But scars of the pandemic will hang over the world for many years to come
By Charles Ellinas
The Atlantic Council (AC) held its annual Global Energy Forum at Abu Dhabi end of January. The main speakers were the world’s top energy and foreign policy decision makers, who examined the longer-term geopolitical and geo-economic implications of the changing energy system, setting the global energy agenda for the year ahead. The key findings are presented in this article.
A year after the last forum, the Covid-19 crisis still hangs over the world with public health and economic consequences. But hopefully, with the spread of vaccines and treatments, we will soon be seeing the light at the end of the tunnel. That also applies to the world energy crisis.
In an AC survey, world energy leaders confirmed that Covid-19 has actually accelerated energy transition. This is remarkable given that one might have suspected the economic slowdown would impede progress on clean energy. For many governments, clean energy investments have been a significant part of their economic stimulus plans in the past year.
However, many caution that nothing is inevitable and that it is up to policy makers and other leaders to seize the opportunity to rebuild economies in a cleaner way.
As Fatih Birol, executive director International Energy Agency (IEA), said at the forum, in the absence of government policy action energy transition will be difficult. In terms of energy the scars of the pandemic will hang over the world for many years to come, and in that respect the pace of recovery during 2021 will be pivotal.
The new US administration is already giving a tremendous push and momentum to climate change action.
The role of the oil and gas industry
Despite the oil and gas crisis in 2020 – still affecting international oil companies (IOCs) in 2021 – the industry has a crucial role to play in the global economy. But it is at an inflection point, unclear about the future of demand and what level of investment is necessary to meet that demand.
The oil and gas industry was battered in 2020, with demand and prices dropping dramatically. As a result of this, IOCs collectively wrote-down more than $145 billion in assets, about 10 per cent of their total value.
Even though the Brent oil price has almost returned to pre-Covid-19 levels, oil consumption will take longer to recover – possibly by 2022/2023.
But despite these problems and the pandemic, the IEA says oil’s dominance is not over yet. Overall, there is no indication that the pandemic has come close to triggering a major structural shift in the oil intensity of the global economy. As the world economy recovers, without significant changes in government policies to accelerate the adoption of low-carbon alternatives, oil demand will recover with it.
When it comes to natural gas, the view from the forum was that during transition gas will integrate with renewables and low-carbon technologies, but with a decrease in overall consumption in the medium- to long-term compared to 2019-2020 levels.
Shifting energy geopolitics
With the emphasis on decarbonising the global energy system growing, the geo-political map of energy producers and consumers has been shifting.
Geopolitical and energy security concerns drive the energy decision-making of most countries, and – as the pandemic continues to reshape the geopolitical order – 2021 could be even more volatile than the past few years.
The gravitational centres of the energy market have begun to shift from the Middle East to the US, China, and Russia, with major implications for how energy and diplomacy intersect. In addition, countries now worry about new supply chains, critical minerals, and cyber-security.
As the largest energy producer and consumer in the world, China views energy security as a top priority for ensuring its national security. The increasing decoupling between the US and China is pushing the latter to maximise domestic energy production, including coal, and give preference to imports from friendly countries.
The role of public policy
These global energy developments are having an impact on the role of public policy in meeting the climate change challenge on a global scale.
There is increasing awareness of the deep injustices of the energy system, which includes providing energy to the millions of people worldwide who suffer from energy poverty, while also minimizing the environmental impact of the energy system on the most vulnerable populations.
The International Renewable Energy Agency (IRENA) says that the world is at a crossroads, where governments, companies, and individuals need to make decisions about making fundamental changes to the current system, that are necessary in order to align with climate priorities.
Net-zero greenhouse-gas emissions pledges accelerated in 2020, but the more important question is how these pledges work in tandem to achieve global net-zero emissions. Only 6 per cent of the AC survey respondents believe it will be done. It remains a key question, still looking for an answer.
The role of technology
A key question is whether technology will step-up in time to tackle climate change challenges. Current technology will almost definitely not be sufficient to meet net-zero emissions goals, both because costs of developing technologies need to continue to decrease to deploy them quickly and at scale, and because current technology cannot effectively address hard-to-decarbonise sectors such as industry and aviation. Innovation is required to meet climate goals.
Shaping a global future
In order to bring about energy transition reliably, affordably and in a timely manner will require a global movement, in which all countries participate at the required scale and together. Will President Biden provide the leadership and direction needed to drive it? It remains to be seen.
As Fred Kempe, AC’s President, said “Shaping the global future together” is AC’s mission. He emphasised how “crucial collaborative ambition is to a successful energy transition toward cleaner and more sustainable energy sources.”
For governments, including Cyprus, and energy leaders the agenda for 2021 should be to realise the opportunities created by Covid-19 to build a more sustainable energy system. For Cyprus how the EU recovery package will be used is key. Allocating funds to projects without a central strategic plan to guide this may plug short-term holes, but risks failing to have a long-lasting impact on energy transition and the island’s economy.
A major challenge to achieving the 2030 and 2050 climate change targets is Cyprus’ outdated electricity grid. Without upgrading it to a ‘smart-grid’, it will not be able to accommodate a high level of renewables securely and reliably. Such a limitation, if it persists, will always limit Cyprus’ ability to achieve future climate change targets.
Dr Charles Ellinas is senior fellow at the Global Energy Centre of the Atlantic Council @CharlesEllinas