IPCC report and Ukraine crisis put spotlight on gas alternatives.
The ability of countries to maintain access to reliable and affordable energy resources continues to shape energy policy, with energy security perceived as a national security issue and often prioritised over climate concerns, the most recent Intergovernmental Panel on Climate Change (IPCC) assessment report said.
Energy security concerns have come to the fore in Europe as Russia’s actions in Ukraine have countries scrambling to reassess their arrangements. In the short-term, consumption of energy from sources such as coal, nuclear and shale gas may increase, specialists warned.
Mark Fulton, Project Director of the Inevitable Policy Response, said for energy security reasons, some European countries would use more coal, paying a premium for fossil fuels to ensure capacity. The push for renewable, clean energy was still in place on the demand side of the equation, he noted during a Climate Bonds Initiative webinar.
“A move away from Russian gas in the EU would mean an increase in coal, nuclear and liquified natural gas (LNG). This will take place along with the acceleration of hydrogen energy and heat pump roll outs,” he said.
Fulton said a “paradigm shift” may occur in climate policies, with the energy transition formerly a “nice to have”, but now considered a “strategic priority”. Transition from fossil fuels to renewable energy would be the long-term trend, but in the short-term to avoid social unrest governments would do everything they could to get power into grids to heat homes and keep industry running.
Supply chain issues
Turning to the US for LNG would cause an increase in drilling and extraction. Fulton highlighted issues with LNG infrastructure, such as terminals and pipelines, both in the US and in Europe. This would drive up costs and create a price premium for LNG.
Another concern highlighted by speakers at the event was the danger of European countries being locked into LNG supplies.
“The key will be the contracts to get LNG terminals into Europe, which US suppliers will almost certainly demand will be long-term. I think most EU leaders will look to avoid lock-in contracts on the actual fuel supply and will manage these contracts carefully,” said Fulton.
In the short-term, there is a risk of “panic policies” in Europe, said Catharina Hillenbrand von der Neyen, Head of Research at Carbon Tracker. “Such policies may divert countries away from their renewable energy trajectory, depending on how ‘sticky’ the policies are. But the perception of what is important in energy – security, affordability, climate – can move around. Affordability may come back as a big consideration, particularly given the household impact of energy pricing.”
Impact on investors
Sean Kidney, CEO of the Climate Bonds Initiative, said investors face three substantial risk areas in energy: the risk associated with the political actions of fossil fuel supply countries, energy price volatility, and climate change itself.
“We will see some countries keeping coal plans open and a step up in coal, along with the substitution of Russian gas with supplies from other markets, but this won’t be enough,” he said.
These challenges point to a longer term boost to renewable energy, Kidney added, at a time when such energy is becoming very “low cost, once you address the capital costs”. Renewable energy is predictable, something that is like “gold dust” to investors, he noted.
“The IPCC report says there will be catastrophic climate change unless we make changes. Investors know the future will be clean and green, but the debate is how long it will take to transition. The crisis in Ukraine is teaching us that some changes can be fast.”
Russian gas supplies
Russia’s state-owned energy company, Gazprom, is continuing to supply natural gas to Europe via Ukraine, it reported. Meanwhile, European countries, including Germany, continue to debate Russian gas imports, with little consensus reached.
