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'Transitional' fuels in the energy transition

Published onJun 27, 2022
'Transitional' fuels in the energy transition

Introduction

“The present global energy mix is broken”.1 The words of U.N. Secretary-General António Guterres on the launch of the latest report by the Intergovernmental Panel on Climate Change (IPCC) show the urgency to reform current energy systems towards a new energetic framework of low to zero carbon emissions.

Guterres’ remarks are relevant to a number of Nationally Determined Contributions (NDCs) and the compromise made by 197 countries to keep global emissions below the 1.5°C pre-industrial levels agreed on the 2015 Paris Agreement.2 However, the path towards decarbonization is not homogenous and varies across nations.

For many regions like Latin America, China, and the European Union, natural gas is tagged as a ‘transitional fuel’ in official policy briefs and high-level declarations, making it, on paper, only a ‘bridge’ to jumpstart a greener future with wind, solar, and hydrogen-powered energy sources.

Different developmental models and contexts may severely extend the lifespan of natural gas as a transitional fuel, delaying energy transition and climate change-related goals. For resource-rich nations with untapped oil and natural gas reserves, the ‘transitional fuel’ provides significant revenues and investments in a post-pandemic world where many financial flows have been derailed.

Furthermore, new geopolitical arrangements deepened by energy security concerns and supply chain vulnerabilities have also impacted the role of natural gas across regions.

For this reason, this paper aims to examine how Latin America, Europe and China perceive the role of natural gas in their journey to energy transition, and how ‘transitional’ it really is for pre-selected nations. We argue that the West is more likely to extend the usage of natural gas than China, and that China can help West’s energy transition through more diplomatic cooperation and expertise on renewable energies.

Latin America and natural gas: a ‘wall’ to a greener future?

Despite the enormous potential of renewable energy with hydropower, solar, wind and green hydrogen, Latin America is gradually looking more towards natural gas as a key energy source3 in its energy transition. It accounted for 31% of the primary resource in the region as for 2020, mostly coming from Mexico, Ecuador, Argentina, Venezuela and Peru. In a 2021 meeting of the Latin American Energy Organization, energy ministers of the region, including Venezuela, Uruguay, Brazil, Paraguay, Argentina and more, agreed on a declaration with 14 articles, in which article 11 laid down the need to acknowledge that “natural gas is a transitional fuel capable of reducing the energy’s sector carbon emissions’ intensity, and it is a viable and trustworthy source in the decarbonization process of a few economies of the region”.4 Furthermore, in the Global Coal to Clean Power Transition Statement signed by 77 countries during COP26 in Glasgow last year, Chile and Ecuador were the only Latin American countries to have signed the document5, showing the general energy journey of the continent.

This discourse not only reflects different Latin American energy mixes’ reliance on fossil fuels, but also the role of energy commodities on the national economy. Fuel exports accounted for 3.84% of Mexico’s merchandise exports, 11.89% for Brazil, 2.68% for Argentina, 29.47% for Bolivia, 3.78% for Peru and 20.4% for Paraguay in 2020, according to the World Bank6. In 2020, Brazil exported US$ 19.8 billion worth of crude petroleum, making the country the world’s third largest exporter of the fuel7. Mexico comes in the second in Latin America with US$ 17.8 billion8, followed by Ecuador (US$ 4.94 billion)9, Venezuela (US$ 2.62 billion)10, Argentina (US$ 689 million)11, and Peru (US$ 153 million)12.

Coal-powered plants were the major energy source of 19 out of 33 countries in the Latin America & Caribbean region in 2019 and 2020 according to the Latin American and Caribbean Electrical Information System (Sielac13). An article14 published by the Inter-American Development Bank also shows that an abrupt move to renewable sources could leave stranded assets behind, namely coal-powered plants, and provoke macroeconomic instabilities and an increase in energy prices in the region. A critical player in the region is Brazil. In its National Energy Plan 2050 (Plano Nacional de Energia 2050, in Portuguese) elaborated by the Energy and Mining Ministry, the complexity of energy transition is clearly articulated in 243 pages: “The new energy transition will be based on electrification (mostly renewable), biofuels, energy efficiency (catalyzed by digitalization), and natural gas.”15 Furthermore, an entire section is dedicated to natural gas alone, the Pré-Sal oil reserves, and new regulatory guidelines in the Novo Mercado de Gás program for the sector have opened the natural gas sector for more investments. The worsening effects of climate change in the country and deforestation in the Amazon led to Brazil’s worst hydric crises in 91 years16, pushing the use of coal-based energy sources as a more “reliable choice”. “With the gradual reduction of the relative participation of hydroelectric plants in the Brazilian electricity matrix, replaced by the expansion of non-controllable renewables, other resources, such as natural gas-fired thermoelectric plants, will become increasingly important for meeting the various requirements of the system in addition to power generation, such as capacity (for peak load).”17

For 2050 projections, the document predicts that hydropower will still be the predominant energy source in installed capacity with 73%, followed by 8% of biomass, and natural gas with 5%.18 It is unlikely that natural gas will only be a transitional gas to climate goals by 2050 or 2060, but in fact an alternative to extend the life span of the oil and gas industries until there is a political shift.

Natural gas and China: a ‘bridge’ towards a greener future

China’s most recent Five Year Plan for a Modern Energy System, published on 22 March, 2022, and the 14th Five Year Plan (14 FYP), released last year, provide an important description of how China plans to fulfil its dual-carbon goals of carbon peak emissions before 2030, carbon neutrality before 2060, and its journey towards energy transition.

The 14 FYP, a top-level policy blueprint for the years of 2021-2025 with a wide range of socioeconomic guidelines, includes a section for the energy sector touching on generation, sustainability and distribution issues. The 14 FYP set the target of 20% of non-fossil energy source for the total energy consumption, from 15.8% in 2020; and a reduction of 18% and 13.5% for carbon and energy intensity respectively. The policy paper also states the need to develop non-fossil energy and build a clean, low-carbon and efficient energy system.19 At the same time, the 14 FYP clarifies the role oil and gas exploration as a way to safeguard a secure and stable energy transition, as it mentions in the section Building a modern energy system, “we will accelerate the utilization of deep-sea, deep-seated and unconventional oil and gas resources, and promote an increase in oil and gas reserves and production”, besides carrying along with the necessary infrastructure by accelerating the “construction of main natural gas pipelines and improve the oil and gas interconnection network”.

A similar approach can be found in the 14th Five Year Plan for a Modern Energy System released in 2022.20 The document sets guidelines and goals for the energy system for the next five years and sets a clear pathway to the new role of coal in China’s energy transition. Although the central government plans to increase the ratio of non-fossil power generation to around 39% in the total power generation by 2025, the document stresses the role of coal in “ensuring the basic energy needs” and a safe source in energy power grid with growing participation of intermittent sources, such as solar and wind.

Moreover, the strategy calls for greater self-sufficiency for energy security and the “sustainable use of coal”, again focusing on the role of natural gas as the foundation and ‘safety net’ of China’s energy transition. A recent analysis of China phasing out coal and its political and financial implications noted that energy transition, especially one with solar and wind-powered sources having the leading role will demand “fundamental changes in institutions, including continued efforts to develop wholesale electricity markets and a shift to probabilistic methods for planning for electricity system reliability”.21

The coal-to-gas strategy could pose a risk to the country’s dual-carbon goals if not well managed. However, it comes down to the leadership role China wants to have in the global climate agenda both as a developing nation, and a ‘responsible’ greatpower in a new (and unstable) global order. China doesn’t rely on fuel exports as much as Latin America, for instance, and is the world’s warehouse for renewable energy supplies, research and expertise. Furthermore, energy security has gained even more traction than it already had with the explosion of the war in Ukraine, as China is the world’s largest importer of coal22, making it advantageous to not be over-reliant on natural gas.

Is the European Union running against the clock?

The European Union has established ambitious climate goals, such as the intent to be world’s first climate-neutral continent, with several countries committing to phase down coal23. The European Green Deal has set a target to reach carbon neutrality by 2050 with binding obligations, and to reduce net greenhouse gas emission by at least 55% by 2030, which means that Europe must reduce the use of natural gas in 37% by 2030. There are enormous challenges to achieving this, including the need to rely on natural gas in winter and the fact that even the European Union has left the possibility of natural gas-fuelled projects being considered ‘green’ in recent climate bills24, highlighting the dual identity of natural gas, sometimes seen as a ‘transitional fuel’.

Plans towards energy transition are on the way to greener EU’s energy mix, currently composed by petroleum products (36.3%), natural gas (22.3%), renewable energy (15.5%), followed by nuclear energy (13.1%), solid fossil fuels (12.7%) as of 2019, with 61% imported.25 The high dependence on imported sources has led to an energy security problem26, highlighted by the ongoing war in Ukraine as Russia is Europe’s largest natural gas supplier, responsible for 40%27 of Europe’s total gas consumption. “What is at stake is both the need to accelerate the fight against climate change, and, as we can see now, the short-term energy security of the European continent”, states Barbara Pompili, Minister for Ecological Transition of France, which currently holds the EU Presidency.28

The European Union is now running against the clock to reduce its reliance on Russian gas by one-third by the end of 2022, but that does not mean a similar rush to eliminate the fuel from its energy source as it will increase the imports from other countries, such as the United States, while it gives a greater push to renewables. Germany’s Chancellor Olaf Scholtz said that “the faster we push ahead with the expansion of renewable energies, the better”.29 Due to the geopolitical context and Europe not being a continent rich in oil resources, and considerable investments in energy transition, natural gas is more likely to be a transitional energy source than in Latin America, and should follow China’s approach by expanding investments and subsidies to green energy and reducing the reliability on imports.

Conclusion

Although the urgency of mitigating the consequences of climate change is much discussed within societies, governments, and international forums, the strategies adopted to achieve an efficient and fair energy transition are complex, diverse, and sometimes contradictory.

Natural gas is gaining traction as a transitional fuel across Latin America, Europe, and China — but each region’s approach is fundamentally different. In oil-rich Latin American countries such as Peru, Argentina, Ecuador, and Brazil, natural gas still is in the energy plans both as a “transitional fuel” and as a source of significant revenues and investments for the economy and development, regardless of the immense environmental challenges they face. This is particularly true for Latin America, as it was the continent hardest hit by the Covid-19 pandemic, with a significant socioeconomic setback amidst an unprecedented health crisis. The enormous untapped oil or gas natural resources with the Pré-Sal basin in Brazil, Camisea in Peru, and Vaca Muerta in Argentina will extend the usage of fossil fuels and delay the energy transition in the continent as South American energy integration will take advantage of these resources.

Although natural gas is perceived as a ‘transitional fuel’ in national energy plans, current exploration projects have the potential to make this fuel not a bridge to a neutral carbon economy, but rather a ‘wall’, downgrading larger investments to solar, wind, and green hydrogen sources, precisely the types of energy that have the most competitive advantage in the region. Latin America and the Caribbean have “green comparative advantages”30 to attract green investments and design an economic recovery that has sustainability as its core center. However, the continent is far from this path, as only 2.2% of the region’s stimulus fund amidst the pandemic were directed to sustainable projects.31 Latin American countries may pursue European markets as the natural gas geopolitics is slowly shifting with the war in Ukraine.

Europe also sees natural gas as a ‘transitional fuel’. But differently from Latin America, European countries face a greater security issue with this fossil fuel, as much of its supply comes from Russia. Transitioning to other importers is possible, but with higher prices. Natural gas will likely have a shorter life span as a transitional fuel in Europe than in Latin America due to the energy security challenge enhanced by the war in Ukraine. However, it is important to note that natural gas won’t be banished from the European energy mix as it is seen as a safe source compared to intermittent sources such as wind and solar. As compared to Latin American countries which have fossil fuels as a relevant share in merchandise exports, Europe’s economic reliability on oil exports and developmental model reduces the chances of a long-term commitment to natural gas as more than a transitional fuel.

Among the three regions analyzed here, China has the most dependency on coal in its energy mix. Like the other two, natural gas is seen as a transitional fuel, and will not disappear from China’s energy composition. However, the considerable investments and political will towards wind, solar, green hydrogen-powered plants, the expansion of UHVs transmission lines, and research and development investments in energy storage can reduce the losses and vulnerability of intermittent sources. Although China also has significant coal mines yet to be explored, the national supply is insufficient to cover the demand, leaving the country with imports. President Xi Jinping, China’s Energy plan, and the 14FYP put energy security as one of the critical priorities for the upcoming years, implying a lower dependency on coal imports. Beyond energy security concerns, an element also found Europe, China’s approach to natural gas is fundamentally different from Latin America and Europe due to the role it wants to play in the global climate agenda both as a developing nation and as a ‘responsible superpower’. China could boost Latin America’s energy transition by helping it with green investments in solar, wind, and exchanges to develop green hydrogen in the region.

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