The new energy world order
The evolution of our way of living today would not have been possible without the extensive utilization of fossil fuels throughout the previous century. The act of burning coal, oil, and gas has facilitated a general improvement in global welfare. However, the adverse effects caused by the unrestrained release of greenhouse gases were not adequately accounted for in the economic development model. Now, as humanity confronts the challenges of climate change in the Anthropocene Era, the energy industry is undergoing a crucial transformation by reducing carbon emissions and shifting towards decentralized energy sources.
Many people still believe that there is a deliberate effort by the 'liberal wokerati' to manipulate the climate debate and exaggerate the negative effects of global temperatures rising above 1.5 degrees Celsius compared to pre-industrial levels (we have already reached 1.1°C). However, it is not passionate environmentalists who are leading the shift to clean energy, but rather determined private investors. Despite recent resistance to financing ESG initiatives and reducing carbon emissions being seen as merely a show of virtue, the clean energy sector continues to attract significant institutional investment. This is because investing in clean energy is now economically advantageous compared to traditional fossil fuels.
Billions of dollars are being used in different parts of the supply chain, including the production of wind and solar power. This is possible because of China's large-scale manufacturing, which reduces the cost of installation. Despite minor setbacks caused by the Covid pandemic and supply chain issues, these types of renewable energy are still cheaper than traditional thermal power, even without government incentives and taxes on carbon emissions. However, because they are dependent on the weather (the sun doesn't always shine and the wind doesn't always blow), there is also a need for reliable energy storage systems. This has led to investments in long-lasting storage solutions like grid-connected batteries and green hydrogen. The funding for research on different battery technologies and electrolyzers has increased significantly in the clean technology sector. It would be foolish to underestimate human innovation in discovering new breakthroughs that are both profitable and scalable in the near future.
Another popular trend in investment is the utilization of demand-side management in order to connect different consumer-owned energy resources, such as solar panels on rooftops, batteries for homes and electric vehicles, to the distribution grid. By creating a bi-directional and digitized relationship between multiple sellers and buyers of electricity, which is powered by artificial intelligence, it not only decreases the highest level of electricity usage but also reduces the amount of investment needed to upgrade the transmission infrastructure as the energy industry further transitions to using electricity. Additionally, there is now an increased focus in the Western world on establishing a "circular economy" in order to minimize waste and enhance energy efficiency.
The shift towards clean energy is not being led by idealistic nature lovers, but by determined private investors.
The rising acceptance of electric passenger vehicles (mainly in China and Europe, and increasingly in the US) will have a significant impact on the future demand for petrol and diesel, as well as the production of crude oil. The electric mobility industry is expanding quickly due to the declining costs of batteries, advancements in technology, government regulations, subsidies, the expansion of charging infrastructure, and the entry of more electric vehicle manufacturers. However, it is unlikely that long-distance road transportation, shipping, and aviation will be able to transition to electric power. Instead, there is potential for these sectors to become more environmentally friendly by utilizing synthetic fuels made from green hydrogen, such as ammonia and methanol, as well as other sustainable molecules. Of course, this will require overcoming economic, logistical, and scalability challenges.
Similarly, other industries that are challenging to transition, like steel and cement, could undergo some modifications to utilize green hydrogen rather than coal for their heating needs. In Europe, gas-fired boilers are gradually being substituted with electric heat pumps for residential heating, and regulations are being revised to enhance energy efficiency in buildings, along with societal guidelines.
The dynamics of geopolitics continue to play a crucial role in the energy industry, especially following Russia's invasion of Ukraine. As Europe moves away from its heavy reliance on affordable Russian gas and ramps up its efforts in transitioning to cleaner sources of energy, it also faces stiff competition from China, which holds a dominant position in the supply chain for critical raw materials. Additionally, President Biden's substantial $370 billion subsidies and tax incentives for clean energy in the United States further intensify the global energy landscape. The concepts of re-shoring and friend-shoring are gaining popularity, driven by the need for energy security and job creation. However, these trends may lead to the fragmentation of the global energy market due to protectionist measures, ultimately resulting in higher consumer prices.
As China and the US (the leading economies and polluters worldwide) compete strategically for dominance in renewable energies, emerging nations (like Chile, Indonesia, and Congo) gifted with valuable lithium, copper, cobalt, nickel, manganese, and graphite resources are poised to gain significant geopolitical significance, potentially overshadowing major oil and gas producers.
It is still uncertain who will take control of the emerging new energy world order as the fossil fuel industry urges for reducing emissions through carbon capture and storage technologies, rather than actually decreasing the use of hydrocarbons to meet the goals of the Paris Agreement by the middle of the century. Natural gas, including LNG, is expected to continue being an important "transition fuel" for the foreseeable future, although stricter regulations on methane leakage will be imposed. Traditional oil and gas companies that are not the most cost-effective producers, or do not focus on their main strengths, will be surpassed by new energy companies, just as Tesla, Amazon, and Netflix outdid their competitors in their respective industries.
Climate finance availability and cost necessary for achieving an equitable transition to sustainable energy in developing countries is a crucial topic of discussion at this year's COP28 climate conference. If we choose to restructure our energy sector with reduced government involvement, Pakistan has the opportunity to attract a significant share of global climate funding. By implementing appropriate policies and minimizing bureaucratic hurdles, we can utilize this funding to support various private projects, such as mining essential raw materials, implementing nature-based carbon offsets, adopting electric buses and rickshaws, developing hybrid wind and solar power systems, and establishing smart grids. Merely relying on financing for adaptation to cope with annual floods and heatwaves is insufficient. Time is of the essence, and Pakistan can either lag behind or become a frontrunner in the emerging new energy landscape.
The author is a previous aide to the prime minister in charge of energy and oil.
Released on Dawn, July 22nd, 2023
