Global energy price spikes will get worse before they get better

Power cuts in China related to the country’s climate targets have disrupted global supply chains.
Power cuts in China related to the country’s climate targets have disrupted global supply chains.
Image: REUTERS/Tingshu Wang
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The energy crunch that started in Europe is going global—and as the economy shifts away from fossil fuels, experts warn, the worst could be yet to come.

In the UK, electricity prices throughout September were three times higher than any time in the last decade. Prices for natural gas and electricity are surging in Brazil and the US, while manufacturers in China are slowing production of smartphones and other key global exports due to a lack of affordable power. And on Sept. 28, the price of Brent crude, the international oil benchmark, reached its highest point in three years.

The perfect storm of factors driving the crunch

Global economic activity—and thus, demand for electricity and natural gas—is recovering from the pandemic, just after a year of cold winters and hot summers drained natural gas reserves. Oil and gas production in the US Gulf Coast was hampered by Hurricane Ida and the February winter storm, while Russia, Europe’s main gas supplier, has so far declined to boost exports. And Asian countries looking to kick their coal addiction are outcompeting Europe for limited shipments of liquified natural gas.

But the global effort to fight climate change is also causing problems. Europe’s wind farms haven’t seen a good breeze in months, and droughts in China and South America have dried up power generation from hydro dams. Meanwhile, surging prices for carbon pollution credits in Europe have made fossil alternatives even more expensive, and Chinese grid operators have come under mounting political pressure to help the country meet its carbon emissions targets by burning less coal.

The energy crisis could imperil political support for climate policies, just as the COP26 climate summit approaches in Glasgow in November. But there are steps governments can take to prevent energy market turmoil leading to sky-high electric bills and breakdowns in the global supply chain.

“What we’re seeing is an unfortunate set of circumstances during a period of transition where we haven’t fully moved from one system to another,” says James Henderson, director of the Energy Transition Research Initiative at Oxford University. “During that period, market risks are enhanced. It’s impossible to envision a world where there won’t be more volatility.”

Why volatility is inherent to the energy transition

There are two key components of a zero-carbon electric grid. First you need generation: All the wind and solar farms. But because those sources are intermittent and can’t be fired up on command, you need a powerful transmission grid that can shuffle electrons near-instantly between locations of supply and demand, and a lot of large-scale batteries.

The first part of that equation is proceeding apace, as the cost of wind and solar technologies falls precipitously. But for regulatory and technological reasons, superpowered transmission lines and batteries are still in their infancy. Until those technologies are able to match the storage and transportation flexibility of fossil fuels—which could take decades—renewables won’t be able to completely replace fossil fuels in the grid. And in the interim, unexpected power supply shortages will continue to be a risk.

In other words, even in an aggressive decarbonization scenario, fossil fuels will continue to supply a major portion of the global energy mix for decades to come. Yet, fossil fuel companies are under growing pressure from investors and governments to cut their carbon footprint, and their capital spending. If investment in oil and gas production falls more quickly than global demand, price spikes are guaranteed, Henderson said. The pandemic, during which oil and gas production froze up, offers a preview of that future.

“The challenge is you would rather see the hydrocarbon system in decline, but at certain times you still really need it,” Henderson said. “How do you ensure there are enough hydrocarbons produced during the period of transition, from producers who are worried their assets could be stranded in the long term?”

Even a fully post-carbon economy won’t be immune from volatility, Nikos Tsafos, a senior energy researcher at the Center for Strategic and International Studies, a Washington think tank, wrote last week. Electricity markets face an inherent trade-off between higher across-the-board costs (to ensure the system is fully supplied even at peak times) or lower costs with the occasional spike.

“There’s no way around it,” Tsafos told Quartz.

Clean energy systems will also still be susceptible to the market volatility of lithium, copper, and other critical minerals (which today is dominated by China). All this transition will happen against a backdrop of heatwaves and hurricanes that strain or damage the grid, even while total electricity demand rises because of electric vehicles.

What should governments do about energy market volatility?

Although it’s painful for consumers in the short run, energy crunches are all the more reason to accelerate the energy transition, not slow it down, Henderson says. With natural gas prices like these, the costs of clean energy suddenly seem more palatable—which, after all, is precisely the point of putting a price on carbon emissions.

By the same token, high gas prices offer an incentive for the development of more LNG infrastructure that could stem future shortages; in fact, a downturn in gas prices around 2014-15 contributed to today’s shortfall, since LNG facilities take around five years to come online, Tsafos said.

Governments have options to soften the blow. Several European countries are temporarily cutting energy taxes and imposing price caps, although that has led to energy companies collapsing, particularly in the UK.

They could reform electricity markets to provide extra compensation to peak suppliers, and offer new incentives for transmission and storage projects, as well as smart meters and other technologies to control demand. And, as EU Energy Commissioner Kadri Simson suggested on Sept. 28, carbon taxes could be recycled back into subsidies for low-income households.

“The question is, can you do this at the retail level without distorting the important price signal that you need for the energy transition?” Tsafos asks. “High CO2 prices are a feature, not a bug, so you cannot merely offset these price increases across the board. You have to be narrow and targeted and really help those consumers who are truly hurting.”

Whatever happens with energy prices, it’s essential to put them in the broader context of climate change impacts, Henderson adds, and the much higher costs the global economy would face without an energy transition: “The net value on this is almost certainly positive.”