NOTEXT MONTH world leaders will meet at COP26, saying they intend to set the course for net global carbon emissions to reach zero by 2050. As they prepare to embark on the 30-year endeavor, the first big fear of energy of the green era is unfolding before their eyes. Since May, the price of a basket of oil, coal and gas has climbed 95%. Summit host Britain has restarted coal-fired power plants, US oil prices have hit $ 3 a gallon, blackouts have ravaged China and India, and Vladimir Putin has just recalled to Europe that its fuel supply depends on Russia. Good will.
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Panic is a reminder that modern life needs abundant energy: without it, bills become unaffordable, homes freeze, and businesses stagnate. The panic also revealed deeper issues as the world shifts to a cleaner energy system, including insufficient investment in renewables and some transitional fossil fuels, growing geopolitical risks, and fragile security buffers in the markets of electricity. Without swift reforms, there will be more energy crises and, perhaps, a popular revolt against climate policies.
The idea of ââsuch a shortage seemed ludicrous in 2020 when global demand fell 5%, the highest since World War II, triggering cost cuts in the energy sector. But as the global economy picked up steam, demand increased even as inventories were dangerously low. Oil stocks are only 94% of their usual level, European gas storage 86% and Indian and Chinese coals below 50%.
Tense markets are vulnerable to shocks and the intermittent nature of some renewables. The list of disruptions includes routine maintenance, accidents, too little wind in Europe, droughts that reduced hydropower production in Latin America and floods in Asia that hampered coal deliveries. The world can still escape a severe energy recession: the problems can be solved and Russia and OPEC may reluctantly boost oil and gas production. At a minimum, however, the cost will be higher inflation and slower growth. And more such cutbacks may be on the way.
This is because three issues are looming on the horizon. First, energy investments are half of the level needed to reach the ambition to reach net zero by 2050. Renewable energy expenditure must increase. And the supply and demand for dirty fossil fuels must be reduced in tandem, without creating dangerous mismatches. Fossil fuels meet 83% of primary energy demand and this must drop to zero. At the same time, the mix must shift from coal and oil to gas which has less than half of coal emissions. But legal threats, pressure from investors and fear of regulations have led to a 40% drop in fossil fuel investment since 2015.
Gas is the pressure point. Many countries, especially in Asia, need it to be a transitional fuel in the 2020s and 2030s, switching there temporarily as they move away from coal but before renewables expand. In addition to using pipelines, most import liquefied natural gas (LNG). Too few projects see the light of day. According to Bernstein, a research firm, the global deficit of LNG capacity could increase from 2% of demand today to 14% by 2030.
The second problem is geopolitical, as wealthy democracies abandon fossil fuel production and the supply shifts to autocracies with less qualms and lower costs, including the one led by Mr Putin. The share of oil production of OPEC In addition, Russia could drop from 46% today to 50% or more by 2030. Russia is the source of 41% of gas imports to Europe and its influence will increase as it opens up the world. Nord Stream 2 pipeline and will develop markets in Asia. The pervasive risk is that it limits supplies.
The last problem is the flawed design of energy markets. Deregulation since the 1990s has seen many countries move from dilapidated state-run energy industries to open systems in which prices for electricity and gas are set by markets, supplied by competing suppliers who add of supply if prices skyrocket. But these are struggling to cope with the new reality of declining fossil fuel production, autocratic suppliers and a growing share of intermittent solar and wind power. Just as Lehman Brothers relied on overnight borrowing, some energy companies guarantee households and businesses the supplies they buy in an unreliable spot market.
The danger is that the shock will slow the pace of change. This week, Li Keqiang, Chinese Premier, said that the energy transition must be “healthy and well paced”, code to use coal longer. Public opinion in the West, including America, supports clean energy, but could change as high prices bite.
Governments must respond by rethinking energy markets. Larger safety margins should absorb shortages and cope with the intermittence of renewable energies. Energy suppliers should hold more reserves, just like banks hold capital. Governments can invite companies to bid on back-up power supply contracts. Most of the reserves will be in gas, but eventually battery and hydrogen technologies could take over. More nuclear power plants, carbon dioxide capture and storage, or both, are essential to providing a clean and reliable baseload energy.
A more diverse supply can weaken the hold of autocratic petro-states like Russia. Today that means building the LNG Business. Over time, more global electricity trade will be needed for windy or sunny remote countries with renewable energy to sell on to 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 subsea grids is part of the answer, and converting clean energy into hydrogen and transporting it on ships could also help.
All of this will require more than double the energy investment expenditure to reach $ 4 billion to $ 5 billion per year. Yet from an investor perspective, the policy is baffling. Many countries have net zero commitments but no plans to achieve them and have yet to agree with the public that bills and taxes need to rise. A moving feast of renewable energy subsidies and regulatory and legal hurdles make investing in fossil fuel projects too risky. The ideal answer is a global carbon price that relentlessly cuts emissions, helps companies determine which projects would make money, and increases tax revenues to support the losers of the energy transition. Yet pricing systems only cover a fifth of all emissions. The shock message is that the leaders of COP26 need to go beyond promises and tackle the fine print of how the transition will work. All the more so if they are found under light bulbs powered by charcoal. â
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This article appeared in the Leaders section of the print edition under the title “The Energy Shock”