Patrick Gilly, Per Jørgensen
April 26, 2022
What do rising energy prices mean for the green energy transition?
We explore what’s driving the unprecedented hikes over the past year in the cost of oil, gas and other fossil fuels, and what’s needed to accelerate investment in renewables.
Energy policy has once again become frontpage news, sharing the headlines with the ongoing war in Ukraine. But the current market volatility is not new per se.
In Germany, the average cost of electricity almost tripled between 2020 and 2021, according to Bloomberg. In the Nordic region, prices jumped 470% over the same period, putting energy policy at the top of the political agenda.
While EU and US leaders have announced more investments into renewables to reduce their energy reliance on Russia, it is still an open question whether higher prices for fossil fuels in isolation can drive more investment into renewable energy.
The short answer, according to Per Jørgensen, Head of Gas Infrastructure at Ramboll, is “not necessarily”.
“The higher prices are not necessarily positive for renewable energy, and certainly not for the climate,” he explains. “Because gas has become more expensive, there has been a partial switch back to coal as a source of electricity in 2021. And because coal is more polluting, we’ve seen CO2 emissions increase”.
“It is difficult to say whether the high energy prices will scare off investors; it might, but then it will almost certainly attract others,” he adds.
5 reasons why energy prices are rising
To understand the interplay between energy prices and the green transition, we have to understand why energy prices have soared. According to Per Jørgensen, there are five key drivers behind the surge:
- The Covid-19 pandemic caused demand for oil, coal and gas to plummet, which coincided with an ongoing trend of reduced investments into the sector; when the economy rebounded, supply could not match demand
- As part of the pivot to green energy, production from European gas fields is being wound down. A notable example is the Groningen field in the Netherlands, once Europe’s largest gas field, which is expected to be decommissioned in 2022
- A cold winter in Asia in 2021 increased demand for liquified natural gas; meanwhile, there has been lower than average wind production in Europe, reducing availability of electricity from renewable sources
- The EU Commission has reduced the number of carbon allowances, contributing to a rise in carbon prices
- The sanctions on Russia has caused further volatility in the energy market, particularly in the EU which in 2021 imported 40% of its gas from Russia.
How do rising energy prices impact green investments?
Some observers have compared our current moment to the energy crises of the 1970s. In 1973, a war between Israel and its neighbours led to an oil crisis, which ultimately sowed the first seeds for the nascent wind industry. Could this crisis lead to a similar outcome?
It is not out of the question, but Patrick Gilly, global division director of energy transition at Ramboll, explains that although prices are high right now, investors are unlikely to base their decisions on short-term price swings:
“Energy has always been volatile,” Patrick Gilly explains. “Investments into energy infrastructure are by nature long-term. That means investors are prepared for ups and downs, and they are unlikely to base their investment decisions on price swings during a single winter. The bigger question is whether investments into renewables can be as profitable as investments into oil and gas have been in the past.”
The answer to that question depends on a number of variables, including the price of raw materials, interest rates and regulation in the market.
Patrick Gilly expects commodity prices will impact the supply chain and cost of renewables. He compares it to a similar period starting in 2003-4 when high commodity prices led to an influx of investments in fossil fuels:
“These added investments led to a shortage of qualified workers and skilled engineers. Renewables will face the same challenge on the people side. It’s not just the price of raw materials, but also the ability to transport, and to install however many foundations for wind or solar panels,” he explains.
The price of raw materials used in solar panels and wind turbines has gone up over the past year, as rising energy prices have caused some manufacturers of commodities to curtail or stop production. But according to the International Energy Agency, commodity prices have had limited impact for new demand of renewable energy.
According to Per Jørgensen, interest rates will also have an important impact:
“With renewables, most of the cost is up-front. This makes them more sensitive to long-term interest rates, as the investment is recouped over a 30-year period, in contrast with, for instance, shale gas in the United States, where investments are recouped faster,” he explains.
A question of speed
The trillion-dollar question in the green transition is whether we are doing enough, and doing it fast enough, to avoid the worst impacts of climate change.
“It is hard to assess if we are going at right pace,” Patrick Gilly says. “But we also have to remember the energy infrastructure we enjoy today took 70 years to build. We are trying to build the alternative in 30 years or less. So of course, we are not moving fast enough. But have we moved that fast in the past? I don’t think so either,” he adds.
To contact the editor of this article, please email Anders Brønd Christensen.
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