For many activists, the abandoned German town of Lutzerath sums up the nightmare of the global energy crisis. Activists blocked demolition of the site for months after Energy Minister Robert Habeck allowed an energy company to tear down the town's houses to expand an open-pit mine for lignite (the dirtiest form of coal). Hundreds of policemen, undaunted by the rain of fireworks thrown at them, were dislodging protesters to make way for a giant bulldozer. Now there is nothing left of the town; and the last buildings have disappeared.
In their panic to prevent power outages, European and Asian policymakers are reopening coal mines, keeping polluting thermoelectric plants running and signing deals to import liquefied natural gas (LNG). State-owned oil giants like the Emirati ADNOC and Saudi ARAMCO are setting aside hundreds of billions of dollars to boost production, while private energy companies reap huge profits. Many governments encourage the consumption of these dirty fuels because they subsidize energy consumption to help citizens get through the winter.
What is certain, however, is that the return of the brown fuel is a subplot in a much larger story. By making coal, gas and oil more scarce and more expensive (despite recent declines, prices remain well above long-term averages), Russia's invasion of Ukraine has given renewable energy, mostly domestically generated, a major strategic and economic advantage. Indeed, while supporting coal mining last year, Habeck, who belongs to the Greens, also presented plans to expand solar and wind power, plans that include the windy Rhineland where Lutzerath is located. Around the world, authorities are raising targets for renewable energy and setting aside huge sums to finance its development.
Such complexity makes it difficult to discern whether the turmoil in the energy markets is helping or hindering the energy transition. To assess the big picture, The Economist has looked at a number of factors, including fossil fuel consumption, energy efficiency and the deployment of renewable energy. Our conclusions suggest that the crisis caused by the war in Ukraine may have accelerated the ecological transition by between five and ten years.
As the battle of Lutzerath indicates, the main cause for alarm is that the world is burning more coal today. Before the war, it seemed that the appetite for that fuel, which had peaked in 2013, seemed to be in continued decline. However, last year, consumption grew by 1.2% and exceeded 8,000 million tons for the first time. Sky-high gas prices have pushed energy companies in Europe and some parts of Asia (notably Japan and South Korea) into greater use of that fuel. Politicians have extended the life of coal plants, reopened closed ones and removed production limits. All of this has led to a supply scramble, which has been exacerbated by the European ban on Russian imports. In China and India, production increased by 8% and 11% respectively in 2022, boosting global production to a record high.
The International Energy Agency (IEA), the official body in charge of energy forecasts, predicts that the demand for coal will remain high until 2025 (although it qualifies that predictions are especially difficult in current market conditions). Europe will receive less gas from Russia and global LNG supplies are likely to remain tight, meaning coal will remain an alternative option for the EU bloc. India's consumption will probably increase, which will increase demand.
However, that increase will be tempered by an increase in the use of renewable energy, and beyond 2025 the fate of coal does not look very rosy. In the United States, Qatar and other countries, new LNG projects are going to start up that will ease the gas markets. At the same time, the rise of wind and solar power will reduce the appetite for fossil fuels, especially in China. The IEA estimates that by 2025 that country will reach a renewable generation capacity capable of supplying 1,000 terawatt-hours, equivalent to Japan's total power generation today.
Meanwhile, existing global production capacity, both for oil and gas, is close to its limit. Russia does not have an easy time reorienting gas exports; their oil rigs, understaffed and spare parts, may not take long to produce less than they do now. Despite the fact that energy-hungry countries have been engaged in signing long-term agreements to import LNG (which will force them to import fossil fuel for several more decades), the volumes remain modest.
Hydrocarbon companies obtain huge profits, but investment in new projects falls. That spending remains well below levels of a decade ago, and a dollar of investment seems to go less far today: Capital spending per barrel of production, a measure of exploration and production costs, is up 30%. since 2017. In both cases, sustained demand amid little-increasing (perhaps even declining) supply should keep prices high.
High prices cause consumers and businesses to try to reduce their dependence on fossil fuels. Last year, the global economy consumed 2% less energy (measured by the amount of energy used to produce one unit of GDP), the fastest rate of improvement in a decade. Efforts to achieve lower consumption are more evident in Europe, something favored in recent months by unusually mild temperatures. The combination of a temperate climate and greater energy efficiency has meant that the continent has consumed 6-8% less electricity this winter than the previous one. Capital is mobilized on a massive scale around the world to make the economy more lean. Last year governments, households and businesses spent $560 billion on energy efficiency. That money went mainly into two technologies: electric vehicles and heat pumps. Sales of the former almost doubled in 2021 and 2022.
However, efficiency is not enough. Alternative sources of energy are also sought, especially in Europe. Between December 2021 and October 2022, the prices of the contracts for wind and photovoltaic solar projects on the continent were on average 77% below wholesale electricity prices. At €257 per megawatt-hour (MWh), the average price in Germany in December, a typical solar plant takes less than three years to break even compared to 11 years at €50 per MWh, the average spot price between 2000 and 2022. In global terms, rooftop installation of solar panels, used by homes and businesses to cut their bills, increased by 50% last year. Onshore wind projects capable of supplying a record 128 GW were also launched, 35% more than the previous year.
Those indicators cover only a fraction of the activity that has taken place since the war, because selecting a site, obtaining permits and designing large wind or solar farms can take many years. A more representative (and even more encouraging) indicator is the amount of money flowing into new projects. Last year, global investment in wind and solar assets rose from $357 billion to $490 billion, surpassing investment in both new and existing oil and gas wells for the first time. The consultancy Rystad Energy estimates that investment will continue to increase over the next two years. At the same time, fuel restrictions have accelerated clean energy policy in the world's largest economies.
The US Inflation Cut Act allocates $369 billion to subsidies for green technology; The European Commission has presented a Net Zero Industry Law, which will provide at least 250,000 million euros to clean technology companies and which advances from 2030 to 2025 the objective of doubling the installed solar capacity in the European Union. National ambitions have also been expanded. In July, Germany raised its target for the share of renewables in electricity generation from 65% to 80% by 2030. China's 14th Five-Year Energy Plan, released in June, sets a target for the share of renewables for the first time. renewables in the generation of electricity (33% in 2025). The country's provincial governments are also increasingly offering green incentives.
Much of the money will be spent inefficiently. The Inflation Reduction Act is accompanied by a series of Made in America provisions. In response, the European Commission plans to relax state aid rules. Such an industrial policy will aggravate an already existing problem: cost inflation. Russia's war in the Ukraine has raised the price of metals such as aluminium, copper and steel, all crucial for the manufacture of cables, turbines and panels. Although the prices of some raw materials are falling, costs are pushed up by rising interest rates; a particular problem for developers of solar and wind farms, which require more start-up capital than regular power plants. And adding to the bill are high transport and energy costs, as well as staff shortages.
Namit Sharma of the consultancy McKinsey estimates that by 2030 the European Union will need to quadruple the number of people developing, building and running the green power plants needed to meet its targets. All of that means developers at the top of the green supply chain aren't making much money. Several offshore wind giants have recently announced that they will be making huge write-downs on projects. In theory, developers could pass the higher costs on to consumers by bidding on potential projects at higher prices.
However, in practice, this is made difficult by the new national rules and the design of the auctions. Europe has this winter adopted a tax on windfall profits from renewable energy generators and a cap on wholesale electricity prices. In Germany, the new offshore wind auction system forces bidders to compete for what they are willing to pay to carry out projects, a system known as a "reverse auction." Endless disputes over permits further dilute the benefits.
In an alternative and less protectionist universe, the huge spending packages of the United States and Europe would have a greater impact. However, even in our fallen world, they are still very important: they are enough, according to forecasts consulted by The Economist, to speed up the energy transition by between five and ten years. Increased investment and tighter targets should create huge renewable generation capacity. In total, the IEA estimates that global renewable energy capacity will increase by 2,400 GW between 2022 and 2027, an amount equivalent to all installed capacity in China today. That figure is almost 30% higher than the agency's forecasts for 2021, published before the war. Renewables will account for 90% of the increase in global generation capacity during that period.
With the rise of green energy and the use of fossil fuels falling, carbon dioxide emissions look set to fall much faster than predicted just 12 months ago. The data signature S
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Translation: Juan Gabriel López Guix
