Tuesday , February 7 2023

The first major energy shock of the green era


N.EXT MONTH world leaders will gather at the COP26 summit, saying it intends to set a target for zero global carbon emissions to reach zero by 2050. As it prepares for the promise of its part in this 30-year endeavor, the first major energy crisis of the green era explodes for it. eyes. Since May, the price of a basket of oil, coal and gas has risen by 95%. Britain, the host of the summit, has turned its coal streams back on, US gasoline prices have hit $ 3 a gallon, blackouts have polluted China and India, and Vladimir Putin has just reminded Europe that its supply of fuel depends on Russia goodwill.

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Panic is a reminder that modern life requires abundant energy: without it, bills become unaffordable, houses freeze and businesses cease. The panic has also exposed deeper problems as the world shifts to a cleaner energy system, including inadequate investment in renewable energy and some transition to fossil fuels, increasing geopolitical risks and weak security buffers on power markets. Without rapid reforms, there will be more energy crises and perhaps a popular uprising against climate policy.

The idea of ​​such a deficit seemed ridiculous in 2020 when global demand fell by 5%, the most since World War II, leading to cuts in the energy industry. But because the world economy is up again, demand has increased, even when supplies are dangerously low. Oil inventories are only 94% of their normal 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 disruptions includes routine maintenance, accidents, bad winds in Europe, droughts that have reduced Latin American hydropower production, and Asian floods that have hampered coal supplies. The world can still escape a severe energy recession: the glitches can be solved and Russia and OPEC can furiously stimulate oil and gas production. At the very least, however, the costs will be higher inflation and slower growth. And more such pinches may be on the way.

That’s because three problems are big. First, energy investment is at half the level needed to meet the ambition to reach net zero by 2050. Renewable energy expenditures must increase. And the supply and demand of dirty fossil fuels must be eliminated in tandem, without making dangerous mismatches. Fossil fuels meet 83% of the demand for primary energy and this should fall to zero. At the same time, the mix must shift from coal and oil to gas that has less than half of coal emissions. But legal threats, investor pressure and fear of regulation have led to a 40% drop in investment in fossil fuels since 2015.

Gas is the pressure point. Many countries, especially in Asia, need it to be a bridge fuel in the 2020s and 2030s, temporarily after shifting because they leave coal but before sustainable energy is depleted. In addition to using pipelines, most liquefied natural gas imports (LNG). Too few projects come on stream. According to Bernstein, a research firm, it has a global shortage in LNG capacity could now go up from 2% of demand to 14% by 2030.

The second problem is geopolitics, because rich democracies stop the production of fossil fuels and shift to autocracies with less scrupulos and lower costs, including the one run by Mr. Putin. The share of oil production of OPEC plus Russia could rise from 46% today to 50% or more by 2030. Russia is the source of 41% of Europe’s gas imports and its levy will grow as it opens the Nord Stream 2 pipeline and develops markets in Asia. The ever-present risk is that it limits deliveries.

The last problem is the flawed design of energy markets. Deregulation since the 1990s has seen many countries move from state-of-the-art energy industry to state-owned systems in which electricity and gas prices are set by markets, supplied by competing suppliers who add supply as prices rise. But these are struggling to cope with the new reality of reductions in fossil fuel exports, autocratic suppliers and an increasing share of intermittent solar and wind power. Just as Lehman Brothers relied on overnight loans, so some energy companies guarantee households and businesses deliveries they buy in an unreliable spot market.

The danger is that the shock will slow down the pace of change. This week, Chinese Premier Li Keqiang said the energy transition should be “sound and good pace”, code for longer use of coal. Public opinion in the West, including America, supports clean energy, but can shift as high prices bite.

Governments need to respond by redesigning energy markets. Larger safety buffers need to absorb deficiencies and deal with the interval of renewable energy. Energy suppliers should have more reserves, just as banks carry capital. Governments can invite companies to bid for backup energy contracts. Most reserves will be in gas, but eventually battery and hydrogen technologies can take over. More nuclear plants, the capture and storage of carbon dioxide, if both, are essential to provide a baseload clean, reliable power.

A more diverse supply could weaken the grip of autocratic petrostats like Russia. Today means building up the LNG company. In time, it will require more global trade in electricity, so that far-flung and sunny countries with sustainable energy savings can export it. Today, only 4% of electricity in rich countries is traded across borders, compared to 24% of global gas and 46% of oil. Building submarines is part of the response and converting clean energy into hydrogen and transporting them on ships can also help.

All of this will require capital expenditures for energy to more than double to $ 4trn-5trn per year. However, from the perspective of investors, policy is confusing. Many countries have non-zero promises but no plan on how to get there and still have to argue with the public that bills and taxes should increase. A movable celebration of subsidies for sustainable energy, and regulations and legal obstacles make investing in fossil fuel projects too risky. The ideal answer is a global carbon price that significantly reduces emissions, helps companies assess which projects would raise money and raises tax revenues to support the energy transition losers. However, pricing schemes cover only one-fifth of all emissions. The message of the shock is that leaders are joining COP26 must go beyond the promises and small print of how the transition will work. After all, when they meet under light bulbs powered by coal.

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This article appeared in the Leaders section of the print edition under the heading “The energy shock”

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