Lessons for global energy markets

A solar energy field stands next to the Lippendorf coal-fired power plant on May 10, 2021 in Lippendorf, Germany.

Jens Schlüter | Getty Images News | Getty Images

The Ukrainian people bear the brunt of the war they are waging against Russia, but the war has also had serious consequences for global energy markets.

The European Union depends on Russian natural gas, and this dependence has forced the United States and Europe to maintain, until now, loopholes in their otherwise harsh economic sanctions against Russia.

On Wednesday, White House spokeswoman Jen Psaki indicated that the Biden administration is considering energy sanctions against Russia, but that’s a very tough call in the face of high oil prices in the United States and Europe. .

The Russian-Ukrainian war is one key to global energy markets, and another is climate change. As Monday’s highly anticipated report of the UN’s Intergovernmental Panel on Climate Change made clear and desperately clear, global warming is an urgent threat to human well-being.

“Almost half of humanity lives in the danger zone – now. Many ecosystems are at the point of no return – now,” UN Secretary-General António Guterres said on Monday. “Unchecked carbon pollution is forcing the world’s most vulnerable on a frog march to destruction – now.”

Rushing over this precipice with climate change while simultaneously surviving the war between Russia and Ukraine generates a new framework for understanding global energy markets.

Energy independence is not synonymous with energy security

A country’s national energy policy is the cornerstone of its national security policy.

In the case of Europe, “it was incredibly irresponsible to outsource gas storage to Gazprom,” said Steve Cicala of the National Bureau of Economic Research. Cicala focuses on the economics of regulation, and more specifically on environmental and energy policy. Gazprom is Russia’s majority state-owned energy giant.

Going forward, the EU “should move at the maximum possible speed to get rid of Russian gas,” Cicala said.

This does not mean that energy independence is the benchmark.

“The goal is security,” said David Victor, professor of public policy at UC San Diego. “And security is not the same as independence.”

Energy independence means relying on national or local energy sources. But even there, flexibility is limited if one of these sources is interrupted or exhausted. A well-functioning global market is a better solution.

“Security comes from diversity and diversity alone,” he said.

For Europe, being too dependent on Russian natural gas pipelines is the problem. The EU satisfies around 10% of its natural gas demand domestically, and all the rest is imported, making it the world’s largest importer of natural gas, according to the EU’s Directorate-General for Energy. EU. Natural gas imported into the EU comes mainly from Russia (41%), Norway (24%) and Algeria (11%).

In the short term, the European Union is looking to increase its imports of liquefied natural gas by tanker from the United States and Qatar, Victor said.

Europe “is actually increasing significant imports from different countries. And having those imports available, it’s an option for them that improves security,” Victor said.

Renewable energy development takes time and political will

The EU has reduced its dependence on coal to meet its climate target of achieving carbon neutrality by 2050 and reducing its emissions by at least 55% by 2030.

In 2020, the most recent year for which data is available, 32% of EU energy came from oil and petroleum products, according to Eurostat, the statistical office of the European Union. Around 25% of EU energy came from natural gas, 11% from solid fossil fuels, 13% from nuclear energy and 18% from renewables.

The focus on renewable energy development is already significant, according to Aaron Praktiknjo, head of energy system economics at the E.ON energy research center at RWTH Aachen University in Germany.

“I don’t think the EU should be blamed for not accelerating renewables,” Praktiknjo told CNBC. “Take the example of Germany: in just 20 years, the share of renewable energies in electricity consumption has increased by a factor of around 10, from around 5% to 50%. In the At the same time, electricity prices for end consumers have doubled, mainly due to subsidies for renewable energies.”

A government policy draft obtained by Reuters on Monday revealed that German leaders are seeking to accelerate their transition to renewable energy, aiming to meet all of their electricity needs with supplies from renewable sources by 2035.

The transition of the EU’s energy network will require physical upgrades and international coordination.

And also, it will require government intervention, a pill that many current political regimes do not want to swallow, according to Sir David King, a former UK climate change official who now chairs the University of Cambridge’s Center for Climate Repair.

“Some governments, and the current UK government is one of them, don’t like regulatory behaviour. We want to deregulate everything and allow the private sector to operate freely. You can’t get that transition without regulatory behaviour,” King says.

Lobbying by incumbent energy providers may contribute to reluctance to regulate the energy industry, King said.

“The United States has the largest lobby system for the fossil fuel industry in the world,” King told CNBC. “The power of the pressure system in the United States has also influenced other countries. So I think the incumbent is terrified of being put out of business.”

Another problem: Politicians aren’t prioritizing energy policy because many of their constituents have more pressing concerns, said Benjamin K. Sovacool, professor of energy policy at the University of Sussex Business School.

“Although energy costs seem high in total, they still represent only a small percentage of overall household spending per month,” Sovacool told CNBC. “So not as high a priority as mortgages, university fees or paying for cars. We spend thousands of pounds or euros on this every year, but only hundreds of pounds or euros on energy .”

Public surveys and polls have found that voters prioritize issues such as immigration, the response to Covid-19, military spending, health care and the war in Ukraine above climate policy and energy issues, according to Sovacool.

“And no politician wants to be seen raising energy prices in the short term by investing in low-carbon alternatives, even if it pays off in the long run or benefits society later,” said Sovacool.

Nuclear could be part of the solution

Nuclear power generation does not emit greenhouse gases, but some voters worry about the potential for accidents and the lack of a permanent repository for the disposal of nuclear waste, which is radioactive.

In a way, the Russian-Ukrainian war will be like a Rorschach test for nuclear energy, Victor told CNBC, because Ukraine has 15 nuclear reactors, which the International Atomic Energy Agency (IAEA ) monitors during the conflict.

“People who are worried about nuclear will see in all the fuss around the Ukrainian nuclear complex in particular more reason to worry about nuclear,” Victor said. “And people who see nuclear as part of the overall emissions management strategy and as a way to also reduce dependence on foreign suppliers will see that as a rationale for keeping nuclear plants open and for building new nuclear power plants in Europe.”

Sentiment on nuclear is often hard to change, and the current moment is no exception, according to Victor. (He sees nuclear power as an important part of decarbonization.)

Germany derived about 25% of its electricity from nuclear power until March 2011, according to the World Nuclear Association. Then the German government passed a law to phase out nuclear power following the Fukushima accident in Japan.

Now, high gas prices and the lack of energy “should motivate Germany to restart its large nuclear production portfolio. Even if only in the short term, it would help soften the blow”, said Cicala at CNBC.

“Decisions to withdraw nuclear weapons were short-sighted and insufficient consideration was given to how the shortfall would be met. But that would have been true even without the risk of a supply disruption from Russia,” he said.

But Germany’s decision is not necessarily an indicator. The Czech Republic, France, Poland and the UK are looking for new nuclear reactors according to John Kotek of the Institute of Nuclear Energy. As Russia falls out of diplomatic favor, it gives U.S. nuclear companies a foot in the door for European customers, Kotek said.

Russia has been “one of the strongest competitors for nuclear export because it would offer aggressive funding packages,” Kotek said. “Russia is really disqualifying itself from many opportunities that are going to exist in the free world over the next few decades because it is proving to be an unreliable partner.”

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