Why diversity and pragmatism are key to a smooth energy transition

Preparing for the future requires policies that combine carbon taxes with time-bound support for breakthrough technology

In two weeks, the Scottish city of Glasgow will welcome delegates to Cop26, the UN's annual climate conference. Many attendees will seek to inform themselves using last Wednesday’s flagship report by the International Energy Agency, which was tailored specifically for the event. However, the IEA, governments and markets are trying to thread an increasingly difficult needle.

Inspired by Henry Kissinger, US Secretary of State at the time, the agency was set up in the immediate wake of the first oil shock of 1973 to 1974 in a push to ensure energy security for the western industrialised states. Although its scope has been expanded and it has added some emerging economies as associate members, its mandate to “enhance the reliability, affordability and sustainability of energy” remains very similar.

The emphasis, however, has changed. Its latest World Energy Outlook on the run-up to 2050 draws heavily on “Net Zero by 2050”, the agency’s report earlier this year, in centring world energy policy around climate change.

Instead of highlighting where it thinks the global energy economy is probably heading, it shows three scenarios. One represents current policies and those that are likely to be introduced, the second covers announced pledges by governments in pursuit of their Paris Agreement climate goals and the third is fully compatible with net-zero greenhouse gas emissions by 2050.

The obvious problem is that these scenarios do not cover the situations where governments renege on their policies or cannot pass or enforce them. This is particularly acute in the short-term. New approaches and new technology will result in a growing and unpredictable impact, but mostly beyond 2030.

Now, the current energy squeeze, with sharply rising prices and fears of shortages, is not the fault of the green transition, as the agency makes plain.

Yes, slow winds in Europe and drought in Latin America have cut renewable output at an inopportune time. But this has been a secondary effect that a well-functioning system would take in its stride.

Big European oil companies such as Shell, BP and Total have laid out plans for falling hydrocarbon output and more investment in low-carbon energy. But, in the absence of environmentalist pressure, would they really have invested that much more in their traditional business after the 2014 oil price slump?

Those who did spend heavily on new output, such as ExxonMobil with its promising new fields in Guyana, were heavily punished by the market for their temerity. This is not, or only slightly, related to environmental activists and carbon-averse investors.

Instead, the run-up in energy prices is the result of a rapid, if not patchy, post-pandemic recovery, a shift to energy-intensive manufactured goods and a previous period of underinvestment and complacency.

Without fearing much from competitors for the moment, the Opec+ alliance has stayed very cautious on reversing its huge oil production cuts. Prices for a host of other raw materials, goods and logistics services are also increasing.

However, the current squeeze has made the stakes of the energy transition very clear. It is increasingly easy for campaigners and financial institutions to block oil, gas and coal production. Despite the rapid growth of renewables and battery vehicles, it is much harder to invest constructively and rapidly in replacing high-carbon consumption.

There are too many fantasy spreadsheets showing reliable, cheap low-carbon energy systems that meet the authors’ ideological preferences; not enough real demonstrations that are robust to all the shocks and squeezes that weather, climate, politics, pandemics, fashions, booms and gadgets throw at them.

For ordinary people, the penalty for failure is freezing at home, as happened in Texas in February, sweltering through Californian power cuts amid forest fires or facing unaffordable heating bills and empty petrol stations, as the UK experienced earlier this month.

The penalty for governments that cannot ensure reliable and cheap energy is to be voted out or otherwise discredited. The apparent swerve of Chinese leader Xi Jinping away from a 2060 net-zero carbon target and back towards coal shows this short-term imperative.

The penalty for environmental groups and green parties is to make them seem misguided or impractical. That would be disastrous because the current crises tell us that we need to move much faster, not at a slower pace, towards a new energy system. However, we need to do it intelligently and without dogma.

The IEA does recognise this. Executive director Fatih Birol points to a “mismatch” between rebounding energy demand and insufficient investment, both in oil and gas and low-carbon energy. But this is a subtle message to give when climate deniers and anti-fossil fuel campaigners each want to misconstrue in their own way.

So, drawing inspiration from the post-1973 energy security paradigm, a smoother transition needs three elements: the market, diversity, and pragmatism.

That means combining carbon taxes with high-impact, focused and time-bound support for breakthrough technology and very careful but limited regulations and reserves against shocks. Massive investment in low-carbon energy must be mobilised while minimising freebies to already profitable businesses.

Diversity means not over-relying on a single model, such as total electrification and energy frugality driven by renewables. Instead, blending in technology such as nuclear, carbon capture and storage, hydrogen and other emerging methods will give a less volatile result.

Pragmatism demands moving forward a step at a time while keeping your eyes on the end-goal. Some governments and companies are hasty with net-zero carbon pledges by 2050 and much less forthcoming on what they will realistically do tomorrow, in 2025 and in 2030.

Plans for 2050 are merely sketches; new technology and trends make any scenario today no more than a guideline.

Robin Mills is chief executive of Qamar Energy and author of The Myth of the Oil Crisis

Updated: October 18th 2021, 9:28 AM