Commercial energy markets

Summary: The commercial energy sector includes federal, state, and local governments; businesses; and other private and public organizations. It essentially includes all activities not included in the industrial, residential, and transportation end-use sectors.

The industrial, residential, and transportation end-use sector definitions are those used by the United States Energy Information Administration (EIA), while other definitions are common. For instance, the New York State Energy Research and Development Administration (NYSERDA) includes large multifamily residential buildings in the commercial sector, while in the United Kingdom the Department of Energy and Climate Change includes agriculture in the services sector, while the EIA includes agricultural in the industrial sector.

The commercial energy sector in the United States has seen steady growth over the past years, although the recent economic downtown has moderated this recently. The sector accounts for 18 percent of energy use in the United States, while the United Kingdom (UK) services sector uses 12 percent of that country’s energy. The following table compares energy use for various activities:

Energy use at institutions such as colleges and universities has a very high visibility due to interest from environmentally aware students and faculty. These institutions have been particularly aggressive at reducing energy consumption and moving to low-carbon resources such as renewable energy. Other large consumers in this sector have also taken a lead in pursuing these opportunities, but even small users have employed measures to reduce expenses that can improve their business competitiveness.

Commercial Sector End-Use Consumption

Trends in the Global Energy Market

Up until 1972 the global market was characterized by the steady increase of alternative energy supplies. Following 1972’s oil crisis, there has been logical price stability, though it has been frequently disrupted by violent swings in oil and gas prices throughout the world. Oil continues to be the leading primary fuel mix, though its share is falling. Global energy demand predicts significant increases in the coming decades with the accompanied worldwide additions of power generation capacities. However, there has not been a perfect energy market so far and the need to correct failed markets with government interventions is inevitable.

After 1945 and the end of World War II and until 1972, the energy market was characterized by the following two major scenarios:

1. Oil took the leading share as the major source of energy. Toward the end of 1960s, following the discovery of the Groningen Gas field in the Netherlands, a sizeable share of the commercial energy market was taken by pipeline natural gas in Western Europe.

2. Electricity steadily increased as a percentage of the static market partially based on nuclear energy, and the coal energy market sector declined in comparison.

Those steady developments were upset by the 1972 oil crisis, which was a political crisis that had little to do with physical availability of crude oil and led to frequent disruptions in prices. Furthermore, the energy market became influenced by local, national, and worldwide environmental movements and a number of new trends developed.

Emerging World Energy Outlook

The desire for oil and other energy sources is growing dramatically, with worldwide energy consumption projected to increase by 36 percent till the year 2035. The increasing demand for energy is accelerated by a population that is predicted to rise by 25 percent in the coming 20 years, with most of that significant population growth in countries such as China and India, which are emerging economies. Rising energy demand fueled by improved standards of living is expected to increase demand for energy supplies. In China, for example, by 2035 energy demand is expected to rise by 75 percent. Over the coming 25 years, it is projected that the use of renewable energies will triple, but the world will likely still depend on fossil fuels for at least 50 percent of its energy requirements.

After a decline in 2009, energy consumption in countries in the G20 soared by over 5 percent in 2010. Developed countries rebounded in their energy use in the oil, gas, coal, and electricity markets, while emerging nations, particularly China and India, had continuously high demand for all types of energies.

Energy Demand

Global primary energy demand is expected to rise by 1.5 percent annually between 2007 and 2030. The main drivers for this growth are Asian developing countries followed by countries in the Middle East. Accounting for more than 75 percent of the predicted total increase in energy use between the years 2007 and 2030, fossil fuels continue to be the principal worldwide sources of primary energy. In the stated projected period, the rise in the demand for coal is by far the biggest followed by the demand for gas and oil. However, oil continues to be the leading largest primary fuel mix by the year 2030, though its share falls from the current 34 percent share to 30 percent. With the exclusion of biofuels, the demand for oil is projected to show 1 percent average annual rise over the projected period of 2008–30, a rise from 85 million barrels per day (2008) to 105 million barrels per day (2030). The growth attributes to the increasing demand from non-OECD (Organisation for Economic Co-operation and Development) countries: demand among OECD countries is projected to have a falling trend. 97 percent of the increase in oil use is attributed to the transport sector.

The demand for world electricity is projected to grow with annual growth rate of 2.5 percent until 2030. A significant part of the growth (80 percent) takes place in those non-OECD countries. While the share of hydropower decreases from 16 percent to 14 percent, the consumption of biofuels for transportation is expected to rise throughout the projected years.

Energy Supply

According to the regularly published reports of the International Energy Information Administration (EIA), total world’s energy supply was set as 102,569 terawatt-hours (TWh, by 1990); 117,687 TWh (by 2000); 133,602 TWh (by 2005); and 143,851 TWh (by 2008). Regarding world power generation, it was 11,821 (by 1990); 15,395 TWh (by 2000); 18,258 TWh (by 2005); and 20,181 TWh (by 2008). On the basis of power source, energy supply in 2008 was 33.5 percent oil, 26.8 percent coal, 20.8 percent gas, 12.9 percent hydro, solar, wind, geothermal power and biofuels, 5.8 percent nuclear, and 4 percent other sources.

According to 2008 world energy supply data, oil and coal combined constituted more than 60 percent of the overall world energy commercial supply. Worldwide additions to power generation capacity are expected to reach 4,800 gigawatts (GW) by 2030, which is almost five times the current capacity of the United States. Around 28 percent of the addition is expected to occur in China. Furthermore, coal is expected to remain the determinant fuel of the power sector, its share of the global energy generation mix rises to 44 percent by 2030 percent. Nuclear-based output may grow in all major regions of Europe, though its overall share in total generation may drop.

Modern nonhydro renewable energy technologies such as wind, solar, geothermal, tide and wave energy, and bioenergy show the fastest rate of growth. Much of the increase in nonrenewable energies is through power generation. The allocation of nonhydro renewable energies in total increases from 2.5 percent (2007) to 8.6 percent (2030), with the biggest absolute increase from wind power.

Market Failure and Government Intervention

Market failure is a situation in which efficient allocation of resources is impossible due to the disruption of price mechanisms (basic demand and supply principles) caused by the dynamics related to factors such as monopolies and the asymmetry of marketing information. Energy market failure is a situation where, in a given market, the amount of energy demanded by final users does not equate to the amount of energy presented by suppliers, which is a direct consequence of a lack of specific economically ideal forces that prevent equilibrium. The energy market is highly characterized by market failure in many of the instances.

Bibliography

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U.S. Energy Information Administration. “International Energy Outlook 2010.” http://www.eia.doe.gov/oiaf/ieo/world.html.