IEF: it’s time for the world to adopt a new approach to energy policy

As we approach winter in Europe and consumers face skyrocketing energy bills, many households face the uncomfortable choice between eating or heating.

Rising prices of fuel, gas and electricity are all symptoms of strains on the energy system that go beyond the recent drop in Russian gas production, and go to the heart of energy policy and how decisionmakers have misjudged the transition to net zero.

When energy supplies are abundant and affordable, they provide important stability to the economy which allows governments to invest in new infrastructure, give access to energy to those who lack it and invest in the new technologies that will decarbonise our energy system.

Looking for alternatives

At times of scarcity like today, high prices drive consumers to look for alternatives. In parts of Europe today, demand for firewood has doubled. Regulators are looking at rationing industrial users to protect households, and some energy intensive industries have simply shut down. These impacts naturally have a major chilling effect on the economy, and also increase harmful emissions.

Today’s crisis follows years of under-investment in energy globally which has left the market fragile and vulnerable to disruption. Investment fell for several reasons. One, because the industry for many years delivered poor returns to shareholders, thanks to ample supply from the US shale producers.

Two, there was a flight of capital away from fossil fuels with the rise of ESG investing; and three, multilateral lenders stopped funding new oil and gas developments in an effort to boost renewables.

Wind and solar have been the fastest-growing primary energy source over the past five years, but hydro is still the largest renewable energy source and together they account for just 4 percent of total supply. Fossil fuels still account for 80 percent, and this number looks likely to rise given the huge increase in coal production in Asia last year.

Need for new approach

So, we need a new approach that avoids market crises, scarcity and unintended consequences. Policymakers need to be more honest about how the transition will actually be achieved, without starving our energy system of capital and disrupting livelihoods.

One of the problems has been a proliferation of fanciful outlooks for energy demand that do not bear up to reality.

In the latest major outlooks, for example, the gap between the highest and lowest scenarios for oil and gas demand in 2050 is larger than the size of today’s global market. The gap gets larger every year as actual demand for fossil fuels defies expectations.

This uncertainty over future demand, coupled with bans on fossil fuel financing by multilateral institutions and growing investor reluctance, is deferring oil and gas investment at a time when we still need it to bridge the gap between the energy systems of today to those of tomorrow.

Rising living standards and a growing population will lead to more energy demand. The priority is to reduce emissions and increase affordability, not to abandon the industry which today provides 80 percent of global energy.

The world is so reliant on fossil fuels – not just for transport and electricity generation, but for so many aspects of modern life such as healthcare and agriculture – that we need to manage this transition carefully.

Focus on eliminating methane

We must take care to invest in existing demand for petroleum while picking the low-hanging fruit in the battle against climate change, eliminating methane leaks and scaling up clean energy technologies such as carbon capture and hydrogen. Investment in these decarbonisation technologies was just a fraction of what is required at $12 billion last year, while renewables attracted $370 billion.

I am concerned that if the public starts to equate high energy prices with climate policies, we will lose support for climate action. That would be a huge setback and it would be hard to get that support back.

So, we need to create a state of market stability to enable the transition to take place and avoid the unintended consequences we are seeing today with skyrocketing energy bills and increased carbon emissions.

This new approach requires a new kind of consultation across diverse stakeholders including governments, civil society, research institutions, the energy industry, financiers and technologists that has been sadly lacking until today.

If there is any silver lining to the current crisis, it has been the growing realisation that a new approach is needed: an approach that helps decisionmakers to deliver abundant and affordable energy that supports economic progress and reverses climate change.