The war in Ukraine has led to an energy crisis on an unimaginable scale, as global prices are pushed high by both surging demand and restricted supply. Martin Allen-Smith reports on the challenges facing business, and the hope for a positive long-term outcome for the planet

While the war in Ukraine brings into focus the very real horrors of conflict to those most closely affected, some of the broader repercussions can reach far and wide. At the time of Russia’s invasion of its neighbour, global energy prices were already on an upward trend, as manufacturing continued its post-pandemic recovery and looked towards a return to business as usual.

Since war broke out in February, the EU’s significant reliance on Russia as a major supplier of its energy – providing around 40 per cent of its gas requirement up to this year – has prompted widespread concern over continuing increases to already sky-high energy prices, and even the risk of possible blackouts in some regions if supply falls short of demand.

The findings of a recent survey of 200 large businesses by energy firm npower show that 77 per cent of organisations cite energy as their biggest business risk, and that 82 per cent believe the Government needs to do more to protect businesses from wholesale market volatility.

In addition, almost half of businesses consider that the current energy crisis will harm net-zero progress – something that alarms businesses and their investors, both of which groups have increasingly become geared towards a more sustainable future, and one that is more energy independent. For many, to backtrack on that no longer feels to be instinctively the right path for the long term.

A long winter

With no sign that the war in Ukraine is set to end in the short term, the turmoil over energy looks set to continue for a considerable time. Qatar’s energy minister, Saad al-Kaabi, has warned that Europe could face a much worse energy crisis next year, particularly if there is a harsh winter. Acute problems, he warns, could extend into the middle of the decade if the war continues and gas supplies from Russia are not resumed. The Financial Times reported that Kaabi – who is also head of the state gas company QatarEnergy – said that because storage capacity is currently full, that this coming winter would be fine, but that unreplenished reserves will create an issue for next year.

One country most directly affected by reduced access to Russian energy is Germany, which has relied on this source for decades. A recent survey by the Association of German Chambers of Commerce and Industry, DIHK, found that around 82 per cent of 24,000 businesses cited energy prices as a significant business risk – a higher proportion than at any time since the group began gathering such data in 1985.

In response to rapidly rising prices, nearly one in five energy-intensive industries in the country have scaled back production or their offerings, while eight per cent are considering shifting production elsewhere – in particular companies in the automotive industry, at 17 per cent.

“We’re hearing quite often from firms that they are looking for or eyeing locations that fit their portfolio in terms of energy, which at the moment is the United States,” DIHK’s Ilja Northnagel says.

Widespread sanctions against Russia – compounded by the Kremlin’s own actions in reducing gas supplies to Europe – have forced governments to take a diverse range of measures to attempt to find a solution. Some have acted to bring back online previously decommissioned fossil fuel power plants, or halt programmes aimed at scaling back nuclear power operations. It is being seen as a huge blow to efforts to combat climate change and a major setback to hopes of reaching net-zero by 2050.

However, in the latest edition of its World Energy Outlook, the International Energy Agency suggests that the global energy crisis has led to profound and long-lasting changes that have the potential to hasten the transition to a more sustainable and secure energy system.

The context for this is an energy crisis that is delivering a shock of unprecedented breadth and complexity. The biggest tremors have been felt in the markets for natural gas, coal and electricity – with significant turmoil in oil markets as well. With unrelenting geopolitical and economic concerns, energy markets remain extremely vulnerable, and the IEA’s report warns that the crisis is a reminder of the fragility and unsustainability of the current global energy system.

New global measures

Alongside short-term measures to try to shield consumers and businesses from the impacts of the crisis – including huge price increases and the risk of potential blackouts, many governments are now taking longer-term steps. Some are seeking to increase or diversify oil and gas supplies, and many are looking to accelerate bigger structural changes. The most notable responses include the US Inflation Reduction Act, the EU’s Fit for 55 package and REPowerEU, Japan’s Green Transformation programme, Korea’s aim to increase the share of nuclear and renewables in its energy mix, and ambitious clean energy targets in both China and India.

According to the IEA WEO’s stated policies scenario – based on the latest policy settings worldwide – these new measures would help to propel global clean energy investment to more than US$2 trillion a year by 2030, a rise of more than 50 per cent from today. As markets rebalance in this scenario, the upside for coal from today’s crisis is temporary as renewables, supported by nuclear power, see sustained gains. As a result, the forecast shows that a high point for global emissions is reached in 2025. At the same time, international energy markets see a major reorientation in the 2020s, as countries adjust to the disruption of Russia-Europe flows.

Fatih Birol, IEA executive director, says: “Energy markets and policies have changed as a result of Russia’s invasion of Ukraine, not just for the time being, but for decades to come. Even with today’s policy settings, the energy world is shifting dramatically before our eyes. Government responses around the world promise to make this an historic and definitive turning point towards a cleaner, more affordable and more secure energy system.

“The environmental case for clean energy needed no reinforcement, but the economic arguments in favour of cost-competitive and affordable clean technologies are now stronger – and so too is the energy security case. Today’s alignment of economic, climate and security priorities has already started to move the dial towards a better outcome for the world’s people and for the planet.”

Wholesale reset

Russia has been by far the world’s largest exporter of fossil fuels, but its invasion of Ukraine is prompting a wholesale reset of global energy trade, potentially leaving it with a much-diminished position. All of Russia’s trade ties with Europe based on fossil fuels had ultimately been undercut in previous forecasts by Europe’s net-zero ambitions, but Russia’s ability to deliver at relatively low cost meant that it lost ground only gradually, as budgetary realities in many countries ensured a cautious approach to switching energy policies. Now the rupture has come with a speed that few imagined possible. Russian fossil fuel exports never return (in any of the scenarios in this year’s IEA report) to the levels seen in 2021, with Russia’s refocus towards Asian markets particularly challenging in the case of natural gas. Russia’s share of internationally traded energy, which stood at close to 20 per cent in 2021, falls to 13 per cent in 2030 according to the stated policies scenario, while the shares of both the US and the Middle East rise.

In the Northern Hemisphere, winter promises to be a perilous moment and a testing time for EU solidarity, but it could just be that in the longer term, one of the effects of Russia’s actions is that the era of rapid growth in gas demand draws to a close.

“Amid the major changes taking place, a new energy security paradigm is needed to ensure reliability and affordability while reducing emissions,” Birol adds. “As the world moves on from today’s energy crisis, it needs to avoid new vulnerabilities arising from high and volatile critical mineral prices or highly concentrated clean energy supply chains.”

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