The world has run out of easy choices. This is especially true of the decisions that must be made about how energy supply will change over the next 30 years. The energy crisis was slowly building up momentum even before the invasion of Ukraine by Russia as a worldwide squeeze on energy supplies pushed gas, coal and oil prices from pandemic-induced lows to record highs.
The war in Ukraine, which has now entered its second month, continues to cause volatility in global energy markets given the fears of supply disruptions from Russia, the world’s largest gas exporter, second-largest oil exporter and third-largest coal exporter.
A decision by the US to ban imports of Russian oil and other fossil fuels sent prices of commodities from energy to metals to grain surging. The UK announced plans to phase out Russian oil imports by the end of 2022. But the EU, which gets about 25% of its oil and 40% of its gas from Russia, as been more conservative in its response, saying it will make Europe independent from Russian energy before 2030.
To make this switch, EU countries will have to find new fossil fuel suppliers. Countries can also choose to speed up their transition to renewable energy. But both these choices will pose new challenges for consumers and politicians alike.
The cost of electricity from renewable sources may now be lower than that of conventional gas- or coal-fired plants, but that doesn’t mean the transition will be cheap. It may very well be the switch to renewables that forces fossil fuel prices up.
Speaking at a conference in March, Isabel Schnabel, a member of the executive board of the European Central Bank, said the war in Ukraine has shown how dependence on fossil fuels poses a risk to freedom and democracy for countries reliant on imports — not to mention the environmental harm.
Climate change itself, or climateflation, is injecting some volatility in the energy market as well as the prices of other commodities. In 2021 Brazil experienced a record drought that hampered hydropower generation (its main source of electricity generation). Brazil had to import electricity, adding to existing pressure on global energy supplies.
As investors and financial institutions start to reduce their exposure to fossil fuel, funding costs increase, which then lead to a slow production response. In SA, banks such as Nedbank, FNB and Standard Bank have already started putting policies in place to limit the financing of new coal mines and new coal-fired power stations.
The country’s energy plans do foresee a gradual move away from coal, but SA will still rely on coal-fired power for a large share of its baseload generation for a good 20 years or more. During this time, a shortage of affordable financing for coal operations could result in energy prices rising more rapidly while renewable suppliers gradually build capacity.
But, according to Schnabel, the effect of the energy financing shift on global prices has, at least until now, been minimal when compared with the way in which “energy producers steer supply in an oligopolistic market”, resulting in artificially tight supplies that push up prices for gas and oil importers such as the EU and SA.
The third shock that Schnabel describes is “greenflation” and this also points to the way in which a shift to renewables could drive inflation during the transition period by raising the demand for “green metals” such as copper, lithium and cobalt (used in the manufacture of green technologies) at a faster rate than supply from new mines can increase.
A faster and more urgent shift to green energy may be the right thing to do. It will help speed up the reduction in greenhouse gas emissions that is necessary to keep global warming within a target that will prevent catastrophic ecosystems collapse. It will also ensure greater energy independence for fossil fuel importing countries. But in the short run it may very well make basics such as fuel, electricity and food more expensive.
The choice might seem apparent, but it is not easy. Especially not when you are a political party that needs the support of inflation-battered voters to remain in power.
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