Thursday , December 9 2021

The first great energy shock of the green era



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NMES EXT world leaders will meet at the COP26, saying they aim to set a course for global net carbon emissions to reach zero by 2050. As they prepare to pledge their share in this 30-year effort, the first major energy scare of the green era unfolds ahead from his eyes. Since May, the price of a basket of oil, coal and gas has soared by 95%. Britain, the summit’s headquarters, has re-ignited coal-fired power plants, US gasoline prices have reached $ 3 a gallon, blackouts have engulfed China and India, and Vladimir Putin has just remind Europe that its fuel supply depends on goodwill.

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Panic reminds us that modern life needs a lot of energy: without it, bills become unbearable, houses freeze and businesses stop. The panic has also exposed deeper problems as the world moves to a cleaner energy system, including inadequate investment in renewable energy and some transitional fossil fuels, growing geopolitical risks and weak security buffers in energy markets. Without rapid reforms there will be more energy crises and perhaps a popular revolt against climate policies.

The idea of ​​this shortage seemed ridiculous in 2020, when world demand fell by 5%, the highest since World War II, and led to cost reductions in the energy industry. But as the world economy has grown again, demand has risen even when reserves have fallen dangerously. Oil inventories are only 94% of their usual level, European gas storage 86% and Indian and Chinese coal below 50%.

Tight markets are vulnerable to shocks and the intermittent nature of some renewable energy. The list of alterations includes routine maintenance, accidents, low winds in Europe, droughts that have reduced Latin American energy production and Asian floods that have prevented the delivery of coal. It is possible that the world will escape a severe energy recession: problems can be solved and Russia and OPEC may reluctantly increase oil and gas production. At the very least, however, the cost will be higher inflation and slower growth. And there may be more straits of this kind along the way.

This is because three problems arise. First, energy investment is running at half the level needed to meet the ambition to reach net zero by 2050. Expenditure on renewable energy needs to increase. And we need to reduce the supply and demand of crude fossil fuels together, without creating dangerous mismatches. Fossil fuels meet 83% of primary energy demand and need to fall to zero. At the same time, the mixture must move from coal and oil to gas that has less than half of coal emissions. But legal threats, investor pressure and fear of regulations have caused investment in fossil fuels to fall by 40% since 2015.

Gas is the pressure point. Many countries, particularly in Asia, need it to be a bridge fuel during the years 2020 and 2030, which will move there temporarily as they abandon coal, but before renewable energy increases. In addition to using pipes, most import liquefied natural gas (LNG). There are too few projects in operation. According to Bernstein, a research firm, the global deficit of LNG capacity could increase from 2% of current demand to 14% in 2030.

The second problem is geopolitics, as rich democracies abandon fossil fuel production and supply shifts to autocracies with less scruples and lower costs, including the one led by Putin. The share of oil production of OPEC in addition, Russia could go from the current 46% to 50% or more by 2030. Russia is the source of 41% of European gas imports and its leverage will grow as it opens the Nord Stream 2 pipeline and develops markets in Asia. . The ever-present risk is that it limits supplies.

The last problem is the faulty design of energy markets. Since deregulation since the 1990s, many countries have shifted from declining state-owned energy industries to open systems in which electricity and gas prices are set by markets, supplied by competing suppliers who add supply if prices increase. prices. But these are struggling to cope with the new reality of declining fossil fuel production, autocratic suppliers and a growing proportion of intermittent solar and wind energy. Just as Lehman Brothers relied on overnight lending, some energy companies also guarantee homes and businesses the supplies they buy in an unreliable one-off market.

The danger is that the shock will slow down the pace of change. This week Li Keqiang, China’s prime minister, said the energy transition must be “healthy and well-paced,” a code to use coal for longer. Public opinion in the West, including the US, supports clean energy, but it may change as high prices bite.

Governments must respond by redesigning energy markets. Larger safety dampers should absorb scarcity and cope with the intermittency of renewable energy. Energy suppliers should have more reserves, just as banks carry capital. Governments can invite companies to bid for energy supply contracts. Most of the reserves will be in gas, but eventually battery and hydrogen technologies could take over. More nuclear power plants, the capture and storage of carbon dioxide, or both, are vital to providing a clean and reliable basic energy load.

A more diverse supply may weaken the grip of autocratic petrostats like Russia. Today that means building the LNG business. Over time it will require greater global trade in electricity so that distant, windy or sunny countries with excess renewable energy can export it. Today only 4% of electricity in rich countries is traded across borders, compared to 24% of world gas and 46% of oil. Building underwater networks is part of the answer and converting clean energy into hydrogen and transporting it to ships could also help.

All of this will require capital expenditure on energy to more than double to $ 4-10 million to $ 5 million a year. Still, from an investor perspective, the policy is baffling. Many countries have zero net commitments, but have no plans to reach them and have not yet agreed with the public that bills and taxes need to go up. A mobile party of subsidies for renewable energy and regulatory and legal hurdles make investing in fossil fuel projects too risky. The ideal answer is a global carbon price that non-stop reduces emissions, helps companies judge which projects would make money, and increases tax revenue to support energy transition losers. However, pricing systems cover only one-fifth of emissions. The message of the shock is that the leaders of COP26 has to break promises and address the fine print of how the transition will work. Especially if they are under coal-fired light bulbs.

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This article appeared in the Leaders section of the print edition under the title “The Energy Shock”

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