WEMO Key Findings

Balancing the fight against climate change with energy security Executive Summary | 24th Edition | 2022

World Energy Markets Observatory

Balancing the fight against climate change with energy security Executive Summary | 24th Edition | 2022 In collaboration with:

Introduction and Global Outlook

Welcome to the 24th edition of the
World Energy Markets Observatory

(WEMO), our annual research report that tracks the development and transformation of energy markets around the world.

In this year’s report, our team’s research and analysis examines the urgency to create balance between two equally important imperatives – the security of affordable energy supply and the fight against climate change, and considers both issues within the context of a series of successive crises that impact supply, pricing, and consumer behavior.

In this year’s World Energy Markets Observatory, we see how the latest waves of disruption are impacting energy security and affordability, while also jeopardizing climate change plans. Emerging technologies and new use cases across the energy value chain, including green hydrogen, CCUS, storage, and e-mobility, will play a critical role in helping the world maintain security while also working towards a net zero future.

Colette Lewiner
Energy and Utilities senior advisor at Capgemini

Capgemini's Global Energy and Utilities Industry Leader, James Forrest, introduces this year's WEMO

Click the magnifying glass to read
Collete Lewiner's Global Outlook Summary

Successive crises impacting the energy markets

For more than two years, the world has gone from one crisis to another. Each of them had significant impacts on Energy and Climate change issues.

Covid lockdowns triggered historical drops in Green House Gas emissions and energy demand

Investments in renewables were renewed too…

$361 billion

invested in renewables
(wind & solar) in 2021

+5% compared to 2020

Covid lockdowns triggered historical drops in GHG emissions and energy demand

Very low energy prices: over 2020, global energy consumption fell by 4 % and GHG emissions by 5.8%. During H1 2020, base-load power traded for an average of €23/MWh in Germany and the TTF1 spot natural gas price fell to €3,5/MWh in May 2020.

Electrical grid stability was threatened: During the pandemic in Europe, the low volume of consumption and the good climatic conditions led to an electricity mix heavily composed of renewable energies, which brought virtual blackouts in Germany and in the UK, demonstrating the need to have schedulable electricity (or storage) to stabilize the electrical grid. This need was also outlined by August 2020 California blackouts caused by a strong heat wave.

End of globalization? The successive lockdowns and breaks in the supply chains (which were amplified in the years that followed) created a desire on the part of companies and public authorities to shorten supply chains and relocate certain factories to developed regions.

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Post-Covid recovery, economic growth erased the 2020 energy consumption and carbon emissions decreases

The global economy grew by 6%, more than compensating for the 3.5% drop in 2020.

Energy consumption, and GHG emissions rose again to roughly catch up with 2019 levels. Global energy demand increased by 4.6% in 2021, more than offsetting the 4% contraction in 2020 and global GHG emissions rebounded by nearly 5% - approaching the 2019 level.

Investments in renewables continued to grow. In 2021, $361 billion was invested in renewables (Wind & Solar), i.e. 70% of total energy expenditure (an increase of 5% compared to 2020). In 2021, 295 GW of renewable capacity was installed (up 6% compared to 2020) despite the post-pandemic supply chain problems.

However, the cost of solar PV and wind installations grew, reversing ten years of decreasing costs. Indeed, in 2021, the recovery shock had a strong impact on the supply chains of some raw materials such as steel and copper leading, with freight prices surging and increasing the renewables cost. As upfront capital and associated financing costs are 70-80% of the wind power levelized cost of electricity (LCOE), and 80-90% of solar PV LCOE, an increase in CAPEX greatly impacts these renewables’ cost. With increased interest rates, these CAPEX will inevitably grow. The International Energy Agency (IEA) report estimated that in 2021, the overall investment cost of utility-scale PV and onshore wind plants increased by around 25% (compared to 2019).

In 2021, the overall investment cost of utility-scale PV and onshore wind plants increased by around 25%

The first energy crisis

Global natural gas consumption rebounded by 4.6% in 2021, more than double the decline seen in 2020. Gas prices soared to over €150/MWh. ETS allowances prices increased from € 17/tCO2 in March 2020 to nearly €90/t CO2 at the end of 2021 because of demand recovery.

There were extremely high spot electricity prices of around €500/MWh (occasionally). At the end of 2021, the electricity spot price in France was €257/MWh!

Market reform. Many voices have been raised calling for a reform of electricity markets (in Europe). We explore transformation triggers, trends and solutions in the full WEMO report.

Measures to limit retail price increases: EU Toolbox. European governments took measures to limit price increases for domestic consumers (October 2021). These measures were either energy checks, cancellations of taxes, tariff limits or cancellations of tariff changes.

The invasion of Ukraine by Russia endangers EU security of energy supplies

Before this war, Russia was the main EU supplier of crude oil, natural gas and solid fossil fuels providing for around 60% of the EU energy needs. Russian gas accounted for 45% of the EU gas imports and 40% of its consumption. The most dependant countries were Germany, Italy, Austria, Slovakia, and Hungary. About 30 % of Europe’s metallurgical coal imports and 60 % of thermal coal imports originated from Russia.

The EU adopted sanctions to dry up the Russian financing of the war. The EU, which is dependent on Russian gas supplies, is not ready to sanction these supplies. Rather, it is Russia that is taking advantage of its dominant position. Many European countries have begun to wean themselves off Russian gas. Since Q4 2021 fossil fuel prices (mainly gas prices) have surged. These price increases in turn impacted electricity prices that soared also.

Global natural gas consumption rebounded by 4.6% in 2021, more than double the decline seen in 2020.

Despite EU imports reductions, Russian fossil fuel financial inflow grew over H1 2022. In May 2022, Russia earned $9226 million in hydrocarbon export revenue every day, up $260 million from May 2021. However, in H2 2022, EU coal and oil sanctions will start to be effective and Russian gas exports to Europe will be reduced. This should lead to an annual contraction of Russia's GDP by 6% (forecast by the International Monetary Fund).

Concerns over Europe security of energy supply: If Russia completely cut off gas supplies to Europe, this would have major consequences for the security of gas and electricity supplies. In 2021, the EU consumed 400 bcm of gas of which 90% were imported. About 45% of gas imports came from Russia, i.e. 155 bcm/year.

The H2 2022 economic and financial crisis should reduce energy demand and decrease the tension on energy supply.

At the end of 2021 and during the first half of 2022, inflation rates were at a 40 year high. In June 2022 US inflation reached 9.1% (in annual variation), the highest since November 1981. The origin of this inflation can be summarized as “too much money chasing too few goods”, for example recovery plans and household savings during confinements. The high energy prices (especially in Europe) are also pushing inflation up. As energy demand is correlated to economy growth, demand could decrease, and energy prices could fall. This demand decrease could be helpful during winter months.

How to manage energy supply in Europe without Russian fossil energies

Energy efficiency and conservation gains are among the fastest, cheapest, and easiest ways to deal with the challenges posed by Russian gas cuts

Ten European Union Member States declared various stages of a gas emergency. According to the International Energy Agency (IEA), lowering the thermostat for heating by just 1 degree Celsius in European buildings would curb gas use by 10 bcm per year equivalent to half of the volumes coming from Russia to Europe through Nord Stream 1.

REPowerEU includes a goal of increasing energy savings for efficiency from 9 to 13 percent by 2030 compared to the EU’s 2020 reference scenario.

Replacement of Russian gas by other gases includes European domestic gas production increases, LNG imports increases and gas imports from new countries.

Extra LNG purchases are not easy. In 2021 Europe imported 27% of its consumption in the form of LNG while it imported 40% of its consumption from Russia, mostly by pipeline (8% of Russian imports were LNG).

The EU and Member States Leaders are actively trying to buy gas from new countries. Africa, Israël through Egypt, Azerbaijan… In conclusion, diversifying EU gas supplying countries is a good strategic move. However, it will bear fruits only on the mid-term.

The present crisis highlights the strategic importance of LNG re-gas terminals, reverse gas flows, gas storage and coordinated purchase.

Increased coal usage

2022 will be the record year (+15% to 20% in Europe, +5% worldwide) for coal usage, with many countries reopening mothballed coal plants to secure electricity supply for the winter.

Green electricity output increase

Energy transition requires the electrification of the economy to get rid of fossil fuels as much as possible, thus decreasing GHG emissions and dependency on imported Russian energies.

The Renewable energy roll out needs to speed up. Europe proposes to increase its 2030 target for renewables percentage of consumed energy from 40 to 45%. It aims to enable faster PV deployment and at quadrupling the EU photovoltaic electricity production by 2030. Delivering the REPowerEU objectives requires €210 billion additional investment from 2022 to 2027.

Nuclear electricity is the carbon-free electricity that allows safe grid operation with a high percentage of renewables. Growth of nuclear is accelerating in France, Japan and China. Other countries are expanding the lifetime of reactors. There is also a move to develop small units (SMRs), with 50 designs and concepts globally, as well as four SMRs in advanced stages of construction in Argentina, China and Russia.

To meet the Paris agreement goals

By 2050, 15% of the world’s energy demand

must be covered by Hydrogen

In your opinion, how can Europe best manage its energy supply without Russian fossil energies?

⬆️ Energy efficiency/conservation
⬆️ Domestic gas production
⬆️ Green electricity output

How to manage energy supply in Europe without Russian fossil energies. Click to discover more in our full article.

Read more

European Energy supply security improvement

In the short term:
To address Russian gas cuts, Europeans should

Re-open the Groningen gas field
Keep operations in Belgian and German nuclear plants whose closure was scheduled
Buy as much LNG as possible considering the LNG spare spot volumes and the re-gas facilities capacity
Invest in gas pipelines to increase their fluidity
Launch major plans for energy conservation as soon as possible
and…hope that this winter will be mild!

In the mid-term:
Europeans should

Invest in re-gas facilities especially in Germany
Implement a bold electricity market reform encouraging low carbon generation financing
Accelerate PV solar deployment by persuading populations to accept alleviated procedures
Be careful not to trade Russian gas dependency against China dependency on PV panels, rare metals, and batteries supply

In the long term:
Europeans should

Accelerate R&D in energy technologies
Invest in nuclear plants
Create favorable financing conditions for long term green energy projects

Why is hydrogen an important energy vector for energy transition?

It decarbonizes around 15% of the economy that is not suitable for the direct use of electricity.

Acceleration in low carbon tech advances is essential to a successful energy transition

Advances in wind and solar technologies

Wind and solar technologies are the most mature renewables after Hydropower. Wind and solar provide a GHG reduction solution, but also allow countries to grow domestic energy sources. Technology advances aim at improving wind or sun conversion rates to electricity, developing offshore wind or floating solar farms equipped surfaces, and decreasing their environmental footprint.

Progress is continuing in wind power due to offshore wind turbines’ capacity increases, improved blade design, noise reduction, and an increased number of sensors coupled to Artificial Intelligence (AI) to better monitor equipment and improve output.

Wind and solar provide a GHG reduction solution, but also allow countries to grow domestic energy sources

Floating offshore wind technology is currently in a precommercial phase, with approximately 84 MW installed worldwide at the end of 2019. Globally in 2019, there were over 7,000 MW in the planning and permitting phases of development, with the first commercial-scale projects expected to be operational in 2024. Floating wind will become competitive (LCOE) and is predicted to grow worldwide to more than 264 GW in 2050.

On the PV solar technology side, research and development is focusing on semiconducting material to increase the solar-to-electricity conversion rate.

CO₂ capture and storage implementation should be accelerated

In 2021, the energy sector emitted 36 billion tonnes of energy-related GHG, worldwide. The development of CCUS has been disappointing in the past, however it is picking up. The past decade saw high-profile project cancellations and government funding programs that failed to deliver. On average, capture capacity of less than 3 MtCO₂ has been added worldwide each year since 2010, with annual capture capacity reaching over 40 MtCO₂ in 2021, thanks to 27 operating plants. This needs to increase to 1.6 billion tonnes (GtCO₂) in 2030 to align with a pathway to net zero by 2050. Significant growth of the number of projects since 2021 and the U.S. is the most supportive region. Other countries are now supporting CCUS.

There has been significant growth of the number of projects since 2021 and the U.S. is the most supportive region. Other countries are now supporting CCUS.

Norway has committed $1.8 billion to the Longship project, which includes the Northern Lights offshore storage hub; the Netherlands has committed up to €2 billion through its sustainable energy and climate fund to the Porthos CCUS hub at the Port of Rotterdam; the United Kingdom has established a £1 billion CCUS Infrastructure Fund with a target of building four CCUS hubs by 2030; and four CCUS projects have been selected in the first funding call for the European Commission’s €10 billion “Innovation Fund”. Support for CCUS is also growing in Canada and in Australia.

Direct Air Capture: (DAC): CO₂ represents 0.04% of ambient air. It is therefore a challenge to capture it.

Two technologies exist that capture CO₂ through a liquid, which is regenerated at the end of the process, or in a solid with subsequent degassing. However, DAC costs in 2022 are extremely high and the process consumes a lot of energy.

In your opinion, which technological advances are most pivotal to a successful energy transition?

Hydrogen production
Wind and solar tech
Nuclear acceleration
Other

Storage

Flexibility and storage are key, with a higher share of Renewables in the electric mix, to balance the grid. Demand – Response, Smarter (Smart Grids) and interconnections are available if slowly growing solutions.

Storage - batteries and hydrogen - being the two complementary solutions (30% CAGR till 2030 predicted by Bloomberg New Energy Finance).

Batteries for mobility. With optimized production methods (Gigafactories), Li-ion batteries will reach a cost of $100/kWh at the cell level and an energy density of 300Wh/kg before 2030. Metals availability (Lithium, Cobalt), recycling and technology progress should improve Li-ion batteries, until solid-state batteries costs competitiveness with research combined to markets expansion. Stationary batteries (Sodium-ion), Batteries used for grid storage and Vehicle to Grid are also progressing, without being commercially viable today.

Hydrogen is an important energy vector for energy transition because it makes it possible to decarbonize around 15% of the economy that is not suitable for the direct use of electricity. Hydrogen also allows inter-seasonal storage of electricity. Hydrogen production must be carbon-free, which is not the case currently (less than 1%).

80 countries support Hydrogen development, out of which European countries are the most ambitious.

To meet the Paris agreement goals, Hydrogen should cover 15% of world energy demand by 2050, and 70% of Hydrogen has to be green by 2030, 30% blue (with Carbon Capture). More technology development and large investments infrastructure are expected to make Hydrogen an industrial reality. The question is should green Hydrogen be reserved for industries where CO₂ is difficult to abate with other technologies.

Heat pumps are an important technology in the transition to clean energy as they enable space heating applications (often fossil-fueled today) to be electrified. On a global net zero pathway, heat pumps will account for more than 1 billion tons per year of avoided CO₂ emissions by 2030 (savings in average 2t CO₂/heat pump/year).

Hybrid heat pumps combined with a boiler can save up to 60% of fuel. Heat pumps are developed in households and buildings. Heat pump technology can be deployed in industry to capture and re-use waste heat, especially where there are drying, sterilization, evaporation, or steam generation processes.

Governments should invest more in these low carbon technologies, from basic research to technologies’ deployment, but also in education and scientific training, which are the pillars of success.

Pump up the use of heat pumps, here’s why! Heat pumps enable space heating applications (often fossil-fueled today) to be electrified.

1 billion tons per year

of avoided CO₂ emissions

by 2030 via heat pumps

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for a closer look at our stats

Has the world lost sight of the need to fight climate change?

The energy crises has emphasized the importance of securing energy supplies, which had, before 2022, been neglected.

Access to energy, which is a vital good, at an affordable price, must be possible for all the inhabitants of our planet (even if this is unfortunately not yet the case today).

In 2021, National climate pledges combined with other mitigation measures put the world on track for a global temperature rise of 2.7°C by the end of the century above the threshold of 1.5°C warming. To keep global warming below 1.5°C this century, we need to halve annual GHG emissions in the next eight years.

In Europe there are packages aimed at accelerating the development of renewable energies.

The “Fit for 55” package was presented by the European Commission in July 2021. It should enable the European Union to reduce its net greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels and to achieve climate neutrality in 2050. It includes thirteen legally binding measures. In May 2022, the European Commission presented the “REPowerEU“ plan, to respond to the double urgency of ending the EU's dependence on Russian fossil fuels and tackling the climate crisis.

The EU taxonomy of sustainable economic activities is a tool to help investors understand whether an economic activity is sustainable and navigates the transition to a low-carbon economy. Specific nuclear and gas energy activities are in the list of economic activities covered by the EU taxonomy.

Do you think the world has lost sight of the urgency to fight climate change?

Yes–it's all talk & no action
No–some efforts are underway

In the US: President Joe Biden...

Who signed the Paris Agreement immediately after taking office, included measures to combat climate change in his ”Build Back Better” plan. The US is the second highest worldwide GHG emitter. The so-called ”Inflation Reduction Act”, which contains historically high financial incentives to achieve the objectives of the Paris Agreement, has been finally approved. It is the biggest climate package in US history. The bill invests more than $360 billion in energy and climate change programs over the next decade, including cash incentives for electric vehicle consumers and tax breaks to speed up the country’s transition to renewable energy sources. Senate Democrats say the bill will reduce carbon emissions by nearly 40% by 2030.

India confirms the targets announced at the COP 26 conference

India is the fourth-largest GHG country emitter, behind Europe, and counts for 7% of global emissions. However, the average carbon footprint per person in India is relatively low at 0.56 tonnes per year.

Russia’s decarbonisation is at risk

And China – US collaboration on climate change decided during COP 26 has been suspended.

Has the world lost sight of the need to fight climate change? Click to discover more in our full article.

Read more

Conclusions & recommendations

For the last few years, we have neglected to ensure consistent energy supplies (e.g: premature closure of nuclear power plants, use of imported gas as a substitute for nuclear power, commitments on the rapid exit from coal, etc.). This could result in an electricity and gas shortage this winter in some European countries.

A balance must be found between these two equally important imperatives (security of energy supply and the fight against climate change) by combining a long-term vision and pragmatism in the design and implementation of the corresponding policies.

Among the measures recommended by European states to avoid a disruption in supply, energy sobriety is certainly the one that can give the best results in the short term, if States and major operators quickly launch incentive campaigns for all players (residential, tertiary and industrial) and take appropriate regulatory measures.

Energy sobriety can give the best results in the short term.

Europe and the United States rightly want to accelerate the development of renewable energies because they are both domestic and carbon-free. However, Europe must not exchange a dependence on Russian gas with a dependence on certain energy transition key components, particularly vis-à-vis China (solar panels, metals, and rare earths, etc.)

Nuclear power is an essential component for the decarbonization of electricity and the stability of the electricity grid. Unfortunately, its development comes up against the difficulty of building large third-generation nuclear power plants in Western countries. As in the UK, long-term remuneration systems for nuclear electricity should be put in place to encourage private players to invest in this industry. In addition, an in-depth reflection involving all stakeholders, taking into account safety requirements, past experience, events around the Zaporijjia power plant, innovations introduced by new players should be engaged so that the nuclear renaissance becomes real.

The use of coal is more pervasive than was hoped for during the COP 26 Climate conference. This underlines the importance of rapidly developing competitive CCUS to eliminate CO₂ emissions from coal and gas fired power plants (as well as other plants using fossil fuels) and produce enough competitive blue hydrogen.

As renewable energies development is late compared to its targets, as the electrolysis industry profitable ramp-up is not yet done, and as hydrogen long distance transportation is still a challenge, green hydrogen should be reserved for industrial processes where emissions cannot be abated otherwise (for example steel, refining, chemicals).

In the short term, the energy crisis will delay GHG emissions reduction. They could rise sharply again in 2022 (compared to 2021) unless during the last part of 2022, the United States, Europe, and China experience a sharp economic slowdown. In the medium term, the development of those carbon free energies that are also domestic resources (renewable and nuclear) could be boosted by the current energy crisis.

Finally, governments should invest more in education, research, and innovation. Moreover, populations, members of the media and politicians should all receive basic information essential to understanding how energy works.

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