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Energy security concerns highlight the need to move faster on decarbonisation


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    Rapid energy price rises and concerns about energy security following Russia’s invasion of Ukraine mean that transitioning to net-zero, has never been more important, says Thibaud Clisson.

    The energy transition – moving to an energy system solely based around low-carbon sources – is a critical part of the response to climate change. Energy-related emissions and those associated with industry, transport and buildings account for around 75% of all greenhouse gas emissions, and these have continued to grow from year to year.

    As the International Energy Agency recently highlighted, energy-related CO2 emissions rose to a record 36.3 gigatonnes in 2021 due to rapid economic recovery from the pandemic.

    Recent events have put energy high on political and business agendas. Prices had already been rising markedly after the rebound in demand following the economic shocks of Covid-19. The Russia-Ukraine conflict and the effects on markets from sanctions on Moscow and budding efforts to diversify supplies have sent them higher still.

    Brent crude tipped over USD 125 per barrel in early March, and at the time of writing is hovering at around USD 115. Gas benchmark prices have been volatile since September 2021, with spikes in early March taking them over 900% higher than a year ago.

    Meanwhile, renewable energy technologies are becoming cheaper. This highlights the potential for renewables to act as a shield against the volatility of fossil fuel markets. It is another argument to accelerate the energy transition. Indeed, many governments are now looking to take this approach.

    Government responses

    Germany, which relies on Russia for some 60% of its gas needs, has been quick off the mark. While it is planning on building two liquefied natural gas (LNG) terminals to replace imports from Russia, it has also set out plans to bring forward its target to generate 100% of its electricity from renewables to 2035, from ‘well before 2040’.

    The plans would see the country generate 80% of electricity from solar and wind energy by 2030, which means reaching 110 GW of onshore wind, 30 GW of offshore wind, and tripling solar capacity to 200 GW by that date.

    The European Commission laid out its action plan to reduce dependency, seeking to move more quickly to a clean energy system. Under the plan, 60 billion cubic metres (bcm) of Russian gas can be substituted by additional import diversification and LNG purchases from countries such as the US and Qatar by the end of the year, while new wind and solar projects can replace 20 bcm. 

    The EU’s flagship climate strategy should help reduce its long-term dependency on Russia by tripling solar and wind capacities to 420 GW and 480 GW by 2030. This would provide energy equivalent to 170 bcm of natural gas, with bio-methane and hydrogen also expected to play a greater role. Moreover, replacing home gas boilers with heat pumps could save up to 35 bcm by the end of the decade. 

    The IEA’s advice also focuses on the potential to save energy and for renewables to curb reliance on Russia. The agency released a separate 10-point plan to reduce oil use, which includes hastening the adoption of electric vehicles. It also suggests that 10 bcm might be saved by asking consumers to turn down home thermostats by 1°C. 

    The UK aims to phase out Russian oil imports by 2023, and is due to set out plans to go further still. The Netherlands is doubling its planned offshore wind capacity by 2030. France is increasing its support for renewable energy heating.

    The conflict has helped to make nuclear energy acceptable again in some corners. The Dutch government intends to build two nuclear plants and Belgium has decided to delay a nuclear phase-out by 10 years. Germany, however, is not revising its plans to end nuclear power, while France is sticking with plans announced already in February to build six new reactors.

    Reviewing these responses, we believe it is safe to say that, from an investment  perspective, the outlook for renewable energy, renewable heating technologies and energy efficiency solutions has brightened as a result of recent events.

    Challenges ahead

    To be fair, the path to net zero as well as energy security will not be plain sailing. The targets are ambitious. Shifting the energy system to one based more fundamentally around renewables and electrification will require not just considerable investment in the technologies themselves, but also the grid infrastructure to support them.

    This includes the associated energy storage and load shifting technologies to help integrate an increasing amount of variable renewable energy into grids in Europe. Indeed, there are reports of Europe’s grid being able to accommodate 50 million heat pumps, with pressure on the US to step up supply efforts to help reduce Russia’s energy leverage.

    Such efforts would shift Europe further away from plans to use natural gas as a bridging fuel en route to net zero. However, the level of dependence on Russia varies from country to country with Latvia, the Czech Republic and Moldova relying 100% on their natural gas. Careful thought is needed to figure out how these countries can transition before deciding to halt imports.

    Another potential hurdle to consider is the boost in demand for the materials needed to expand grids and increase electrification in general. Prices for ‘green metals’ such as copper and cobalt are already high and new projects will only raise them further. Given the concentration of producers, we need to be aware of the risk of supplier dependency.

    Finally, it is worth highlighting that clean energy options should be quicker to implement and should contribute faster to energy supplies than developing new conventional or unconventional oil and gas projects. These can take decades to come on stream.

    Indeed, analysis from the Institute for Energy Economics and Financial Analysis states that what is needed is a much more fundamental diversification of energy sources. Renewables will be key here.


    Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

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