Hastening the process of converting energy sources towards a zero-emission economy has become a global necessity. The geopolitical situation in the world and the change in energy suppliers in the European Union have given rise to thoughts of a failure in the model undertaken. But far from resulting in a halt, experts recommend stepping up the process to achieve the replacement of fossil fuels.
Conversations about energy and investment often fail to take into account the considerable lag between investment decisions and when projects actually go live. The International Energy Agency warned years ago that global investment in clean energy and energy efficiency was not sufficient to put us on a path to reach climate goals. Without a surge in clean energy spending, the amounts invested in conventional energy projects also risk falling short of what would be needed to meet potential increases in demand.
"Although the current energy crisis was triggered by Russia's invasion of Ukraine, we still need to pay close attention to these underlying investment imbalances as we emerge from the crisis, or we risk greater volatility in the future. Are today's sky-high fossil fuel prices a signal to invest in additional supply or yet another reason to invest in alternatives?" warns Fatih Birol, Executive Director of the International Energy Agency (IEA).
The IEA owes its creation to the US Secretary of State Henry Kissinger, in the fight against the other great energy crisis that the world experienced in the 1970s. The Organization of Petroleum Exporting Countries decided to slash the supply of crude oil and raise the price by 70% in protest against the countries that had supported Israel in the fourth Arab-Israeli war.
The parallels between this era and the present are evident fifty years on. Even the Nixon administration's 55-mile-per-hour speed limit calls to mind recent advice to drive at a maximum of 90 kilometres per hour to curb the effect of rising fuel prices.
“Energy investment decisions are being clouded by the fog of war. Russia’s invasion has thrown investment plans across all energy sectors into turmoil and exacerbated strains in global commodity markets that were already visible”, warns Fatih Birol in a recent article published by the magazine of the International Monetary Fund (IMF).
Energy importing countries are now scrambling to replace disrupted supplies of fuels, and soaring costs have wreaked havoc in many economies and forced millions of people back into poverty and energy insecurity, says the head of the IEA.
The shadow of factory closures, a considerable burden in countries such as Germany, the heart of the European Union, is one of the great threats of the current situation. A situation that entails the dangers of growing unemployment and difficulties for families to access the energy they need to heat their homes.
"Today’s energy crisis - the first truly global energy crisis - has given rise to a false narrative that now is not the moment to invest in clean energy", Birol warns. An ambivalence about which there must be no doubt. Both goals must be pursued at the same time. “Massive investment in clean energy - including energy efficiency, renewables, electrification, and a range of clean fuels - is the best guarantee of energy security in the future and will also drive down harmful greenhouse gas emissions”.
Global energy-related CO2 emissions rose by a record amount in 2021 and investment in clean energy technologies is still well below what it will take to bring emissions down to net zero by mid-century or soon thereafter. These investments have also left some oil and gas producers without sufficient capacity to meet current demand.
But despite this discouraging outlook, there is also a ray of hope. In the five years following the 2015 Paris Agreement clean energy investment grew only 2 percent a year. However, since 2020, this rate, led by increased spending on solar and wind power, including a record year for offshore wind power in 2021, has risen to 12 percent a year. There is also strong momentum in other new areas like low-emissions hydrogen; new battery technologies; and carbon capture, utilisation, and storage.
But the problem is that this investment remains concentrated in advanced economies and China. This leaves many emerging market and developing economies, particularly in Africa, unable to attract the clean energy investments and financing they need.
This is where international financial organisations and development institutions have a major role to play. They can work with local governments to develop policies to improve the investment environment, and their financing can help de-risk private sector involvement.
"The current situation offers a crucial opportunity for the oil and gas sector to show it is serious about the transition to clean energy. The run-up in prices is set to generate an unprecedented $2 trillion windfall for oil and gas producers this year, bringing their total income to a record $4 trillion in 2022," said Fatih Birol. "Yet the oil and gas industry is still spending only modestly on energy transitions: on average, clean energy spending accounts for about five per cent of total oil and gas company capital expenditure. That is up from one percent in 2019, but still far too little."
The IEA's executive director says that the current global energy crisis presents huge challenges, especially for the coming winters. But after the winter comes spring - and the right investment decisions can transform this crisis into a historic turning point toward a cleaner and more secure energy future.
"We are already seeing encouraging steps in this direction - such as the Inflation Reduction Act in the United States; the REPowerEU package in the European Union; Japan’s Green Transformation plan; and the growth of renewables in China, India, and beyond. A new global energy economy is emerging, and the governments and businesses that invest early and wisely stand to reap the benefits."