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Preparing for a green energy shift in 2022

The ‘irresistible force’ for clean energy has met the ‘immovable object’ of an embedded fossil fuel energy system. How can policies reconcile this paradox?

Steam billows from a nuclear power plant next to utility lines in Doel, Belgium. Weeks before leaders gather for a UN summit in Glasgow, recent scientific reports paint a dire picture of the international effort to curb greenhouse gas emissions. (AP)

Those at the helm of energy policy in India face a challenging conundrum in the new year: To navigate the choppy waters of the “dirty” petroleum market and stay on the “green” course towards clean energy. There is an oft-quoted French phrase “plus ca change , plus c’est la meme chose” — “the more things change, the more they stay the same”. It captures well the developments of the energy market over the past year.

2021 saw tangible change in the energy sector. One hundred and thirty-three countries pledged to a “net-zero carbon emissions date” and most governments, corporates and civic entities have shown determination to “phase down” and eventually phase out fossil fuels from their energy basket. But the year also witnessed a repeat of the familiar. The petroleum market seesawed and was expectedly volatile. Natural gas prices reached stratospheric levels as demand exceeded supplies and geopolitics compounded the imbalance. Twelve months back, India could have purchased a cargo of liquefied natural gas on the spot market for around $18/mmbtu. Today, it would be hard-pressed to get one for less than $40/mmbtu. The year also ended with oil prices projected to hit triple digits.

Political leaders find themselves currently amid a messy reality. The seemingly “irresistible force” for clean energy has met, it would appear, the “immovable object” of an embedded fossil fuel energy system. The question is: What should they do to reconcile this paradox? Five trends will shape the emergent energy landscape. These must be factored into any policy response.

First, the energy transition will be long and expensive. The fossil fuel-based economic system will have to be redesigned and, in parts, rebuilt for clean energy to achieve scale. The process will take decades and require massive capital infusion. There are varied estimates of the investment needed to scale up the generation of solar, wind, bio etc; decarbonise the grid; electrify mobility, and capture and sequester “carbon”. The thread linking them is the cost range of hundreds of billions. No country or multilateral institution can finance this transition individually. The world will have to collaborate and if it fails to do so, the financing deficit will push back the transition even further.

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Second, fossil fuels will dominate the energy basket during this transition phase. As has been the case so far, its market will be defined by the “fundamentals” of demand, supply and geopolitics and the “non-fundamentals” of exchange rates and speculative trade. The price movements will be sharp, volatile and unexpected.
Third, “ OPEC plus” will resurge in market influence. The low-cost, high resource petrostates (Saudi Arabia, the Gulf nations, Iraq, Iran, Russia) will, in particular, gain greater control over the petroleum market as private companies move beyond fossils under pressure from shareholders and regulators.

Fourth, the geology of the minerals and metals required for clean energy is skewed towards the geology of petroleum reserves. The Democratic Republic of Congo controls, for instance, more than 50 per cent of the global supply of cobalt; Australia holds a comparably large share of the lithium market; and China bestrides the mining, processing and refining of rare earth minerals. It is difficult to tell how and when these countries will exercise their market power but it is clear that the “green transition” will create new centres of energy power.

Fifth, nationalism and political opportunism will be overriding determinants of energy policy. The US and China are currently embroiled in a “Cold War” over technology, trade, cyber issues and the South China Sea. Harvard Professor Graham Allison draws on historical analogies to suggest they may fall into what he refers to as the “Thucydides trap” and drift into hot conflict. Thucydides was a Greek historian and general who chronicled the Peloponnesian war between the city-states of Sparta and Athens in the 5th century BC. At the time, Sparta was the dominant power and Athens the emergent power. The war was triggered by Sparta’s determination to prevent Athens from pushing it off its hegemonic pedestal. The US and China appear to be in a similar face-off. But that has not come in the way of their energy relations. A few weeks ago, the two countries decided to coordinate the release of oil stocks from their strategic reserves to cool off the oil market. More recently, China contracted to import 4 million tones/pa of LNG for 20 years from Venture Global, a US company. And notwithstanding President Biden’s explicit criticism of President Xi for not attending COP 26, both leaders signed off on a joint communique on the green transition. The underlying reality is that national self-interest and short-term political ambition will be the defining determinant of future energy supply relations cutting across values and rhetoric.

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Set against this strategic backdrop, India should consider the following policy initiatives. First, it must assiduously nurture relations with our traditional suppliers of oil and gas. It must not assume their role in the energy market will diminish. Second, it should accelerate the build-up of the storage capacity for oil and gas; the latter to hold strategic oil reserves, the former to store gas for inter alia conversion to blue hydrogen. Third, it must create a facilitative ecosystem for the search and development of the minerals and metals required for clean energy. A single point executive should be appointed to align the interests of the multiple stakeholders (governments, regulators, farmers ) involved in this process and to develop common rules and standards. Fourth, it should create a “clean energy aatmanirbhar supply chain”. The green transition must not lead to import dependency on raw minerals and manufactured inputs, especially from China. The current policy to incentivise the manufacture of semiconductors is a step in the right direction.

This column first appeared in the print edition on January 3, 2022 under the title ‘Time for a green shift’. The writer is chairman and distinguished fellow, Center for Social and Economic Progress

First published on: 03-01-2022 at 04:00:18 am
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