The global energy crisis has become a knotty conundrum for many nations. Can they establish systems that provide reasonable levels of affordability, availability and sustainability?
“We are in the middle of the first global energy crisis.”
Dr Fatih Birol, executive director of the International Energy Agency, was not mincing his words at the annual meeting of the World Economic Forum at Davos in May.
Summing up the scale of the problem facing great swathes of humanity, Birol told delegates: “In the seventies, it was the oil crisis. Now we have an oil crisis, a natural gas crisis and a coal crisis. All prices are skyrocketing. Energy security is a priority for many governments, if not all.”
But he added that the clean and renewable sources of energy should form the basis of the solution, arguing that “we don’t need to choose between an energy crisis and a climate crisis. We can solve both of them – with the right investment.”
With these words, Birol encapsulated the energy trilemma facing most nations. They are struggling to find the right balance between three goals – energy security, sustainability and affordability – where the pursuit of any two always seems to come at the expense of the third.
Given the international socioeconomic impact of Russia’s latest invasion of Ukraine, the most pressing task for the many nations affected by the war is to keep the lights on in their countries – as Birol noted – at an affordable price. But if they look to new fossil-fuel sources to improve their immediate energy security, for instance, that’s likely to increase global warming and exacerbate the climate crisis in the longer term. Or if they accept discounted energy imports from Russia, say, that could prop up the Putin regime and lengthen the war. The choices are stark.
“In trying to find a solution, we risk creating a less sustainable situation that may deal with the here-and-now challenge – for example, high energy prices – but place an economy at a disadvantage in the longer term,” notes Sharmila Jugessur, sustainability and strategy lead at US engineering firm KBR. “The need to look well beyond a single political term is vital.”
There is no easy way to solve the conundrum, as the UK’s chancellor, Rishi Sunak, has been finding. He has just imposed a “temporary targeted energy profits levy” of about £5bn on the nation’s energy sector – which has largely benefited from the war in Ukraine – to part-fund a relief package aimed at alleviating the cost-of-living crisis. Energy companies that reinvest their profits in UK oil and gas exploration will be able to claim back 90% relief on this windfall tax, but no such arrangement exists for firms that reinvest in renewable sources.
That dichotomy in particular has infuriated the environmental lobby. Responding to Sunak’s announcement, Greenpeace UK’s political campaigner, Ami McCarthy, wrote: “Instead of driving money into clean energy solutions, the chancellor has chosen to pour fuel all over the climate crisis.”
What’s sorely lacking in many cases is a detailed picture of what is truly at stake, according to Gavin Watson, a partner specialising in energy at global law firm Pillsbury Winthrop Shaw Pittman.
“Honesty, transparency and open dialogue about the real issues would be a good start. The energy trilemma won’t be solved if it becomes even more politically weaponised than it already is,” he argues. “The evangelical pursuit of energy transition in recent years masks a fundamental reality: it is a luxury based on energy security. I see security and energy transition as two sides of the same climate currency coin.”
This means that governments, energy leaders and investors need to establish a clear energy plan for both the short and long term, balancing every element carefully. They must progress with an array of solutions that work in parallel, as well as diversifying their sources of supply.
The situation is compounded by the fact that fossil fuels are heavily subsidised. According to the International Monetary Fund, the global industry received about $5.9tn (£4.7tn) in 2020. That equates to $11m a minute.
“The question is: how do we ensure that the billions of people who benefit from subsidised fuel can access green energy at no extra cost?” Jugessur says. “Shifting subsidies needs to be gradual, ensuring that the social cost is minimal. Diversion of funds from fossil fuels to renewables with no proper phasing would break supply chains, kill industries and create the perfect conditions for an even bigger crisis.”
Improving energy efficiency would be one of the most effective ways to deal with the challenge. Indeed, Birol cited it as a key solution in his address at Davos, along with an increase in nuclear generation by countries that have such capabilities.
Nial Greeves, energy director at the Frazer-Nash Consultancy, agrees that focusing on energy efficiency would be a relatively cheap and easy approach to tackling the energy crisis in the short term.
“There are also benefits to be gained from maintaining our energy generation and distribution assets and so prolonging their lives,” he adds. “This will help to avoid the need to draw upon the planet’s limited resources to replace them.”
Policy-makers should also be considering more innovative ways of shifting the dial, Jugessur suggests.
“One of the more left-field ideas would be to alter the way in which energy is traded,” she says, pointing out that the US dollar is the standard currency that any oil-importing country will use when buying in hydrocarbons. “We need to create a new global currency that is attached to green energy, proven through a digitised blockchain economy. This would encourage investors into a market that is purely related to sources of zero-carbon energy. Confusion over greenwashing would disappear and allow for a transparent market to evolve.”
There’s a penny or an electro-dollar for your thoughts.