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Like not accepting that hangovers are 10x worse after hitting 30, the realities of the energy crisis have not hit home yet, either.
What happened: The war in Ukraine has somewhat clouded our understanding of the energy crisis. Though supply shocks as a result of the war are real, the world was undersupplied well before Russia’s invasion in March.
- As far back as February 2021, organizations were warning of an upcoming global energy shortage stemming from a lack of new energy investment. Robert West, CEO of the energy transition research consultancy Thunder Said Energy, estimates the world will be 10 percent undersupplied in energy in just three years.
Reasons for the shortage: In its Net Zero by 2050 Roadmap, the International Energy Agency (IEA) highlighted that demand must be reduced before supply is reduced or risk runups in energy prices.
- TLDR: the opposite happened and now only aristocrats can afford road trips.
There are several reasons for the lack of new energy investment, including investors pressuring oil companies to spend cash flows on dividends and share buybacks instead of new drilling, and the fossil fuel divestment movement. (A global pandemic didn’t exactly help things, either.)
Global energy investment, 2015-2021
USD billions
Data courtesy of the IEA
What to do: While it’s tempting to suggest bringing on new energy supplies will cure our ails, that’s easier said than done. OPEC+, the world’s traditional energy tap, announced earlier this month it has run out of spare capacity to produce more.
Even with aggressive new investments, new energy projects will take years to bring on.
- According to Thunder Said Energy, “the fastest thing you can build in the energy industry is a solar asset at maybe 4 years from conception, glimmer in the eye to commissioning the project. Wind average is about 6 years. LNG average is about 6 years. Pipelines, God help you if you have a tough permitting process, but also on that 5ish year timeframe.”
In short, even if a ramp-up in energy projects takes place, we won’t see the impacts for 4 to 6 years, at least.
So what to do in the meantime?
Hello supply-demand, our old friend
On the supply side: Without new projects to bring on, the options for additional energy supplies are limited to firing up existing projects that are currently shut down.
- Nuclear: Germany has been mothballing its nuclear plants since Fukushima. Bringing those back online would help ease the price pain.
- Coal: As strange as it is, re-firing up coal plants may be a positive ESG decision. If the ultimate goal for limiting the impacts of climate change is the reduction of human suffering, an argument can be made that there’s more allaying of suffering by addressing energy poverty in the short term than by addressing climate change in the long term. The strange times we live.
On the demand side: Finding ways to reduce energy consumption over the next 5 years can also help sustain us until new projects arrive.
- Crypto: This is the easiest. Given Bitcoin’s energy consumption is on the scale of countries, cryptocurrencies are increasingly hard to justify in a world facing an energy crisis.
- Electric vehicles: As tough a pill it is to swallow, a temporary slowdown in EV adoption might be the best short-term decision. EVs are much more energy intensive in their construction than conventional cars. According to Reuters, while they are eventually more energy efficient, their energy payback period is 2 to 5 years, right in the sweet spot of the energy crisis.
- Behaviours: Dads rejoice – you are now almost obligated to turn down the thermostat. The IEA outlined several behavioural activities to use less energy.
Bottom line: The realities of the energy crisis may not have hit home yet. What is clear now is the energy transition will be bumpy. If energy transition policy is policy by provocation without constructive dialogue and coordination, the transition speed bumps will continue to be big.
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