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Energy Transition
Reducing the risk of
future shocks Energy consultancy Wood Mackenzie, a Verisk business, discusses how to manage the shift to lower-carbon sources while strengthening energy security. HE CRISIS CAUSED by Russia’s invasion of Ukraine has highlighted the challenges for energy supplies as the world moves to tackle the threat of climate change. The uptake of low-carbon technologies can help address problems of energy security and affordability, and strengthen resilience to shocks in the future. But businesses, investors and governments need to manage the transition in the right ways. Ed Crooks, vice-chair, Americas at Wood Mackenzie, said, “Soaring fossil fuel prices are a threat not only to consumers and the economies of energy-importing countries, but also to the energy transition itself. If governments want to continue to make progress on cutting emissions, they will need to show that they can deliver energy security and affordability at the same time through timely investments and clear policies.” The five key lessons drawn by Wood Mackenzie analysts are:
1. The world is still reliant on fossil fuels, and the energy transition needs to be focused on cutting demand first, rather than supply The Covid-19 pandemic and the war in Ukraine have highlighted the central importance of fossil fuels to the global economy and how finely balanced these markets are, with fossil fuels still accounting for roughly 80% of primary energy worldwide. If policy and investment decisions constrain oil and gas supplies, such as
If governments want to make progress on cutting emissions, they will need to show they can deliver energy security and affordability at the same time.” 14
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Issue 3 2022
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Solar and wind power have made significant inroads.
discouraging investment in upstream assets or new pipelines, while demand remains robust, that volatility will threaten consumers with periods of high prices. Ann-Louise Hittle, vice president of Oils Research at Wood Mackenzie, said, “To avoid worsening the risk of future oil price spikes, the emphasis needs to be on reducing demand, with supply following as higher-cost, higher-emissions sources are no longer needed. Curtailing supply while demand remains strong is a recipe for crisis.”
2. Resilience and security can be expensive, but the costs are worth paying as insurance against price volatility “Electrification is central to cutting emissions and reducing vulnerability to commodity price shocks, but to do this, electricity systems must deliver power reliably and with
low emissions, which can be expensive,” Crooks said. Solar and wind power have made significant inroads, but fossil fuels still dominate power supplies in most markets, accounting for around 60% of electricity generation worldwide in 2021. “The EU and the UK have in total developed an impressive 428 gigawatts of wind and solar capacity this century, but over the same period, their reliance on imports has increased from 44% to 60% of their primary energy,” Crooks added. There are other options for managing variability, including demand response and energy storage, but each have limitations and further technological innovation is needed. Although the costs of wind and solar generation have fallen rapidly and are likely to decline further in the long term, the cost of maintaining a stable grid is rising.
