The Importance of Renewable Energy in the Present Energy Crisis
STORY INLINE POST
The energy crisis in Europe has generated significant concern among government officials and has forced them to move the topic of energy security and affordability to the top of their agendas. Many experts fear that this priority shift will be to the detriment of environmental considerations, the third pillar of the so-called energy trilemma (security, affordability, environmental impact). While Mexico has had significant constraints on energy capacity for the last few years, up until recently, that wasn’t the case in most OECD countries, where energy security was taken for granted, barring isolated short-term events like wildfires, and energy policy discussions were focused on the speed of the energy transition toward renewables, driven by two factors. First, the ability to ramp-up installed capacity of renewable sources, and second, the economics around different energy sources (fossil fuels versus renewables), which led to different policies to encourage renewables on both the demand and supply side. Absent any concerns about energy security, the outlook was rosy for renewables considering both its attractive economics in most of the world as well as the push toward net zero by governments, companies, and society in general.
The Russian invasion of Ukraine upended this outlook. International sanctions on Russia and its subsequent response to cut supplies of oil and gas to Europe resulted in a sizable hike in global oil and gas prices and overall electricity costs. In August, the trading prices for gas reached €321 versus €27 a year ago. Combined with the recent OPEC decision to cut oil production, Brent crude oil prices increased from US$70.68 per barrel (average in 2021) to US$104.85 per barrel (average for 2022). This increase in energy and electricity costs for end-consumers has fueled inflation and forced politicians to find short-term solutions. Numerous nations have resorted to increasing supply by using coal and oil, retreating from climate targets as desperation grows among the population. For example, to make up for the decrease in the gas supply from Russia, Germany, a pioneer in the transition toward renewable energy, has extended production in coal plants until 2024. Other short-term solutions that have been implemented to alleviate the price increase for end users include the implementation of price caps, subsidies to energy suppliers, tax cuts, and discounts. However, these solutions not only intensify panic but may also lead to market shortfalls. These measures also fail to address the main faults of the structure of the current energy market, leaving it susceptible to future complications and external influence.
In this context, fossil fuel suppliers are experiencing an unexpected boom and benefiting from higher profits. Despite the short-term incentives to increase supplies of oil and gas, these companies are feeling the pressure of a growing environmentally conscious society. In addition, these large corporations are aware of the volatility of prices in the energy market, and even though they are peaking at the moment, they can collapse in the future, as they did at the beginning of the pandemic. Considering limited incentives for these companies to increase production, as well as an investor community that’s increasingly focused on ESG factors and are hesitant to increase their exposure to the sector, we can expect short-term energy prices to remain high.
Oil, coal, and gas are still the biggest sources of energy accounting for more than 80 percent of global consumption. Despite the short-term potential increase in their reliance, as evidenced by the delay of retirement for certain coal plants, it is encouraging to see that even energy companies are betting on the future of renewables. For example, Repsol, the biggest oil and gas company in Spain, has publicly committed to develop projects of renewable energy with a capacity of 20 gigawatts by 2030, financed from the sale of a 25 percent stake in its oil business.4 Additionally, Shell has committed to reducing its emissions 20 percent by 2030, 45 percent by 2035 and to become carbon neutral by 2050. BP has also pledged to achieve net zero by 2050, with very clear transition milestones to achieve it. While one can argue that these plans are not aggressive enough, and some even accuse these companies of greenwashing, we should not minimize the fact that there is consensus on the direction that we need to take.
Governments are also looking to accelerate this transition. The European Commission has launched the REPowerEU plan, which will drastically accelerate the clean energy transition in the region and seeks to remove Russian fossil fuels from the energy mix by 2030. To achieve this, a key factor is the diversification of energy sources to include multiple sources (wind, solar, hydrogen, nuclear); a second is the balance between domestic production and imports. Some renewable sources of energy allow for enhanced levels of self-sufficiency as they utilize natural resources that are omnipresent, like the sun or the wind, removing dependency on the scarce and monopolized supply of fossil fuels.
Domestic production of renewable energy generates additional advantages for the country: First, it can stabilize the trade balance, by reducing imports and in some cases even exporting excess energy. Second, it has been established that renewable energy sources are in many cases cheaper and therefore lead to a reduction in electricity costs, driving competitiveness and benefiting the end customer. Third, the first World Energy Employment Report published by the IEA indicates that growth in the renewable energy sector has the biggest potential for job creation.
The transition toward renewable energy is still in its preliminary stages. For 2022, projections indicate an 8 percent increase in renewable capacity, with solar as the leading source. However, according to the IEA, current investment in renewable projects does not support the aggressive targets set in the COP26 to achieve net zero. Moreover, the recovery of the post-pandemic economy has resulted in a 4 percent increase in energy demand, which has been fulfilled by fossil fuels. To satisfy the growing demand in a sustainable way, large players in the global economy, both in the public and private sectors, need to allocate more funds to renewable energy. Additionally, renewables, policies and regulatory frameworks need to align at the local, national, and international levels. It is necessary to set clear and comprehensive targets that define commitments from the general public, businesses, large corporations, governments, and international organizations.
We should not forget that despite the challenging short-term environment, there is long-term momentum toward renewables. The IEA points out that thanks to record deployment of renewables and EVs, the CO2 intensity of the world’s energy supply is improving again after worsening in 2021 when the economy rebounded sharply. Annual renewable capacity additions broke a new record in 2021, increasing 6 percent to almost 295GW, despite the continuation of pandemic-driven supply chain challenges, construction delays and record-level commodity prices for raw materials. Distributed generation, including rooftop solar, will continue to become an even bigger part of the transition toward renewables. There is a future where solar panels are ubiquitous, in every home and business. All efforts to accelerate this will help us reduce CO2 emissions and mitigate climate change.