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Analysis: As Fossil Fuel Prices Spike, Transition Off Carbon Can’t Happen Soon Enough

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From surging fuel costs in Europe and North America to rolling blackouts in China, a global spike in fossil fuel prices is raising concern that the shift off carbon could be uneven and messy—and feeding the argument that the transition can’t happen soon enough.

Europe has seen a record-high increase in natural gas prices, “raising concerns that consumers will be hit hard by high energy bills this winter as global demand for fuel rises,” Euronews reports. In the UK, “average energy prices this past month were almost three times higher than in any other September in the past 10 years, with the average household expecting to pay nearly US$190 more this year,” Gizmodo adds. “Energy bills are set to increase even more steeply after Friday, when a price cap on bills is set to rise.”

Europe: A Perfect Storm

Euronews attributes the surge to a mix of factors, including rising demand as economies reopen from the COVID-19 pandemic, higher consumption during cold winters in Europe and East Asia, low European wind production over the last year, the continent’s continuing push to phase out coal, less maintenance of oil and gas fields during the pandemic, and declining fossil fuel investment.

“Europe is seeing a perfect storm in its natural gas market,” said Simone Tagliapietra, senior fellow at the Brussels-based Bruegel economic think tank.

“The big concern in the market is that the level of the storage of gas in Europe is lower than usual at this point of the year,” he added. “We are not prepared, well prepared to navigate the winter season, which is the heating system. Right. So that is the concern that is driving up prices.”

Climate Home News has natural gas trading at €52 per megawatt-hour in early September, more than triple the price for the same period last year, with electricity prices exceeding €100 per megawatt-hour. Inside Climate News says U.S. prices hit US$5 per million BTUs last month, a doubling in six months and the highest for September since 2008.

Euronews and others report that Russia is helping to feed the shortage, after supplying more than 40% of the continent’s gas imports in 2019 and 2020, in a push to get the controversial Nord Stream 2 gas pipeline online.

“The problems started last winter, when uncharacteristically low temperatures stuck around through March,” Gizmodo adds. “Due to the cold, countries across the northern hemisphere ran through their gas reserves at a fast clip. At the same time, countries began to emerge from COVID-19 lockdowns, creating more demand for energy and sending fossil gas prices skyward.”

While “some European gas stores would normally have been replenished by Russia,” the Gizmodo report continues, “the nation has been increasing shipments of gas to China while lowering its supply to Europe. A drought in Brazil lowered hydropower generation, also driving up demand for gas power there,” European nuclear plants have been down for maintenance, a major electricity import cable caught fire in France, and 2021 saw the least windy summer in 50 years.

“Russia could do more to increase gas availability to Europe and ensure storage is filled to adequate levels in preparation for the coming winter heating season,” the International Energy Agency said. Some 40 members of the European Parliament recently called for an investigation into whether Russian gas fossil Gazprom is withholding supplies.

The situation has driven European oil prices to a three-year high, Bloomberg reports. Rising prices brought colossal fossil ExxonMobil a US$700-million windfall in quarterly profits, while driving short-term liquefied natural gas prices to a record high in Asia.

Local impacts are spreading across the UK economy, and will become obvious on retail shelves in the next couple of weeks.

“The crunch is forcing UK factories to shutter,” Gizmodo states. “Several fertilizer plants have announced they are halting operations due to the high price of gas. Industrial carbon dioxide, which is produced as a byproduct of fertilizer, is now in short supply. As a result, soda producers are struggling. So is the meat industry, which uses carbon dioxide to stun animals before they are slaughtered.

Low-income households in poorly-insulated homes will be hit hardest by higher fuel prices. “Worst off of all are elderly people, and people with disabilities, who suffer more from the cold, need more heat, and have least resources to pay the bills,” said Fuel Poverty Action coordinator Ruth London.

The UK’s Energy & Climate Intelligence Unit says families in homes with lower energy efficiency ratings are already “paying up to the equivalent of £246 more on their annual gas bills”. The UK government is preparing to call in tanker truck drivers from the military to “further stabilize” fuel supply chains and ease the petrol shortage, prompting social media speculation that they’re filling in a work force that was decimated by Britain’s exit from the European Union. The fuel shortage also had drivers in the UK showing renewed interest in electric vehicles, Bloomberg reported last week, citing Auto Trader advertising.

U.S.: A Short-Term Win for Coal

In the U.S., “gas prices have soared in the last month because of disruptions to gas infrastructure from Hurricane Ida, a hot summer that boosted gas demand, and economic growth, as the country emerges from the coronavirus pandemic. The rising demand is taking place at a time when supply has not yet caught up, resulting in low levels of gas reserves in storage,” Inside Climate writes.

“The combination of these factors is leading to high prices, and the possibility of even higher prices in a few months, if this winter turns out to be unusually cold,” adds reporter Dan Gearino. “The probable financial winners include just about everybody who sells electricity, especially owners of coal-fired power plants.”

Ian Lange, director of the mineral and energy economics program at the Colorado School of Mines, said U.S. coal generators will benefit from high gas prices until the supply crunch sorts itself out, likely by spring. “They’ll make a lot of money in the short term,” he told Gearino. “They’re probably riding these things out, almost on their last legs, and taking the profits,” but “supply is going to catch up.”

More broadly, “the global oil and gas industry is struggling to replenish supplies after demand tumbled and prices cratered during the dark early months of the pandemic in 2020,” the Globe and Mail writes. “Companies coped with the sudden loss of cash flow by slashing spending for maintaining and increasing production. Now, they are struggling to meet resurgent demand, and prices have jumped.”

China: Fossil Lobbyists Seize the Moment

In China, the price shifts led to a serious electricity supply crunch that has triggered rolling blackouts and could threaten global product supply chains, the Globe reports

“Surging coal and gas prices, as well as rising demand for electricity amid a boom in manufacturing and exports, have led to severe power shortages across China, with more than half of all provinces reporting problems,” the news story states. “The impact on industries is broad and includes power-intensive sectors such as aluminum smelting, steelmaking, cement manufacturing, and fertilizer production. Suppliers for Tesla Inc. and Apple Inc. have also reportedly been forced to halt production,” and “analysts are concerned that knock-on effects could damage the wider Chinese economy.”

The Guardian reports that as many as 20 of the country’s 23 provinces are seeing the effects, and Reuters says the government is under pressure to increase coal imports to “keep lights on, factories open, and water flowing” in the country’s northeastern industrial heartland. “Each railway company should strengthen coal transportation to powerhouses (utilities) with inventory of less than seven days and launch the emergency supply mechanism in a timely manner,” said China’s state planner, the National Development and Reform Commission (NDRC).

The Guardian says China’s energy supply woes reflect a mix of factors that isn’t quite the same as Europe’s. “Trying to reduce its emissions to become carbon neutral by 2060, the Chinese economy has lagged behind in improving energy efficiency, even as coal production has slowed because of new regulations,” the paper writes. “On top of that, the rebound in demand for goods from Chinese factories as the world reopens after the COVID-19 pandemic—a factor facing other economies—has left coal production unable to keep up with the demand for energy from factories.”

The impacts have been dire. “Since last week, power rationing has been implemented during peak hours in many parts of northeastern China, with news reports and social media posts showing outages of traffic lights and 3G communications networks in the region,” the paper states. “An internal document from a large technology components maker in China reviewed by Reuters said more than half its daily production in Kunshan, in the eastern industrial province of Jiangsu, had been suspended since earlier this week.”

In the city of Jilin, one public water utility warned residents to expect power cuts “of indeterminate lengths, at indeterminate times, without plan, without warning” through March, before deleting the statement and apologizing for its “unsuitable wording and inaccurate content,” the Washington Post reports.

While “China’s latest measures to cap energy consumption have been widely blamed for causing the current power crisis,” S&P Global wrote in an analysis last week, “the curbs more likely ignited a tinderbox of issues accumulating for months around soaring fuel prices and coal shortages, highlighting the difficulties in implementing energy policy in the context of a huge economy with numerous moving parts.”

With traffic lights out and some residents having to climb dozens of flights of stairs to get home, the Post says some “influential commentators” in India were swift to blame the country’s carbon reduction efforts, possibly opening an opportunity for fossil lobbyists to undercut the Chinese government’s climate goals. But that messaging runs counter to the evidence on the ground, said Yu Aiqun, a researcher with the non-government Global Energy Monitor.

“The power shortage is nothing to do with emissions controls,” she told the Post. “The fossil fuel industry has been sending out signals that we now need to rethink the pace of transition and make sure that coal can anchor the power system when, in reality, it was coal power plants not taking up their supposed function that caused the problem.”

‘Ploughing Ahead’ with the Shift Off Carbon

Opinion and analysis across multiple media combined the pull back to fossil-fuelled energy production and the opportunity for a shift to sources that are more efficient, less expensive, and lower-carbon.

“The current situation shows how difficult the task ahead is for countries rich and poor to end their reliance on fuel sources that have long been taken for granted,” the Globe and Mail writes. “The transition towards carbon neutrality, it’s not going to be linear and it’s going to be messy,” said Erica Downs, senior research scholar at Columbia University’s Center on Global Energy Policy.

“The direction will not change, there will always be more renewables on the system, but people have to be aware of the risks and the volatility issues of getting to that higher point,” agreed Glennmont Partners CEO Joost Bergsma, in an interview with Fortune magazine.

“It’s absolutely true that we should continue to plough ahead with the transition and investing in these things, but be realistic about where we are today and where we will be for the next couple of years,” added Abhi Rajendran, director of research at Energy Intelligence in New York. 

“There have been a lot of agencies with reports saying that if we want to get to net zero by 2050, we have to reduce emissions every year,” he told the Globe. “Where the disconnect is, is that as consumption comes back—and it’s going to be coming back over the next couple of years—you do have to think about resetting the base for emissions and supply.”

Most analysts see the current crunch as good reason to speed up the shift off fossil fuels, not slow it down, with unsteady supplies and unpredictable prices lining up as one more reason to get the transition done. “While some commentators have blamed climate policy for rising energy costs, most experts say the crisis reinforces the case for switching to clean energy and reducing reliance on a volatile commodity,” Climate Home writes.

“Shocker. Volatile prices are volatile. They go up and down,” an unidentified energy finance executive told Fortune. If policy-makers want stable prices, he added, “then why do you encourage the most volatile price determination?”

“We would not have this situation if at this point in time we were to have way more renewables into the system,” Tagliapietra told Euronews. Renewables “basically diminish the role of fossil fuels” and “shield the market from the supply, from the price shock in fossil fuels.”

So “the long-term response to the current situation in Europe must be to speed up the deployment of renewable energy sources, but also of energy efficiency solutions, which are very important to diminish the demand for heating.”

The Solution: More Renewables, Greater Efficiency

UK publications pointed to a dramatic, two-page spread in the Daily Mail that blames climate advocacy and the transition off carbon for high fossil prices. “The Daily Mail has, predictably, cleared its pages today for a climate skeptic,” tweeted Carbon Brief Editor Leo Hickman. “Funny, though, that it doesn’t find space to mention the author has made £££ from coal mining on his land.”

Similarly, The Hill published an opinion piece by former Trump environmental advisor Samantha Dravis claiming that Europe’s price woes are “foreshadowing what may happen as America looks to achieve net-zero carbon emissions and meet the goals of the Paris Accord.”

But more reasoned analysis was easy to find.

“Recent increases in global natural gas prices are the result of multiple factors, and it is inaccurate and misleading to lay the responsibility at the door of the clean energy transition,” IEA Executive Director Fatih Birol said in a prepared statement.

“The solution, in the longer run, is the accelerated deployment of renewables and improved energy efficiency,” the EU Commission’s head of renewable energy and energy system integration, Lukasz Kolinski, told a webinar last week hosted by European electricity lobby Eurelectric. “We must keep investing in wind and solar to have more days when renewables are setting the price. Today’s situation underlines that we have to limit our dependence on foreign fossil fuels as soon as possible.”

European politicians struck a similar tone. “Spain’s ecological transition minister Teresa Ribera blamed fossil fuels and said the direction of structural reform to support clean energy must stay the same, with temporary measures to relieve costs on families and efficient industry,” Climate Home says. “Austrian climate and energy minister Leonore Gewessler said a faster shift to renewables would make the EU ‘more resilient to price fluctuations in the long term’,” while “Slovenian infrastructure minister Jernej Vrtovec concluded ‘we need to decrease our dependency on fossil fuels’.”

“Blaming low wind is clutching at straws,” Ember electricity analysis Sarah Brown told Climate Home, adding that the availability of wind-generated electricity had only a “very marginal” impact on prices.

Bloomberg Green tackles the conflicting narratives around the price hikes, concluding that the conclusion analysts reach likely reflects their position on climate change and the transition off carbon. “If the political context is favourable to the transition, people are going to leverage the crisis to double down on renewables,” Nikos Tsafos, an energy and geopolitics specialist at the Center for Strategic & International Studies, told Bloomberg analyst Akshat Rathi. “If the political context is against the transition, people are going to use it as a way to have it slow down.”

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