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.
Investments in renewables were renewed too…
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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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%
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.
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.
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.
