Move to renewables is fuelling a growing global energy crisis

A solar farm in Queensland’s Darling Downs.

As we were locked down in our houses last year, it was easy to concentrate on local issues. What were the Covid-19 case numbers? What were the rates of hospitalisation? What restrictions applied?

The reality was there were significant geopolitical and economic shifts occurring across the world that were under-reported and under-analysed here. Among these was the emerging energy crisis affecting European countries, Britain and parts of the US.

Just as the Australian government signed on to net-zero emissions in 2050, serious problems arising from countries’ past decarbonisation attempts began to emerge. These problems include a lack of adequate supply and rapidly rising prices. Electricity ­prices in Europe reached their highest level last year.

Consider Germany. The impact of the bizarre decision taken by chancellor Angela Merkel to phase out nuclear power there is becoming apparent. This year, the entire fleet of nuclear power plants, some relatively new, will be shut down. As a consequence, Germany is more dependent than ever on gas to power its electricity grid, and most of this gas is sourced from Russia. Wind-generated electricity has proven to be problematic with an extended wind drought in Germany and other parts of Europe.

There is also still a reasonable amount of Germany’s electricity generated from coal. The newly installed government – a coali­tion with a strong environmental slant – has had to water down its commitment to phase out coal by including the adverb ideally in the aim of eliminating coal by 2030.

Electricity prices also are rising strongly in other parts of Europe, with wholesale prices increasing by more than 200 per cent in France, Spain and Britain in the past year. Energy-intensive plants such as smelters, steelworks and fertiliser producers are having to curtail or, in some instances, halt production.

In Britain, the legislated cap on retail electricity prices has cushioned the impact of rising energy costs on households although more than 20 suppliers have been forced out of business. Consumers who have had to switch to other companies have been penalised. The crunch will come in April when the cap is due to be adjusted, with the net effect likely to be household bills close to double what they were a year ago.

California is also facing its own energy crunch, in part because of the closure of a large nuclear plant. Electricity prices are among the highest in the US. While solar is widely used by households, in 2020 more gas-generated electricity was added than solar. The state also must import electricity from other states, often sourced from coal.

Several themes are emerging from this energy crisis. The first is the increasing reliance on natural gas for electricity generation and the dominance of Russia as a source of supply in Europe.

This is a particular issue for Germany and delays in approving the commissioning of the Nord Stream 2 gas pipeline from Russia is adding to price pressures. (Some members of the German coalition government are opposed to the pipeline being approved.) The European benchmark gas price rose from about €35 a megawatt hour in July last year (itself a high price) to close to €150 ($234.80) at year’s end.

Worldwide, there is a relative shortage of natural gas, particularly after China sought to supplement its supplies after a series of domestic blackouts. Liquefied natural gas tankers are being diverted to supply customers willing to pay the highest spot price.

There is also the issue of the difficulties and time needed to bring new supplies of energy, including natural gas, to market. With private finance wary of funding any fossil fuel-related activities, the normal responsiveness of supply to higher prices is significantly attenuated. In other words, this energy crisis is not necessarily self-correcting.

A second theme relates to nuclear power. While most countries have not taken the German option to phase out nuclear power altogether, others with nuclear electricity generation capacity have deliberately cut output or prevaricated.

Under France’s Green Growth Act, electricity generation must cut its reliance on nuclear power to 50 per cent by 2025. And while Britain is in the process of having the (nuclear) Hinkley Point C plant built, it will not be in operation until 2026. The site was first approved in 2010.

It is only in the past 12 months that some political leaders have changed their minds on nuclear power, the most reliable emissions-free source of all. French President Emmanuel Macron is calling on the EU to define nuclear (and natural gas) as environmentally friendly and eligible for subsidised financing. According to him, “nuclear power is one of the solutions to decarbonise our economies”.

British Prime Minister Boris Johnson also has started to talk up the benefits of nuclear power, including the option of small nuclear reactors. It has been government policy that any new nuclear electricity plant would not be eligible for government funding, a policy position that is in the process of being changed.

A third and important theme is the role of climate-related policy settings in driving up prices and creating some of the problems in energy markets. In Britain, for instance, there are specific green levies embedded in electricity prices paid by households. Moreover, as electricity producers have been forced to switch to coal and even oil, the price of carbon credits have been pushed up, which are in turn passed on to consumers.

A final consideration is the prospect that higher energy prices will contribute to the growing signs of higher inflation, directly and indirectly. As a critical input price, energy drives other prices (including food); higher electricity prices can start a spiral of higher prices and wages. Towards the end of last year we saw several central banks respond to higher inflation by raising official interest rates.

From Australia’s perspective, we appear to have emerged relatively unscathed from these developments. Indeed, the strong demand for energy-related commodities, including LNG and coal, have generated benefits for the country. And domestic electricity prices have been falling.

But there are lessons we should learn. Without reliable backup, transitions towards electricity generation based on renewable energy is fraught. We also should expect gas prices to rise in line with international trends, creating problems for some energy-intensive activities.

When it comes to climate policies, we should watch what countries do rather than what they say.