Low carbon technologies can help address problems of energy security and affordability, and offset future shocks, but businesses, investors and governments need to manage the energy transition in the right ways, according to Wood Mackenzie.
The 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.
Wood Mackenzie Americas vice chair Ed Crooks 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.”
Wood Mackenzie has drawn five conclusions.
The first is that the world is still reliant on fossil fuels, which accounts for 80% of primary energy worldwide, and the energy transition needs to be focused on cutting demand first, rather than supply.
Wood Mackenzie oils research vice president Ann-Louise Hittle 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.”
The second is that resilience and security can be expensive, but the costs are worth paying as insurance against price volatility.
“The EU and the UK have in total developed an impressive 428GW 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 said.
Other options for managing variability, including demand response and energy storage, have limitations and further technological innovation is needed, said Wood Mackenzie and the costs of maintaining a stable grid is rising, though solar and wind costs are falling.
Crooks said: “In the long term, declining costs for low carbon energy should ease the burden on consumers, but that will take time.
“Until then, one way to help consumers struggling with energy costs is to use tax and spending policy.”
Third, innovation in new technologies is crucial for energy security, as well as for tackling climate change.
Prakash Sharma, vice president of multi-commodity research at Wood Mackenzie, said: “The only way to achieve a largely electrified energy system based on zero carbon generation will be through advances in technology.”
These newer technologies will also need regulatory and legal frameworks that encourage development, so the private sector can invest, scale up and deploy, he added.
He said “comprehensive policy” is needed to encourage energy efficiency measures.
“Policy support is crucial for innovation. If it is left to the private sector, it will not make progress fast enough to address the challenges of climate and energy security on the urgent schedule that is required.”
Fourth, linkages between energy markets have become stronger so that shocks in one sector or region can be rapidly transmitted to another, increasing the need for resilience.
As the global gas market becomes more integrated, customers and policymakers need to do more to provide flexibility in both supply and demand, to cushion the impact of shocks between sectors and regions.
Fifth, globalisation creates geopolitical risks for energy security and consuming countries need to manage those risks through stronger domestic production and greater investments overseas, or both.
Crooks said: “Today’s energy crisis has put a spotlight on other potential threats to energy security, from low carbon technologies as well as fossil fuels and from countries other than Russia, highlighting the need to support diversity of supply in key sectors, from the electric vehicle and battery supply chain to the mining of critical minerals,” Crooks said.