New Energy Imperative
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- Authors: Gernot Wagner
- Published: June 2, 2022
Crisis and opportunity of the Ukraine war
- Russia’s invasion of Ukraine is presented as both a crisis with potential long-lasting economic and political consequences and a moment of opportunity for the energy transition.
- Political dynamics can entrench the status quo: lawmakers’ attempts to lower high energy prices directly can dampen incentives to cut fossil fuel use.
- Establishing who should pay for the energy transition’s investments will generate difficult political fights, but measured from a societal perspective, these investments “pay for themselves many times over,” because fossil energy use imposes external damages exceeding its value added to GDP.
- True net-zero transition requires both:
- rapid deployment of new low-carbon technologies, and
- more significant systemic changes.
- Quotation on political resistance: “The innovator has for enemies all those who have done well under the old conditions, and lukewarm defenders in those who may do well under the new.”
Affordable energy: technology cost trends and deployment
- Solar PV:
- International Energy Agency (2020): “for projects with low-cost financing that tap high-quality resources, solar [photovoltaic (PV)] is now the cheapest source of electricity in history.”
- Systems prices have come down dramatically: declining by a factor of two within a decade, three within four.
- Global PV market share stands at about 3 percent.
- Batteries and electric vehicles (EVs):
- Prices have declined fast, spurring rapid adoption.
- BP Energy Outlook (2016) projected the world would surpass 70 million plug-in vehicles globally by 2035; that number now looks achievable for 2025, 10 years earlier than expected on a 20-year time horizon.
- EV market penetration remains low: EVs are “not yet 2 percent.”
- Even 70 million EVs would be less than 6 percent of today’s global vehicle fleet of some 1.2 billion cars.
- Inflationary dynamics:
- Solar PV prices rose in the past two years, contributing to “greenflation.”
- However, “fossilflation” dominates, with fossil-based power source prices rising by more than the relatively small increases in solar PV, further lowering relative solar prices per kilowatt of capacity and actual electricity produced.
Short-term energy policy trade-offs in response to the shock
- Immediate priorities to disentangle EU dependence on Russian oil and gas:
- Decrease demand.
- Find alternatives to Russian supplies, which implies increasing oil and gas production elsewhere.
- Accept some short-term trade-offs, for example:
- Avoid the German nuclear exit scheduled for December 2022.
- A short-term increase in European coal power production (noting that a good portion of EU coal also comes from Russia).
Assessing risk and limitations of prior analyses
- Pre-invasion analyses underestimated the possibility that Russia would cut off gas deliveries to the European Union altogether.
- Example: ENTSOG’s stress test considered scenarios such as no Russian gas through Belarus or none through Ukraine, but did not model a scenario with no Russian gas at all.
- A widely cited European Central Bank analysis titled “Natural Gas Dependence and Risks to Euro Area Activity” concluded that:
- a 10 percent gas supply shock would cut euro area GDP by 0.7 percent, and
- the electricity, gas, steam, and air-conditioning supply sector would see output fall by almost 10 percent due to a 10 percent gas supply shock.
- Such analyses suffer from status quo bias and static methodologies that understate dynamic adjustments (for example, rapidly increased demand for alternatives such as heat pumps).
Benefits, costs, and economic implications of low-carbon technologies
- Heat pumps:
- Replace oil and gas furnaces and operate much more efficiently.
- Even if all electricity came from natural gas, emissions from heat pumps would still be lower than direct natural gas combustion in home furnaces.
- Heat pumps are essentially air-conditioners run in reverse; demand for heat pumps would “skyrocket” under gas disruptions, straining supply chains and adding to inflation pressure.
- Net-zero transition cost estimate:
- McKinsey’s analysis: about $25 trillion over 30 years to convert the world economy from its current path to one that achieves net-zero carbon emissions by midcentury.
- Net assessment: Transition entails real costs and hard changes, but those costs also present economic opportunities and benefits when viewed from a societal perspective.
Source: New Energy Imperative, F&D Magazine, Gernot Wagner, June 2022.
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