How the Russia-Ukraine War Will Accelerate the Energy Transition

Russia’s invasion of Ukraine sent shockwaves through the global community and oil and gas prices soaring. While there is much speculation about what the invasion means to the global political order, it is also reshaping the politics of climate change and the energy transition.

To find out how, we solicited the wisdom of our network on LinkedIn.

The majority of our survey respondents (54%) felt that the war would accelerate the energy transition while thirty percent of our respondents felt that the war would either cause the energy transition to stall or to go backwards.

In the near term, there is no refuting that the war has had a negative impact on the immediate goal of reducing carbon emissions.

As we reported last month, the war provided a boost for coal power as European countries - which get approximately 40% of their energy supplies from Russian gas - shored up energy supplies in the face of the country’s aggression. 

Bloomberg reported that following the invasion, the use of coal by European power plants rose by 51% over the same period the year before.

“There is a temporary role for coal, which we had hoped would be out of the energy mix by the end of this decade. But it will stay longer. We will need it until we find alternative sources. Until that time, even the greenest government will not phase out coal,” said Václav Bartuška, the Czech government’s energy security commissioner, in an interview with news site Seznam Zprávy following the Russian invasion.

Coal is a major contributor to climate change and is difficult to phase out as it is relatively inexpensive and widely available.

Many countries have pledged to reduce their reliance on coal power; however, even before the invasion, carbon emissions from coal hit historical highs last year, according to the IEA’s annual emissions report.

Nearly half of the growth in greenhouse gas emissions last year was from coal, an all-time high of 15.3 billion tonnes.

Following the invasion, oil and gas prices rose rapidly, which increases the likelihood of gas-to-coal switching for electricity generation.

Last year, according to the IEA, gas-to-coal switching accounted for over one hundred million tonnes of extra global CO2 emissions and the high gas prices this year are likely to bolster that trend, much to the detriment of global GHG emission goals.

Similarly, Russia is a major exporter of many of the components needed for electric vehicles and other clean energy technology. The country is the world’s third largest supplier of nickel, a key component of electric vehicle (EV) battery packs.

A study by S&P Global Mobility predicts that the cost of manufacturing EV battery packs could increase by up to $8000 by the end of the year because of soaring commodity prices. The impact may slow the adoption of electric vehicles due to soaring prices and scarcity of components.

However, long-term, our respondents who predict that the war may cause the energy transition to accelerate could be proven correct for three reasons: western democracies now have an impetus to rapidly reduce dependency on foreign oil and gas; oil companies shave more money to invest in the energy transition; the price of renewables and green sources of energy have become comparatively economic in the face of high oil and gas prices.

“There has seldom been a more compelling argument for us to accelerate our investment into renewables, into domestic energy sources, into clean energy sources–both for our political and economic dependence, but also for climate change purposes,” said Christiana Figueres, a climate advocate and former executive secretary of the UN Framework Convention on Climate Change, quoted by Bloomberg. “These actually go hand in hand.”

#1: Reducing dependency on foreign oil and gas

Russia currently supplies about 40% of Europe’s gas demand through a network of pipelines that cross countries including Ukraine. It also provides about a third of the bloc’s oil, according to Eurostat. In some countries, such as Germany, those numbers are even higher.

“Much the same way the 1970s OPEC crisis sparked investment into renewable energy, and set forth new legislation mandating national fuel efficiency standards, this crisis may force Europe to invest at a much faster pace into distributed energy resources, renewables and demand-response technologies to secure its energy future,” said Peter Sobotka, CEO of Corinex, to MarketWatch. 

Individual consumers, affected by the high price of fuel and rapid inflation, are also incentivized to increase their energy efficiency and will be more likely to consider EVs for their next vehicle purchase.

#2: Fossil fuel companies invest in the future of energy

Before the war, most oil and gas majors had announced ambitious carbon reduction targets – many in line with net zero by 2050 goals – and were beginning to aggressively launch new strategies and lines of business to support a future low carbon economy.

Spending and investment figures indicate that oil and gas companies are putting their money where their mouth is. Investment in renewable energy by oil and gas majors has more than doubled in two years, according to Wood Mackenzie, a global research and consultancy business.

Almost a quarter of investment by European majors will be spent on renewables such as wind and solar energy. US companies, meanwhile, are also increasing their investments into renewables, albeit at a lower rate of approximately 10% of total investment.

There is, of course, the risk that cash rich oil companies use their financial position to advantage with governments and regulators to adopt fossil fuel friendly regulations to pump more from existing fields in the long run.

But, despite the short-term boost to oil and gas coffers, long-term it is in the industry’s interest to reduce the carbon intensity of their operations and products. Consumers, investors, and regulators are increasingly calling for greater sustainability and transparency from the industry. Oil and gas companies that do not heed that call are likely to miss one of the greatest business opportunities of this century and will find it difficult to attract top talent to the business.

#3: High price of oil and gas make green energy more competitive

One of the early challenges of renewable energy is that it was both more expensive and less reliable than fossil fuel alternatives. But, according to a 2020 report by the International Renewable Energy Agency (IRENA), the cost of renewable energy has fallen dramatically in recent years. 

The agency says that the cost of electricity produced by large scale solar farms fell by 85% in the past decade while onshore wind projects fell by 13%, and offshore wind projects by 9%. As technology costs fall for these renewable sources of energy and oil and gas prices stay high, it is likely that they will become a greater part of the energy mix.

Meanwhile, Rystad Energy, recently predicted that the surging costs of fossil fuels has increased the feasibility of “of green hydrogen as an affordable and secure source of renewable energy in Europe.” 

Hydrogen is often seen as a credible fuel of the future as it is a dependable and environmentally-friendly alternative to fossil fuels. Green hydrogen is produced using renewable sources of energy such as hydro electricity or solar power where no C02 is released during the process. (That is in contrast to blue and gray hydrogen which are both produced using power from natural gas. In blue hydrogen the C02 emissions released during this process are captured and stored, while in gray hydrogen the C02 is released into the atmosphere.)

Conclusion

While the war may have provided a short term set back to global climate goals, it is likely that in the long run it will accelerate the energy transition. Companies and nations are incentivized to adopt of a range of lower carbon energy sources to ensure security of supply and position themselves for a low carbon future.

Interested in learning more about this topic? 

The Biden administration has identified industrial decarbonization as a crucial step in confronting the climate crisis and achieving an equitable clean energy future. If you’re tasked with reducing emissions in your operations, join us at Decarbonizing America's Industrial Sector, taking place at the Palm Springs Convention Center September 13-15, 2022. Find out more about the event here.