After Ukraine – The Great Clean Energy Acceleration

By Michael Liebreich
Senior Contributor

Twenty years ago, sustainability was the only real driver of the transition to clean energy. Around ten years ago there was a major acceleration when it became clear that wind, solar and batteries were going to become really cheap; economics also started to drive the clean energy transition. I believe this hellish year is going to lead to another similar acceleration, as it becomes clear that clean energy, and not fossil fuels, holds the key to energy security.

We have of course known for centuries that coal, oil and gas have driven vast improvements in standards of living, but they have also caused crisis after crisis, war after war and scandal after scandal. We have also known, for decades now, that we needed to transition to clean energy from a climate perspective, but that only got us so far. What is different about this crisis is that, instead of having no choice but to double down on securing fossil fuel supplies, for the first time we can double down on proven, safe and scalable clean solutions. What was once disparagingly called “alternative energy” really does now present an alternative.

From now on all three elements of the energy trilemma – security, affordability and sustainability – are pushing in the same direction. We face some very difficult years, there is no question. But as we get through them, things are going to start moving extremely fast. The Great Energy Price Spike is going to give way to the Great Clean Energy Acceleration.

In the US, just when everyone had given up hope of a federal climate change package, the Inflation Reduction Act (IRA) popped up and sailed through Congress in a matter of weeks. There has been plenty of excellent analysis of it by others, including this overview by BloombergNEF. I’m going to focus here mainly on Europe and the consequences of Russia’s invasion of Ukraine, but before I do so, allow me to note that it was the Great Energy Price Spike that put the “I” in the IRA and made the politics work – though I will reserve judgement on whether the result does actually reduce inflation.

Russia’s pivot east

No one knows how the war will end. Ukraine may make further breakthroughs; Russia may use its mobilization of conscripts to freeze the status quo by force of numbers, as the Soviet Union did in Eastern Europe after WWII. In any case there seems little prospect of an end to the war swift or decisive enough for sanctions on Russia to be lifted within five or even 10 years.

If there is to be a silver lining to this ghastly war, therefore, it will be that it draws a permanent line under Europe’s long-standing over-dependence on Russian fossil fuels.

There will still be some level of Russian energy imports into Europe – allowed under humanitarian or other exceptions, seeping out via the grey market, perhaps even to fund reparations to Ukraine for damages inflicted – but they are likely to remain modest compared to the dependency of recent years. That’s not to say that Russian commodities won’t find their way into the global market. China, India and countries across Asia and Africa will remain willing buyers, Iran and Turkey will be willing intermediaries and transport corridors.

Diverting Russian coal and solid commodities to new markets will not even require too much in the way of new infrastructure – most are transported by rail and sea. Russia’s real challenge lies in finding new markets for its gas. In 2021, Russia exported only 33 billion cubic meters (bcm) to Asia, compared to 155 bcm to Europe. By diverting all of its LNG to Asia and ramping up the capacity of existing pipelines, Russia could relatively quickly increase Asian gas sales to around 80 bcm, according to analysis by the Center for Strategic and International Studies. By 2030, with investment in further projects, the figure could perhaps reach 120 bcm. Beyond that, projects under discussion could take this to 200 bcm, but that is a much more distant and less likely prospect.

Western countries will do their best to impede this pivot to the east. They will make sure Russia struggles to source advanced control systems based on western microprocessors, as well as specialist equipment like submersible LNG pumps, and expertise. But China has far too much to gain, and far too much technology to offer in return, for western sanctions to do more than delay, rather than prevent.

As this pivot plays out, the overall global supply and demand balance for energy will be restored. In the end, Russia might pump a bit less, but other countries will pump a bit more. Russian resources will sell to the East and South at something of a discount, freeing up other producers to sell to the West at something of a premium. Europe will import less gas via pipeline and more via LNG – at a higher price, but not catastrophically so once facilities are built.

Unless Russia’s war on Ukraine goes significantly non-linear, we should expect energy and commodity prices to come back down. European economies will eventually return to growth, and a new normal will emerge, but – and this is crucial – with Europe’s addiction to cheap Russian fossil fuels broken forever.

The gas taps are going off all over Europe

Back in 1969, when the German government was looking to build its first pipeline from the then Soviet Union, officials from the Federal Economics Ministry assured NATO that the gas that would flow would not meet more than 10% of Germany’s needs. By 2014, the year it annexed Crimea, Russia supplied around a third of Germany’s energy needs; by 2021 it was 35 percent of Germany’s oil, 45 percent of its coal and an astonishing 55 percent of the country’s gas.

Germany’s great and good simply assumed that Russia, despite repeated military incursions against neighbors and troublemaking around the world, would remain a reliable energy supplier. After the invasion, former German finance minister, Wolfgang Schäuble, spoke for them with humility and succinctness: “I was wrong. We were all wrong.”

The problem of overdependence on Russian energy had been acknowledged for years in the corridors of Brussels, but no action was taken. Following the annexation of Crimea, the European Council asked the European Commission for a plan to diversify the bloc’s energy sources. Eight years later, in 2022, despite continuous conflict interrupted by no fewer than 29 failed ceasefires, EU countries were more dependent on Russian oil, gas and coal than ever.

Even after the invasion began, European leaders were slow to react. Legislators in Brussels slogged through the delivery of an increase in the bloc’s emission reduction ambition from 40% to 55% by 2030 (relative to 1990 levels). Initially, they presented this as sufficient response to the crisis, with Commission EVP Frans Timmermans stating in March that his top priority was to ensure the Green Deal and Fit-for-55 did not “go on the back burner”. It was not until the end of May that the EU agreed a year-end embargo on Russian coal and seaborne oil. Even then, Russian gas was given a stay of execution: it was only to be reduced by two thirds by the end of this year, with elimination only targeted “well before 2030”.

By the end of the summer, however, despite gas export volumes down 80%, Russia was still earning as much from fossil fuel exports as it had been before the invasion. President Putin seemed to realize well before EU leaders that Europe would be harder hit by a gas shut-down than Russia – and it was he who decided to turn off the taps.

Now Europe is facing its first winter in 50 years without Russian energy supplies. The final six months of Russian supplies were at least used to nearly fill the continent’s gas storage tanks – mild weather might obviate the need for rolling power outages, but a harsh winter could easily overwhelm supplies, with unpredictable consequences.

Muddling through the next two winters

It was only over the summer that Europe’s leaders appeared to wake up to the fact that Great Energy Price Spike could be catastrophic, not only for their citizens’ finances, but for their own political careers.

Their reflexive response was, as it had been during the Great Financial Crisis and the pandemic, to reach for taxpayers’ check books. Costs were transferred from individuals and businesses to the state, either explicitly – via direct utility bill support and government-funded energy price caps – or implicitly via unfunded price caps followed by bailouts or outright nationalization of energy companies – Uniper and the gas importers in Germany, EDF in France, Bulb and 30 other utilities in the UK, and so on.

The sums are eyewatering: according to Brussels-based think tank Breugel, by the middle of September European governments had committed EUR 500 billion ($480 billion) to keeping the lights on. And this may be just a start: Norway’s energy major Equinor has warned that European energy market participants might need $1.5 trillion in liquidity guarantees to continue to operate. Clearly, this can only go on for so long before the bond markets exact punishment. A re-run of the European financial crisis of 2011 cannot be ruled out.

Other than spending public money, many of our leaders spent the early months of the crisis arguing for whatever energy technology they had always favored – be that renewables, heat pumps and electric vehicles, hydrogen, fracking or nuclear power. Of course, none of these can be deployed fast enough to make much of a difference over the next two critical winters.

At a recent event I attended, the former head of one of the UK’s security agencies, asked for his thoughts on energy security in the light of Russia’s invasion of Ukraine, stood up, cleared his throat, and launched into a paean to small modular reactors. I am much of a nuclear fan as any sensible person, but we must be realistic: not a single SMR will be operating much before 2030; there is no plausible scenario in which SMRs supply 1% of global electricity before 2040; and even then we have no idea where the fuel would come from or what the resulting power is likely to cost.

One of the first moves by the new UK administration under Liz Truss was to lift the ban on fracking. I am also a fan of fracking – as long as it is done right and appropriately regulated. But the idea that fracking in the UK will produce enough natural gas to move European gas prices any time soon is absurd. The industry’s own trade body, UK Onshore Oil and Gas, estimates fracking could cover 5% of UK needs in five years – less than 1% of current European gas demand.

It’s not just the UK where fantasy energy politics grab the headlines. German Chancellor Olaf Scholz has been promising German industry a “big boom” in hydrogen, the “gas of the future”, which will enable natural gas to be replaced for industry, heating and transport. In August he was in Canada, signing an agreement with Prime Minister Trudeau to start imports by 2025 and ramp up by 2030 – apparently completely unaware of the physics of hydrogen, which would drive such eye-watering costs that that no more than homeopathic quantities of liquid hydrogen will ever travel by ship.

Real responses

There is a limited number of things that could actually help over the coming two winters compensate for the loss of Russian gas: energy efficiency; sourcing more gas from non-Russian sources; keeping existing nuclear plants online and bringing back those that are offline; burning more coal; and, as a last resort, demand reduction – rolling power cuts, gas rationing and the like. That’s it. The rest, when it comes to helping Ukraine, is noise.

No fewer than 25 Floating Storage and Regasification Units – which enable LNG to be injected into the European system – are in various stages of planning in Europe, with the first ones due to arrive this winter. Germany alone has decided on locations for no fewer than five, though supply negotiations are tricky, with LNG suppliers angling for long-term contracts and buyers angling to avoid them as they interfere with their climate plans.

On nuclear, Belgium has decided to keep its remaining plants running until 2035. California has given Diablo Canyon a reprieve beyond its 2025 planned closure. Japan’s Prime Minister Fumio Kishida has firmly backed the reopening of more of his country’s plants, shuttered since Fukushima. Germany, however, has decided to allow two of its last three plants to remain operational “to provide an emergency reserve”, but it is hard to see what would constitute an emergency if this winter’s supply squeeze does not qualify. French engineers, meanwhile, are working round the clock to bring back online as many as possible of the 32 plants (out of a total of 56) that are currently offline for routine maintenance or because of corrosion.

As for energy efficiency, in June 2020 I wrote a piece for BloombergNEF entitled Energy Efficiency Key To Covid Recovery, making the case that investment in efficiency should lie at the heart of the post-pandemic stimulus packages. Somewhere in a parallel universe our leaders listened – and saved us all a few tens of billions of pounds and Euros this winter. In any case, by now most European countries have announced urgent energy efficiency programs. Spanish offices, for instance, may not be cooled below 27C or heated above 19C. Germany is introducing mandatory checks on the efficiency of heating systems, which are often incorrectly set, even there. Only the UK is hanging back – lagging on lagging, as you might say.

As for burning more coal, yes, we are seeing a spike in global emissions. Not only is Europe burning more to replace Russian gas, but China is trying to prop up its economy in the face of a devastating real estate crash and a potential zero-covid-driven recession via a 6.8 trillion yuan (about $1 trillion) infrastructure stimulus. These are both, however, short-term phenomena: we will soon be back to the emissions plateau on which we have been since around a decade.

After that, we should expect the Great Clean Energy Acceleration to kick in.

The Great Clean Energy Acceleration

The EU now has in place a range of frameworks designed to drive investment in clean energy and hydrogen. It has the Green Deal, Fit for 55, the Hydrogen Strategy and REPowerEU, which the Atlantic Council calculates will drive spending through 2025 equal to around 1.4% of GDP. Member countries are translating these into local policies. Germany’s Chancellor may be talking up hydrogen, but his ministries are beavering away, demolishing planning barriers to renewable energy projects and accelerating the electrification of heat and transport. No new natural gas boilers may be installed after 2024. Heat pump installations across 21 of the 27 EU member states have doubled over the last four years and are now growing by 34% per year. Plug-in vehicles account for around 20% of new car registrations in the EU, up from less than 5% three years ago. Europe is not just going cold turkey on Russian energy for a couple of years – it is looking to go clean for good.

In the UK, the new administration has kicked off a review of the cost-effectiveness of current plans to get to net zero. Whatever it decides, however, and despite the rhetoric of some of its allies, the proportion of renewable power is set to soar. The goal of the previous administration was to reach 50GW of offshore wind capacity by 2030, against a current figure of just 12.7GW. 12GW of Contracts for Difference for new offshore wind projects have already been awarded earlier this year – at a fixed price some three times lower than the output of the Hinkley C nuclear power station currently being built, and nine times lower than the price of power from natural gas this year (as then Prime Minister Boris Johnson cheerfully pointed out). Then there is XLinks, the HVDC cable designed to import 3.6GW of dispatchable renewables from Morocco by 2030 at a price likely to be around half that of the 24GW of nuclear plants currently planned for 2050.

We have already touched on the US, where the $369 billion Inflation Reduction Act comes on top of the 2021 Infrastructure Investment and Jobs Act, which contained around $140 billion for energy innovation, public transport and the electrical grid, and the 2020 Energy Act. The Atlantic Council estimated that the passing of the Inflation Reduction Act would double US climate spending through 2025 from 0.6% of GDP to 1.25%. The most interesting aspect of the Act, however, might be the signal it sends that the US intends to lead the world in climate-related technologies, laying down the gauntlet to both Europe and Asia.

Despite the prospects of benefiting somewhat from increased flows of Russian fossil fuels, as we have seen, Asia looks set to take up the challenge. China’s Nationally Determined Contribution – the pledge it made at the Glasgow COP26 summit to reach peak emissions before 2030 – hinged on doubling wind and solar power to 1.2 Terawatts (TW), increasing the proportion of EV sales to 40%, and adding 20GW of new nuclear power by 2025. In May, Japan’s Prime Minister Fumio Kishida launched the country’s plan to reduce greenhouse gas emissions by 46% by 2030 over 1990, as part of its pledge to reach carbon neutrality by 2050. The plan requires investment this decade of JPY 150 trillion ($1.0 trillion), of which the government is planning to raise JPY 20 trillion ($140 billion) in the form of sovereign Green Transition Bonds. India has committed to reaching 175GW of renewable capacity by the end of 2022; it looks like missing this target by 20% or more, but it recently increased its 2030 goal to 450GW – a figure it could easily surpass.

If none of this persuades you that we are on the verge of a Great Clean Energy Acceleration, contemplate this, courtesy of Jenny Chase and the BloombergNEF solar team: global solar installations are expected to grow to 245GW this year, up 38% on last year. By 2025, existing and planned solar silicon refining capacity would be sufficient to deliver no less than 940GW of solar cells and panels annually – as much each year as has been installed over the entirety of the last two decades. The cell and panel capacity may not yet exist, but the supply chain for a solar singularity is on its way.

In summary, we are in the middle of tough times, particularly in Europe – and our thoughts are primarily with the brave people of Ukraine. However, we can take solace in the thought that the Great Energy Price Spike of 2022 should in due course give way to the Great Clean Energy Acceleration.

President Putin may be starting to lose his war of aggression on Ukraine. More importantly, however, he may have set in motion forces that will accelerate the eventual redundancy of the fossil fuel reserves on which his imperial ambitions were built. One can but hope.


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