Access to affordable energy

 

We are currently in the middle of a third energy crisis, as the Ukraine conflict rages on. With the ongoing Russia-Ukraine conflict, climate goals may need to come second to energy supply concerns caused by higher energy prices and clogged supply chains worldwide. Europe has already seen its major gas supplier Russia collapse. However, multi-decade high inflation and soaring interest rates may still considerably worsen the situation. 

Industry players are all too familiar with the energy trilemma – the struggle that companies and policymakers face in ensuring a secure and reliable energy supply, at an affordable cost, with minimal environmental impact. Add increasingly frequent climate-related disasters, and we find ourselves at an energy inflection point as an industry and a society. Businesses and governments must develop new strategies to meet critical energy goals in an ever-more complex environment. 

While global reliance on hydrocarbons will decline, new dependencies on critical minerals and technology will arise. Minerals powering the energy transition – like lithium, copper, cobalt, nickel, and rare earth elements – need additional investment. Their supply sources and demand centers will become new points of vulnerability, as well as economic and geopolitical advantages, shifting the geopolitics of resource policy.

I am not convinced that the current energy crisis will expedite the movement toward energy transitions. The whole debate around energy transitions and climate change ignores the political economy of this highly important policy issue. However, fossil fuel investment is hopefully on the decline, as the UN’s Antonio Guterres urges G20 countries to “dismantle coal infrastructure”, branding further government spending on fossil fuels “delusional. According to Climate Action Tracker (CAT), countries’ net-zero aspirations are still inadequate. Only 6 of the 41 nations covered by the CAT, accounting for 8% of global GHG emissions, have set ‘acceptable’ net zero objectives. Those six countries are Chile, Colombia, Costa Rica, the EU, the UK, and Vietnam. The US is evaluated as ‘average’, while Japan and China rank as ‘poor’.

Developing economies are more impacted by the energy crisis, with less access to resources, weaker economic frameworks, and volatile currencies. Thus, they are slower in phasing out fossil fuels, with insufficient renewables investment, often buying fossil fuels on the black market. According to the latest IEA figures, outlined in the World Energy Investment 2022 report global clean energy investment is picking up and is predicted to surpass $1.4 trillion in 2023, accounting for nearly three-quarters of global energy investment growth. Since 2020, the annual average growth rate in clean energy investment has increased to 12% from just over 2% in the five years following the signing of the Paris Agreement in 2015.

Governments will increasingly look to diversify supply chains and secure critical minerals and energy from domestic or friendly sources. Broader environmental, social, and geopolitical considerations will also impact policy and the success of energy transition projects. Higher costs, including higher interest rates, are forcing governments to trade-off between affordability and decarbonization, often favoring fossil fuels in the immediate term.

Several countries now find it cheaper to replace natural gas with coal. In Europe, where carbon pricing is well established, permit costs have moderated this shift, though Germany will now maintain some coal plants as mitigation against natural gas price spikes.

The situation exacerbates the already patchy implementation of nations’ COP26 carbon reduction commitments, with disparities in energy costs between high- and low-action regions potentially incentivizing offshoring. These realities fundamentally change the game for businesses, policymakers, and developing economies. Companies should prepare for short-term shocks and build operational resilience to avoid major losses while developing robust scenarios to inform new strategic directions.

Another major policy achievement was the US Inflation Reduction Act, which would allow $369 billion in energy and climate change investment, with the goal of reducing US greenhouse gas emissions by 40% below 2005 levels by 2030. However, these efforts may not be quite enough, as the World Energy Outlook 2021, mentions “Today’s pledges cover less than 20% of the gap in emissions reductions that need to be closed by 2030 to keep a 1.5 degrees Celcius path within reach.