After some discussions at ADIPEC (Abu Dhabi International Petroleum Exhibition and Conference) in Abu Dhabi with the energy sector, COP27 took place in Egypt. It was a crucial challenge for policymakers and industry leaders as previous discussions at ADIPEC had laid the foundation for agreements. Those agreements had to take place in Sharm el-Sheikh, Egypt. There are some facts that will decide what happens next. They will be deciders for the future of energy in the whole world.
1. The Power of Policy-making
In 2022, we saw shifting world dynamics on a large scale. One of its reasons was the Russia-Ukraine war and its impacts on the world. Ultimately, policymakers also had to change and rewrite the game’s rules. This war alerted the whole world about its energy sector. If we recall the energy crisis of 1979, we will get to know that it also led to shifting the policies. Germany has been relying on Russian oil and gas for decades. This oil and gas have been the cause of Germany’s economic growth. Last year, it also shifted its policy overnight due to this change in the world order.
This is causing permitting reforms to be important in many countries. Permitting reform refers to changes made to the regulations and processes involved in obtaining permits for activities. These activities can be building construction, land development, resource extraction, or environmental protection. Without permitting reforms, all policies will fall short. It would not matter how much capital is being expended if there are no reforms.
2. New Energy Security Challenges
Due to climate change issues, the world’s reliance on hydrocarbons will decline and it will depend mainly on critical elements, minerals, and technologies. The minerals which can power the energy transition include lithium, copper, nickel, cobalt, and rare earth elements. They need additional investment. Obtaining these minerals will change geopolitics. It is because their demand centers will be new vulnerability points.
World powers and developed countries will struggle to secure these minerals. They can obtain them from friendly or domestic sources. Social and environmental concerns will also impact policy and the journey of energy transition projects. There is an example of this challenge is that the Democratic Republic of Congo (DRC) produces 70% of the world’s cobalt. On the other hand, Russia accounts for 20% of the global pure nickel supply.
3. A Shortage of Energy Efficiency Measures
Using energy in an efficient way reduces its demand due to a reduction in consumption. Reducing energy consumption through more efficient use is called the “first fuel“. It is quick to implement and presents climate benefits.
However, many countries are focusing on subsidies like tax breaks, discounts, and price caps. They are doing this to reduce the impact of high prices on end users. Its example can be seen in the UK and Spain. The UK has lowered taxes on road fuel and offered discounts on electricity and gas. Spain has imposed price caps on household energy usage and on fuel.
Such policies will have negative impacts on efficiency measures if there are no checks by strengthening demand and increasing market shortfalls. Smart subsidies should be like that they should also protect low-income customers as well as it should ensure that it doesn’t incentivize more consumption.
4. Higher Decarbonization Costs
Higher costs. higher interest rates are compelling governments to go for trade-offs between affordability and decarbonization. It gives favor to fossil fuels because of their low costs. There are many countries that find natural gas cheaper than coal. Europe has well-established carbon pricing. Its permit costs have moderated this shift. However, Germany will keep some of its coal power plants because of the high prices of natural gas.
As discussed in COP26, some countries are already in the progress of carbon-reduction commitments, this situation exacerbates it.
5. Government Investments and ‘Greenflation’
Renewable energy producers faced difficulties in the supply chain and capacity even before the Russia-Ukraine war. And, now after this war, Europe needs infrastructure on a large scale to shift itself towards LNG imports. This could lead to additional supply chain log jams and more inflation of materials and critical components i.e. “greenflation”.
Governments can ease delays by rechecking their permitting processes and shortening the time needed to bring new capacity. However, inflationary pressure remains the same.
6. Insufficient Energy Supply
There has been insufficient investment in oil and gas production, especially in recent years. They must be ramped up to avoid price spikes. Growing energy security concerns and the need to maintain supply chains require sufficient investment which has not been seen since 2007. Moreover, new technologies have also not received sufficient funding. According to BCG analysis, there is a $22 trillion gap between current spending and 2030 needs.
7. Inadequate Energy Access in the Developing World
The economic impact of Covid-19 caused more than 100 million people deprived of energy. This pandemic reversed almost a decade of improvements. The supply chain difficulties and high prices will cause to increase in people deprived of access to energy. Such issues have already impacted many countries especially Sri Lanka and Pakistan. Furthermore, food and fuel prices protests are increasing more and more in the world.
There are also other issues that developing countries are facing. They are being told not to develop energy resources. Meanwhile, Europe is doing exactly the opposite.
These realities are basically changing the world game for policymakers, businesses, and developing economies.