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Wholesale Banking

Will short-term price shocks hinder the energy transition?

As energy prices soar, the cost of the energy transition is being questioned and even blamed for the crisis. ING senior economist Gerben Hieminga explains why this is a misguided view and stresses the importance of investing in a clean energy system for the future.

offshore wind turbines

Why is the cost of the energy transition under the spotlight?

The shift to clean energy and the investments it demands was always going to make energy more expensive during the transition period. Countries need to build new, renewables-based energy infrastructures, while continuing to invest in old fossil-fuel based systems, which still make up the vast majority of our energy supply. The costs are undoubtedly high, but they are longer-term costs for society and are not the reason that energy bills are currently rising so fast. Nevertheless, the volatility in the market, so much of which is caused by the war in Ukraine, is putting the spotlight on the cost of the energy transition, and that carries some risks.

What risks do you see?

There is now a danger that the political focus could shift from long-term ways of reaching climate goals to short-term solutions for companies and households facing high energy prices. For example, some European countries are being forced to consider reviving their coal plants, or delay nuclear phase-outs, to help reduce their dependency on Russian gas. This could be bad news for the European Union, which has a target of increasing renewable energy’s share of its total consumption to 40% by 2030. Continued investment in both renewable energy and storage are key for the energy transition, alongside new clean energy technology such as green and blue hydrogen and carbon capture, storage and utilisation. All in all, the current situation clearly shows that sustainability, security of supply and affordability hold equal importance in the transition to a low-carbon economy.

As energy prices rise, are renewables becoming less attractive?

Such dramatic price increases and high volatility are never good for the market – especially not for a sustained period of time. But, for the moment, high power prices make renewables very competitive. Many projects are actually generating high profits now, even without subsidies.

Is public support for the energy transition stalling?

The discussion of who pays for the energy transition will continue in Europe’s key markets as consumers start experiencing new near-term costs. But the good news is that about 80% of the public still support the use of renewable energy .(3) Maintaining that support was on the political agenda at COP26 and will be for the next decade to come, because there is no other technology that is as sure a bet for reducing Europe’s dependency on Russian gas in the short term..

Does public opinion differ around Europe?

The political framing of rising energy costs is different across Europe, as well as across the left-wing and right-wing parties. If it is framed in such a way that these high prices are the result of a tightness in fossil-fuel markets, which is the case, then it can actually speed up to transition towards renewables. On the other hand, some are saying that these prices are the result of the energy transition. This is a misguided view that risks undermining the strong public support for the shift to renewables.

Why do you think extreme energy prices are not related to the energy transition?

The war in Ukraine has had the most dramatic recent impact on the energy markets, with the turmoil driving gas, coal and oil prices to unprecedented highs. Even before the war, in the summer and autumn of 2021, high demand for power from the economic recovery after Covid-19, low seasonal gas-storage levels and a lull in renewable generation from wind led to record gas and power prices. And droughts across Europe are limiting the supply of hydro and nuclear power, as well as the availability of coal, as rivers run dry. None of this is related to the energy transition.

What is the bigger picture, amid so much uncertainty?

Whatever the short-term uncertainty, the longer-term reality is that demand for electricity is predicted to grow fivefold by 2050. Meeting that demand will require a historic level of investment in the energy sector – more than it has seen before. The ultimate goal is to create a new energy system with a much lower carbon footprint, capable of delivering the net-zero targets set out in the Paris Agreement. Getting there requires unprecedented technological developments, lower costs in renewable energy and for governments to make tough political choices. With that in mind, we can’t afford for the critical long-term goals of the energy transition to be thrown off course by short-term market volatility.