Russia's invasion of Ukraine has triggered an energy crisis. But that shouldn't stop countries from implementing their net-zero targets, say experts at Schroders.
More e-cars were bought in the UK in March 2022 than in all of 2019. This is despite the downturn in the small vehicle market and supply chain issues that currently make it difficult to purchase an e-vehicle. Even before the recent rise in energy prices, the switch to electric cars was in full swing. But the price increase due to high oil prices makes conventional combustion engines unattractive for consumers.
"Prices for gas and coal are now four times higher than a year ago. As a result, the economics of renewable energy sources have improved significantly in comparison", Felix Odey, Portfolio Manager of the Schroders Global Energy Transition Team, explains.
Russia's invasion of Ukraine had exacerbated oil and gas price increases at a time when energy costs were already rising. The lack of investment in recent years has led to a shortage of newly developed reserves in the oil and gas markets. One thing is certain: energy companies were reluctant to extend support. "The international focus on reaching net zero means that management teams have had to turn away from oil production without knowing what demand there will be for their end products in ten years' time", Odey explains.
Fewer and fewer investors are also willing to finance the development of new fossil fuels, he said. This mixed situation caused tight supply in the market, price increases and strong returns in the conventional energy markets.
Covering with renewable energy
The net-zero challenges facing countries were known even before the war of aggression on Ukraine: How to make economies independent of fossil fuels while ensuring energy security? What has changed, he said, is that these factual issues are now front and center. The current energy crisis is likely to change the path taken towards net zero. Some countries could bring forward CO2 emissions as they ramp up power generation to avert the cost pressures of rising electricity and gas prices from consumers.
"Something positive, especially in Europe, is that policymakers have responded to the energy security crisis these days with plans for greater use of renewable energy", says Alex Monk, portfolio manager of the Schroders Global Energy Transition Team. Although more fossil fuels would be used in the short term, renewables dominate the energy mix in the medium- to long-term strategy.
On the part of policymakers, this is a first, Alex Monk points out: "If the energy crisis had happened earlier, I don't think that would have been the standard response. A political turn has taken place." The conclusion: countries whose CO2 emissions will increase in the coming years would have to increase the pace of decarbonization. In other words, a significant expansion of renewable energies is needed. This is the only way to achieve the net-zero targets.
Ukraine war accelerates energy transition in the longer term
The Federal Republic of Germany is considered as a good example. The government passed a far-reaching reform to triple renewable energy sources by 2030. This is to ensure energy security in the wake of Russia's invasion of Ukraine. Some European and U.S. politicians also suggested more employees should work from home offices. This would reduce the amount of fuel needed for transportation.
Despite these measures, Europe is consuming more coal and gas. That means countries must meet their emissions targets faster than planned. Some British politicians would have been in favor of more incentives to install solar panels on roofs, as well as cutting red tape with regard to renewable energy sources. But so far, only small actionable steps have been taken in this area.
Alex Monk further argues that much more can be done. Consumers could reduce their electricity bills by further incentivizing solar installations. This would additionally help the country meet its emissions targets. "In the long term, the Ukraine crisis is a support for the energy transition. The short-term slowdown on the part of policymakers does not matter", he adds.
However, such programs tend to benefit the middle class rather than those who need it most. It is impossible for the poorest in society to pay for solar panels, even with reduced prices. The cost-of-living crisis has plunged millions into poverty: many have to consider whether to heat or eat. "Governments are faced with serious factual issues. To what extent can they reduce energy costs without widening the gap between rich and poor?? A short-term solution could be increased use of coal and gas", says Alex Monk.