High energy prices: Accelerator or disruptor of the zero carbon energy transition?

The recent spike in energy prices and concerns over shortages is finally starting to highlight the difficult choices that governments face in trying to accelerate the zero carbon energy transition and meet their net zero targets. In this article I show some of the short and long term trade offs that they will face and whether recent events will serve to accelerate the zero carbon transition, or put the brakes on it.

In the short term high natural gas prices is likely to mean that more thermal coal – and to a lesser extent more fuel oil – will need to be burnt to generate electricity. Both fuels are significantly worse for the environment than burning natural gas. This is already happening, and its likely to get worse. Coal fired generation has made a comeback in Europe this year as gas inventories dwindle and high prices incentivise the burning of coal. As we head into winter Europe’s utilities demand for coal is set to grow in order to avoid shortages. Earlier in September, Sweden’s oil fired power station started generating electricity in response to high power prices. The facility is normally only called upon during rare periods during the winter when it is especially cold.

Energy cost increases may even push parts of the global economy into a deep slowdown, if not outright recession. Since the 1970’s, the majority of recessions in the EU have been preceded by a sharp increase in commodity prices during the previous 6-18 months. And so policymakers will be eager to avoid tightening monetary policy too quickly. Here the risk is that they misdiagnose the cause of high energy prices as being demand led. If they make this mistake then they risk snuffing out any post-covid-19 rebound in activity. As high energy prices and fears of shortages weigh on businesses the correct response is to loosen policy, not tighten.

A deep economic malaise is likely to distract attention from introducing climate policies, pushing environmental priorities down the policy agenda. Citizens may push back against higher bills if they are unable to get a job or afford or access basic necessities; the French political establishment saw this risk materialise first hand in 2018 when the gilets jaunes (Yellow vests) protests forced Emmanuel Macron’s government to back down from their plan to introduce hike environmental taxes. Similar protests could happen again elsewhere in Europe or further afield. The elephant in the room is that people suddenly perceive – rightly or wrongly – that they are not being told the whole truth about the long term cost of the energy transition. A number of EU countries including Spain, Portugal and Poland have expressed concern on the pace of the transition and the current policy framework.

Longer term (post winter), the experience of high energy prices may prompt households to invest in better insulation for example, and for manufacturers to look to alternative processes that reduce the energy intensity of their operations. Both of these actions will only occur if everyone believes that high energy prices are here to stay and they are actually able to invest in energy efficiency. In a weak economic environment this may be something that can only occur with government support.

Shortages at petrol stations in the UK resulting from distribution bottlenecks has resulted in a surge in search engine activity for electric vehicles. Whether Googling EV’s will actually be followed through with a purchase will also depend on expectations over the future and individual households and businesses ability to finance that vehicle. If it is then new challenges will emerge, namely the ability of the power grid to cope with the influx of electric vehicles.

I suspect and hope that the current malaise does not accelerate the zero carbon energy transition as currently envisaged, but instead prompts a more nuanced debate about the role that fossil fuels needs to have in that transition. For example, natural gas has been demonised as a nasty fossil fuel, but lost in that cacophony of negative voices has been the role that it plays in balancing intermittent renewable power. But that very demonisation has in part led to the shortages that we see today. Natural gas producers have been disincentivised from exploring for an developing new sources, and likewise dissuaded from the merits of ensuring sufficient storage capacity is in place.

A cursory look at every previous energy transition shows that the incumbent fuel source doesn’t simply disappear. Instead, of being a zero-sum game, the emergence of new energy sources tend to result in new applications that lead to higher energy demands. The sooner that we recognise reality the sooner that smarter policies can be introduced, ones that create a more sustainable ramp up in the zero carbon energy transition and that take account of the potential for unintended consequences the better. Simply carrying on regardless is likely to lead to further energy crises in the future, with potentially far greater social, economic and political ramifications. Ignoring the economic reality of energy transitions is no longer an option.

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