A war between Russia and Ukraine turned one year old last Friday (24). Several lives were lost and millions of people had to leave their homes to live in other countries.
For many, February 24, 2022 is a date that will forever be remembered. In addition to the impact on the lives of Ukrainians, the conflict also affected other countries, mainly with regard to global energy markets.
Rising prices and supply chain disruption have led to a fuel affordability crisis and fueled inflation that is affecting the global economy.
In view of this scenario, Simon Flowers, president and chief analyst of wood mackenzie, spoke about how the war changed energy markets. According to him, no country can again afford to depend on imported electricity from a single supplier.
“In the future, energy security will be based on the diversity of fuels and sources and the primacy of domestic resources”, emphasized the executive.
A booster shot for the energy transition
In Flowers' view, self-sufficiency, at a reasonable price, will define energy security in the future – low-carbon energy produced domestically, using domestically owned technology and supported by domestic supply chains.
“Many countries are far from that today, and dependence on China for critical transition metals and hardware is a widespread concern. But most countries have already planned to make the long-term journey as they move towards net zero. The war just made it happen faster,” he reported.
For him, the United States is off to a great start, introducing game-changing tax incentives in the Inflation Reduction Act of 2022. “One example – we have since increased our forecasts for the installation of wind, solar and energy storage capacity in the US between 50% and 100%”.
“We also anticipate a similar acceleration of investment in other low-carbon technologies, including CCUS (carbon capture and storage), hydrogen, next-generation nuclear technologies and advanced battery chemistries,” he said.
The European Union also moved last month to bolster incentives to secure capital flows to Europe to help meet its own low-carbon targets. “So perhaps temporarily higher CO2 emissions before much faster reductions.”
Limitations of energy markets
Another point emphasized by the analyst is that the extreme conditions revealed the limitations of energy markets based on marginal prices in Europe.
“A combination of rising input fuel costs and extended power supplies has led to very high wholesale prices across the continent. Some generators made huge margins when consumer bills hit the ceiling,” he explained.
According to Simon Flowers, governments were forced to temporarily subsidize bills to deal with an affordability crisis, and regulators intervened with the aim of reforming wholesale markets at regional and national levels.
“The challenge is to use a means of setting prices that is 'fair' and still encourages the industry to invest in new generation capacity and supporting technologies. Energy markets around the world will follow with interest. The expansion of the network infrastructure, cross-border and domestic, is also imperative”, he pointed out.
Europe can live without Russian gas
Still according to Flowers, the global market adapted remarkably quickly. High prices reduced demand in Europe and Asia and reduced available supply for the European market. “There is growing confidence that Europe can muddle through over the next three years, albeit with relatively high and volatile prices.”
“New supply volumes, mainly US and Qatari LNG, arrive from 2025, helping prices return to 'normal'. In the long term, LNG (liquefied natural gas) growth is still centered in Asia,” he commented.
The war, however, for him, fundamentally changed the market forever – it is now a more global, flexible and fungible market, but probably more volatile, as Europe competes with Asia for the same LNG cargoes.
“Could Europe buy Russian gas again in the future? Maybe, but it will still take time, requiring a change of regime and, even then, in our opinion, no more than 15% of its needs”, highlighted the president of Wood Mackenzie.
Who has done well?
According to Flowers, there are, for example, investors in low-carbon technologies and associated supply chains, as well as gas producing countries, particularly those connected by gas pipelines in Europe, and oil and gas producers, particularly integrated companies with commercial capacity. , along with US refineries.
Who did badly?
In his view, gas and electricity consumers in many parts of the world, and gas importers, including some in Europe who have demanded government bailouts. “Last but not least, Russia.”
“The country has lost 130 billion cubic meters of annual gas exports to Europe, worth more than $30 billion a year in pre-war revenues, and will likely never be replaced by alternative export options. It has also lost its credibility as a reliable commercial partner”, concluded the executive.
