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Monday, June 27, 2022
HomeLatest NewsCrisis and energy transition: difficult compatibility | Enrique Parra's opinion

Crisis and energy transition: difficult compatibility | Enrique Parra’s opinion

Date: June 27, 2022 8:32 pm
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The Russian invasion of Ukraine has raised great concern about the dire consequences of the war and the EU’s huge dependence on fossil fuels from Russia.

In 2020, 83% of the world’s energy consumption came from fossil fuels., while 50 years ago it was 87%. The decline was only four points in five decades. The climate emergency caused by this rise has placed on the world agenda (led by the European Union, which emits 10% of greenhouse gases) an energy transition to dramatically reduce emissions, mainly through energy production, resulting in 74% of them. Renewable energy sources that do not emit greenhouse gases – hydropower, solar energy and wind – account for 13% of primary energy in the world and 16% in the EU. Nuclear, meanwhile, is 4% and 11% in the EU.

international agreements to reduce emissions they were not successful. In 2021, the maximum greenhouse gas emissions were reached. They continued to rise despite the 2015 Paris Accords, with the exception of 2020, the worst year of the pandemic. GHG emissions are concentrated in a few regions of the world: China (30% of emissions), USA (15%), EU (10%) and India (7%) account for almost two thirds of emissions. The stated goal is to achieve a net zero emissions (NZE) situation by the middle of this century.

European Unionwho is a leader on this path, has set your goals in reducing emissions by 55% by 2030 and reaching neutral (“net zero”) in 2050. Since 70% of the energy in the Union is of fossil origin, this comes at the cost of reducing energy per unit of GDP (reducing energy intensity) and that this energy emits less CO2 (reduced carbonation intensity). For its part, the Biden administration in the United States claims to reduce the weight of fossil fuels: from the current 82% to 52% by 2030. But, China (84% fossil energy, 60% primary energy comes from coal) announces that its emissions will peak in 2030 and “net zero” in 2060. An ambitious target when its growth target of 6% per year requires more energy and more emissions.

emissions growth will be reduced because the Chinese transition is based on switching from coal to natural gas. This is an obvious paradox of decarbonization: using natural gas instead of coal reduces emissions and is a key element of the transition. From India, as well as from other emerging economies, we cannot expect a reduction in emissions, but a strong increase in emissions associated with its economic development.

Decrease intensity of carbonization this requires huge investments in energy efficiency and changing the assets that produce and consume energy. A special case is transport, the source of 45% of emissions. Options for decarburization lie in developing new technologies or improving existing ones: modern batteries have a very low energy density per kilogram, far from that of gasoline; planes fly only on petroleum-derived kerosene, and no viable alternative is in sight other than stopping flights. Maritime transport – the cornerstone of the globalization of trade and global supply chains – mainly uses fuel oil (derived from oil), and its most plausible alternative is the gradual inclusion of natural gas.

Relatively remove CO2, carbon capture or sequestration projects are expensive. We shouldn’t be surprised that some pre-pandemic studies concluded that the cheapest way to remove CO2 is to plant hundreds of millions of trees. More and more investment funds will be allocated to this as the price of CO2 remains high and hence the investment is profitable.

commitment to decarbonization gave a clear signal to oil and gas producers and the sector cut investment, but if there is no new investment in the sector, production will decrease at each of the active fields and prices will rise. There is a cartel in the international oil market (now OPEC+) that maximizes its profits before oil is no longer used, and to do so limits supply to achieve high prices.

As far as consumption is concerned, return to economic growth boosted demand for oil and gas. Faced with this increase in demand, OPEC+ timidly increased production and prices rose rapidly (averaging $40/bbl in 2020, $70/bbl in 2021, or over $100/bbl now), spurring a recovery in U.S. production. . Gas in Europe rose in price even faster than oil: 5 euros per ton during quarantine, about 30 euros per ton a year ago and 100 euros per ton now (with peaks above 200 euros per ton).

And in this situation, Russia invades Ukraine. The EU’s reaction is to abandon Russian energy sources: oil (and its derivatives) and gas. In the case of oil, the EU is estimated to have to replace 3 million barrels a day with other producers. Some OPEC countries could immediately increase production, but this would mean a violation of the OPEC + agreements. The other alternative is the rapid growth of production in the US, whose operators have shown great flexibility in the face of price increases if they see them as long-term.

Russian gas will be almost impossible to replace in the short term (weeks, months) and only partially in the medium term (years). Replacing at least part of this gas, competing with the demand of China or Japan, means more production (USA, Qatar…), more tankers to transport methane, more liquefaction and regasification plants that are built not in weeks, but in years. There is a threat of shortages for next winter.

high prices are a curse for consumers because of its effect on inflation, but is a blessing for the energy transition, and steps taken in the emission rights market and environmental taxation, for example, have gone in the direction of making fossil energy more expensive. Investments in efficiency will become more profitable, and investments in solar energy, wind energy, … even green hydrogen will become more attractive.

These high prices will bring consumption reduction. The recommendations of the IEA, the EU go in this direction. It’s time to touch the thermostat, drive slower, use public transport, change old boilers and improve sound insulation. Consumers change their minds when they see the price they pay for energy in all its forms: transport, air conditioning, industrial heat or electricity.

The desire is to arrive at an energy price that stimulates the transition but does not lead to an economic downturn and/or the observed high inflation. Success is not a sure thing.

Enrique Parra, Professor of Energy Economics at the University of Alcala


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