The first big energy shock of the green era

nEXTENDED MONTH World leaders will be on the POLICE OFFICER26 summit, saying they want to set a course for global net carbon emissions to zero by 2050. As they prepare to make their contribution to this 30 year endeavor, the first great energy panic of the green era unfolds before their eyes. Since May, the price of a basket of oil, coal, and gas has risen 95%. Britain, the host of the summit, has restarted its coal-fired power plants, American gasoline prices have hit $ 3 a gallon, power outages have hit China and India, and Vladimir Putin has just reminded Europe that its fuel supply depends on Russian goodwill.

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The panic is a reminder that modern life needs abundant energy: without it, bills become unaffordable, houses freeze and business comes to a standstill. The panic has also exposed deeper problems as the world shifts to a cleaner energy system, including insufficient investment in renewable energy and some fossil transitional fuels, rising geopolitical risks, and weak buffers in electricity markets. Without rapid reforms, there will be more energy crises and perhaps a popular revolt against climate policy.

The notion of such a shortage seemed ridiculous in 2020 when global demand fell 5%, the steepest since World War II, resulting in cost reductions in the energy industry. But as the global economy regained momentum, demand has increased even though inventory has become dangerously low. Oil reserves are only 94% of their usual level, European gas storage facilities are 86%, and Indian and Chinese coal are below 50%.

Tense markets are prone to shocks and the sporadic nature of some renewables. The list of incidents includes routine maintenance, accidents, lack of wind in Europe, droughts that have reduced Latin American hydropower production, and Asian floods that have hampered coal supplies. The world could still escape a severe energy recession: the breakdowns could be fixed and Russia and OPEC can reluctantly boost oil and gas production. However, the cost will be at least higher inflation and slower growth. And more such bruises could be on the way.

That’s because three issues play a big role. First, energy investments are only running half as much as needed to meet the target of net zero by 2050. Renewable energy spending must increase. And the supply and demand for dirty fossil fuels must be reduced together without creating dangerous imbalances. Fossil fuels cover 83% of the primary energy requirement and this must decrease to zero. At the same time, the mix of coal and oil must be switched to gas, which causes less than half of coal emissions. But legal threats, pressure from investors, and fear of regulation have all caused fossil fuel investments to plummet 40% since 2015.

Gas is the pressure point. Many countries, especially in Asia, will need it as a bridge fuel in the 2020s and 2030s, temporarily switching to it when they give up coal but before renewables are ramped up. In addition to using pipelines, most import liquefied natural gas (LNG). Too few projects come onto the market. According to Bernstein, a research firm, the global deficit is in LNG Capacity could increase from 2% of demand today to 14% by 2030.

The second problem is geopolitics, as rich democracies are giving up fossil fuel production and shifting supply to autocracies with fewer scruples and lower costs, including those led by Mr Putin. The proportion of oil production from OPEC Also, Russia could increase from 46% today to 50% or more by 2030. Russia is the source of 41% of Europe’s gas imports and its influence will increase as it opens the Nord Stream 2 pipeline and enters markets in Asia. The ever-present risk is that supplies will be restricted.

The last problem is the flawed design of the energy markets. Deregulation since the 1990s has resulted in many countries moving from the ailing state energy industry to open systems in which electricity and gas prices are determined by the markets supplied by competing suppliers who increase their supply when prices rise . However, these are struggling to cope with the new reality of the decline in fossil fuels, autocratic suppliers, and an increasing share of intermittent solar and wind power. Just as Lehman Brothers relied on overnight borrowing, some energy companies guarantee supplies to households and businesses that they buy in an unreliable spot market.

The danger is that the shock will slow the pace of change. This week, Li Keqiang, China’s prime minister, said the energy transition must be “solid and swift,” a code for longer use of coal. Public opinion in the West, including America, supports clean energy but could change if high prices bite.

Governments must respond by reshaping energy markets. Larger safety buffers should cushion bottlenecks and deal with the intermittent nature of renewable energies. Energy suppliers should hold more reserves, just like banks should carry capital. Governments can invite companies to bid for backup energy supply contracts. Most of the reserves will be in gas, but at some point battery and hydrogen technologies could gain the upper hand. More nuclear power plants, carbon capture and storage, or both, are critical to delivering a base load of clean, reliable electricity.

A more diverse offer can weaken the influence of autocratic petrostats like Russia. Today that means building the LNG Companies. Over time, it will require more global electricity trading so that distant windy or sunny countries that have renewable energies can 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 networks is part of the answer, and converting clean energy to hydrogen and transporting it on ships could also help.

All of this requires energy capital expenditures to more than double to $ 4 to 5 trillion a year. But from an investor perspective, the policy is confusing. Many countries have net zero promises but no plan on how to get there and have yet to grapple with the public about the need to increase bills and taxes. A moving feast of renewable energy subsidies, as well as regulatory and legal hurdles, make investing in fossil fuel projects too risky. The ideal answer is a global carbon price that tirelessly cuts emissions, helps companies assess which projects would make money, and increases tax revenues to support the losers in the energy transition. However, pricing models only cover a fifth of all emissions. The message of shock is that leaders are at POLICE OFFICER26 need to go beyond commitments and address the fine print of how the transition will work. Even more so when they meet under coal-powered lightbulbs.

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This article appeared in the Leaders section of the print edition under the heading “The Energy Shock”

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