Does the energy crisis have a silver lining?

In 2022, Russia’s invasion of Ukraine precipitated an energy crisis that is still with us today. Western Europe’s struggle to wean itself off Russian oil and gas has sent shockwaves across the global energy supply sector, leading to an explosion in energy prices.

That’s particularly true of natural gas, which saw prices rise to unprecedented levels in the months after the start of the war. Wholesale costs have calmed somewhat since then, but the prices that consumers and businesses pay for energy remains damagingly high, especially in Europe.

In response, Europe has been busy buying up Liquid Natural Gas (LNG) supplies across the globe, and is spending large sums on the infrastructure it needs to better handle LNG imports in future.

At the same time, idling coal power stations have been brought back online, and plans to mothball ageing nuclear power stations have been put on hold.

What of alternatives? In the immediate aftermath of the crisis, the priority has been keeping the lights on. A fossil fuel crisis has been met with predominantly fossil fuel solutions. But as we look to the longer term, our view is that  the crisis will accelerate the  clean energy transition. Investment in renewables is growing as costs fall, and major new policy initiatives - aimed in part at creating energy security - are adding to the sense of optimism.

A return to the 1970s?

Crisis is often the mother of invention, and this is a crisis unlike any other. It has been described as a return to the 1970s, a decade notorious for soaring energy prices and sky high inflation? John Lorié, Chief Economist for Atradius, says that in some ways our current predicament is worse.

“There are similarities with the 1970s, because in both cases the crisis has been caused by geopolitical issues and has fed into higher inflation,” John adds. “But the big difference is that this time the disruption is far more widespread, going beyond oil into gas, coal and electricity prices, and with a deeper effect on the wider economy.”

Electricity prices tripled in Europe in the first half of 2022, as Russia reduced gas supplies in response to economic sanctions and political support for Ukraine. Higher coal prices and lower nuclear availability compounded the problem, and drought reduced the contribution of hydropower. It was a perfect storm for the energy sector.

In response, Europe bought LNG stocks from wherever they could be found, creating a ripple effect that hiked energy prices across the globe.

Long-term energy problems

Was any of this avoidable? Could we have been better prepared for a shock to global energy supply? Has Europe and the wider world taken energy security for granted?

Some energy experts believe there has been an underinvestment in fossil fuel capacity in the last couple of years, one that has not been balanced by greater investments in nuclear energy or alternative technologies. While investment in fossil fuel capacity may seem at odds with net zero ambitions, many experts believe it is required  to guarantee stability. Squeezed supply may have created supply-demand mismatches and price volatility even without a severe shock like the Ukraine war.

At the same time, Europe’s heavy reliance on Russian gas is a long standing structural weakness. Governments were aware of the risk prior to 2022, but made only half-hearted attempts to do anything about it. In fact, Russia satisfied more of Europe’s gas demand (40%) in 2015-2020 than in the previous five year period.

“Had Europe diversified its energy supply earlier, the current crisis may not have been averted, but it would have been significantly less disruptive,” says John Lorié.

It’s hard not to reach the conclusion that energy security was not taken seriously enough, especially in Europe. Instead, when the crisis hit, governments were forced to step in to help households and businesses pay soaring energy bills. There had been USD 550 billion worth of government interventions up to September last year, according to the International Energy Agency (IEA). In addition, some countries introduced incentives to cut energy use during the winter months.

Clean energy is the long-term solution

Energy security is certainly front and centre of government agendas today. With it comes the growing realisation that the transition to clean energy may be good for supply stability, as well as the planet.

This realisation is being backed up with policy and - crucially - funds. In the US, the Inflation Reduction Act (IRA) is a USD 370 billion package aimed at promoting renewable energy projects and manufacture. Its goal is to create 100,000 more jobs in the clean energy sector.

The IRA represents a huge package of subsidies, and it has forced the EU to bring in similar financial incentives or risk losing investment to the US. The European Green Deal Industrial Plan, announced in January, aims to boost Europe's manufacturing capacity for renewables and other clean energy technologies with around EUR 250 billion of financial support. Europe’s longer-term aim is to be the first climate-neutral continent by 2050.

Are these schemes enough? On their own, no. But they signal a step forward on the long path to achieving net zero by 2050, prompted in part by the war in Ukraine and fears over long-term energy security.

Clean energy: a long way to go

These are all signs that the current crisis is helping to shift perspectives on energy security and the clean energy transition.

Of course, there is a very long way to go. Global CO2 emissions are high and the trend is, at best, flat. Getting to net zero will require a huge effort and massive investment.

But Russia’s war and the shock it has caused global energy markets have at least brought the challenge into stark relief. Together, energy security and climate change make a compelling case for action.

Read more in-depth analysis of the energy crisis in our Energy Outlook research paper Energy crisis supports green transition.