Industry players and governments need to develop new strategies to secure affordable energy for all. Image: Unsplash/NASA
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- Industry players all too familiar with the challenges of providing an affordable energy supply and the past year has only intensified these.
- Russia's invasion of Ukraine, among other factors, has led to a surge in energy prices, meaning we are now at an energy inflection point.
- Here are eight realities policy-makers and businesses need to understand in order to develop new strategies to meet critical energy goals.
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.
The past year has intensified the challenge, with more ambitious (and urgent) COP26 commitments, Russia’s invasion of Ukraine, and the resulting global surge in energy and other commodity prices.
Add increasingly frequent climate-related disasters, and we find ourselves – as an industry and a society – at an energy inflection point. Businesses and governments must develop new strategies to meet critical energy goals in an ever-more complex environment.
This will be the key challenge for industry leaders and policymakers as they gather in Egypt for COP27, after a successful round of discussions with the energy sector in Abu Dhabi at ADIPEC 2022 , which laid the groundwork for the agreements that will be made in Sharm El Sheikh.
Eight realities will shape what happens next. Here's what they are:
1. The power of policy-making
Policymakers are rewriting the rules of the game, with potentially long-lasting effects. The fallout from Russia’s war in Ukraine is just one example of energy security concerns shifting policy direction, with impacts reverberating throughout global supply and demand.
Recall the 1979 energy crisis which led to policies that accelerated the transition away from oil. This year, Germany has rewritten its energy strategy virtually overnight after relying for decades on Russian oil and gas imports as a pillar of its economic growth strategy.
The importance of permitting reform in many countries is also becoming more clear. Without it, the policies to bring forward new energy sources will fall short, regardless of the capital expended.
2. New energy security challenges
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 centres will become new points of vulnerability, as well as economic and geopolitical advantages, shifting the geopolitics of resource policy.
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.
3. A shortage of energy efficiency measures
Reducing energy consumption through more efficient use is often called the “first fuel” as it effectively cuts demand, is quick to implement, and offers cost and climate benefits.
Instead many countries are focusing on subsidies like tax breaks, price caps, or discounts to reduce the impact of higher prices on end users.
Spain, for example, has imposed price caps on fuel and household energy usage, while the UK has lowered taxes on road fuel and offered discounts on gas and electricity. These policies, without checks, will have the opposite impact on efficiency measures, strengthening demand and exacerbating market shortfalls.
Smart subsidies should be leveraged to both shield lower-income consumers, but also ensure it does not incentivize more consumption.
4. Higher decarbonization costs
Higher costs, including higher interest rates, are forcing governments to trade-off between affordability and decarbonization, often favouring 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.
5. Government investment and ‘greenflation’
Even before Russia invaded Ukraine, renewable power producers faced supply chain issues and capacity constraints. Today, significant energy infrastructure investments are required to reorient European supply networks away from Russia and toward more diversified liquefied natural gas (LNG) imports.
This could lead to additional supply chain log jams and further cost inflation for critical components and materials, i.e., “greenflation”. Governments can help ease the delays by re-examining their permitting processes and shortening the time needed to bring new capacity to market, but inflationary pressures remain.
6. Greater energy price volatility
Volatility levels for Brent oil have risen nearly 100% since February 2022 and TTF natural gas price volatility has swung wildly as the concerns of this summer gave way to a short-term oversupply, which will quickly vanish, pushing prices upward again.
This, along with the need to deliver returns after years of lackluster results is causing oil and gas companies to delay investment decisions, with interest rate-sensitive low-carbon projects, particularly at risk.
The longer-term volatility and investment impact of energy sanctions on Russia remain to be seen.
7. Insufficient energy supply
Investments in oil and gas production have been insufficient in recent years and must be ramped up to avoid price spikes.
The growing importance of energy security and the need to bolster supply chains will require a level of energy investment not seen since 2007.
Neither have new technologies received sufficient funding. BCG sees a $22 trillion gap between current spending and 2030 needs, according to its analysis.
8. Inadequate energy access in the developing world
The economic impact of COVID-19 caused more than 100 million people to lose access to energy, reversing almost a decade of improvements. With higher energy prices and supply challenges, the number of people without energy access will only increase.
These issues have already impacted the ability of countries like Pakistan and Sri Lanka to pay for natural gas, while food and fuel protests are becoming commonplace in many parts of the world.
There is also growing anger in the developing world about inconsistent messaging: countries are being told not to develop domestic energy resources, while Europe appears to be doing the opposite.
Everyone needs access to affordable energy
These eight realities are fundamentally changing the game for businesses, policymakers, and developing economies.
Businesses should prepare for short-term shocks and build operational resilience to avoid major losses while developing robust scenarios to inform new strategic directions.
How is the World Economic Forum facilitating the transition to clean energy?
They will need to be responsive and flexible in the face of changing regulations. Those enjoying energy- or commodity-price-related revenue boom must allocate this capital with wisdom and foresight.
Balancing energy security, affordability, and environmental sustainability is more urgent and more challenging than ever. Players must collaborate in new ways to ensure that people everywhere have access to affordable energy while making the energy transition a reality.
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The views expressed in this article are those of the author alone and not the World Economic Forum.
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