Over the next few weeks, world leaders will gather at the COP26 summit in Glasgow as they continue to set a course for global greenhouse gas emissions to reach net zero by 2050.
At the same time, a global shortage of natural gas due to low stockpiles has sparked a supply crunch around the world, pushing up power prices and leading policymakers to grapple with potentially sky-high power bills come winter.
While oil and gas prices have historically always been volatile and are expected by analysts to normalize again after the winter, it raises the question of their impact on the energy transition.
We provide our key takeaways below:
Over-reliance on fossil fuel imports leads to energy supply shocks and volatility:
The current energy price hikes are a reminder to societies that a more diverse supply would help energy independence and weaken reliance on volatile oil and gas prices.
Despite the strong growth in renewables over the past years, the EU energy mix is still composed of around 70% fossil fuels today (coal, oil and gas) and more than three-quarters of EU’s natural gas imports rely on 4 countries (Russia, Norway, Algeria and Qatar), with Russia accounting for approximately 40% (source: Eurostat).
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Today’s situation clearly highlights the importance of focusing on increasing local supply of solar, wind, and energy storage to mitigate this reliance by boosting local power production.
Clean energy capacity buildout must accelerate to match fossil fuels phase out:
Many fossil-fuel proponents are using the current crisis to warn of the dangers of an accelerated energy transition. Indeed, it is primordial to coordinate the buildout in clean energy supply and storage with the phasing out of fossil-fuels to avoid further system shocks and volatility in the future.
However, the science is clear that we need an urgent transition away from fossil fuels if we are to avoid the worst effects of climate change with potentially much higher and severe costs on society than higher energy prices.
In fact, the International Energy Agency’s recently published World Energy Outlook stated that annual clean energy capacity additions need to quadruple compared to current levels, in order to reach net zero by 2050.
The EU Commissioner for Energy Kadri Simson has also recently made it very clear in her speech, that “we are not facing an energy price surge because of our climate policy or because renewable energy is expensive. We are facing it because the fossil fuel prices are spiking while we do not yet have enough of that green, affordable energy for everyone. We need to speed up the green transition, not slow it down” (source: EU Commission press).
Deflationary nature of renewables to counter inflationary impacts of rising fossil-fuel prices:
The current crisis has understandably led to concerns over the inflationary impact of the energy transition as we limit fossil fuel supply, since this would cause their prices – and thus energy prices - to rise.
Here it is important to remember that renewables, after having gone through a decade of drastic cost reductions and now being the cheapest source of power in most regions today (and costs are still continuing to decline), are deflationary for our energy systems because the underlying sources of energy such as wind and solar are essentially “free”.
While we may experience some moments of price volatility in the initial stages of the energy transition as economies adjust, adding more renewables and storage into the energy mix is the best way to lower our energy bills in the long-term.
Energy storage is a top priority to combat volatility in the energy transition:
Of course, changing weather conditions can cause volatility in our energy supply, i.e. when the wind doesn’t blow or when the sun doesn’t shine. Indeed, the spike in prices in Europe has not only been driven by strong demand and tighter-than-expected supply of gas, but also by lower-than-usual availability of wind resources.
Here is where the building out and development of short and long-duration energy storage will be a top priority.
Short-duration energy storage needs can already be met by utility-scale batteries, and solar projects being built today are increasingly coming with their own battery storage facilities to smoothen out the daily cycles of renewable energy production.
Long-duration energy storage still poses a challenge today, although opportunities and potential solutions are emerging in this space.
While natural gas may still have a role as a temporary solution in the near term, alternative and increasingly low-cost emissions-free long-duration energy storage sources such as pumped-hydro, biomethane, e-gases or green hydrogen will contribute to achieve net zero emission targets.
Energy efficiency’s key role in the energy transition equation:
While the discussion around the current energy crisis and the larger energy transition has been focused on the supply side (i.e. the sources of energy), the demand-side of the equation is often overlooked.
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Energy-efficient and smart demand-response systems are an important way to manage supply and price volatility in our energy systems, stabilize overall energy demand while bringing down cost of energy bills for manufacturers and residents as they allow users to adjust to any fluctuations in supply and power prices.
In a scenario where energy prices are rising in addition to rising raw material costs, energy efficiency simply becomes all the more important from an overall systems and cost perspective.
Jennifer Boscardin-Ching is client portfolio manager, thematic equities team at Pictet Asset Management
Photo by Jason Blackeye on Unsplash
