The “energy trilemma” is a term often used to describe the challenge of supplying sustainable, secure, and affordable energy. The emphasis in recent years, especially in Europe, has been on the sustainable and affordable attributes. The EU’s Fit for 55 plan promises a 55% reduction in greenhouse gas emissions by 2030, on the way to net-zero greenhouse gas emissions by 2050. Plummeting costs for renewable electricity have been making those goals a bit easier to achieve. Between 2010 and 2020, solar electricity costs fell by 85% and wind electricity costs fell by 56%. Renewable electricity today is often cheaper to produce than electricity from fossil fuels.
However, with Russia’s invasion of Ukraine, the secure portion of the trilemma is the key issue for 2023. The situation in energy markets is different from past crises, turning old ideas about energy security upside down.
The world is experiencing its first global natural gas crisis. Before liquified natural gas (LNG) was widely traded, pipelines linked sellers and buyers of natural gas in a long-term exclusive relationship, rather like a marriage. Pipelines are still crucial – in 2020 pipelines supplied about three-quarters of Europe’s imported natural gas. But the advent of LNG trading means that regional supply crunches can now ripple through global natural gas markets, as LNG is attracted to markets with high prices. Russia’s cut off of natural gas supply to Europe is rippling through markets in Asia, Africa and Latin America. A slowdown in China’s economy due to COVID is helping to keep LNG prices down somewhat, but that may not continue. I fear that Europe has not seen the high point of natural gas prices.
Global oil markets are also experiencing something completely new. Oil consumers are weaponising demand for oil, unlike the oil crises of the 1970s when producers withheld supply to punish consumers. The EU and G7 have sanctioned maritime shipping and finance of Russian oil, but are allowing sales to avoid the sanctions if the oil is sold subject to a price cap. It remains to be seen how well the price will work; enforcement is difficult and the initial price cap is close to the price the Russians are already getting for their oil from customers outside the EU and G7. But oil markets are in uncharted and uncertain territory.
Clearly, an energy system based on renewable electricity and other non-fossil sources would have prevented this mess, but the world just isn’t there yet. Even for renewable electricity, which is affordable and feasible today, the transition takes time and investment capital. In other industries, the technologies to move away from fossil fuels are immature, such as those required for steel or ammonia production. Other uses of fossil fuels are diffuse and particularly time- and resource-intensive to replace. For instance, natural gas heating is prevalent in much of Europe. Changing to electric heat pumps means replacing the heating systems in millions of individual homes and businesses.
The great challenge for policy makers and the energy industry is that the world wants more fossil fuels right now, but not forever. We need to feed the energy system we have today while we work to transform it into the system we want for the future.
The key to achieving both of these goals at once is to find ways to meet current energy needs in future-friendly ways. This involves avoiding lock-in of fossil fuel infrastructure, through financial or technical means. Financially, that might mean structuring financing and contracts for new LNG import facilities in Europe such that they can recoup their costs faster. This would allow investors to achieve return on their investment while still shutting down the facility when it is no longer needed. From a technical perspective, it might involve building natural gas pipelines that could carry green hydrogen in the future. Not all natural gas infrastructure can be adapted to hydrogen. Hydrogen is a much smaller molecule that is more prone to leaks, and hydrogen requires different metallurgy to prevent pipelines carrying it from becoming brittle and cracked. But if pipelines are designed to carry hydrogen up-front, they could be repurposed later. This is particularly relevant for pipelines from North Africa, an area with an abundance of natural gas and renewable resources. Even running coal plants past their planned retirement dates, or turning on retired coal plants, could be good decisions in the short term. Although these plants will result in greater greenhouse gas emissions now, they are an inexpensive way to keep the lights on in a time of crisis, allowing focus on investments for the future.
Europe is going through a particularly difficult time when achieving all three energy supply goals – sustainable, secure, and affordable energy – seems nearly impossible. Nonetheless, a future energy system less dependent on fossil fuels will be less prone to crises such as the one we are currently experiencing. Europe and the rest of the world will weather the energy market storm caused by Russia’s aggression in Ukraine and come out stronger in the end.
