Will the Ukraine war derail the green energy transition?
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By the end of the COP26 climate summit in Glasgow in November, negotiators felt a fragile sense of progress had been achieved. More than 80 per cent of the world’s emissions were covered by governments’ pledges to achieve net zero — that is, when the amount of greenhouse gases added to the atmosphere is equal to the amount taken out.
The summit had witnessed key agreements on deforestation, methane emissions and coal production. At least 23 countries made new commitments to phase out coal power, including in south-east Asia and Europe.
The final deal between 197 countries contained an agreement to draw down fossil fuel subsidies, despite a fierce argument that broke out over whether coal should be “phased down” or “phased out”. But the direction of travel was clear, said COP26 president Alok Sharma. “Countries are turning their back on coal,” he said. “The end of coal is in sight.”
Four months on, the global energy picture has shifted significantly — and not in the direction Sharma and other COP negotiators wanted.
Far from declining, coal use globally surged to record levels over the winter, causing emissions to rise, while clean energy installations fell below the levels needed to reach climate targets.
And that was before Russia invaded Ukraine, precipitating a global energy crisis that has forced countries, especially in Europe, to look for ways to quickly wean themselves off Russian oil and gas, and reconsider timelines of commitments to cut the use of fossil fuels.
Economist Dieter Helm, professor of energy policy at Oxford university, says the shift away from fossil fuels has rarely looked more complicated. “The energy transition was already in trouble — 80 per cent of the world’s energy is still from fossil fuels,” he says.
“I expect that in the short term, the US will increase oil and gas output, and the North Sea may see some further investments.” On top of that, EU coal consumption could increase, he adds.
European leaders are urging the bloc to accelerate the transition to renewables in response to the war. At a meeting to discuss an EU-wide energy strategy this week, they are expected to push for a green response.
“We are determined to limit [Vladimir] Putin’s capacity to finance his atrocious war,” Ursula von der Leyen, president of the European Commission, wrote on Twitter at the weekend. “The EU must get rid of its dependency on fossil fuels.”
Clean energy, says Christian Lindner, finance minister of Germany, should be considered the “energy of freedom”. The country plans to cut its dependence on Russian energy imports by accelerating renewables and reaching 100 per cent clean power by 2035 (though Chancellor Olaf Scholz accepted that, in the short term, it has little choice but to continue buying gas and oil from Russia).
But some experts say Europe and other countries already missed a similar crisis turned opportunity with the Covid-19 pandemic. “They say, never waste a good crisis. I think you already wasted one with the pandemic,” says Thijs Van de Graaf, associate professor of international politics at Ghent University.
A recent research paper in the journal Nature found that G20 countries spent $14tn on economic stimulus measures during 2020 and 2021 — but only 6 per cent of this was allocated to areas that would cut emissions.
This crisis might yet be different, Van de Graaf suggests. “Many of the strategies to lower dependency on Russia are the same as the policy measures you want to take to lower emissions.” In Europe, he points out, the war is triggering a surge of investment in clean energy. “At the moments where we have these crises, the [energy] transition can be supercharged.”
The question is whether such a shift can happen rapidly enough to allow the world to meet its tenuous climate goals — and if the economic instability of the war will prove to be a long-term setback, rather than an incentive, towards a green transition.
“What has happened this year, is the first ‘net zero price crisis’,” says Helm. “And the first indication of just how costly, but necessary, the transition is likely to be.”
Even before the war began, coal was enjoying a comeback as the surging post-pandemic economic recovery led to high demand for power.
That was the case even in countries with lofty environmental goals. In the US, coal-fired power generation was higher in 2021, under President Joe Biden, than it was in 2019 under then president Donald Trump, who positioned himself as the would-be saviour of America’s coal industry. In Europe, coal power rose 18 per cent in 2021, its first increase in almost a decade.
The global surge in demand has delivered windfall profits for companies such as Glencore, Whitehaven Coal and Peabody Energy, the once bankrupt Wyoming group now planning to expand production after its most profitable quarter ever.
Peabody chief executive Jim Grech expects this year to bring “a period of elevated demand” for coal, and continued high prices.
The war in Ukraine could boost coal demand even further, at least in the short term. That point was acknowledged last week by Germany’s economy minister Robert Habeck, of the country’s Green party, who said Europe may be forced to burn more coal in the face of Russian aggression and spiralling gas prices.
Gas prices hit a record above €335 per megawatt hours this week, and at that level it is cheaper for some power stations to burn coal rather than gas even when the cost of carbon permits is taken into consideration.
Energy security concerns are also contributing, with some countries including Italy saying they may need to burn more coal, in order to burn less Russian gas.
The IEA recently acknowledged this trade-off. “The faster EU policymakers seek to move away from Russian gas supplies, the greater the potential implication, in terms of economic costs and near-term emissions,” the IEA said, in a report last week.
The conflict in Ukraine is having an impact on the global coal market in other ways, as Russian coal exports are called into question. As banks, insurers and shipping companies shun Russia, coal consumers in Europe and Asia are now scouring the market for alternative sources of supply and pushing up prices, which last week hit more than $400 a tonne, from $82 a year ago.
At those prices, 2022 promises to be another year of bumper profits for the industry. Russia accounts for about 30 per cent of Europe’s imports of thermal coal, which is burnt in power stations to generate electricity.
Coal is still dominant in Asia too, especially in China, the world’s largest emitter. The country is still constructing new coal plants, and emissions there rose 4 per cent last year, accounting for a quarter of the total global increase in emissions. (The US was not far behind, accounting for about 22 per cent of the global increase in emissions last year.)
The increase in Chinese power demand in 2021, compared with 2019, was the equivalent of the entire power output of Germany and France combined. This year, Beijing is targeting 5.5 per cent gross domestic product growth, which implies a further increase in energy demand.
Even though China gets only 5 per cent of its gas supply from Russia and 10 per cent of its oil supply, according to data from IHS Markit, it is not insulated from the global energy shock.
“If there’s any natural gas shortage, China may have to again resort to increasing domestic coal production — often cited as the last defence for energy security by officials,” says Xizhou Zhou, vice-president of power and renewables at IHS Markit.
Beijing has pledged to cap its coal consumption during this decade, which means that its coal consumption, and emissions, are likely to keep growing for several more years.
Bumps on the road
Despite these setbacks, many energy executives believe that a transition away from fossil fuels is still happening — if perhaps not as quickly, or as easily, as expected.
“These are bumps on the road,” says Scott Mackin, managing partner at Denham Capital, a sustainable infrastructure fund based in Boston. “The momentum is still very strong toward the energy transition, in the big picture.”
Behind the record profits of the coal sector lies an industry in structural decline. “Coal is having a dead cat bounce, in my view,” says Mackin. “We are not in some grand period of time where thermal coal will get better and more investable.”
The coal industry itself largely agrees — or at least, the publicly listed European and American coal companies do. Commodity trader Glencore says that part of the reason prices, and profits, are so high right now is because of that structural decline, which means a lack of investment into new coal projects and consequently a smaller supply.
Glencore has pledged to cap its coal production at 150m tonnes a year — but that figure will still allow room to increase output. The company produced about 100m tonnes of coal last year and will mine about 120m tonnes this year following a deal to buy out partners in a Colombian mine.
Over the longer term, the company plans to run down production and eventually close all of its coal mines in Australia, Colombia and South Africa over the next three decades and be net zero by 2050. The moves have been backed by its big shareholders.
“Nobody is building new coal mines. No one is getting funding for new coal mines, but there continues to be a healthy appetite for coal in Asia,” Glencore chief executive Gary Nagle said to reporters last month, after its coal division reported more than $5bn in earnings before interest, tax, depreciation and amortisation in 2021.
Yet even if the war in Ukraine only extends coal production’s resurgence in the short term, it threatens a timeline to reach net zero that is extremely tight.
According to the International Energy Agency’s net zero pathway, coal use must fall by half this decade in order to stay on track. Meanwhile, electricity generation needs to increase 40 per cent in the same period, according to that scenario, in which emissions fall to zero by 2050 and global warming stays below 1.5C by the end of the century.
Doing both at the same time — increasing electricity output while cutting coal — will require huge growth in renewables, especially wind and solar, paired with energy storage.
But at the same time as coal has been enjoying its great comeback, renewables have been struggling. Due to a combination of logistical headaches and trade war woes, neither solar nor wind is on track to grow as much this year as it would in a net zero emissions scenario.
Zhou says this process is turning out to be an “unsynchronised transition”, as renewables have not grown enough to replace the coal that needs to be removed from the system. “You have this period of awkwardness, before you can entirely transition to no fossil fuels.”
He points to the big surge in electricity needs last year, as the global economy recovered from the pandemic. “The demand really surprised everybody last year.”
“Renewables today cannot respond to those kinds of upswings [in power demand] because our battery storage is not at that kind of capacity yet,” says Zhou. Low investment in fossil fuels also contributes to the volatility, he adds.
“The system in general has less cushion to deal with these ups and downs,” says Zhou. “The Ukraine conflict is another such supply shock which will test the resilience of energy systems in transition.”
A new kind of politics
How quickly that transition happens is not just a question of economics, but also one of politics. And in terms of climate negotiations, the diplomacy that has greased the wheels of the COP process for decades could also falter due to the war.
The conflict means that global co-operation on climate change, which must necessarily include big emitters such as China and Russia, will become all the more difficult.
High energy prices could also make it harder politically for some countries to push through clean energy policies. In a sign of the fraught politics of energy prices, the UK politician Nigel Farage launched an anti-green movement last weekend, which is calling for a national referendum on the UK’s net zero goals.
Ahead of the COP27 climate summit, which is taking place in Egypt this autumn, countries are supposed to submit improved climate plans to the UN. Climate negotiators say that is particularly important for big emerging economies such as China and India, whose existing climate pledges are not in line with limiting global warming to 1.5C.
The signs that these countries might improve their climate pledges did not look very promising even before the war broke out, said Pete Betts, a former lead negotiator for the EU and also the UK at the UN climate talks. “They look even less promising now, given the amount of bandwidth that will be absorbed by the Ukraine situation.”
Nevertheless, Betts and others believe the war has lent a new sense of urgency to the task of transitioning away from coal, oil and gas, which could prove to be a turning point.
“We are in a very new kind of politics for everything, including climate,” Betts says. “I think climate will be seen as being part of energy security much more.”
If the idea of renewables representing “freedom energy” continues to spread, it could trigger a level of focus — and spending — on clean energy, particularly in Europe, that has until now been missing.
“The truth is that we have never treated climate change as the emergency that it really is, in the same way as we are now treating the Ukraine war as an emergency,” says Van de Graaf. “The national security paradigm has a far greater mobilising force than the climate catastrophe paradigm.”
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