That’s a good recipe for volatility, Nikos Tsafos with the Centre for Strategic and International Studies, wrote in a recent analysis.
“You’re definitely moving into a system that’s more vulnerable,” Tsafos, the centre’s James R Schlesinger chair for energy and geopolitics, said in an interview.
To be clear, the transition itself – imperative for the planet – didn’t cause the squeeze. But any big, complex system can become more fragile when it’s undergoing major change.
All this is happening at a time when power consumption is projected to increase 60 per cent by 2050, according to BloombergNEF, as the world phases out fossil fuels and switches to cars, stoves and heating systems that run on electricity.
Continued economic and population growth will also drive consumption higher. And as the world moves even more into all things digital, it will mean that this heightened vulnerability comes at a time when people need reliable power more than ever.
The surge in electricity demand combined with fuel-price volatility means the world could be in a for a rocky few decades. The consequences will likely range from periods of energy-driven inflation, exacerbating income inequalities, to the looming threat of power outages and lost economic growth and production.
The planet’s energy systems are interconnected, so the crisis and its spillover are being felt across the world. The crunch has had knock-on effects across industries, obstructing silicon production, disrupting food supplies and snarling supply chains.
In the US, natural gas futures have already more than doubled this year, before the peak demand that comes with the winter cold. With 40 per cent of the country’s electricity now generated by burning gas, those higher prices will inevitably push up electricity and heating bills.
In China, even as the government pushes to ramp up renewable power, the industrial economy still relies heavily on fossil fuels: coal, gas and oil. And when its factories started humming again during the pandemic rebound, the country simply didn’t have enough fuel. Chinese manufacturing contracted in September for the first time in 19 months, suggesting that soaring energy costs have become the biggest shock to strike the economy since the beginning of the pandemic.
China’s government is now vowing to stabilise the situation by procuring more overseas coal and liquefied natural gas. That puts the nation in direct competition with Europe, threatening to starve the continent of fuel and worsen that crisis.
There will be an inevitable fight over what exports are available, leaving some developing countries such as India and Pakistan worried they can’t compete.
As major Western producers from BP to Royal Dutch Shell work to reduce emissions and America’s shale drillers take a step back from expansion, the finite amount of exportable supplies is growing tighter.
Jeff Currie, global head of commodities research at Goldman Sachs, points to underinvestment in fossil fuels as a big part of the problem.
Investors seeking the big returns that come from new businesses have been pouring money into alternative energy stocks rather than fossil fuel companies. Others are actively dumping coal and oil stocks, seeing them as a risk while the energy transition accelerates. And some fossil fuel companies have themselves started directing investments into the low-carbon future rather than focusing solely on their old role of finding, pumping and delivering more oil and gas.
“In many parts of the world, you’ve overbuilt wind, you’ve overbuilt solar,” Currie said in an interview on Bloomberg TV.
“The new economy is over-invested and the old economy is starved.”
Wind and solar power production have soared in the last decade. But both renewable sources are notoriously fickle – available at some times and not at others. And electricity, unlike gas or coal, is difficult to store in meaningful quantities. That’s a problem because on the electrical grid, supply and demand must be constantly, perfectly balanced. Throw that balance out of whack, and blackouts result.
So far, natural gas plants have served as the stable backup that wind and solar power need. That interdependence works fine, so long as gas prices aren’t going through the roof.
One of the biggest obstacles ahead will be storing power generated by intermittent wind and water sources. Solutions do exist, but it will be years before we have them at the scale on which they’re needed.“The transition is both the challenge and the opportunity,” said Amy Myers Jaffe, managing director of the Climate Policy Lab at Tufts University.
Australia and California are plugging massive batteries into the grid to keep power supplies steady when the sun sets on solar plants. That deployment is just in nascent stages, and the batteries themselves are limited, usually supplying electricity for about four hours at a time.
‘The new economy is over-invested and the old economy is starved.’
Jeff Currie, head of commodities research at Goldman Sachs
Many countries and companies have pinned their hopes on hydrogen, seeing it both as a way to store energy and as a fuel for transportation and industry.
Hydrogen can be split from water using machines called electrolyzers powered by renewable energy, whenever it’s abundant. The process produces no greenhouse gases. The hydrogen can then be burned in a turbine or fed through a fuel cell to generate electricity – all without carbon emissions. And unlike oil, gas and coal, such “green hydrogen” can be produced almost anywhere there’s water and strong sun or wind.
The first wave of green hydrogen plants is still in planning stages. Many of the potential users – heavy industries and utility companies – are still studying whether the solution will work for them. The point at which hydrogen could underpin our global energy system, if it arrives, is likely years away.
In the short term, a warm winter across the northern hemisphere would bring gas prices down and allow storage fields to fill back up. But the current price spike has served as a reminder that even as the world is trying to build a new energy system, it’s still reliant on the old one.
“It’s not just about capacity of the amount of power we can get onto the network, it’s about the flexibility and the ability to deliver that power at the right time,” said James Basden, founder and director of Zenobe Energy, which is building Europe’s biggest battery.