Energy is a sector in flux

We have a second chance to grow back greener from the energy crisis, explains Eoin Murray, head of investment, Federated Hermes.

With more than 80% of the world’s emissions captured in various governmental pledges to achieve net zero following COP26, it almost felt like the world had really begun to embark upon its transition. But coal use surged globally to record levels over the winter, with emissions rising as a result. At the same time, renewable energy installations dipped beneath the levels required to keep us on the necessary transition pathways. Natural gas shortages grabbed the headlines too, and we found ourselves in an energy crisis.

And all that was before the Russian invasion of Ukraine, with sanctions and concerns over national security further exacerbating an already difficult situation. The shift away from fossil fuels in one sense looks more challenging than ever, but it also presents us with further opportunities to make the required changes. Some $14tn of economic stimulus measures were provided during the pandemic, yet only 6% are being directed towards a greener future. Have we now been offered a second chance to grow back greener?

We know what the intended target can look like, courtesy of research from Mark Jacobsen and his colleagues at Stanford University. Take the example of the UK: if energy was drawn from a mix of onshore and offshore wind, solar PV, geothermal, hydro, tidal and wave sources, with a complete absence of fossil fuels, nuclear, bioenergy and carbon capture, the upfront cost would amount to $880bn, which pays for itself over time from energy sales. In terms of social impact, 564,000 long-term, full-time jobs are created net, with an estimated 13,800 lives saved from reduction in air pollution by 2050. End-use energy requirements would fall by 62%, with private energy costs down by 65%, and energy, health and climate costs down by $148bn, $137bn and $251bn per annum, respectively.

The European Union and the International Energy Agency have drawn up responses to the challenge, both of which are predicated on two main themes: (i) diversifying away from Russian gas to more liquified natural gas and gas from non-Russian suppliers and (ii) accelerating the green transition. The immediate need is to rebuild gas inventories ahead of next winter, with a proposal to require gas facilities be at 90% capacity by 1 October each year. Alternative suppliers being canvassed include Azerbaijan, Norway, Algeria, Qatar, the US and Australia. All come with difficulties around supply and capacity, and longer term we should expect to see an acceleration in the transition towards renewables.

With energy security focusing minds, nuclear energy is back at the centre of the debate, offering both energy security and no carbon emissions, but most forecasts still show nuclear playing a minor role in the green transition. However, if energy security trumps the energy transition, then we may well be set for a nuclear power renaissance, handy for dealing with adverse weather and intermittency issues that challenge the reliability of renewables. Providing that safety concerns can be allayed, even though the levelised cost of nuclear energy is greater than renewable alternatives, it will play a greater role going forward.

Contrast this with the role ascribed to hydrogen in the future, where proponents have advocated strong growth for some time, particularly with respect to industries and processes that are hard to electrify, such as steel making and long-distance, heavy transport. So far, 17 governments have announced hydrogen strategies and a further 20 have them under development, backed by the announcement of nearly 400 projects and an anticipated fall in green hydrogen production costs of as much as 80% in coming decades.

But hydrogen still faces a number of major obstacles. It uses 2-14 times more electricity than alternatives, and is a secondary rather than a primary source of energy. On top of that, it is less efficient, converting just 40% to 45% of energy from a hydrogen fuel cell into forward motion for an electric vehicle versus around 85% for energy sourced from wind. Ultimately scaling hydrogen represents a challenge that may not be overcome any time soon.

Our current predicament sees us at a fork in the road. Will the economic instability of war prove to be a long-term setback as we further embed our dependence on fossil fuels, or will it instead provide the push towards a greener transition? My bet is on the latter.