to Many activistsLutzerath, an abandoned village in Germany, symbolizes the nightmare of the global energy crisis. For months, activists prevented the site from being demolished, after Robert Habeck, the country’s energy minister, allowed a utility company to mine for lignite—the dirtiest form of coal—under its painted houses. As a giant excavator approached, hundreds of policemen, unfazed by fireworks being fired at them, dragged the protesters from their posts. Now the village is empty. Its last buildings are gone.
In their fear of keeping the lights on, policymakers across Europe and Asia are reopening coal mines, keeping polluting power plants alive, and signing deals to import liquefied natural gas (LNG).lng). State-owned oil giants, such as The United Arab Emirates‘s ADNOC and Saudi Aramco, allocating hundreds of billions of dollars to boost production, even as private energy companies make huge profits. Many governments encourage the consumption of these dirty fuels by subsidizing energy use, to help citizens get through the winter.
However, the truth is that the return of the brown fuel is a subplot in a much larger story. By making coal, gas and oil scarcer and more expensive — prices remain well above long-term averages, despite recent declines — the Russian invasion of Ukraine has given renewable energy, mostly domestically generated, an important strategic and economic advantage. Indeed, even as Habeck endorsed coal exploration last year, the green politician laid out plans to expand solar and wind power, including in the stormy Rhineland in Luzerat. Officials around the world are raising renewable energy targets and allocating huge sums to fund an increase.
This complexity makes it difficult to discern whether turmoil in energy markets has helped or hindered the energy transition. to assess the overall picture, The Economist It considered a range of factors, including fossil fuel consumption, energy efficiency and the deployment of renewable energy sources. Our findings suggest that the war-induced crisis in Ukraine may, in fact, have accelerated the green transition over a surprising period of five to ten years.
As the Battle of Lutzerath indicates, the main cause for concern is that the world is burning more coal these days. Before the war, it seemed as though the appetite for fuel, having peaked in 2013, was in secular decline. But last year, consumption grew by 1.2%, exceeding 8 billion tons for the first time in history. Sky-high gas prices have prompted utility companies in Europe and parts of Asia, particularly Japan and South Korea, to use more of the stuff. Politicians extended the life of coal-fired plants, reopened closed stations and raised production ceilings. This has led to a conflict over supplies, exacerbated by the European embargo on Russian imports. Production in China and India jumped 8% and 11%, respectively, in 2022, pushing global production to a record high.
International Energy Agency (any), one of the official forecasters, says coal demand will remain high through 2025 (although he warns that cooling off is particularly difficult in current market conditions). Europe will receive less gas from Russia, and global lng Supply is likely to remain tight, which means coal will remain the bloc’s regression option. India’s appetite is likely to grow, which will increase demand. But the rise will be tempered by greater use of renewables – and coal’s fortunes after 2025 will look bleak. new lng Projects in America, Qatar and elsewhere will start, providing relief to the gas markets. At the same time, the wind and solar boom will dampen the appetite for fossil fuels, at least in China. the any The country expects to build renewable generation capacity capable of supplying 1,000 TWh by 2025, equivalent to Japan’s total power generation today.
Meanwhile, the current production capacity of both oil and gas in the world is already close to full utilization. Russia cannot easily redirect gas exports. Short on people and parts, oil rigs may soon produce less than they do now. Although energy-hungry countries have been busy signing long-term import deals lngAnd Which will force them to import fossil fuels for several more decades, volumes remain modest. Hydrocarbon companies are enjoying ample profits, but investment in new projects is declining. That spending is still well below levels from a decade ago, and a dollar of investment seems to be going a lot less today: capital spending per barrel of production, a measure of exploration and production costs, has risen 30% since 2017. Sustained demand amid slowly rising supply, and possibly declining, which would keep prices of both higher.
High prices meant that consumers and businesses sought to reduce their dependence on fossil fuels. Last year, the global economy became 2% less energy intensive—measured by the amount of energy it uses to produce one unit of it gross domestic productFastest rate of improvement in a decade. Efforts to reduce consumption are evident in Europe, helped by the unusually mild temperatures of recent months. Combined, warm weather and increased energy efficiency mean the continent used 6-8% less electricity this winter than the previous winter. All over the world capital is being mobilized on a large scale to make the economy more economical. Last year, governments, households, and businesses together spent $560 billion on energy efficiency. This money mainly went to two technologies: electric cars and heat pumps. Sales of the former nearly doubled in 2021 and 2022.
But efficiency can only make a huge difference. People are also looking for alternative sources of energy, especially in Europe. From December 2021 to October 2022, contract prices for solar and wind projects on the continent were on average 77% lower than wholesale energy prices. 257 euros per MWh (MWh), Germany average price in December A typical solar power plant takes less than three years to become profitable, versus 11 years at €50 each MWh, average spot price between 2000 and 2022. Globally, rooftop solar panel installations, which households and businesses use to cut bills, rose by half last year. A record 128 GW of onshore wind projects were also achieved, representing a 35% increase over the previous year.
These indicators cover only a fraction of the activity that has taken place since the war, because choosing a site, obtaining permits and designing large wind or solar farms can take many years. The most representative – and most encouraging – metric is the amount of money flowing into new projects. Last year, global capital spending on wind and solar assets grew from $357 billion to $490 billion, outpacing investment in new and existing oil and gas wells for the first time. Consulting firm Rystad Energy believes that investment will continue to rise over the next two years.
At the same time, fuel pressure has led to an increase in clean energy policy in the world’s largest economies. US Inflation Reduction Act (Ira) allocates $369 billion in subsidies to green technology. The European Commission has unveiled its “Net-Zero Industry Law,” which will provide at least 250 billion euros ($270 billion) to clean-tech companies, while offering a target of doubling European UnionInstalled solar power capacity to 2025, from 2030. National ambitions have also been exceeded. In July, Germany raised its target for the share of renewables in power generation by 2030 to 80%, from 65%. China’s 14th Five-Year Energy Plan, released in June, for the first time set a target for the share of renewables in power generation (33% by 2025). The country’s provincial governments are also increasingly offering green incentives.
Too much money will be spent inefficiently. the Ira It comes with a set of “Made in America” terms. In response, the European Commission plans to relax state aid rules. This industrial policy will exacerbate an already existing problem: cost inflation. Russia’s war in Ukraine has raised prices for metals such as aluminum, copper and steel, all of which are needed for cables, turbines and panels. Although some commodity prices are now falling, costs are rising due to higher interest rates—a particular issue for solar and wind farm developers, which require more upfront capital than regular power plants. High shipping and energy costs, as well as staff shortages, add to the bill. Namit Sharma of McKinsey, the consulting firm, believes that by 2030, the European Union It will have to quadruple the number of people developing, building and operating the green plants needed to achieve its goals.
All of this means that developers at the top of the green supply chain don’t make a lot of money. Several offshore wind giants have recently announced that they will be taking massive writedowns on projects. In theory, developers could charge consumers higher costs by bidding on potential projects at higher prices. But in practice, miserable new national rules and auction designs make doing so difficult. This winter Europe adopted an unexpected tax on renewable energy generators, and a cap on wholesale energy prices, effectively capping revenues. Germany’s new offshore wind bidding system makes bidders compete for how much they are willing to pay to operate projects, a system known as “negative bidding”. Never-ending bickering allows returns to be mitigated even more.
Earth, wind and fire
In an alternative, less protectionist world, the massive spending packages of America and Europe would have an even greater impact. But even in this crumbling world, they’re still pretty important—enough forecasters I’ve consulted The Economist Estimate, to accelerate the energy transition from five to ten years. Increased investment and tighter targets should create a massive amount of renewable generation capacity. all said, any Global renewable energy capacity is expected to increase by 2,400gw Between 2022 and 2027, an amount equivalent to China’s total installed power capacity today. This is nearly 30% higher than the agency’s forecast in 2021, which was issued before the war. Renewables are set to account for 90% of the increase in global generation capacity over this period.
With green energy turbocharged and fossil fuel use declining, it looks like carbon dioxide emissions will fall much faster than predicted just 12 months ago. s&s Global, a data company, believes that emissions from energy combustion will peak in 2027, the level the world would still be producing in 2028 had the war not occurred. Rystad estimates that those from electricity generation and heating alone could hit a ceiling as soon as this year. This is because the recent mad rush to secure fossil fuels is unlikely to last long or be large enough to counteract the green boom. To illustrate this, go back to Germany. Lutzerath’s fate was decided by a compromise. The agreement will see two coal plants that were due to close in 2022 run until March 2024. In return, two large plants will be shut down in 2030 — eight years earlier than planned. ■
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