% of Russian gas transits the Ukraine on its way to the EU, making the Ukraine the EU’s key transit country.8 The combination of many factors makes Ukrainian gas transit a delicate issue: the Ukraine’s antique pipeline system; the fact that it is itself a considerable gas consumer; and most importantly commercial and political disputes between the Ukraine and Russia regarding gas transit.9 Again, the overall EU picture is different from the SoS situation in individual member states. Some Eastern member states rely especially on Ukrainian gas transit which was demonstrated by the 2009 gas crisis when they were seriously affected by supply shortages. (3) Investment and facility risk: the global financial and economic crisis has led to a reduction of all kinds of investments in the gas industry in general and the upstream and transit sector in particular. While it is nearly impossible to measure the extent of uncertainty and the impact it will have in the end on the EU’s SoS, it is clear that this risk dimension has, more than ever in the past, the potential to jeopardise the EU’s longterm SoS. Targeted investments in Russia’s upstream and Ukraine’s transit sector would help to significantly limit the investment and facility risk. However, both Gazprom and Naftogaz are not only financially unable to make these investments but so far also reject foreign investors, thereby clearly limiting the EU’s means to control this risk dimension. Again, all member states do not face the same investment and facility risk. Most affected are the EU’s eastern countries that import large amounts of their gas from Russia with transit through Ukraine.

1 2 3 4 5 6 7

F.-L. Henry, “Europe’s Gas Supply Security: Rating Source Country Risk”, CEPS Policy Brief, no. 220, Brussels, Centre for European Policy Studies, 2010, p. 4. A. Behrens, “Learning from the Crisis: A Market Approach to Securing European Natural Gas Supplies”, CEPS Policy Brief, no. 183, Brussels, Centre for European Policy Studies, 2009, p. 2. A. Honoré, “Economic recession and natural gas demand in Europe: what happened in 2008-2010?”, NG 47, Oxford, The Oxford Institute for Energy Studies, 2011, p. 14. J. Stern, Security of European Natural Gas Supplies: The Impact of Import Dependence and Liberalization, London, The Royal Institute of International Affairs, 2002. Henry, op.cit., p. 1. In 2008, 46% of the overall gas imports came from Russia, while 27% were imported from Norway and 20% from Algeria. A. Riley, “The Coming of the Russian Gas Deficit: Consequences and Solutions”, CEPS Policy Brief, no. 116, Brussels, Centre for European Policy Studies, 2006, p. 8. In 2005, Finland, Estonia, Latvia, Lithuania, Romania, Bulgaria and Slovakia faced a 100% dependence on Russian gas imports. F. Umbach, “Global energy security and the implications for the EU”, Energy Policy, vol. 38, no. 3, 2010, p. 1236. 8 A. Macintosh, “Security of Europe’s Gas Supply: EU Vulnerability”, CEPS Policy Brief No. 222, Brussels, Centre for European Policy Studies, 2010, p. 5. 9 Ukraine’s efforts to become less dependent on Russian gas by boosting renewable, its LNG regasification capacity and the exploration of shale gas might have a positive impact on the transit risk in the long term.

Risk management

As transit risk and the Ukraine clearly present the greatest threat to the EU’s SoS, the focus of a risk management strategy should be here. For the EU to manage the transit risk posed by the Ukraine, it should (1) continue to support new pipeline routes circumventing the Ukraine, (2) strengthen the European Energy Community Treaty which the Ukraine joined recently, and (3) promote a tripartite gas pipeline consortium involving the EU, Russia and the Ukraine. (1) New pipeline routes: the second branch of the North Stream pipeline will go online in 2012/Q4, allowing (in theory) a reduction of Ukrainian transit by 45%, together with the first branch. However, the new gas supplies will be directed to Northern Europe and not to Eastern Europe where countries face the biggest transit risk. Also, the South Stream pipeline is expected to be operational in December 2015 with a capacity to replace around 50% of Ukrainian gas transit. However, Serbia would be involved as transit country which may trigger new transit risks. In addition, the upgrade of the EU’s LNG regasification capacity could be a further instrument to accommodate seasonal supply shortages. However, even all these projects together will not fully replace Ukrainian gas transit and would imply higher gas prices. Some Eastern European countries in particular will continue to be highly dependent on gas supplies directed over Ukrainian territory. Moreover, the EU’s growing demand for gas as well as the fact that Russia does not want to replace Ukrainian transit but rather take over its pipeline system imply that gas transit through the Ukraine cannot be avoided but in fact needs complementary risk management tools. (2) The European Energy Community: the Energy Community clearly provides a unique opportunity to improve the EU’s transit risk. The Ukraine’s full membership since February implies the inclusion of the Ukraine in the EU energy market in the long term. This would allow negotiating the transit issue not between Ukraine and Russia - subject to repeated gas disputes - but shifting it to the EU-Russia level. Similarly, it has been argued that the handing-over of the ownership of the gas from Gazprom to European companies could be shifted from the UkrainianEuropean to the Ukrainian-Russian border. However, the fate of the Energy Community could be stalled by Moscow’s reluctance to accept the takeover of the EU acquis by the Ukraine. (3) A tripartite gas transit consortium: the suggested gas consortium seems at first glance to be the best option to deal with the transit issue, bringing together Russia as gas supplier, the Ukraine as gas transmitter and the EU as gas consumer. For the EU, comprehensive reforms in the Ukrainian gas market would improve Naftogaz’ ability to meet its financial obligations vis-à-vis Gazprom, thereby tackling the root of Russian-Ukrainian gas disputes. Moreover, Russia would rethink its strategy of making the Ukraine appear as an unreliable transit country for the EU, hoping for the EU’s support for new pipeline projects that circumvent Ukrainian territory. Without a doubt, this strategy played an important role in both gas crises in 2006 and 2009. As in the case of the Energy Community, the success of a possible consortium would depend on Russia and whether it approves a legally binding dispute settlement agreement.

Summary

The diversification of import routes can only be considered an additional instrument to address transit risk. While both the Ukraine’s membership

in the Energy Community and the prospect of a tripartite gas consortium have the potential to considerably reduce transit risk in the long term, Russia’s tolerance will be decisive for the success of both projects: if Russia will be reluctant to accept the Ukraine’s reform process within the Energy Community, it is likely to put pressure on the Ukraine that will result in no long-term improvement of the EU’s SoS. Similarly, in order to be successful, the consortium idea will need a strong legal framework that Russia is not likely to support. All of the EU’s member states face different SoS levels. While this may require individual risk management by national governments, the EU should make sure that these national risk management strategies are always consistent with the EU’s overall risk management. Moreover, the EU can clearly provide an added value by encouraging cross-border policies that improve SoS in member states of Eastern Europe. Here, some member states face relatively high source, transit and facility and investment risk. By coordinating between member states, the EU can make sure that risk management is carried out in the most cost-efficient way.

Biography

Anselm Ritter has studied International Relations and Diplomacy Studies at the College of Europe (Bruges). He wrote his MA Thesis on “The EU’s gas security of supply: risk analysis and management” after the global financial and economic crisis. Currently, he is working as a Consultant in Brussels.

Bibliography

- Behrens, Arno, “Learning from the Crisis: A Market Approach to Securing European Natural Gas Supplies”, CEPS Policy Brief, no. 183, Brussels, Centre for European Policy Studies, 2009. - Emerson, Michael, “Time for a Tripartite Gas Pipeline Consortium for Ukraine”, CEPS Commentary, Brussels, Centre for European Policy Studies, 8 June 2010. - Henry, François-Loïc, “Europe’s Gas Supply Security: Rating Source Country Risk”, CEPS Policy Brief, no. 220, Brussels, Centre for European Policy Studies, 2010. - Honoré, Anouk, “Economic recession and natural gas demand in Europe: what happened in 2008-2010?”, NG 47, Oxford, The Oxford Institute for Energy Studies, 2011. - Macintosh, Andrew, “Security of Europe’s Gas Supply: EU Vulnerability”, CEPS Policy Brief, no. 222, Brussels, Centre for European Policy Studies, 2010. - Riley, Alan, “The Coming of the Russian Gas Deficit: Consequences and Solutions”, CEPS Policy Brief, no. 116, Brussels, Centre for Europeafn Policy Studies, 2006. - Shapovalova, Natalia, “The battle for Ukraine’s energy allegiance”, FRIDE Policy Brief, no. 55, Madrid, Fundación para las Relaciones Internacionales y el Diálogo Exterior, 2010. - Stern, Jonathan, Security of European Natural Gas Supplies: The Impact of Import Dependence and Liberalization. London, The Royal Institute of International Affairs, 2002. - Umbach, Frank, “Global energy security and the implications for the EU”, Energy Policy, vol. 38, no. 3, 2010, pp. 1229–1240. - Unihovskyi, Leonid et al., “Diversification of sources and routes of gas supply: the choice for Europe and Ukraine”, National Security and Defence, no. 6, Kiev, Razumkov Centre, 2009, retrieved 1 May 2011, http://www.uceps.org/eng/files/category_journal/NSD110_ eng_3.pdf

10 L. Unihovskyi, et. al., “Diversification of sources and routes of gas supply: the choice for Europe and Ukraine”, National Security and Defence, No. 6, Kiev, Razumkov Centre, 2009, pp. 60, 61. 11 Henry, op.cit., p. 4. 12 N. Shapovalova, “The battle for Ukraine’s energy allegiance”, FRIDE Policy Brief, no. 55, Madrid, Fundación para las Relaciones Internacionales y el Diálogo Exterior, 2010, p. 3. 13 M. Emerson, “Time for a Tripartite Gas Pipeline Consortium for Ukraine”, CEPS Commentary, Brussels, Centre for European Policy Studies, 8 June 2010, p. 2.

Opportunities and Obstacles for European Alternatives to Russian Natural Gas Over the past decade, some European and U.S. officials have grown increasingly concerned about Russia’s potential to manipulate natural gas supplies to Europe for political reasons. Russia’s “National Security Strategy to 2020,” released in May 2009, stated that “the resource potential of Russia” is one of the factors that has “expanded the possibilities of the Russian Federation to strengthen its influence in the world arena.” Baltic, Central and Eastern European countries that rely almost exclusively on Russian gas imports have been particularly vulnerable to supply disruptions. However, despite its dependence on Russian gas, Europe does rely on several other sources of imported gas that could be expanded with the help of the United States and Europe.

Michael Ratner, Paul Belkin, Jim Nichol, and Steve Woehrel Analysts US Congressional Research Service

a willingness to go to great lengths to maintain its European market share of natural gas.

Figure 1. 2011 EU Natural Gas Imports

Notes: For primary energy, which is the base source of energy used to produce electricity and perform other work, Russian natural gas did not comprise greater that 50% for any EU country. Source: BP Statistical Review of World Energy 2012. Notes: The United States re-exported a minimal amount of LNG to Europe in 2011 and is included in Other. Units are billion cubic meters (bcm).

Russia’s Angle

Europe is the most important market for Russian natural gas exports, a calculation that Moscow must consider when developing its political relations with Europe. The revenues generated by natural gas trade are vital to the ruling Russian elite. As a state-controlled firm, Gazprom has the closest possible links with top Russian leaders (Russia’s Prime Minister and former President Dimitri Medvedev served as president of Gazprom). The personal and political fortunes of Russia’s leaders are also closely tied to Gazprom, whose profits constitute about 10% of Russia’s GDP. Russian government revenues (in 2010, 46% of total Russian government revenue came from oil and natural gas taxes) and Russia’s economic revival in the Putin/Medvedev era has been heavily dependent on the massive wealth generated by energy exports to Europe. The opening by Russia of the Nord Stream pipeline and the proposed South Stream pipeline highlight a challenge Europe faces with diversifying its natural gas supplies: Moscow has demonstrated

Potential Alternative Supplies

Two regions—Central Asia and North Africa—hold great potential to produce more natural gas than they currently do and, given their proximity to Europe, offer possible alternatives to Russian supplies. Central Asia has been a focus of U.S. and European efforts to provide Europe an alternative to Russia for natural gas through the southern corridor, but a lack of success may be decreasing U.S. interest. North Africa, which already has multiple pipelines to Europe and LNG export terminals, could benefit from a reassessment of U.S. and European policy and become a more viable alternative for Europe. Beyond Central Asia and North Africa, LNG liquefaction capacity has grown tremendously over the last few years, mainly in Qatar, and more capacity is projected to be added globally. The United States has multiple proposed LNG liquefaction projects at various stages of regulatory approval. Discoveries in the Eastern Mediterranean and East Africa, much greater than projected domestic consumption levels, raise the possibility of future LNG projects that would be in close proximity to Europe and add to the world market. The addition of more liquefaction capacity will provide the EU with other alternative suppliers even though Europe’s ability to use LNG is currently constrained by a lack of infrastructure, particularly storage.

1 The authors are analysts with the U.S. Congressional Research Service, part of the Library of Congress, but the views and opinions in this paper represent those of the authors and not the Congressional Research Service, the Library of Congress, or the United States Congress. 2 The text of the National Security Strategy can be found at the website of the Russian National Security Council at http://www.scrf.gov.ru/documents/99.html. 3 Ahmed Mehdi, “Putin’s Gazprom Problem,” Foreign Affairs, Web Edition, May 6, 2012.

Central Asia: Great Expectation Competition from Asia, particularly China, for Central Asian exports could limit supplies available for Europe. China increasingly has relied on gas imports from Turkmenistan and other regional states, including expansion of the capacity of the Central Asia-China gas pipeline. Turkmen natural gas fields could help meet both Pakistan’s and India’s growing energy needs and provide significant transit revenues for both Afghanistan and Pakistan. The more Central Asian gas goes elsewhere but Europe, the greater Russia’s position in Europe.

North Africa: Transitions May Bring Opportunities Difficult business environments and high domestic demand, prompted by subsidies, have limited development of North Africa’s natural gas resources. Recent political unrest and government changes in Egypt and Libya pose an opportunity for each to change its policies to promote expanded development of natural gas resources. However, both newly elected governments may take time to develop new long-term energy policies.

Source: BP Statistical Review of World Energy 2012. Source: BP Statistical Review of World Energy 2012. a: Azerbaijan does export natural gas to Turkey, which then sends some of it to Greece.

Azerbaijan: The EU’s Best Hope For New Natural Gas Supplies? Successive U.S. Administrations have maintained that exports from Azerbaijan could boost energy security for European customers currently relying more on Russia. According to U.S. Ambassador Richard Morningstar, Azerbaijani natural gas “is absolutely essential to the development of the Southern Corridor, including for a revised version of the Nabucco pipeline.”4 Of importance to U.S. foreign policy is Azerbaijan’s relationship with Iran, which includes a minor Iranian stake in the Shah Deniz gas project and Iranian natural gas shipments to Azerbaijan’s Nakhichevan exclave, Azerbaijani territory that is situated between the Armenian controlled area of Nagorno-Karabagh and Armenia proper. U.S. sanctions against Iran have not affected development of Azerbaijan’s Shah Deniz field or broader U.S.-Azeri relations, but future U.S. legislation may not rule out this option. Turkmenistan: European Orientation? Turkmenistan’s drive for alternative export routes for its natural gas has pitted it against some of the other Caspian countries. In September 2011, the EU approved opening talks with Azerbaijan and Turkmenistan to facilitate an accord on building a trans-Caspian natural gas pipeline. Russia and Iran oppose the building of trans-Caspian pipelines, claiming that the delineation of Caspian Sea borders and the use and protection of maritime resources must first be worked out by the littoral states. Turkmenistan’s claims against Azerbaijan regarding some offshore oil and natural gas fields also have stymied a formal agreement on a transCaspian pipeline between the two countries. In mid-October 2011, then Russian President Medvedev warned again that all the littoral states would need to agree to a trans-Caspian pipeline. The Turkmen Foreign Ministry pointed out that several bilateral agreements on sea use had been concluded by Russia and others and repeated Turkmenistan’s argument that it similarly could reach an agreement with Azerbaijan on a pipeline.

Algeria: Unconventional Resources May Be Its Future According to a study by the U.S. Energy Information Administration, Algeria may hold shale gas resources much greater than its conventional reserves, which are substantial. Depending upon the development of its unconventional natural gas resources and its conventional resources, Algeria could become a more significant natural gas producer and exporter. However, a difficult business environment may continue to limit its potential. Libya: Opportunity is Knocking Post-Qadhafi Libya may have the greatest potential to increase natural gas exports to Europe once a new regime is established and possibly a new state oil and natural gas company. The civil war halted natural gas production, but production has since resumed and appears to be recovering more quickly than most analysts had forecast. Libya has one LNG export terminal and one natural gas pipeline to Europe, Greenstream, which was closed during the recent unrest. Greenstream has operated close to capacity, so to significantly increase exports to Europe would require an additional pipeline to be constructed or the existing pipeline to be expanded. Libya’s LNG exports were minimal and well below capacity through 2011. Eastern Mediterranean: A Recent Development Although years away from production and export, recent announce ments of natural gas discoveries in the eastern Mediterranean by Israel and Cyprus, may open a new source of European natural gas. Initial estimates pose a scenario in which Israel and Cyprus could become natural gas exporters, with Europe as the largest nearby market a likely recipient. Cyprus, which is an EU member and holds the EU presidency, currently does not consume any natural gas in its economy and would require much infrastructure to do so. Additionally, other countries in the region, including Lebanon, Syria and Turkey, may begin exploration efforts that could increase regional natural gas production. Although a potentially positive option for Europe, questions regarding development and delivery (pipeline vs. LNG) costs will become major factors of the region’s viability as a supplier.

4 U.S. Embassy, Baku, Media Advisory, Ambassador Richard Morningstar, Special Envoy for Eurasian Energy: Speech to Plenary Session of Caspian Oil and Gas Conference, June 8, 2011.

Possible U.S. LNG Exports: Pricing, Not Volumes, May Be Key

One growing alternative source of supply for Europe could be the United States. Analysts have already begun speculating on what a significant increase in U.S. LNG exports would mean to global natural gas markets, especially to Europe. Any volumes of LNG from the United States would benefit the overall market, including Europe, by offering a new supplier to consumers. For parts of Europe where the United States enjoys strong and friendly relations, especially the Baltic region and Central Europe, any decision to export U.S. LNG would be welcomed, though import capacity would need to be further developed. There are currently about fifteen proposed U.S. LNG export projects - approximately 190 bcm of capacity - at various stages in the regulatory approval process. However, one obstacle to implementing this is the U.S. statutory requirement that exports can only go to countries that have a free trade agreement (FTA5) with the United States. No EU country has a FTA with the United States. Pending completion of a report by the U.S. Department of Energy, due later this year, on the impact of LNG exports on domestic natural gas prices, no additional non-FTA approvals are expected. The earliest exports would likely commence would be 2015, with additional projects, assuming regulatory approval, being phased in over time. Projects would be phased in as each new project approved for export is evaluated against preceding projects for the impact on domestic prices. LNG exports, particularly to non-FTA countries, could be subject to congressional scrutiny, but thus far have attracted limited congressional interest. As the impact on domestic prices of LNG exports is examined in more detail, the congressional interest will likely rise or fall depending

upon the results. To date, there has been one congressional hearing on the topic, and only a few members of Congress have publically expressed interest for or against exports. The argument against exports focuses on the impact on domestic prices and exposing the United States to higher world prices. Proponents of exports, especially to Europe, emphasize free trade and open markets and cite the U.S. commitment to European energy security. At the moment it is difficult to see LNG exports becoming a significant issue although the European market will grow in interest. Additionally, other energy issues, such as the Keystone pipeline, hydraulic fracturing, and gasoline pump prices, will continue to receive more attention.

Conclusion: Opportunities Exist

Although all the alternative suppliers mentioned in this paper face hurdles in sending more gas to Europe, each also has great potential and could benefit from increased U.S. and European assistance in developing their resources. Even Central Asia, the focus of U.S. and European diversification policy, might actually contribute greater volumes, though less than planned, as part of a broader policy shift. Having alternatives, including Russian projects, has raised questions about the commercial viability of the southern corridor projects. North Africa, with its existing infrastructure, and the Eastern Mediterranean because of its geographic proximity, can be greater contributors to European diversification, but will require a more intensive focus from European and U.S. policy足 makers.

5 Free trade agreement countries include: Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, Korea, Mexico, Morocco, Nicaragua, Oman, Peru, and Singapore. The Natural Gas Act deems exports to FTA countries to be in the public interest and applications shall be authorized with modification or delay. Non-FTA applications require the U.S. Department of Energy to determine if the applications are in the public interest.

Finance, Risk and the Energy Value Chain This newly developed programme is one of our first Joint Excellence Programme and is organised in cooperation with PriceWaterhouseCoopers. This 5-day course teaches participants how to navigate financially and make decisions under uncertainty, and includes both theoretical and practical components. The morning session of each day will be spent exchanging the necessary knowledge on the topic of the day and the lessons learned will be applied in a case study, including Real Options. This programme is intended for financial professionals in the energy sector with 3 - 8 years working experience. It is especially interesting for controllers, internal accountants or those working within financial or strategy departments. This first edition will take place 5 - 9 November in Groningen, the Netherlands. For information please contact Richard Sanders, sanders@energydelta.nl

Liquid Markets: Assessing the Case for U.S. Exports of Liquefied Natural Gas

Charles Ebinger, Kevin Massy and Govinda Avasarala The Brookings Institution

NOTE: The following paper is an abridged excerpt of a full-length paper published by the Brookings Institution in May 2012.

becoming a significant exporter of LNG (see Figure 1 for a list of proposed and potential lower-48 LNG export terminals).

Less than a decade ago, the United States was facing a major shortfall in the supply of natural gas as declining conventional production and reserves were outpaced by rising demand.1 The situation was so acute that private companies, encouraged by federal-government policies, began constructing import terminals for LNG, which was regarded as the only way to meet growing demand. Since 2005, the situation has dramatically reversed. Driven by advances in exploration and production technology and a precipitous rise in the price of natural gas to 2008, the U.S natural gas sector has undergone a revolution as vast amounts of previously uneconomic “unconventional” resources in shale formations across the Northeast, Midwest, and South have been developed.

The United States already exports modest volumes of natural gas via pipeline to Mexico and Canada and in the form of LNG from the Kenai Terminal in Alaska to Japan. Several projects currently under consideration would involve the development of liquefaction facilities to enable the export of LNG in increased quantities. These proposed projects, some of which have been given partial approval by the federal government over the past year, are currently evaluated by energy and environmental regulators on a case-by-case basis.

Early estimates of the size of the unconventional gas resource have varied. However, it is clear to producers and end users alike that the increased available volumes of shale gas mean that there is far more potential for natural gas in the U.S. energy mix than previously estimated. While the domestic focus has been on the potential for increased natural gas use in the power, industrial, petrochemical, and transportation sectors, there is also increased interest among policy makers and private investors in the prospect of the United States

Supporters of these projects maintain that they will provide a valuable source of economic growth, gains from trade, and job creation for the United States. Opponents contend that they will raise domestic natural gas prices to the detriment of U.S. consumers and negatively affect U.S. energy security. The Brookings Institution’s Energy Security Initiative has undertaken a year-long study to assess the feasibility and implications of an increase in U.S. LNG exports. The report assesses the feasibility of LNG exports (the factors that are likely to have a bearing on the ability of the United States to export more gas) and the implications of significantly increased LNG exports from the United States.

Figure 1: Proposed/Potential North American LNG Export Terminals (as of February 28, 2012). Source: Federal Energy Regulatory Commission, Department of Energy

1 The 2005 Energy Policy Act demonstrated Federal government support for a streamlined LNG import process through both codification of the 2002 “Hackberry Decision” by the Federal Energy Regulatory Commission (FERC), which absolved U.S. LNG import terminals from open-access requirements and allowed them to charge market based rates; and by granting FERC exclusive authority to approve siting, construction, expansion and operation of such import terminals.

Feasibility

For exports to be feasible, several demand and supply-related conditions need to be met. On the supply side, adequate resources must be available and their production must be sustainable over the long-term. The regulatory and policy environment will need to accommodate natural gas production to ensure that the resources are developed. The capacity and infrastructure required to enable exports must also be in place. This includes the adequacy of the pipeline and storage network, the availability of shipping capacity, and the availability of equipment for production and qualified engineers.

On the demand side, LNG exports will compete with two main other domestic end-uses for natural gas: the power-generation sector, and the industrial and petrochemical sector. According to most projections, the U.S. electricity sector will see an increased demand for natural gas as it seeks to comply with policies and regulations aimed at reducing carbondioxide emissions and pollutants from the power-generation fleet. The U.S. Energy Information Administration (EIA) estimates that natural gas power plants will account for 60 percent of new electric capacity additions between 2010 and 2035.2 ICF, a consultancy that has modeled gas penetration in the electricity sector and has made projections based on EPA’s proposed regulations and the age of the existing coal power plant fleet, estimates that roughly 40 gigawatts (GW) will be retired by 2020, resulting in an increase in gas demand of between 1.6 and 2 tcf/ year.3 Cheaper natural gas in the industrial sector has the potential to lower the cost of petrochemical production and to improve the competitiveness of a range of refining and manufacturing operations. Advocates of natural gas usage in the transportation fleet - particularly in heavy-duty vehicles (HDVs) - see it as a way to decrease the country’s dependence on oil, although absent major policy support, this sector is unlikely to represent a significant source of gas demand. For increased U.S. LNG exports to be feasible, they will also need to be competitive with supplies from other sources. The major demand centers that would import U.S. LNG would be Pacific Basin consumers ( Japan, South Korea, and Taiwan, and increasingly China and India), and Atlantic Basin consumers, mostly in Europe. The supply and demand balance in the Atlantic and Pacific Basins and, therefore the feasibility for

natural gas exports from the United States, depend heavily on the uncertain outlook for international unconventional natural gas production. Recent assessments in countries such as China, India, Ukraine, and Poland indicate that each country has significant domestic shale gas reserves. If these reserves are developed effectively—which is likely to be difficult in the short-term due to a lack of infrastructure, physical capacity, and human capacity—many of these countries would dramatically decrease their import dependence, with negative implications for existing and newcomer LNG exporters. Detailed analysis of the foregoing factors suggests that the exportation of liquefied natural gas from the United States is logistically feasible. Based on current knowledge, the domestic U.S. natural gas resource base is large enough to accommodate the potential increased demand for natural gas from the electricity sector, the industrial sector, the residential and commercial sectors, the transportation sector, and exporters of LNG. Other obstacles to production, including infrastructure, investment, environmental concerns, and human capacity, are likely to be surmountable. Moreover, the current and projected supply and demand fundamentals of the international LNG market are conducive to competitive U.S.-sourced LNG.

Implications

While LNG exports may be practically feasible, they will be subject to approval by policy makers if they are to happen. In making a determination on the advisability of exports, the U.S. federal government will focus on the likely implications of LNG exports: i.e. whether LNG exports are in the “public interest.” The extent of the domestic implications is largely dependent upon the price impact of exports on domestic natural gas prices. While it is clear that domestic natural gas prices will increase if natural gas is exported, most existing analyses indicate that the implications of this price increase are likely to be modest (see Table 1). Natural gas producers will likely anticipate future demand from LNG exports and will increase production accordingly, limiting price spikes. The impact on the domestic industrial sector is likely to be marginal: to the extent that LNG exports raise domestic gas prices above the level at

2 EIA, April 2011a. p. 74 3 “Domestic Gas Usage in the Power Sector,” presentation by John Blaney of ICF to the Brookings Natural Gas Task Force, August 3, 2011. A previous ICF assessment projected 51 GW of retirements, but the newly proposed regulations have shown more flexibility than earlier proposals, and more coal plants are expected to remain online.

which they would have been in the absence of such exports, they will negatively affect the competitiveness of U.S. industry relative to international competitors. However, the competitiveness of natural-gas intensive U.S. companies relative to their counterparts is likely to remain strong, given the large differential between projected U.S. gas prices and oil prices, which are the basis for industrial feedstock by competitor countries. In 2005, the ratio of the price of oil to the price of natural gas was approximately 6:1, just below the 7:1 oil-to-gas price ratio at which U.S. petrochemical and plastics producers are globally competitive.4 That same year Alan Greenspan, then-Chairman of the Federal Reserve, noted that because of natural gas price increases “the North American gas-using industry [was] in a weakened competitive position.”5 Since then the price of natural gas has collapsed. In 2011, the oil-to-natural gas price ratio was more than 24:1. As European and many Asian petro chemical producers use oil-based products such as naphtha and fuel oil as feedstock, U.S. companies are more likely to enjoy a significant cost advantage over their overseas competitors. Further, LNG exports are likely to stimulate domestic gas production, potentially resulting in greater production of natural gas liquids such as ethane, a valuable feedstock for industrial consumers. According to a study by the American Chemistry Council, an industry trade body, a 25 percent increase in ethane production would yield a $32.8 billion increase in U.S. chemical production.6 To the extent that increased gas production linked to exports results in increased production of such natural gas liquids, they will benefit the petrochemical industry.

needed liquidity to natural gas consumers around the world, potentially improving the energy costs for consumers in LNG-dependent countries like Japan and India (See Figure 2 for a picture of the tightening global LNG market between 2015 and 2020).

LNG exports are also unlikely to result in an increase in price volatility. The volume of LNG exports is capped by the capacity limitations of liquefaction terminals. If liquefaction terminals are running at close to full capacity, an increase in international demand will do little to affect domestic demand for - and therefore domestic prices of - natural gas.

Source: Brookings analysis of Morgan Stanley research and data; IEA, EIA, ClearView Energy

The potential benefits of U.S. LNG exports relate to trade, macroeconomics, and geopolitics. Exports of natural gas would bring foreign exchange revenues to the United States and have a positive effect on U.S. balance of payments, although in the context of overall U.S. trade, the impact of LNG revenues are likely to be small. The construction, operation, and maintenance of LNG export facilities and related infrastructure will also likely lead to some, limited, job creation. Exports may also serve as a stimulus to continue and even increase production of natural gas, which may result in an additional supply of employment. With some domestic production—mainly dry gas with little liquid content— being suspended due to gas prices being too low for continued economic extraction, exports may serve as an important source of incremental demand to support necessary volumes to stabilize gas prices. To the extent that gas for export is produced at zero or negative cost in association with unconventional oil, such gas can be seen as a consequence, rather than a detriment to increased U.S. energy security. Additional volumes of U.S. LNG will be beneficial to the global gas market. While U.S. export volumes are unlikely to transform the existing fragmented structure of existing LNG trade, it will help to erode the basis of oil-linked contracts that have characterized it for decades, and to move the market toward global price convergence. In the short-term, the emergence of the United States as an exporter comes at a time of tightening global supply, meaning U.S. exports will provide much

Figure 2: Estimated LNG Spare Capacity from 2015-2020 (bcf/day)

Partners

While the economic benefits of this are clear, the progression towards a more global LNG market has substantial geopolitical implications as well. Although the U.S. government cannot directly influence the destination of each LNG cargo exported from the United States, U.S. foreign policy interests are served through a better-supplied global LNG market and through assistance to import-dependent strategic allies in Europe who will gain strategic leverage from the increased competition to Russian gas.

What Should the U.S. Government Do?

Beyond a simple cost-benefit analysis, there is a larger, more fundamental consideration that the U.S. government must consider when evaluating the merits of U.S. LNG exports. Policymakers should recognize that the non-exportation of U.S. LNG is comes at the opportunity cost of forgoing the benefits of the free market. As a principal advocate and beneficiary of a global trading system characterized by the free flow of goods and capital, the United States has a long-term economic and political incentive to refrain from intervention in the market wherever possible. The economics of U.S. LNG exports– both the costs associated with producing, processing, and transporting LNG, and the competitive nature of the global market - are likely to impose market-determined boundaries on their viability. Irrespective of the status of permits, incremental additions to actual export capacity will be dependent on long-term financing and interest from contracting parties. Increases in domestic natural gas prices as a result of marginal increases in demand negatively impact the economics of additional export projects, thereby protecting domestic consumers from unlimited exports and price rises.

4 According to EIA statistics, in 2005 the price of Brent Crude oil was $54.57 and the price of natural gas at Henry Hub was $8.67, giving an oil-to-gas price ration of approximately 6.3:1. The 7:1 threshold is according to the American Chemistry Council report, “Shale Gas and new Petrochemicals Investment,” March 2011. (ACC, March 2011) 5 Remarks by Alan Greenspan, Chairman of the Federal Reserve, before the National Petrochemical and Refiners Association Conference in San Antonio, Texas, April 5, 2005. (http://www.federalreserve.gov/boarddocs/speeches/2005/20050405/default.htm) 6 ACC, March 2011.

A proscription or limitation on LNG exports would constitute a de facto subsidy to domestic consumers at the expense of domestic producers. History suggests that government intervention in the allocation of rents can lead to inefficient outcomes and unintended consequences. To avoid these outcomes, the U.S. government should neither act to prohibit nor

to promote LNG exports. In refraining from intervention in the gas market, the government will ensure that U.S. gas is allocated to its most efficient end uses, many of which will bring ancillary political and economic benefits to the United States and its partners and allies around the world.

Master Class LNG Value Chain

(Quarterly subscribers receive a 10% discount) The 4 day Master Class on LNG is designed to give participants a complete overview of the LNG value chain and discuss the most recent developments in this sector. The highlights of this course include a Small Scale LNG seminar where experts share their insights, a site visit to the Fluxys LNG Terminal and the fireplace debate with Thierry Bros about unconventional gas and its impact on the global LNG Market. This Master Class is very accessible for professionals from throughout the energy industry. Previous participants from Gazprom, Gasunie, RWE, Shell, Vopak, GDF Suez, Fluxys and others had a wide range of working experience in the energy industry, and this course is suitable for all those seeking a deeper understanding of LNG and its implications across the value chain. The next edition of the Master Class will be 22 -25 October 2012 in Bruges, Belgium. For more information please contact Thiska Portena, portena@energydelta.nl

EDIâ&#x20AC;&#x2122;s Upcoming Courses October

November

15-16 October: Dusseldorf, Germany Master Class Gas Pricing Strategies http://www.energydelta.org/mainmenu/executive-education/specificprogrammes/master-class-gas-pricing-strategies

5-9 November: Groningen, the Netherlands Finance, Risk and the Energy Value Chain http://www.energydelta.org/mainmenu/executive-education/ specific-programmes/finance-risk-and-the-energy-value-chain

22-25 October: Bruges, Belgium Master Class LNG Chain http://www.energydelta.org/mainmenu/executive-education/specificprogrammes/master-class-lng-chain-lng-training-course

6-8 November (part 1), 3 December (part 2): Amersfoort, the Netherlands Energiemarkten (given in Dutch) http://www.energydelta.org/mainmenu/executive-education/ introduction-programmes/energiemarkten-2

22-25 October: Copenhagen, Denmark Fellowship on Energy Programme (module 1) http://www.energydelta.org/mainmenu/executive-education/ executive-master-programmes/the-fellowship-on-energy-programme 29 October - 2 November: Copenhagen, Denmark Large Energy Projects Course (week 1) http://www.energydelta.org/mainmenu/executive-education/ executive-master-programmes/executive-master-of-gas-businessmanagement/large-energy-projects-course 29 October - 2 November, Groningen, the Netherlands International Gas Value Chain http://www.energydelta.org/mainmenu/executive-education/ introduction-programmes/international-gas-value-chain

12-16 November: Groningen, the Netherlands Underground Gas Storage Course http://www.energydelta.org/mainmenu/executive-education/ specific-programmes/underground-gas-storage-course 19-23 November: Groningen, the Netherlands Fundamentals of Gas Strategy http://www.energydelta.org/mainmenu/executive-education/ specific-programmes/gas-strategy-course 26-27 November: Groningen, the Netherlands Gas Transport & Shipping Course http://www.energydelta.org/mainmenu/executive-education/ specific-programmes/gas-transport-shipping-course

December 10-14 December: Groningen, the Netherlands Gaswaardeketen (given in Dutch) http://www.energydelta.org/mainmenu/executive-education/ introduction-programmes/de-gaswaardeketen

Upcoming Conferences October 2012

November 2012

October 1-2: London, UK Biomass Power Generation 2012 https://www.platts.com/ConferenceDetail/2012/pc250/index

November 1 (tentative): Groningen, the Netherlands Roundtable: LNG and itâ&#x20AC;&#x2122;s Application in Heavy Trucking http://www.theenergyexchange.co.uk/north-africa-oil-gassummit-2012/s13/a204/ In November, the Energy Delta Institute and Energy Valley will organise a round-table session about the application of liquefied natural gas (LNG) in heavy-duty trucking. This event must be seen in the light of the recent Green Deal negotiated between the central government and the northern Netherlands regarding the stimulation of LNG as fuel for heavyduty trucking. The goal of this event is to inform truck-fleet owners and other stakeholders about the opportunities of LNG in heavy-duty trucking. Keep an eye on the link above for additional information.

October 2-4: London, UK World Independent Oil Companies Congress http://www.terrapinn.com/independentoil October 13: Brussels, Belgium The European Gas Policy Forum 2012 http://www.eu-ems.com/summary.asp?event_id=122&page_ id=973&/ October 8-11: London, UK Gastech 26th Edition http://www.gastech.co.uk/ October 10: Rotterdam, the Netherlands EcoMobiel http://www.ecomobiel.nl/ October 23-25: Warsaw, Poland European Unconventional Gas Summit, 3rd Annual Meeting http://www.theenergyexchange.co.uk/european-unconventional-gassummit-3rd-annual-meeting/s13/a274/ October 30 - November 1: Istanbul, Turkey CIS Oil and Gas Transportation 14th Annual Meeting http://www.theenergyexchange.co.uk/cis-oil-and-gas-transportation14th-annual-meeting-/s13/a272/

November 6-8: Vienna, Austria North Africa Oil and Gas Summit http://www.theenergyexchange.co.uk/north-africa-oil-gassummit-2012/s13/a204/ November 13-16: Washington D.C., USA North America Gas Summit http://www.theenergyexchange.co.uk/north-america-gas-summit/s13/ a288/ November 14-15: Brussels, Belgium Energy Forum http://www.energy-forum.be/ November 20: Groningen, the Netherlands Young Energy Delta Convention http://www.energydelta.org/mainmenu/events/upcoming-events/ young-energy-delta-convention November 21: Groningen, the Netherlands IEA Roadshow Nederland http://www.energydelta.org/mainmenu/events/upcoming-events/ iea-roadshow-nederland-november-2012 November 27-28: Rotterdam, the Netherlands Nationaal Energie Forum http://www.energieforum.nl/

December 2012 December TBA: Moscow, Russia Eurasia Dialogue http://www.energydelta.org/mainmenu/events/upcoming-events/ eurasia-dialogue December 2-5: Muscat Oman Gas Arabia Summit http://www.theenergyexchange.co.uk/gas-arabia-summit-8th-annualmeeting/s13/a135/ December 3-5: Rotterdam, the Netherlands LNG Tech Global Summit http://lngsummit.com/

Recent Publications Keun-Wook Paik, September 2012. Sino-Russian Oil and Gas Cooperation - The Reality and Implications. The Oxford Institute for Energy Studies.

China and Russia are giant countries whose recent economic and energy experience could hardly be more different: in the one, unprecedentedly rapid industrialization has sent its share of world primary energy consumption soaring from 7 to 20 percent since 1985 (overtaking the USA); in the other the collapse of centrally planned industry has reduced its share from 11 to 6 percent during the same period. China has tried to exploit its modest energy endowments sparingly, while forging a world-wide supply structure that prevents it from being deprived of the imports its economy needs. Russia meanwhile has become a major oil and gas exporter, possessing more than 20 percent of the world’s gas reserves, part of which it is eager to sell to China. Inevitably, therefore, energy is at the centre of relations between these two countries. This book is available at: http://www.oxfordenergy.org/shop/sino-russian-oil-and-gascooperation-the-reality-and-implications-2/

Howard Rogers, September 2012. Gas with CCS in the UK Waiting for Godot? The Oxford Institute for Energy Studies.

This paper by Howard Rogers addresses the issue of the challenges in establishing CCS at a commercial scale in the power generation sector, and shows that all aspects of the implementation of CCS projects are complex, albeit that the underlying technologies have been used individually in the petrochemical, refining and upstream industries for decades. Costs, and technical and commercial complexity go a long way towards explaining why there is no gas-fired power plant with CO2 capture and storage in operation or under construction anywhere in the world. This paper is available at: http://www.oxfordenergy.org/wpcms/wp-content/uploads/2012/09/ NG-66.pdf

European Commission DG Environment, August 2012. Climate Impact of Potential Shale gas production in the EU.

This paper by DG Clima examines the implications of shale gas revolution in Europe and the associated impacts on the climate. Exploitation is characterized by some studies as being responsible for the release of large amount of greenhouse gases (in excess of those attributed to coal), while other indicate that lifecycle emissions on slight exceed that of conventional natural gas exploitation. This paper performs an analysis of various sources and examines the policy implications of responsible exploitation of unconventional gas. This paper is available at: http://ec.europa.eu/clima/policies/eccp/docs/120815_final_report_ en.pdf

European Commission DG Clima, July 2012. Support to the Identification of Potential Risks for the Environment and Human Health Arising from Hydrocarbons Operations involving Hydraulic Fracturing in Europe.

This paper by DG Environment examines potential risks to the environment and human health due to hydrocarbon exploitation via hydraulic fracturing. It examines the implications of a USA-style shale gas boom in Europe, and provides a preliminary risk assessment in this context. This paper is available at: http://ec.europa.eu/environment/integration/energy/pdf/fracking%20 study.pdf

Bros Thierry, August 2012. After the US shale gas revolution.

After 20 years at different positions in the gas sector, from the policy side to trading floors, the author gives an overview of the major issues associated with and the consequences of the US shale gas revolution. The first part of the book provides basic knowledge and gives needed tools to better understand this industry, that often stands sandwiched between upstream oil and utili¬ties. After extensive research, publication and teaching, the author shares his insights on fundamental issues all along the gas chain and explains the price mechanisms ranging from oil-indexation to spot. The second part looks into the future of worldwide gas balance. To supply growing markets, the major resource holder, Russia, is now in direct competition with the major gas producer, the US. China has the potential not only to select the winner but also to decide the pricing principle for all Asian buyers in 2020. As China is a new and growing gas importer and has a lower price tolerance than historical Asian buyers ( Japan and South Korea), it is highly possible that, against basic geography, China selects waterborne US LNG vs. close Russian pipe gas, to achieve lower import price. Europe, so risk adverse that it won’t be able to take any decision regarding shale gas production this side of 2020, should see its power fading on the energy scene and would rely more on Russia. Gas geopolitics could tighten Russia stronghold on Europe, on one side, and create a flourishing North America-Asian trade. This book is available at: http://www.editionstechnip.com/sources/Liste_Fiche. asp?CV=1791&Fa=1

International Energy Agency, 2012. Energy Technology Perspectives 2012: Pathways to a Clean Energy System.

Energy Technology Perspectives (ETP) is the International Energy Agency’s most ambitious publication on new developments in energy technology. It demonstrates how technologies - from electric vehicles to smart grids - can make a decisive difference in achieving the objective of limiting the global temperature rise to 2°C and enhancing energy security. ETP 2012 presents scenarios and strategies to 2050, with the aim of guiding decision makers on energy trends and what needs to be done to build a clean, secure and competitive energy future. This publication is available at: http://www.iea.org/w/bookshop/add.aspx?id=425

International Energy Agency, 2012. The Impact of Wind Power on European Natural Gas Markets.

Due to its clean burning properties, low investment costs and flexibility in production, natural gas is often put forward as the ideal partner fuel for wind power and other renewable sources of electricity generation with strongly variable output. This working paper examines three vital questions associated with this premise: 1) Is natural gas indeed the best partner fuel for wind power? 2) If so, to what extent will an increasing market share of wind power in European electricity generation affect demand for natural gas in the power sector? and 3) Considering the existing European natural gas markets, is natural gas capable of fulfilling this role of partner for renewable sources of electricity? This publication is available at: http://www.iea.org/publications/freepublications/publication/ name,20562,en.html

Akira Miyamoto, Chikako Ishiquro & Mitsuhiro Nakamura, June 2012. A realistic perspective on Japan’s LNG Demand after Fukushima. The Oxford Institute for Energy Studies. The earthquake and tsunami which left its toll of destruction and the tragic loss of life on Japan’s eastern seaboard on 11th March 2011 was a natural disaster of the highest order. This working paper addresses methodically and in detail the extent of the impact of the events of 11th March 2011 on Japan’s energy complex and describes how, through higher utilization of fossil fuel plant and enforced and voluntary demand conservation measures, the country has coped with this unprecedented reduction in generation capacity. Looking forward, the key uncertainty is the policy-driven path of future nuclear generation. It is in this context that the paper provides a timely and robust evaluation of Japan’s future LNG import requirements based on a range of scenarios regarding the future utilization of operable nuclear power facilities. Importantly, the paper also analyses the strong growth in industrial consumption of LNG in the period prior to 2011 and identifies this as a continuing source of demand growth tempered perhaps by the prevailing linkage of imported LNG prices to crude oil. This paper is available at: http://www.oxfordenergy.org/wpcms/wp-content/uploads/2012/07/ NG-62.pdf

Patrick Heather, June 2012. Continental European Gas Hubs: Are They Fit for Purpose? The Oxford Institute for Energy Studies.

This paper by Patrick Heather assesses the development of the European Continental Gas Trading Hubs. It is a natural successor to his 2010 paper ‘The Evolution and Functioning of the Traded Gas Market in Britain’. Although the drivers and challenges for gas trading on the European Continent have been different from those of Britain, the desire for change at an EU policy level, the catalyst of the economic recession and the sea-change in the acceptance of trading have all contributed to an astonishing development in European gas hubs over the past few years. Based on extensive research and discussion with the key actors intimately involved, the paper provides deep insights into the characteristics of the individual hubs, the reasons behind their particular evolutionary path and their characterization as ‘Trading Hubs’ (NBP and TTF), ‘Transit Hubs (ZEE and CEGH) and ‘Transition Hubs’ (GPL, NCG, PEGs and PSV); a framework which assists the reader in better understanding the current and future role of each. This paper is available at: http://www.oxfordenergy.org/wpcms/wp-content/uploads/2012/06/ NG-63.pdf

Paolo Natali, May 2012. The U.S. Natural Gas Revolution: Will Europe BE Ready in Time? The Transatlantic Academy Paper Series. The shale gas revolution in the United States is going to bring significant change to the global gas market. As more liquid natural gas (LNG) volumes and short-term opportunities become available, and with the once largest LNG importer set to possibly become an exporter, investment in LNG regasification capacity is flourishing in Western Europe, improving the diversification of sources and therefore overall energy security in the region. But the diversification challenge is felt more strongly on the eastern than on the western side of Europe. What can be done so that gas markets across the European continent are equally able to reap the benefits of the changes the global gas market is experiencing? Countries without LNG terminals will need to find ways to improve the conditions for gas shipping across borders. Europe has a developed gas network but there are still significant barriers to crossborder shipping, mostly of a technical nature: network infrastructure development but, more importantly, inefficient market rules. Can these

obstacles be overcome in a timely manner, before other regions secure LNG imports and the global market is reshaped in a way that is unfavorable to Europe and the transatlantic region? The paper starts with a description of the emerging global glut, and of the incentives and disincentives to integrate markets in Europe. It then moves on to analyze the likelihood that changes will take place, and the policy measures that are needed in order to make the best of the situation, namely the need for a European “shipping passport” to enable easy cross-border exchange of natural gas, and a Fourth Package of measures for the liberalization of the gas market. This publication is available at: http://www.transatlanticacademy.org/publications/us-natural-gasrevolution-will-europe-be-ready-time

Fan Gao, April 2012. Will There be a Shale Gas Revolution in China by 2020? The Oxford Institute for Energy Studies.

This paper, by Fan Gao, assesses the extent to which China is likely to achieve levels of shale gas production by 2020 which would make a meaningful difference to its growing need for imports of pipeline gas and LNG. The study suggests that, given the rather disappointing progress on Coal Bed Methane production since exploration and development work started some 25 years ago, a cautionary approach is needed in anticipating the outlook for shale gas for the remainder of this decade. The specific challenges include water availability and population density demographics as well as the need to stimulate an innovative competitive dynamic in the Chinese upstream service sector and an appropriate upstream investment framework with foreign participants for the transfer and application of technology. The paper provides a rare appreciation of the dynamics of the onshore Chinese upstream industry and from that basis a better understanding of what will be required, on a number of policy levels, for Chinese shale gas development to succeed. This paper is available at: http://www.oxfordenergy.org/wpcms/wp-content/uploads/2012/04/ NG-61.pdf

James Henderson, March 2012. Is a Russian Domestic Gas Bubble Emerging? The Oxford Institute for Energy Studies.

Recent forecasts for gas supply in Russia produced by Novatek and Gazprom highlight the large amount of gas available to meet demand in the next 10 years and also point to contrasting views about which companies’ production may be preferred in a potentially oversupplied market place. In light of this potential oversupply situation, it is becoming clear that a number of Non-Gazprom producers (NGPs), including Novatek and some Russian oil companies, are taking the view that the Russian gas market will soon become much more competitive and that access to end consumers will become essential for any company wishing to maximise its gas sales. However, this suggests the possibility that Gazprom, which is becoming more reliant on production from remote and relatively high cost fields, may soon find itself at a competitive disadvantage and facing the possibility that it may fail to meet its own production targets by some distance. As a state-owned company, it may hope to rely on political support to achieve its objectives and maintain its dominant position in the Russian gas market. But in this case, the Russian Administration faces a potentially awkward consequence of a higher domestic gas price than might otherwise be necessary, as the lower cost gas owned by Non-Gazprom Producers is crowded out to leave room for Gazprom’s gas. This comment examines this impending dilemma for the Russian government and suggests that one conclusion is that what is good for Gazprom may no longer be good for Russia. This publication is available at: http://www.oxfordenergy.org/wpcms/wp-content/uploads/2012/03/ Is-a-Russian-Domestic-Gas-Bubble-Emerging.pdf

EDI Quarterly is published in order to inform our readers not only about what is going on in EDI, but also and in particular to provide information, perspectives and points of view about gas and energy market developments. Read the latest developments in the energy industry, daily published on the website of EDI. ISSN: 2212-9669 Editor in Chief Catrinus J. Jepma Scientific director EDIAAL* Editors Jacob Huber Nadja Kogdenko Steven von Eije Klaas Kwakkel Milan Vogelaar EDI Quarterly contact information Energy Delta Institute Laan Corpus den Hoorn 300 P.O. Box 11073 9700 CB Groningen The Netherlands T +31 (0)50 5248337 F +31 (0)50 5248301 E quarterly@energydelta.nl

* The EDIAAL project is partly made possible by a subsidy granted by The Northern Netherlands Provinces (SNN). EDIaal is co-financed by the European Union, European Fund for Regional Development and The Ministry of Economic Affairs, Peaks in the Delta.