MJC H2 ECON P1 QN P

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2 9732/01/JC2 PRELIMINARY EXAMINATION/MJC/2011 Question 1: Renewable Energy Extract 1: Oil prices should spur investments in energy technologies Oil supply has been hit by uncertainties in the Middle East. Although we have not seen major disruptions, prices for crude oil are fluctuating, ranging up to US$120 per barrel, and most predict the long-term trend will be upwards. To ensure affordability, Vietnam, Indone sia and Malaysia continue to subsidise energy, increasing government burdens as o il prices rise. Their artificially low energy prices increase wast e and destroy incentives to invest in alternative technologies. Studies suggest that energy efficiency measures can achieve at least the equivalent savings in power needs with safe, off-the- shelf technology at a much lower cost. Renewable energy currently costs more but with technological advances, may prove viable in the medium term. Source: Today Online, 27 July 2011 Extract 2: Renewable energy markets in developing and developed countries Renewable energy enjoyed a "r emarkable growth" in inve stment last year, says a recent UN report, rising by one-third to a record $211 billion worldwide. China alone splurged $48 billion on new green energy proj ects to consolidate its position as the world's leader. And, for t he first time, developing countri es collectively spent more on renewables than their richer counterparts. But curiously, this building frenzy coincide s with a wave of cuts to solar subsidy schemes across Europe. The future of sun-pow er does not look so bright in Spain, for instance, where cuts to the subsidy that the state uses to guarantee producers a set price for energy sold to the grid – have been made to tackle the enormous debts run up by the scheme. The government now fa ces lawsuits from its own renewables sector, which had invested heavily on the promise of such profits. More recently, France has drawn criticism from the EU over its reduction of solar subsidies, which have damaged investor confidence. Although China's ability to afford its $46 bil lion stimulus package is not likely to be tested, many other develop ing countries experiencing booms would do well to take note. Source: The Economist, 26 July 2011

3 9732/01/JC2 PRELIMINARY EXAMINATION/MJC/2011 Extract 3: Renewable energy still too expensive Despite high oil prices, fossil fuels will continue to trump renew able energy sources such as solar and wind power without ma ssive government subsidies, a new investment bank says. On a barrel of oil equivalent basis, an equ al amount of solar power would cost about $450 a barrel even a fter factoring carbon dioxide costs of about $50 per tonne — which Mawd sley noted is more than double the current price of emission credits in Europe. Source: Centre for Global Energy Studies, April 2011 Extract 4: Indonesia’s energy challenge Indonesia is Southeast Asia’s largest energy producer and consumer. Its reliance on subsidised fossil fuels means it has m ade little progress in terms of renewable energy. Yet Indonesia has enormous renewabl e energy potential. Energy sources such as geothermal power c ould readily meet up to 40 per cent of the country’s energy needs while emitting none of the greenhouse gases like carbon dioxide that are produced by burning fossil fuels. But switching to renewable energy won’t be easy. Removing fuel subsidies is a sensit ive political issue. Promoting renewable energy requires structural adjustment and high levels of initial investment. Source: Inside Indonesia, 25 July 2011 Extract 5: Japan shifts towards renewable energy In Japan, regulated utilities, like TEPCO, control both the production and distribution of electricity. Hence operator s of wind- or solar-farms mu st sell their electricity to these renewable-energy middlemen. While ut ilities are required to purchase a small percentage of their electricit y from renewable sources (l ast year about 1.3 percent) they have no incentive or obligation to repl ace any more of their conventional power with alternatives. Furthermore, the grid itse lf is built to handle centralized thermal and nuclear plants rather than distributed renewables. A proposed new law would require utilitie s to buy all electricity generated by renewable sources. It would also introduce a feed-in tariff (FIT), requiring utilities to pay a higher price for electr icity from solar, wind, geot hermal, biomass, and small- and mid-scale hydro-electric plants. FI Ts are common throughout the world; a similar system recently helped Germany leap to the forefront of the solar market. Japan's FIT legislation faces opposition from politicians and industries concerned that the price of electricity will rise. Source: The Japan Times, 24 July 2011

4 9732/01/JC2 PRELIMINARY EXAMINATION/MJC/2011 Figure 1: Oil Prices from 1996-2010 Source: World Bank Commodity Data Figure 2: Existing world solar energy capacity, 1996-2010 Source: PV news, EPIA 0 50 100 150 200 250 300 Jul‐96 Jul‐97 Jul‐98 Jul‐99 Jul‐00 Jul‐01 Jul‐02 Jul‐03 Jul‐04 Jul‐05 Jul‐06 Jul‐07 Jul‐08 Jul‐09 Jul‐10 Jul‐11 Price Index Price Index (Oil) 0 5 10 15 20 25 30 35 40 45 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Gigawatts

5 9732/01/JC2 PRELIMINARY EXAMINATION/MJC/2011 Questions: a Compare the changes in the world pric e of oil between 1996 to 2010 with the changes in solar energy capacity over the same period. [2] b Explain why ‘artificially low energy prices increase waste and destroy incentives to invest in alternative technologies.’ (Extract 1) [6] c With the help of a diagram, explain the impact of the proposed new law on a firm like TEPCO. [4] d To what extent will the changes in oil prices impact the renewable energy market of different economies? [8] e In light of the data provided, if y ou were a consultant economist, would you recommend that Singapore leave the production of renewable energy to the market? Justify your answer. [10] Total Marks: 30

6 9732/01/JC2 PRELIMINARY EXAMINATION/MJC/2011 Question 2: The Road to Recovery Extract 4: Post-crisis Recovery Six months ago the Asian economies were among the hardest hit in the world, as exports to the rich world plunged. How can they be bouncing back when demand in America and Europe remains feeble? Do mestic demand seems to be the key, thanks to the biggest fiscal stimulus of any region of the world. On the other hand, Singapore’s bounce, for example, wa s partly due to a big increase in pharmaceuticals production, which is notoriously volatile. Sceptics argue that China alone cannot igni te economic recovery across the region because a large portion of Asia’s exports to China