By Shraddha Bhandari
In 2023, the key trends in the energy market will follow from the tensions b/w dirty and clean energy, countries that control and who are dependent and the larger geopolitical and power dimensions. There will be a disruption in the existing fossil fuel market, renewables/green energy will be unable to fill the gap, and the consequent scrambling for all energy resources will create a VUCA market and geopolitical uncertainties.
Revenge of the Fossil Fuels?
In 2023 – the world will oscillate between continued investments in and move to green energy sources and the ‘polluting’ fossil fuels, particularly coal and natural gas, re-invigorated by geopolitical and climate events.
This tension has been in the making for years and was brought to the fore by the Russia-Ukraine war. In the summer of 2021, severe droughts in China forced hydropower plants to shut down, leading to a power crisis in 9 top industrial provinces. At this time, there was a definite relaxation in President Xi’s policy of limits on coal usage to produce electricity. This theme was echoed in Asian industrial powerhouses as they sought to cope with the recovered post-pandemic demand.
Experts have also warned that the trajectory of moving from dirty to clean energy has not adequately taken into account the risks related to power and geopolitics. While the U.S. and European energy companies, including the much-touted shale oil companies, have been hit by uncertain policy and regulatory framework, class action suits and climate activism – Gazprom, Rosneft, Saudi ARAMCO, Abu Dhabi National Oil Company and Qatar Energy have been under no similar compulsions. In 2021, western companies controlled about 15% of the oil market, while OPEC and Russia controlled more than 40% of the market. The results of this leverage in the hands of ‘geopolitical’ troublemakers have been fairly evident.
Move from fossil fuels to cleaner energy sources is writing on the wall, but in 2023 – securing cheap and reliable energy will trump talk and action on sustainability and green energy. It will involve what the Economist has called ‘Faustian’ bargains: overlooking and, in some cases appeasing tendencies of OPEC plus, scrambling for alternatives sources of oil and natural gas (including in several conflict-hit areas of Africa) and in extreme cases (or politically sensitive ones) starting/stepping up coal usage.
Even worse, sanctions on Russia have fractured the ‘unified’ energy markets that offered some predictability in supply patterns. Today the conventional energy (oil, gas and refined products) market is broken with different prices (prices determined by the western ‘price cap’ mechanism, Russian price and a shadow price in the middle), attempts by nations to outbid each other and to push smaller powers like Pakistan, Sri Lanka and many African countries out of the race. Volatility, price unpredictability and fall-outs for many under-developed nations will continue in 2023.
Main stakeholders will adopt accelerated, state-led plans for transition to green energy, but political and economic compulsions will make the change uneven and costly
The accelerated plans for clean energy (and using LNG as a bridge in this transition), especially at the EU level, are being viewed as a silver lining of the Russia-Ukraine saga. Sweden, Finland and Latvia are leading in the consumption of renewable energy. Germany and the U.K. have stepped up their efforts in line with the EU-wide Renewable Energy Sources and Offshore Wind Energy Act of 2023.
In Germany, there are efforts to meet their 2030 renewable energy goal of 115 GW of installed onshore wind capacity, 30 G.W. of offshore wind capacity and 215 GW of solar P.V. capacity by 2030. Shaking its vast bureaucracy, Germany also saw the fastest construction of its first floating terminal for LNG at the North seaport of Wilhelmshaven – to diversify its dependence on Russian pipeline gas. In the U.K., there are plans to tap nuclear energy through Hinkley Point C, a nuclear plant being built in Somerset and a new one, the location for which will be chosen by 2024. France is also attempting to harness its nuclear energy capabilities.
But these plans will be hampered by political and economic compulsions, starting with the European Union. The E.U.’s two main pillars – France and Germany have different strategic interests in terms of fossil fuels vs. nuclear. Germany has opposed France’s efforts to include nuclear in the E.U.’s “green taxonomy” because of France’s lead in the segment. France is the E.U. country where nuclear energy accounts for the largest % (by far) of total electricity production. As a result – the EU-wide approach to energy will remain problematic – electricity prices remain indexed on energy prices and most E.U. countries give precedence to fossil fuels.
Another key factor will be the Chinese centrality in critical energy supply chains. Before Covid, China manufactured 1/3rd of global wind turbines, 70% of solar panels, and 3/4ths of lithium-ion battery cells. It has created dominance in critical rare earth minerals required for lithium-ion batteries (lithium and cobalt), through domestic production and securing mines in other countries. As the superpower rivalries heat up – the Chinese have the power to weaponize the clean energy transition, at least in the short term.
The last factor is the current economic conditions – setting up nuclear plants, for example will be challenging given the cost of living crisis in several European economies.
Changing global energy patterns will have significant geopolitical implications
In 2023, the impact of some of the structural changes in the energy market will start manifesting. The buyer’s ascendancy narrative, pushed to the fore by West’s price cap mechanism, has created unease in the OPEC plus. In a market traditionally dominated by sellers, the recent Russian sanctions and the accelerated move to green energy are threatening a control of price by the buyers. OPEC plus’s response of cutting production despite U.S. pleas in October 2022, not sanctioning Russia and narratives of petro-yuan are just the beginning of this West vs. OPEC.
New patterns will also create geopolitical winners and losers. In the short term, LNG-producing nations Algeria, Qatar, and Azerbaijan will stand to gain. Several African nations will be able to attract investments in the energy segment from superpowers competing for influence.