How war and subsidies changed the green transition. Report Economist
The crisis caused by the war in Ukraine may have accelerated the green transition by five or ten years. The deepening of the Economist
For many activists, Lutzerath, an abandoned village in Germany, holds the nightmare of the global energy crisis. Activists blocked the site's demolition for months after Robert Habeck, the country's energy minister, allowed a utility company to mine lignite, the dirtiest form of coal, under its graffitied houses. As a giant excavator approached, hundreds of policemen, heedless of the fireworks thrown at them, chased the protesters from their positions. Now the village is empty, the last buildings have disappeared.
In a panic to keep the lights on, politicians across Europe and Asia are reopening coal mines, keeping polluting power plants running, and signing deals to import liquefied natural gas (LNG). State-owned oil giants, such as the UAE's Adnoc and Saudi Aramco, are setting aside hundreds of billions of dollars to boost production, even as private energy companies are raking in huge profits. Many governments encourage the consumption of these dirty fuels by subsidizing the use of energy, to help citizens get through the winter.
But the reality is that the return of fossil fuels is a subset of a much bigger story. By making coal, gas and oil scarcer and more expensive – prices remain well above long-term averages, despite recent declines – Russia's invasion of Ukraine has given renewables, which they are mostly generated domestically, a significant strategic and economic advantage. Indeed, although Habeck backed coal mines last year, the green politician has unveiled plans to expand solar and wind power, including in the windswept Rhineland of Lutzerath. Around the world, politicians are raising targets for renewable energy and setting aside huge sums to finance plant construction.
This complexity makes it difficult to discern whether the turmoil in energy markets has helped or hindered the energy transition. To assess the big picture, The Economist looked at a number of factors, including fossil fuel consumption, energy efficiency and the spread of renewable energy. Our results suggest that the crisis caused by the war in Ukraine may have accelerated the green transition by as much as five or ten years.
Smoke signals
As the Battle of Lutzerath suggests, the main cause for alarm is that the world is burning more coal these days. Before the war, it appeared that appetite for this fuel, having peaked in 2013, was in chronic decline. Last year, however, consumption grew by 1.2%, exceeding 8 billion tons for the first time in history. Skyrocketing gas prices have prompted utilities in Europe and parts of Asia, especially Japan and South Korea, to use the fuel much more. politicians have extended the life of coal-fired plants, reopened closed ones and lifted production caps. This has led to a scramble for supplies, exacerbated by Europe's ban on imports from Russia. In China and India, production increased by 8% and 11% respectively in 2022, taking world production to a record level.
The International Energy Agency (IEA), an official analyst agency, predicts that demand for coal will remain high through 2025 (although it warns that forecasting is particularly difficult in current market conditions). Europe will receive less gas from Russia and global LNG supply will likely remain constrained, meaning coal will remain the bloc's fallback option. India's appetite will likely grow, boosting demand. But the increase will be mitigated by an increase in the use of renewable energy and, beyond 2025, the fate of coal looks bleak. New LNG projects in America, Qatar and elsewhere will come on stream, relieving gas markets. At the same time, booming wind and solar will reduce appetite for fossil fuels, not least in China. The IEA expects the country to build renewable generation capacity capable of supplying 1,000 terawatt hours by 2025, equal to Japan's current total electricity generation.
Meanwhile, the world's current oil and gas production capacity is already close to being fully utilized. Russia cannot easily redirect gas exports; its oil rigs, lacking personnel and spare parts, may soon produce less than they do now. Although energy-hungry countries have pledged to sign long-term LNG import deals that will force them to import the fossil fuel for decades to come, volumes remain modest. Hydrocarbon companies are enjoying juicy profits, but investment in new projects is declining. Spending remains well below levels of a decade ago, and a dollar of investment appears to be going less far today: Capital spending per barrel of production, a measure of exploration and production costs, has increased by 30 % since 2017. Strong demand and slowly increasing, possibly even declining supply should keep prices high for both.
High prices mean that consumers and businesses have sought to reduce their reliance on fossil fuels. Last year, the world economy became 2% less energy-intensive – measured by the amount of energy used to produce a unit of GDP – the fastest rate of improvement in a decade. Efforts to consume less are most evident in Europe, which has been favored by unusually mild temperatures in recent months. Thanks to warm weather and increased energy efficiency, the continent used 6-8% less electricity this winter than last winter. All over the world, capital is being mobilized on a massive scale to make the economy more frugal. Last year governments, households and businesses together spent $560 billion on energy efficiency. This money went mainly to two technologies: electric vehicles and heat pumps. Sales of the former nearly doubled in both 2021 and 2022.
But efficiency can only make a big difference. People are also looking at alternative energy sources, especially in Europe. From December 2021 to October 2022, contract prices for the continent's wind and solar PV projects averaged 77% below wholesale energy prices. At €257 per megawatt-hour (mWh), the average price in Germany in December, a typical solar installation takes less than three years to become profitable, versus 11 years at €50 per mWh, the average spot price between 2000 and 2022 Globally, installations of rooftop solar panels, which households and businesses use to cut bills, increased by half last year. A record 128 GW of onshore wind power project was also launched, an increase of 35% over the previous year.
These indicators cover only a fraction of post-war activity, because selecting a site, obtaining permits and planning large wind or solar farms can take many years. A more representative, and even more encouraging, yardstick is the amount of money flowing into new projects. Global capital spending on wind and solar plants grew from $357 billion to $490 billion last year, outpacing investment in new and existing oil and gas wells for the first time. Consultancy firm Rystad Energy believes investment will continue to increase over the next two years.
At the same time, the fuel squeeze has given a boost to clean energy policies in the world's major economies. The US Inflation Reduction Act (IRA) allocates $369 billion in subsidies for green technologies; The European Commission has presented a " Net-Zero Industry Act ", which will provide at least 250 billion euros ($270 billion) to cleantech companies, also anticipating the goal of doubling the installed solar capacity in the EU to 2025, from 2030. National ambitions have also been scaled back. In July, Germany raised its target for a renewable share of electricity generation by 2030 to 80%, from 65%. China's 14th Five-Year Energy Plan, released in June, sets the first once a goal for the share of renewables in energy production (33% by 2025). The country's provincial governments are also increasingly offering green incentives.
Much of the money will be spent inefficiently. IRA comes with a set of “Made in America” clauses. In response, the European Commission is planning to relax state aid rules. This industrial policy will aggravate an already existing problem: that of cost inflation. Russia's war in Ukraine has driven up the price of metals such as aluminum, copper and steel, all of which are essential for cables, turbines and panels. Although the prices of some raw materials are now falling, costs are being pushed up by rising interest rates, a particular problem for solar and wind farm developers, which require more upfront capital than conventional power plants. High transportation and energy costs, as well as staff shortages add another burden to the bill. Namit Sharma of consultancy McKinsey believes that by 2030 the EU will need to quadruple the number of people developing, building and operating the green facilities needed to achieve the goals.
All of which means that developers at the top of the green supply chain aren't making much money. Several offshore wind giants have recently announced that they will make large write-downs on projects. In theory, developers could pass the higher costs on to consumers by bidding on potential projects at higher prices. But in practice new national rules and auctions make this difficult. This winter, Europe adopted a tax on renewable energy generators and a cap on wholesale energy prices, effectively capping yields. Germany's new offshore wind tender system has bidders compete over how much they are willing to pay to manage projects, a system known as a 'negative bid'. Endless licensing disputes further dilute returns.
Earth, wind and fire
In an alternative, less protectionist universe, the vast spending packages of America and Europe would have an even greater impact. But even in this fallen world, they're still quite important: according to experts consulted by the Economist, they're enough to accelerate the energy transition by five to ten years. The investment surge and tighter targets are expected to create a huge amount of renewable generation capacity. Overall, the IEA projects that global renewable energy capacity will increase by 2,400 GW between 2022 and 2027, an amount equivalent to all of China's installed electricity capacity today. This is an increase of nearly 30% from the agency's 2021 forecast, released before the war. Renewables are expected to account for 90% of the global generation capacity increase over the period.
With the rise of green energy and the decline in the use of fossil fuels, carbon dioxide emissions are expected to fall much faster than predicted just 12 months ago. S&p Global, a data company, believes emissions from energy burning will peak in 2027, at a level the world would still be producing in 2028 if there hadn't been war. Rystad estimates that those from electricity and heat generation alone could hit a ceiling as early as this year. That's because the recent rush to buy fossil fuels is unlikely to last long or be big enough to counter the green boom. For an illustration of this, let us return to Germany. Lutzerath's fate was sealed by compromise. The agreement provides that two coal-fired plants that were due to be closed in 2022 remain in operation until March 2024. In exchange, however, two larger plants will be decommissioned in 2030, eight years earlier than planned.
(Excerpt from the press release of eprcommunication)
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/energia/transizione-verde-guerra-sussidi/ on Sun, 19 Feb 2023 06:59:01 +0000.