15 September 2022
Demand versus Supply:
Closing the renewable energy gap
Five decades on from its foundation, the International Energy Agency (IEA)’s forecast for the future of the world’s energy system is a complex one.
IEA executive director Fatih Birol warned the disruption triggered by Russia’s invasion of Ukraine will likely worsen the energy market’s COVID-19-fuelled disequilibrium. ‘The world has never witnessed such a major energy crisis in terms of its depth and its complexity,’ says Birol.
The volatility of fossil fuel supply and the concentration of that supply in the hands of just a few producers has resulted in a scramble for reliable supply chains, and in some cases the urgency of the situation is ironically re-energising ‘dirty’ fuel project plans – even in the green-conscious EU. Keeping the lights on in Europe over winter 2022-23 is likely to require extending the life of coal-fired power plants and even reopening closed units. However, this abundant volatility could provide a silver lining – it may act as a wake-up call to governments reliant on fossil fuel imports and accelerate their transition to renewables. There is again symmetry with the past; Birol noted that the oil price spikes of the 1970s encouraged greater fuel efficiency, and the current crisis could act as a similar catalyst.
Even before the war in Ukraine, there was evidence of a growing global gap between increasing power demand and the available energy supply. As economies reopened, energy consumption surged back to pre-pandemic levels, and the major supply/demand gap became evident. The challenge confronting governments at this moment is how to fill the void left by Russia, and reduce reliance on ‘roguish’ states or other power blocs like OPEC, while simultaneously developing strategies to re-balance the energy mix to benefit from more renewable or sustainable energy sources. It’s a tricky tightrope to walk at the best of times.
The search for alternative suppliers to the EU is already underway. European Commission President Ursula von der Leyen signed a deal with Azerbaijan to double Europe’s imports of Azeri natural gas. Other EU officials have sought to step up purchases of liquified natural gas (LNG) from Nigeria and Qatar, while Algeria and the UAE have also been named as potential producers that could step up supply.
US president Joe Biden, when attending an EU summit in Brussels in March 2022, pledged that US supplies of LNG would be redirected to Europe to help to address the shortfall caused by reduced purchases from Russia. Significant investment into new LNG terminals is ongoing and more will be needed to fulfil Europe’s potential capacity to use and store meaningful amounts of LNG.
However, without major investment in building new terminals, Europe is restricted in how much LNG it can realistically accept as its storage infrastructure is limited. Meanwhile, nuclear energy has suddenly become attractive again.
Keeping the lights on in Europe over winter 2022-23 is likely to require extending the life of coal-fired power plants and even reopening closed units.
Is it likely that this current volatility will catalyse a renewables boom?
New horizons for OPEC and BRICS
OPEC’s power and influence could wane as the transition to renewables gathers traction, although it will take some years to complete and certain OPEC members are, of course, able to ramp up renewables ‘side projects’ to ease their own transition to a more diversified energy mix.
Meanwhile, the BRICS have recently made moves to reinforce their collective economic clout by adding five new members. Actions like this indicate that fossil fuel investment – and wealth and power derived from this – aren’t going away anytime soon, regardless of Western politics’ green direction of travel.
Simultaneously, the world’s biggest oil producers and exporters are also enthusiastic about the financial opportunities renewable investment presents. Based on projects underway in a number of OPEC/BRICS countries, it’s clear that governments have spotted the potential, and the investments are flowing- particularly when there is such an opportunity to be gained from being an early mover.
For example, the IEA reports that solar photovoltaic (PV) power has become the world’s cheapest source of green energy, with China leading in solar panel production thanks to generous state subsidies and tax breaks for manufacturers over the past two decades. China has overtaken the US, which invented the original technology, with solar manufacturing costs 35% less than Europe, 20% lower than the US and even 10% cheaper than in India.
The picture is also complicated because rare earths - central in the transition to cleaner energy – are located and concentrated in a handful of countries. China accounts for around 25% of all exports of rare earths, and Russia supplies nearly 20% of the world’s palladium output. In the 2020s, China overtook Chile and Peru as the main exporter of lithium for batteries. Five of the top 10 global wind turbine manufacturers are Chinese, while 80% of solar PV cells exported around the world originate in China. The world’s largest manufacturer of LED lighting, is a Chinese company.
Increasingly, in a case of soft ‘green’ power involving financing with limited strings attached, the Chinese authorities have ramped up their commitment to building a green Belt and Road Initiative through financing and foreign investment into countries that are home to green economy resources. For instance, China Development Bank and China Export-Import Bank provided 85% of the financing for the 500 megawatt Cauchari solar power plant, one of the largest projects of its type in Latin America. Of course, whether soft green power yielded by China leads to a transition to sustainability on the part of its investment host countries is a different question entirely.
Russia, traditionally a laggard in the environmental space, has also seen the potential in going greener. Following the May 2020 environmental disaster at Norilsk in Russia’s far north, where a major oil spill caused billions of dollars in damage, both the government and corporations started to put ESG standards on the agenda. Furthermore, more evidence of Russia’s enthusiasm for sustainability comes from its copper rush; Russian entrepreneur Alisher Usmanov saw the potential in this market, acquiring the Udokan copper reserve via his USM Holdings, investing USD 7bn and launching production in 2022. The project will turn the mine into one of the top 10 copper producers globally. While government interest might have waned somewhat with the onset of the Ukraine war, Russian corporates are likely to continue their green push. Indeed, after Norway’s sovereign wealth fund banned investment in companies with poor ESG scores, some of Russia’s blue-chip companies lost up to a third of their shareholders, prompting Norilsk Nickel to invest USD 3 billion in a clean-up operation and to plan for more. Most of Russia’s largest firms have announced their intentions to move towards assessing their green credentials, including Sberbank, XS Retail Group, Splat, Rosatom, Alrosa, Polymetal, Sibur, Rosseti and Rusal.
China accounts for around 25% of all exports of rare earths
Clean and bright
In contrast, Nordic countries have been revered for decades as states that have ‘got it right’ when it comes to weaning supply from fossil fuels and meaningfully transitioning to cleaner energy. Technological and scientific innovation will create the next milestones in this race – not projections of soft power and political influence. In particular – because lithium is a key piece in the renewables puzzle – how much lithium can be extracted is central to innovation. An emerging source of high-value lithium is in geothermal brine, a hot and concentrated saline solution enriched with minerals. More efficient lithium extraction processes from brine are hugely relevant and many involve water technologies. A process based on new high-capacity selective sorbents (materials used to absorb liquids or gases, and a new sorbent regeneration process) has been pioneered by research institute SRI International, and other innovators include Evolve and EnergyX Energy Exploration. Extraction efficiency of battery-grade lithium is as high as 90%, and it reduces the cost of lithium production and uses smaller volumes of sorbent. No wonder we are seeing a gold rush for new technologies to extract lithium from brines in regions with access to geothermal resources.
Recently, news that Finland - already cut off from Russian gas - is launching the world’s first commercial sand-based thermal energy storage system has generated significant interest. Developed by Polar Night Energy, initially to provide heating for the city of Kankaanpää, it is said to be relatively cheap and easy to build – a steel container filled with tonnes of sand is heated to 500-600 degrees Celsius with renewable electricity, and can then be stored for future use by local heating systems. The contribution of this innovation cannot be underestimated, as it could solve the problem of year-round supply, one of the biggest challenges of green energy. How do we keep the lights on when the sun does not shine, and the wind does not blow? Furthermore, currently, batteries made from lithium are expensive and have a large physical footprint. The Finnish battery made from sand provides a low-cost, low impact solution to storage and circumvents the central problem of solar and wind energy – intermittence. Moreover, it provides a solution that can warm homes in winter when energy is more expensive and is needed most. However, the central questions are whether the sand battery can be upscaled, and if it can emit electricity in addition to heat? The answers remain uncertain because the system’s efficiency plummets when the sand is used only to return power to the grid. Regardless, in our view, the mere fact that it provides flexibility for the use and storage of heat is a major contribution to reducing expenses when the cost of energy is increasing dramatically.
Extraction efficiency of battery-grade lithium is as high as
Race to the finish?
China and the Nordic countries are currently the frontrunners in the renewables race - a race that many believe will also transform energy politics. Competing strategies are already emerging, resulting in pinchpoints that have the potential to become more significant.
Continuing to meet the world’s current power needs and balancing them against a green agenda in the face of project-heightened power demand means that innovation may need to be allied to rethinking traditional taboos. In that sense, because the structural shift in energy demand is a given, there is no contradiction in a country like Germany re-orienting towards ESG in the medium-term, while making some short-term investments in coal. It may slow the transition and lessen the efficiency of the market, but the market is itself causing the same effect, as boom times for the biggest exporters of critical renewable raw materials are leading to soaring costs, thereby delaying the transition anyway.
The apparent overlap of contradictory goals is also an outcome of the political drivers of the Ukraine war. Yet they do not derail ESG as a medium-term goal for any country – oil producer or not. Markets could never be expected to switch from 0 to 1 in a digital manner and dual time frames acknowledge that markets do not exist in a political void - least of all energy markets. Despite the mixed short-term outcomes of Glasgow’s COP26 UN Conference on Climate Change Mitigation, renewables have emerged as the central resource of the current techno-economic paradigm, and they will be the object of geopolitical conflicts for decades to come.
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