Many are opting out of international agreements set to reduce emissions. Is this the end of the road for the energy transition?
We live in a world with high aspirations for an economy powered solely by clean energy. Discussions at the recent United Nations Conference of the Parties (COP26) failed to clarify the speed and extent of future emissions reduction, but did foster some international agreements on such key issues as methane reduction and stopping deforestation. Despite several positive steps, however, the breaking of global agreements is rampant in many regions that have opted for dirtier energy sources. Will these disruptive episodes derail the great energy transition from moving ahead?
Transition Management
Although they promise a great future, renewables today are not a stable source of energy because their supplies are intermittent and available only in certain areas and at certain times. A lack of wind power has seen the UK and Europe scurrying for a replacement energy source and has created very nasty price spikes for natural gas as a backup fuel. Meanwhile, many industrializing economies in Asia and elsewhere continue to opt for electric power generated by the black fuel (coal) because it is more easily obtained and less expensive than many alternative energy sources. Coal may remain king in these areas over the next decade because it is cheap, relatively stable, and often produced domestically. Without international funding, these nations are likely to be slow to adopt cleaner energy sources.
These problems complicate the transition towards a cleaner energy mix, but they are manageable over the longer term. Upgrading power systems with 21st century infrastructure and storage capacity will eventually make renewables a more steady and reliable supply source. When replacement energy is required, thoughtful investment and management practices can help to reduce the risk of fluctuating prices for these other fuels. Natural gas price swings can be moderated by expanding facilities like LNG terminals and gas storage where there is a risk of scarcity. Similarly, easier access to financial markets will provide tools for managing risks by mitigating losses if the market price should suddenly spike. Hedging through a forward contract that sets a future delivery at a fixed price can be particularly effective for managing price risks.
Transition Policies
Policymakers will also need to recognize and acknowledge the benefits of having a diverse mix of energy from multiple sources that will allow them to manage their search for low-cost options as technology and markets change. Early retirement of nuclear plants in Germany, Italy, Belgium, and Switzerland without a clear strategy for providing for the rapid growth in power demand does not appear to be a wise decision. Moratoria on future natural gas use in homes in various Massachusetts and California localities in favor of all electric homes may be beneficial in the long term, but can strain existing electric grids. In the longer term, they may even restrict the energy system from adapting to changed technology or market conditions during the transition. The main disadvantage of natural gas today is its relatively high content of methane, a powerful greenhouse gas even if shorter lived than carbon dioxide. But the natural gas industry is not dormant to this challenge. Larger producers are committing heavily to responsibly produced natural gas that emits far less methane. Major success in these actions may transform the preferred energy balance.
At the heart of the back to coal issue lies its relatively low market cost for energy purchasers. Coal is traded internationally based largely on supplies from countries like Australia and the United States where coal subsidies substantially reduce its private costs to consumers. Removing or lowering these subsidies would increase coal prices and place that fuel on a more even playing field with newer, cleaner energy sources. Coal is also sold at market prices that exclude the social and environmental costs of burning it. These unaccounted-for costs include the health and economic costs associated with emissions of greenhouse gases, sulfur dioxide and oxides of nitrogen, hydrocarbons and suspended particulate matter. Allowing market prices to include these social costs would help to resolve the inconsistency between low market prices for coal and our clean-energy goals. If political factions do not allow removing subsidies and adding fees, the incentive to buy cheaply and impose costs on others will persist and slow the process.
Incentives often work perversely in the real world with imperfect international coordination. Commitments to phase out coal by 2030 have already been adopted by the new German coalition government. How will that action influence an Asian economy that already has a large exposure to the coal industry? At best, that policy would have no influence. More likely, it may stimulate more coal use in the Asian market. Germany imports all the hard coal it currently uses. When Germany releases that coal, its current exporters will reduce their price as they search for new buyers in other countries.
While the energy landscape is rapidly changing and there are reasons for eventual optimism, the energy transition will be a slow, volatile, and sometimes ugly process.
