Time for aggressive renewables investment

An energy crisis has gripped Europe. Policymakers must react to the gas crisis with aggressive investment in the wind and solar industries.

By October 2021, European gas prices had increased by about 500% from the beginning of the year. In the UK, prices of 60p per therm¹ at the beginning of the year rose 37% in 24 hours to trade at 400p per therm. Energy bills are forecasted to rise by up to 30% next year, whilst by October 18, sixteen smaller energy providers had gone bust in the UK market as they struggled with rising costs.

The crisis presents an inflection point in the energy transition.

While some have blamed this energy crisis on the energy transition, it is most likely a result of supply and demand, geographic and political factors, rather than merely the rising cost of carbon². Such factors include low gas storage stocks, reduced gas supplies from certain geographies, a shortage in Liquified Natural Gas (LNG) deliveries linked to high demand from Asia following China's decision to ban imports of Australian coal following a political dispute, as well as lower than normal renewable output in Europe due to meteorological factors.

While there will likely be short-term growing pains as the world undergoes a major transformation of the energy system, it could be argued that extreme volatility in gas prices is a result of too little investment in clean energy and associated energy storage technologies. The more renewables and storage capacity is increased, the less need there is for fossil fuel sources such as LNG or coal to smooth the transition.

Consequently, we suggest that policymakers should react to the gas crisis with aggressive investment in the wind and solar industries. Renewables are no longer an expensive source of energy. On the contrary, wind and solar costs have dropped by 60% and 80% respectively over the past 10 years, owing to larger, more efficient wind turbines and the automation of solar product manufacturing. Increased wind and solar capacity can support a wholesale shift away from gas towards electrification in domestic heating, industry, and power generation, as well as supporting the growing green hydrogen industry.

Renewable sources of energy such as wind and solar are inherently deflationary forces in the long run. The International Energy Agency’s (IEA) research on the topic is very clear. Under its Net Zero scenario, the IEA predicts that in the next 10 to 30 years, the cost of electricity from gas is set to rise across geographies, while costs for solar and offshore wind are set to drop the most. Besides this direct-cost rationale, wind and solar capacity must be scaled up to reach Net Zero by 2050. According to Bloomberg New Energy Finance (BNEF), 505 gigawatts of new wind power globally need to be provided each year to 2030 (5.2 times the 2020 total), as well as 455 gigawatts of solar PV (3.2 times the 2020 total). Such an electrification process could lower household energy and fuel bills by up to 50%, according to research from Goldman Sachs³.

Policymakers should spend political capital informing the public that renewables will make energy more reliable and more affordable in the future, not less. They need to recognise that renewables are the solution, not the problem, and that the energy transition requires a long-term perspective. Governments should simultaneously redesign energy markets to mitigate the intermittent nature of wind and solar, for example by scaling up storage technologies which have shown similar cost declines, and by investing in electricity transmission, rather than investing further in fossil assets.

Overall, renewables are poised to provide an increasing share of global energy consumption in a way that is cleaner and more cost competitive compared to fossil-based sources of energy. According to the IEA, by 2030 we can expect a significant slow-down (or contraction in a net zero scenario) in the demand for oil and gas energy and a huge increase in the production of wind and solar based energy. This dynamic will create winners and losers across the global economy—countries which are well-positioned to produce technologically sophisticated products necessary for the production and supply of wind and solar energy stand to gain from the transition, while those that depend on fossil fuel exports income risk being left with stranded assets. Equally, the corporate landscape of the energy sector, from basic materials, through energy production to energy supply, will shift radically.

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1. One therm is equivalent to 100,000 BTUs (British Thermal Unit) – the amount of heat needed to increase the temperature of one pound of water by one degree Fahrenheit.

2. From January to November 2021 the EU carbon price has doubled (https://ember-climate.org/data/carbon-price-viewer/) while EU gas prices over this period have quadrupled. (https://www.euronews.com/2021/10/28/why-europe-s-energy-prices-aresoaring-and-could-get-much-worse)

3.  Alberto Gandolfi and others, 'Energy costs and affordability: who pays for Net Zero?' Goldman Sachs Research, 5.9 (2021), 56

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