IEA Commends Norwegian Energy Policy for Exemplary Management of Resource Wealth, but Outlines Challenges on Climate Change and Security of Supply

Norway’s transparent and forward-looking management of its petroleum resources provides a good example to other countries. "Norway is playing a pioneering role in the liberalised Nordic electricity market. This is commendable”, said Claude Mandil, Executive Director of the International Energy Agency (IEA), today in Oslo at the launch of "Energy Policies of IEA Countries – Norway 2005 Review". He added that the country was now facing important challenges: “Growth in energy consumption is outpacing that of onshore production and real difficulties must be overcome if the country is to meet its Kyoto target without compromising on security of supply.”

Norway’s natural resource management presents an example of best practice
The skilful development of its large oil and gas resources has made Norway Europe’s largest exporter of oil and gas, and is contributing significantly to Europe’s security of supply. But now, the Norwegian oil and gas industry is now close to reaching the peak of its production. The government’s transparent and forward-looking way in which it intends to manage the expected decline is commendable as well as its plans to extend production for as long as possible. It has taken strong action to increase exploration for new fields and to open the industry further to smaller companies. It has also made important progress since the last review in reducing state involvement with the partial privatisation of Statoil. Altogether, Norwegian management of its petroleum resources is an example of best practice for the management of valuable natural resources in a small economy.

Achieving the Kyoto Target is a challenge for Norway
Norway’s CO2 emissions are rising because of increased production of petroleum and increased demand in all sectors of the economy. The concentration of emission increases in the offshore and transport sectors, the predicted growth of offshore activities, and the commissioning of gas-fired power generation, will make the achievement of Norway’s Kyoto target difficult without the extensive use of the Kyoto mechanisms. The IEA recommends a comprehensive public debate looking at the full range of policy tools to combat climate change and achieve security of onshore electricity supply

Norway has been a pioneer in introducing a CO2 tax system. However, the effectiveness of this tax has been limited due to significant exemptions to major emitters. The government should evaluate its effectiveness and review its design, if appropriate. While Norway has introduced a quota-based emissions trading system (ETS) envisaging its linkage with EU-ETS, its current effectiveness is restricted due to its small coverage. It is a challenge how to design the CO2 tax in a compatible way with emissions trading.

Norway is expecting that Carbon Capture & Storage (CCS) will play a significant role in reducing emissions from increased gas use onshore. But the technological and economic realities of CCS need to be considered by the public and decision-makers, and efforts should be made to ensure a realistic understanding of the technology’s possibilities.

Norway set up Enova SF in 2001 as a state-owned company tasked with achieving energy savings and supporting renewables. The underlying structure of Enova SF as an independent company with its own long-
term funding and clear objectives is exemplary. The 2002/03 programme of support for energy efficiency in the residential sector has shown that great success is possible. Norway should consider expanding its efforts to reduce building and transport energy use.

Norway is also encouraging the development of new renewables such as biomass and wind. It has a good resource base of high wind speeds and a very long coastline, but the future integration of wind into the Nordic grid, and the transportation cost for wind-generated electricity should also be considered in expansion plans for renewable capacity. The planned introduction of a joint green certificate system with Sweden is a positive development. The liberalised electricity market provides a good framework for this, and it can lead to a more market based and cost efficient allocation of financial resources. Norway should continue to work closely with Sweden so that the integrated market in green certificates can start from 2007.

Norway’s onshore security of supply depends on sound investment and strong international links
Since 1990, Norwegian energy consumption has grown slowly, but even this relatively slow growth has been outpacing onshore energy production. Norway’s domestic energy demand is unusual because it consists primarily of renewable electricity in stationary use and oil for transport use, with a very high share of the electricity consumption used for heating. The use of gas is still very limited within Norway. Increasing domestic access to gas and installing new renewables can significantly contribute to supply security in the power sector. However, construction of gas-fired power has been held up due to environmental concerns about CO2 emissions. The construction of additional hydropower stations and wind farms has been also delayed due to local environmental concerns and electricity grid operators face constraints on expanding their capacity. Initiatives will not go ahead unless better understanding by the general public on Norway’s future challenges in terms of energy supply/demand (for example, through long-term energy forecast) is ensured. It is also important to ensure that any undue barriers to diversification of ownership and investment are reduced, and that investors have a clear path for the approval of projects.

In the 1990s, Norway fundamentally reformed its electricity sector, leading to the development of the Nordic electricity market with a more marked based and increased cross-border trade. Low rainfall in 2002/03 highlighted the importance of international trade to secure reliable electricity supplies for Norway. A critical factor as to whether Nordic electricity market can continue to deliver affordable and reliable outcomes for Norway is the degree of market integration. The recent announcement of a new link between Norway and the Netherlands is therefore commended. Efforts to strengthen dialogue and improve coordination among Nordic regulators and transmission system operators are positive developments. More opportunities may exist to further clarify regulatory and institutional responsibilities and to strengthen coordination.