The Russia-Ukraine war is highlighting the importance and complexity of global energy. While rising energy security concerns are well aligned with clean energy transition especially in the long term, it is also creating short-term pains in many parts of the world, demanding immediate action to address supply reliability. Adding to all of this are rising geopolitical tensions, not just between the West and Russia, but also the US-China rivalry, which is intensifying.
Energy security and decarbonization are aligned in terms their long-term solution in clean energy. Short-term disruptions such as record fossil fuel prices and shortages are making countries and companies scramble for supply (and pay for it), but the immediate future, high and volatile fossil fuel prices will help drive energy transition, making the more united in its quest for a low-carbon future.
Technology collaboration in new technologies such as energy storage, hydrogen and carbon capture and storage present great opportunities. Countries face common challenges in scaling and commercializing key technologies that are not yet mature. While there’s ample room for competition to create innovation, there is also plenty of opportunities for collaboration in these areas – similar to past technological breakthroughs.
Significant new investment will be required to fortify clean energy supply chains; cross-border collaboration is critical. From mineral extraction and fabrication to equipment manufacturing and transportation, the supply chains that make wind turbines, solar panels, and batteries will likely come under stress as demand soars in the coming decades. Speed will be key to “front load” clean energy investment while geographic diversity can reduce risks. Ensuring supply chain security requires coordination and collaboration, with multilateralism likely playing a key role.
New energy infrastructure requirements will be significant. The demand for new power transmission lines and hydrogen pipeline systems will increase sharply as renewables and hydrogen scale up. From technology development and standards setting to construction and operational know-how, large countries that are pioneering in these areas (e.g., China, US) have unique roles to play in expanding the infrastructure required for low-carbon energy.
Multilateralism is required more than ever as the US-China rivalry intensifies. The risk of the two major powers forcing the world into opposing camps based on great power conflicts or ideologies is greater than ever, but growing economic and political power as well as commercial opportunities in many emerging markets – in Asia, Africa, and Latin America – also mean that the emerging economies will have bigger voice in global affairs, moderating the tensions from the US-China rivalry.
The Russia-Ukraine war is thrusting energy transition to the fore of the global geopolitical and economic discourse. Clean energy is no longer viewed as just a solution for climate change, but also a key pillar to energy security.
From an economic perspective, record-level fossil fuel prices are making alternative energies more attractive. From a geopolitical perspective, Europe’s heavy reliance on Russia’s fossil fuel supply exposed the vulnerabilities of energy dependence on a single country.
All this has created added urgency to the clean energy transition. Yet the calculations aren’t so simple. A number of issues have been raised:
Near-term reliability goals versus long-term clean energy future: A disorderly transition could cause major supply disruptions, with developing countries being the most vulnerable. What is an orderly pathway from today’s fossil-fuel dominated world in crisis and a renewable-dominated world vision?
Clean energy supply chain risks: Can the manufacturing supply chains for wind turbines, solar panels, batteries, and hydrogen scale up fast enough to deliver an accelerated transition? How much could costs go up for clean energy as supply tightens? How much geographic diversity is needed to ensure supply chain resilience?
Geopolitical rivalries intensifying between the US and China: Countries outside the “Western Alliance” are increasingly put in an awkward position to “take sides” in the US-China rivalry, yet these are the countries that will account for the majority of the incremental energy demand in the future. What will be their roles in the future? Will they have a bigger voice in the geopolitics of energy transition?
The upheavals in oil, gas and coal markets since the Russia-Ukraine war began are reverberating across the energy landscape globally. Fossil fuel prices have soared around the globe as the crisis continues, increasing energy security and reliability concerns.
Coal and gas markets are expected to remain tight in the near term, continuing to pressure power prices. While the situation is especially prominent in Europe given its dependence on Russian fuel imports, the impacts are being felt globally—albeit to different degrees depending on regional exposure to spot fuel markets. Asia, for instance, is less reliant on spot LNG purchases, with a large part of the region's LNG supply on long-term contracts.
As Europe looks to cut its dependence on Russian fuel imports, the region is seeking alternative fossil fuel supplies and is willing to pay a premium, putting further pressure on prices. In response, fuel suppliers are starting to divert supplies from in Asia and Latin America to Europe.
With coal prices rising, South and Southeast Asian markets that are reliant on imported coal are avoiding coal imports as prices remain beyond their reach with many expected to curtail power production. A few markets with abundant domestic coal resources, such as Indonesia, China, and India, could boost domestic production.
High coal and gas prices are likely to further complicate global power supply reliability, which has already been under heightened stress recently.
In particular, power supply disruption risks are expected to be higher in regions such as South and Southeast Asia where affordability is a concern. In markets with a regulated tariff structure, like India and South Korea, the financial condition of utilities and distribution companies could also come under strain since they are unlikely to pass through soaring fuel costs to consumers, further challenging the system and increasing the risk of load shedding.
In China, the situation is less serious compared with last year given lower power demand growth expectations as a result of recent Covid-19 lockdowns, although the risk of power disruption remains, especially if demand picks up later and weak hydropower conditions in the south return.
In some Latin American markets, such as Brazil, strong rainfall is easing the region's exposure to global gas prices.
Meanwhile, in Europe, the concern currently is less about power supply disruptions and more about affordability, with European governments starting to intervene with measures to reduce the impact of high energy prices on consumers.
The Ukraine crisis has brought energy security to the fore, in addition to putting renewed focus on cybersecurity.
In Europe, cutting reliance on gas in the short term will likely entail bringing back or delaying closures of coal or nuclear capacity, although the region also relies on uranium sourced from Russia.
Surging LNG prices could also lead to higher coal generation in Asian markets, depending on international coal prices and production in domestic coal markets. In Southeast Asia, reverting to coal is not difficult—given the region's relatively young coal fleet—and could also mitigate cost concerns for countries with domestic coal resources like Indonesia, although current high seaborne prices are making importers wary.
Sustained high gas prices could also keep coal generation elevated in the United States. Higher coal generation could in turn lead to higher power sector carbon emissions in the short term.
In OECD Asian markets, such as Japan and South Korea, governments are also focused on increasing nuclear power. For example, South Korea's newly elected president Yoon Suk-yeol has said he would rescind the previous administration's policy of phasing out nuclear power and instead make the country a nuclear energy leader.
While in the short term, some markets – especially Europe and the United States – may revert to coal generation somewhat, in the medium to long term, there will likely be a push to accelerate the energy transition and eventually wean off fossil fuel dependence. The pace of transition will likely be different in different regions. An accelerated energy transition could also mean lower cumulative carbon emissions, even if emissions increase or stall in the short term.
Developing countries will be a key area for energy transition. In the latest S&P Global long-term planning scenario, primary energy consumption in OECD countries are expected to decline by 9% between now and 2050, where as non-OECD economies are projected to increase their energy consumption by 38%. For example, by 2050, the ten nations in Southeast Asia will be consuming as much energy as the entire European Union.
How to ensure an orderly transition in these regions will be key to combatting global climate change. This, in turn, means that emerging economies will have a bigger voice in global energy and climate governance.
The Russia-Ukraine conflict renews supply chain risks for clean energy technology, as Russia is a significant producer of critical materials used in wind, solar photovoltaics (PV), and battery storage. Russia, and to a much lesser extent Ukraine, accounts for a significant share of global production of many raw materials, including several key metals used across clean energy technology supply chains such as steel, aluminum, and copper.
While the full extent of the direct impacts to price and availability of key materials caused by the conflict is yet unclear, several factors have already resulted in increased risk of availability and impacted prices:
Trade sanctions. Global economies, including the United States and the European Union, have set plans to limit or abolish trading with Russia and Russian-linked counterparties on key commodities such as natural gas and oil.
Asset divestment. Major mining companies, such as Rio Tinto, have announced plans to divest Russian assets and sever ties with Russian-linked companies, risking supply reductions.
Production cuts. The conflict has disrupted production and transportation of raw materials, such as alumina and neon, in Ukraine, including freight of goods across the Black Sea. Additionally, increasing costs for inputs such as natural gas and power put pressure on material producers in Europe and risk potential force majeure scenarios as producers seek a way out of loss-making contracts.
Higher input costs. Price spikes of input feedstocks used in raw material production, such as power and natural gas, have resulted in higher production costs for other raw materials produced outside of Russia and Ukraine.
As Europe – and indeed – the rest of the world look to accelerate clean energy investment in light of the current crisis, the supply chains for different clean energy technologies will be put to the test. Efforts to increase European security of supply alone could lead to an additional 320 GW of renewables capacity to be added between now and 2030 as part of the “REPowerEU” plan (in comparison, the world added just over 200 GW of solar and wind projects in 2021).
Given the above global backdrop, the global energy, climate, and geopolitical landscapes are becoming ever more complex. How will US-China relations evolve as tensions rise? And what does that mean for energy and climate globally?
A few areas where global collaboration may be promising are discussed below, especially considering the importance of “front-loading” green investment in the earlier years.
While wind and solar technologies have matured during the past two decades and are becoming a mainstay in global energy, a number of new clean technologies are yet to be commercialized and scaled, including carbon capture and storage (CCS), green hydrogen, and grid-scale energy storage.
While batteries have matured greatly for electric vehicles (EVs), larger capacity battery storage that can be utilized at scale in the electric power sector is yet to be commercialized. Cost remains too high for rapid take-off. China is the biggest battery manufacturer in the world, but the majority of the batteries produced are smaller and used only in the EV sector. Global deployment of grid-scale batteries has also been slow.
In 2021, just over 10 Gigawatts (GW) of energy storage projects were added in the power sector globally. In comparison, over 200 GW of wind and solar capacity was added during the same year. If battery storage were to replace conventional fuels like natural gas to provide flexibility to the power system and back up intermittent renewables, its deployment must be much faster.
While green electricity can help reduce emissions, there are many sectors that are very hard to electrify, e.g., industrial processes that require flame or steam, heating buildings, among others. Natural gas and liquefied petroleum gases (LPGs) like propane have traditionally been the fuel of choice.
“Green hydrogen” – produced by using renewable electricity to split water with an electrolyzer – is considered a key carbon-free technology today to replace natural gas and LPGs. Europe, for example, has identified hydrogen as a strategic area to develop as a way to replace Russian gas.
However, the green hydrogen industry is in its infancy, and despite the recent rise in interest from energy companies, electrolyzers are too costly for green hydrogen to be commercially viable.
While electricity and green hydrogen could solve part of the energy-climate puzzle, there are always going to be some sectors that are extremely hard – or costly – to decarbonize and thus making emissions unavoidable. To this end, capturing the emitted carbon is therefore a key pathway for decarbonization.
While CCS has been researched for many years, the progress made has been slow and costs are too high today to justify large-scale commercial application.
For all three technologies above, China has a unique role to play given its scale and past experience in driving down costs of new technologies:
It has the largest power generation fleet in the world, including the largest coal, hydro, wind (onshore and offshore), and solar fleets – and growing, making battery storage a key technology to crack.
Its enormous industrial and manufacturing sector consumes large amounts of LPGs and natural gas, making hydrogen a key low-carbon substitute in a decarbonized economy.
Its massive coal consumption – from both power sector and industrial and commercial sectors – also make CCS an appealing technology for those sectors that are extremely hard to decarbonize with electricity or hydrogen.
All these technologies are also key to how Europe, the United States, and many other countries can decarbonize their economies. Some level of competition is healthy and can drive innovation, but closer collaboration in research and development among countries and companies can also benefit all.
As the demand for clean energy equipment rises globally, the entire value chain for key technologies such as wind turbines, solar panels, batteries, and fuel cells must scale up substantially and rapidly. For example, global wind and solar capacity is expected to more than double by 2030 according to the latest outlooks issued by S&P Global. Similarly, battery storage in the power sector is projected to increase ten-fold.
From mineral mining and fabrication to assembling and transportation, significant new investments are required to just meet the clean energy sector’s demand.
Many are comparing the mineral extraction process for clean energy metals such as cobalt, nickel and lithium in the 21st century to the oil and gas sector of the 20th century. Dan Yergin of S&P Global has commented that “Big Oil” would be replace by “Big Shovel” to highlight the importance of the new minerals to the future energy sector.1
China has been a key player in the extraction and fabrication of many of these key minerals and has built an integrated supply chain for final products. However, China alone can’t meet the new demand that is coming.
Already, we’re seeing Chinese solar panel manufacturers working with companies in other countries to set up new factories in new geographies like Southeast Asia, bringing the supply chain closer to new growth markets for renewables.
In these areas too, some level of competition is healthy and can help drive down costs of key technologies – just like how wind turbine and solar panel costs have declined over the past decade. However, better coordination could also help make investment more efficient and avoid wasting precious capital and resources.
Another area that is critical for the expansion of clean energy is the infrastructure that is required. Part of this is the supply chain and logistics for moving everything from minerals to 150-meter long (or even bigger) wind turbine blades across land and ocean. Another part of the infrastructure includes the wires and pipes that can bring clean energy to consumers.
Many countries have imbalances with regard to where renewable resources are and where demand centers are located. In North America, for example, the mid-continent has great wind resources, yet the consumers in the localities don’t have enough demand for all of the wind power produced, making it necessary to build long-distance high-voltage transmission lines from the wind-rich states to other parts of the country. Similar situations exist in China, India, Latin America, and other countries.
In many developing markets, it’s often difficult to finance and build any transmission at all, leading to power outages but also unnecessary curtailment of renewable energy.
China’s experience in building out a highly connected high-voltage and ultra-high voltage transmission grid can be useful in other markets that face these challenges. For example, China’s State Grid Corporation has made significant investment in Brazil’s transmission infrastructure.
While hydrogen is still in its infancy, research on building pipelines to transport the fuel is under way. Just like electrolyzers, experience in building hydrogen pipelines and distribution networks can be shared across borders – either through bilateral collaboration or multilateral mechanisms.
While technology and economics could be logically addressed and executed, geopolitics can complicate this all.
The US-China rivalry does not appear to diminish – in fact, many believe it will intensify. And with that, it brings new geopolitical challenges not just for areas that Beijing and Washington can work on, but also make life much more difficult for other countries, particular emerging markets whose energy demand continues to grow and overtime eclipse mature economies.
This makes it ever more important for political leaders in the US and China to contain the competition and not let it spill over to rest of the world and make other countries choose one or the other, which would without a doubt hurt the global march towards a low-carbon future. The new geopolitics of energy transition also requires that multilateral institutions play an even more prominent role in mediating this rivalry and facilitating collaboration in these seemingly no-brainer areas that will benefit everyone.
Similarly, the increasing economic and energy influence of many emerging markets also means that they will have more say in global affairs, which can play a moderating role in the US-China rivalry.