Despite the fact that wholesale energy prices have dropped due to the warm winter and economic difficulties in China, we shouldn’t be deceived.
High energy costs will become a regular feature in the next decade. High energy costs are not a result only of the conflict in Ukraine. Oil prices were above $100/bbl before Russia placed a foot in Ukraine. The European gas prices have also increased fourfold.
The fragility of the energy system that we created in the last decade, particularly in Europe, was exposed by the war.
This is because of the way we pursued the goals of The Paris Agreement on Climate Change. During my decades working at BP, I came to see the energy industry in terms of the energy trilemma. How to ensure that the world has access to affordable, secure, and sustainable energy.
After Paris, sustainability was the sole focus. It was about how to reduce greenhouse gases. The explicit mechanism was a decrease of fossil fuel supply and its replacement by renewables.
Capital allocations to fossil fuel industries have been dramatically reduced since Paris. It now stands at 60-70pc, compared to the level it was in the decade prior to Paris. Investment is required for 60-70pc current demand levels. Hydrocarbons were also slowly demonized until it was not invited to COP 26, last year.
Because no one has ever spoken to the customer. It was not possible to consider the demand side of the equation, or the implications for energy security and the potential price increases if fossil fuel investments were withdrawn before other options are available.
A new record was set for 2022’s record-breaking fossil fuel consumption. This was accompanied with record levels of oil and coal, as well as gas. In 2023, there will be even more consumption. This is the reason for high prices.
Many will point fingers at the slow pace of renewable energy development. There are many things that can be done. It is important to recognize that renewable energy penetrates our energy system quicker than any other source.
Coal was replaced at the start of the industrial revolution faster than wood. To usher in mass mobility, oil replaced coal quicker. As the 80s saw the discovery of a cleaner and cheaper fossil fuel, gas replaced oil quicker.
Problem is that demand and scale are both required. The world’s energy consumption continues to grow at an average of 1 to 2% per annum. According to the International Energy Agency, to maintain current output levels, global energy systems must invest approximately $1.5trn annually, mainly in fossil fuels.
It will take twice as much investment to transition to a low carbon system and meet the Paris targets. The current investment in renewable energy amounts to approximately $1.5trn annually, while the requirement for $4trn is as high as possible.
The rapid penetration of renewable energy is hindered by two obstacles. The first is bureaucracy within government. In the entire world, the permitting and approval process of renewable energy is too slow.
Second, even though many of the new technologies have been proven in pilot and lab settings, very few have been commercially implemented. The major institutional investors that will not invest in scale-able technology cannot do so until this hurdle is removed.
Governments can solve both of these problems. The Inflation Reduction Act was an example of a government taking initiative, which was passed by the Biden administration at last year’s US elections.
This act covers permits and government support for technologies that are yet to be proven at large scale. Hydrogen is the most well-known example.
The third area where government can play an important role is demand. It is amazing that until the current crisis, demand wasn’t a priority area for government attention. Now, demand is seen as more of a short-term solution to the current problem than a strategic plank within any energy policy.
There was a significant improvement in energy efficiency in developed nations during the 70s and 80s. Energy demand growth has been approximately 50% of GDP growth since the 1980s, when it was equal to GDP growth. We must see a similar transition in the coming decade if we are to achieve the Paris emission reduction targets and return to low-cost electricity.