The UK will pay the price for demonising fossil fuels
We failed to anticipate the world’s spiralling energy demands when planning our future strategy
The current mild winter and economic difficulties in China might have caused wholesale energy prices to drop back, but we should not be fooled. High energy costs are going to be a feature of the next decade. They are not simply the consequence of the war in Ukraine. Oil prices were above $100 per barrel and European gas prices had risen fourfold before one Russian boot was on the ground in Ukraine. What the war has exposed is the frailty of the energy system that we have built over the last decade, particularly in Europe.
The roots of this go back to how we have chosen to pursue the objectives of the Paris Agreement on climate change. In the several decades prior to Paris, during most of my time working at BP, the industry thought about its role in terms of the energy trilemma: how to provide the world with secure, affordable and sustainable energy.
Following Paris, the focus was only about sustainability – how to reduce emissions – the explicit mechanism being a reduction in the supply of fossil fuels and replacing them with alternatives such as renewables and nuclear.
In the period since Paris, the allocation of capital to the fossil fuel industry has been dramatically reduced – it is currently running at around 60pc of the level it was at in the decade prior to Paris and 60pc to 70pc of the investment needed to satisfy current levels of demand – and the hydrocarbons industry has been progressively demonised to the point that it was not invited to Cop26 in 2021. The problem with this is that no one consulted the consumer. There was very little attention paid to the demand side of the equation and to the implications for energy security and prices of withdrawing fossil fuel investment before alternatives are in place.
Fossil fuel consumption reached an all-time high in 2022 with record use of coal, oil and gas, and 2023 is projected to be even higher. Hence the high prices. Many will point to the pace of the build-out of renewable energy as the problem – and indeed more could be done.
However, we also need to recognise that over the last decade, renewable energy has penetrated the system faster than any new source of energy in history. Faster than coal replaced wood at the start of the Industrial Revolution, faster than oil replaced coal to usher in the modern world of mass mobility and faster than gas replaced oil as the world found a cheaper and cleaner fossil fuel in the 1980s and 1990s.
The challenge is the scale required and continued demand growth. The world’s demand for energy continues to grow at between 1pc and 2pc a year. According to the International Energy Agency, in order to sustain current levels of output, the global energy system requires around $1.5trillion (£1.2trillion) a year of investment, principally in fossil fuels. But to transition to a low-carbon system at the pace we want to, in order to meet the Paris goals, the necessary investment number is more than double that. The current investment into renewable energy is around $1.5trillion a year versus a requirement of up to $4trillion.
There are two impediments to more rapid renewable energy penetration. Firstly, government bureaucracy. Across the world, the permitting and approval processes and grid connection processes for all forms of renewable energy are far too slow.
Secondly, many new technologies have been proven in the lab and even at the pilot demo scale – but few have been deployed commercially. Until that hurdle has been passed, the major institutional investors that will provide the capital for the build-out of proven technology are not able to invest at scale in technologies that may fail.
Governments have a major role to play in solving both of these problems. The Inflation Reduction Act passed by the Biden administration in the US at the end of last year is an example of a government stepping up to the plate. Within the Act, there is a specific focus on permitting and providing significant government support for new technologies that have yet to be proven at scale: hydrogen being perhaps the best example.
The third area where government has a major role to play is on demand. It is extraordinary that until we were actually in the middle of the current crisis, almost no one had focused on demand and even now it is seen as little more than a short-term intervention to manage today’s problem rather than a key strategic plank of any energy policy.
The last energy crisis in the 1970s and 1980s saw a massive improvement in energy efficiency across the developed world. Energy demand growth went from being the same as GDP growth to being roughly 50pc of GDP growth. Over the coming decade, we need to effect a similar transition if we are to have any hope of a return to lower-cost energy and to have any hope of hitting the Paris emission reduction targets.
The final area where we could all take a lead would be to stop, or at least scale back, the demonisation of the fossil fuel industry by activists, politicians and the media so that it can invest more as we navigate a very difficult transition – but that is probably too much to hope for.