Although the current warm winter and economic problems in China may have caused wholesale energy prices to drop back, we shouldn’t be fooled.
In the coming decade, high energy costs will be a common feature. These high energy costs are not just a result of the conflict in Ukraine. Before one Russian foot was placed in Ukraine, oil prices were at or above $100/bbl. European gas prices had also risen fourfold.
The war exposed the fragility of the energy system we have created over the past decade, especially in Europe.
This is due to the way we chose to pursue the goals of The Paris Agreement on Climate Change. During my many decades of work at BP, I saw the energy industry as thinking about energy in terms of the energy trilemma. How to provide secure, affordable, and sustainable energy for the world.
After Paris, sustainability was the only focus – how to reduce greenhouse gasses – the explicit mechanism being a decrease in fossil fuel supply and replacement with renewables.
Since Paris, capital allocation to fossil fuel industries has been drastically reduced. It is now at 60-70pc of its level in the decade before Paris. 60-70pc of current demand levels require investment. The hydrocarbons industry was also gradually demonized to the point where it was not invited last year to COP 26.
This is because no one ever consulted the customer. The demand side of the equation was not considered, nor were the implications for energy security or the prices that would be incurred if fossil fuel investments are withdrawn before alternative options are available.
The 2022 record-breaking consumption of fossil fuels saw a new high. In 2022, this was accompanied by record levels of oil, coal and gas. 2023 is expected to see even greater consumption. This is why high prices.
Many will blame the slow pace at which renewable energy is being developed. However, there are many things that could be done. We must also recognize that renewable energy has penetrated our energy system faster than any other source of energy.
Faster than wood was replaced by coal at the beginning of the industrial revolution. Oil replaced coal faster to usher in the modern age of mass mobility. Gas replaced oil faster as the world discovered a cleaner, cheaper fossil fuel in the 80s.
The problem is the need for scale and continued growth in demand. The world’s energy demand continues to rise at a rate of between 1 and 2% per year. The International Energy Agency estimates that to maintain current output levels, the global energy system needs to invest around $1.5trn per year, primarily in fossil fuels.
To transition to a low-carbon system at the speed we want, and to meet the Paris targets, will take more than twice that amount of investment. Current investment in renewable energy is approximately $1.5trn per year, compared to a requirement of as high as $4trn.
Two obstacles stand in the way of the rapid penetration of renewable energy. First, is bureaucracy in government. The permitting and approval process for renewable energy is far too slow in the whole world.
Second, although many new technologies are proven in the lab and at a pilot scale, few of them have been commercially deployed. Until that hurdle is cleared, the major institutional investors who will invest in proven technology at scale cannot do so.
Both of these problems can be solved by governments. An example of a government taking the initiative is the Inflation Reduction Act, passed by the Biden administration at the US’s end of last year.
The act focuses on permits and government support for new technologies yet to be demonstrated at scale. Hydrogen is perhaps the most prominent example.
Demand is the third area in which government can play a significant role. It’s amazing that demand was not a major area of government attention until the current crisis. Demand is now seen more as a short-term intervention to address the problem today than a strategic plank in any energy policy.
In the 80s and 70s, there was a huge improvement in energy efficiency in developed countries. From is equal to GDP growth, energy demand growth has been roughly 50% of GDP growth. If we want to see a return to low-cost energy and reach the Paris emission reduction targets, we must make a similar transition over the next decade.
We could also take action to end, or at the very least, reduce, the demonization of fossil fuel industries by politicians, activists, and media to allow them to invest more in a difficult transition. But that’s probably too optimistic.
