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News Article

Energy Markets Must Keep Pushing for Decarbonization

By María José Goytia | Thu, 09/08/2022 - 14:00

The world is facing its biggest energy crisis since the 1970s. The pandemic and geopolitical tensions have led to disruptions in supply chains and fuel price hikes, leaving the energy security of several regions in jeopardy. For Mexico, the only way out of the crisis is forward, while keeping the push toward decarbonization.

In Texas alone, the price of natural gas has increased four times over in the past two years. In Europe, the increase in natural gas prices has been much more drastic due to the Russia-Ukraine war. Against the backdrop of rising energy prices and fuel shortages looms a shortage in the winter. "If action is not taken soon, this shortage will last for some years," said Ramón Moreno, President, the Mexican Energy Association (AME).

The current energy crisis is at odds with the decarbonization and energy transition agenda pushed before the pandemic to combat climate change. Trends show that oil consumption will stabilize in the coming years, reaching peak demand in the next decade.

Owing to higher efficiency rates of other power sources and the electrification of global consumption, the shift away from oil as the main fuel is approaching. However, this trend may be delayed somewhat due to natural gas shortages and rapidly-rising energy prices in international markets.

"Energy crises can no longer be measured solely by a supply and demand issue or by geopolitical interests. The biggest challenge is how to confront the change toward an economic and energy model that facilitates the transition toward decarbonization and climate change mitigation measures," Moreno explained.

The current global energy model emerged in the 1980s as a result of the oil crisis of the previous decade. This model has been operating for over 50 years. "Likely, the reconfigurations to the energy model will also guide the economic dynamics for decades to come," Moreno explained, adding that "we must make the right adaption for our solutions to truly combat climate change."

There are four main components affecting today's energy systems: climate change, technology, energy security and policy. These components interact with each other, setting the agenda and the future of the energy market.

Climate change must be addressed in two ways: mitigation and adaptation to irreparable changes in the environment. Mitigation efforts focus on eliminating greenhouse gas emissions such as CO2 and methane. To achieve decarbonization in light energy consumption, equivalent to 65 percent of energy demand, countries need to focus on clean power production, electrification and storage. Decarbonizing the remaining 35 percent of heavy power consumption will require the development of clean fuels.

Furthermore, the world’s power systems need to adapt to new climate conditions and become resilient to different environments. As weather conditions become increasingly extreme and atypical weather events increase in frequency, power grids must be modified to maintain their power flow and prevent blackouts.

Energy security has become a priority on Mexico’s public agenda. This concept positions reliable and accessible energy supply as a key component for the well-being and integrity of countries. Energy security has two main components through which it can be understood: reliability and sovereignty.

Reliability is based on the capacity of the electricity system to generate and distribute enough energy to meet demand and to keep the system stable in the face of changes in the power flow. "The challenge is to match variable power production with instantaneous consumption," Moreno said. The intermittency of renewable sources calls into question the reliability of the system. Nevertheless, the correct implementation of storage can help mitigate these gaps.

Energy sovereignty focuses on the geopolitical implications of energy and the risk that over-dependence on the outside generates for countries on a financial level. Renewable power technologies are facilitating on-site power production, which decreases dependence on imported fuels. However, as long as the energy transition is not completed, the energy security of countries remains exposed to geopolitical tensions.

Mexico must therefore foresee the implications of its overdependence on natural gas imports from the US and aim to increase its domestic gas production while diversifying its energy matrix. To do so, the country can take advantage of the ample availability of renewable resources and protect itself from disruptions in the gas supply or price hikes in commodity markets.

Technology has been the key tool in overcoming the challenges of the energy transition. Continued innovation has enabled solar and wind energy to be at a record low levelized cost of energy. Advances in storage capacity have gradually remedied the intermittency problems of renewables, too.

Meanwhile, advancements increased the safety of nuclear power production and made it possible to find economically-viable sources of energy, for example through waste management. In addition, big data and data analytics are transforming grids, making them more efficient and stable. All these advances, are driving the energy transition toward the 2050 net zero goals.

Fatih Birol, President, the International Energy Agency, has repeatedly emphasized that "policy decisions are the most important element in combating climate change.” If this component is missing, the transformation of economic dynamics will be much more complicated and will take more time than the world likely has to prevent fatal climate change scenarios.

Mexico faces a dilemma regarding its energy future. The development of electricity infrastructure is critical to the country's economic and social development. The expansion of transmission and distribution networks is key to ensuring the right of access to energy. This infrastructure requires long-term investments from both the public and private sectors. "Incentivizing these investments requires legal certainty and regulatory certainty," Moreno said.

Long-term planning with a vision toward decarbonization is the second crucial challenge for Mexico. The transformation of the energy matrix must be based on clean resources and gradually reduce Mexico’s dependence on natural gas.

Likewise, countries must adapt their strategy to their particularities. "Mexico's energy industry cannot be imagined without the participation of state-owned companies," explained Moreno, who stressed that it is in the country's interest to have strong state energy companies. However, this is not contradictory to increasing private sector participation in favor of a successful energy transition. "Mexico's energy policy has to meet the country's needs, take advantage of the geopolitical situation and address global and long-term challenges," Moreno concluded.

Photo by:   MBN
María José Goytia María José Goytia Journalist and Industry Analyst