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The optimal structures of energy sources for achieving economics, environment and energy goals

By To Hoang Anh (VNP 24)

Supervisor: Dr. Vo Hong Duc

Abstract:

Energy is generally considered one of the most widespread concerns in a modern world because of its overarching effects on life and economic growth and development for any country regardless of the income level. From the beginning of the human history, fire is the primitive energy source. So far, we have generated energy from various sources such as coal, oil, hydropower, wind, solar, geothermal, nuclear and others. Each source of energy has carried different advantages and disadvantages for the usage, generally known as the trade-off between energy security and affordability. For example, fossil fuels are stable supplies and cheaper than the renewables. However, fossil fuels have caused pollution. Other sources of energy such as wind and solar are very clean to the environment. However, their supply is limited because wind can stop blowing and sun can disappear in specific days. A trade-off among the use of these sources of energy is well aware by the governments. For example, in Australia, oil accounted for the largest share of Australia’s primary energy mix in 2017-18, at 39 per cent, followed by coal (30 per cent) and natural gas (25 per cent). Renewable energy sources accounted for 6 per cent (the Australian Government, 2019).1 The decision of choosing the sources of energy, or generally known as energy mix, completely depends on the direction of the governments. Understanding on this important issue is required for the well-informed policies on energy. However, the important trade-off has largely been ignored in current literature.

For the purpose to determine an optimal structure of energy sources that simultaneously achieves the three important goals: Economics, Environment and Energy (the “3E goals”), this study is the first of its kind to combine quantitative and qualitative methods to rank various energy sources including both non-renewable and renewable sources which could satisfy the 3E criteria.

For the economic criteria, this study ranks a set of all energy sources (including: Coal, gas, oil, hydropower, and renewable energy) based on the impact of each of these energy sources on economic growth. For the environment and energy criteria, Two sets of ranking depend on CO2 emission and the stability in supply from each energy source. To combine these three rankings from three criteria, the multi-criteria decision making (“MCDM”) problems including five energy sources and three criteria are considered. This study uses the weighted scoring method (“WSM”), the most popular method for the MCDM (Jadhav & Sonar, 2009; Fishburn, 1967 and Mendoza & Prabhu, 2000), to score all rankings from five sources and three criteria. This method chooses one or a set of several alternatives (energy sources) which depends on the score for each alternative and the weighting for each criterion. The final optimal structure of energy sources is a set of five sources that satisfy the three important criteria, including: (i) the most boosting effect to economic growth, (ii) less harmful to the environment or less providing the CO2 emission, and (iii) the most stable supply.

Various tests are conducted in this study including the cross-sectional test, stationary test, and panel cointegration test. Once passed and the results show that there is at least one long-run nexus between explanatory variables and the dependent variable, then the long-run estimators will be employed. The most popular models for estimating the mean group long-run effect, which can take into account the endogeneity problem and serial correlation in macroeconomic panel data, are the Fully Modified Ordinary Least Square (FMOLS), and the Dynamic Ordinary Least Square (DOLS) will be used. The purpose of this study is to determine an optimal structure of energy sources. As such energy sources are ranked based on their regressors.

Key findings from this study can be summarised as follows.

First, findings from this study confirm that the vital role of energy consumption by energy sources has provided profound effects on the economic growth, not only contributing greatly to boost the economy but also leading to the problems in the environment for this and next generation.

Second, scenario analyses adopted in this study present problems in a current energy supply including the problems in the short run such as limited fossil sources, high production cost, and unstable supply of clean energies. Furthermore, the advantage of fossil energies in the context of stable supply and an enhancement of economic growth, despite of negatively affecting the environment, has also been confirmed using the last 50 years of available data. Meanwhile, clean energy sources such as hydropower and renewable energy do improve the quality of the environment.

Third, this study presents the general trend of the world in energy usage, which gradually replaces fossil energy with clean energy. The replacement started years ago, that trend is expected to persist for many years to come. Nonetheless, this shift requires a considerable amount of time with special challenges, such as improving technology to reduce costs, improving system stability and safety of alternative energy systems. Experiences from other countries show that the development of renewable energy sources requires appropriate strategies, roadmaps, steps and policies which should be appropriate for specific conditions of each country, particularly the potentials of energy resources available in the country. This means that the future will see a positive change in the exploitation and use of energy: a gradual shift from fossil energy to renewable energy.

Fourth, environmental scenario demonstrates an optimal structure of energy sources in the short and long run. The first priority for many countries is to start using clean energies. Many policies have been formulated and adopted to meet the target.

Fifth, the economic scenario shows the vital role of fossil energies in boosting economic in some groups of countries such as underdeveloped and developing countries. The final structure of energy sources indicates that in both short and long run, it is impossible to replace fossil sources to meet the priority of economic goal.

Last but not least, as a common trend, a majority of countries in the world will follow the clean energy movement. As a first step, the government will formulate and apply policies to encourage the incentive in research activities, improving production cost and stability in clean energy supply. The next step will be to improve the efficiency in clean energy use. In the long-run, due to technology change and energy investment, the complete replacement from fossil to clear energy is completely feasible.

In summary, by presenting the overall review of the current status and progress of energy consumption and the role of each energy source in environment and the economy, this study aims to raise awareness of the public, practitioners and policymakers regarding energy consumption. We argued that the optimal structure of energy sources should be considered on the basis of the 3E Goal simultaneously. Understanding and then responding to only demand and the supply of only one specific source of energy is clearly inadequate. The approach adopted in this study should be considered a standard framework for policymakers.

One paper drawn from the findings of this thesis has now been published in the International Journal of Environmental Research and Public Health (a journal indexed in SSCI, SCIE, Scopus & MEDLINE with the impact factor of 2.5). Another paper from this thesis on the 3E Goal is now under review for Energy Economics. 

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