Understanding the energy security risks facing net zero

A swathe of sanctions have been brought against Russia since its invasion of Ukraine began, with fossil fuels from the nation forming a large part of these. Most notably the EU has declared it will ban imports of Russian oil and gas, dragging current energy relationships into light. According to the Centre for Research on Energy and Clean Air, by mid-April Russia had exported €58bn worth of fossil fuels since the start of the invasion. The EU accounted for 70% of this.

Energy security vs energy transition

These geopolitical tensions have pitted energy security concerns against energy transition according to Frédérique Carrier, head of investment strategy (UK and Asia) at RBC Wealth Management.

“Governments are shifting energy policies back in favour of fossil fuels in the short term, raising fears the energy transition may end up on the back burner,” she says.

“With a sense of urgency and in an effort to find a short-term fix, several strategies to increase energy supplies are being touted, including more drilling, diversifying LNG [Liquefied Natural Gas] suppliers, and expanding the life of existing coal power plants. All would slow progress toward achieving net-zero emissions in the short term and seem like a step back in the energy transition.”

Energy prices have become a very real concern for a number of economies, with heating and fuel costs beginning to soar off the back of this instability. There may be a temptation to revert to proven and available fossil fuels, but this may not be the case universally according to Dan Wells, partner at investment manager Foresight Group.

“The twin objectives of energy security and decarbonisation can be met through the transition to a zero-carbon energy system with cheap renewables at its core,” he says. “And, indeed, the two are self-reinforcing.

Seizing the opportunity

There is evidence that this opportunity, to accelerate energy transition, is being recognised by a number of governments. Germany has already brought forward its goal of 100% renewable energy by 15 years to 2035, in Italy the country’s private sector has witnessed a “rush” to provide rooftop solar panels to the masses, and the UK’s Energy Transitions Commission has released a paper on the subject.

This called for a “massive acceleration” of renewable energy adoption in the current climate, increasing targets for renewable energy deployments, setting clear programmes for renewable energy auctions and developing clear strategies for distribution networks.

The challenges this presents are clear, and Wells points to the scale of what is being attempted which now has greater immediacy. For him, the reality of low-carbon energy may present a learning curve for investors: “The dramatically increased focus on energy security has supercharged the energy transition in Europe as countries seek to switch to domestically produced wind and solar power, also with an increasing focus also on the “deeper” decarbonisation technologies such as hydrogen.

Much of these solutions are already available, but they require more investment to bring them into the mainstream and the point at which they can support whole populations. This is the view of Laurent Schmitt, European CEO at energy company dcbel, who sees state support as crucial at this stage.

Instead of signing new fossil fuel deals to meet urgent demands, Schmitt wants policymakers to be progressive on this front: “What is missing is smart energy regulation that incentivises further integration of these technologies into the grid in real-time conditions.

“This will ensure the notion of net zero is not only seen through the individual home perspective but also throughout the energy system, taking advantage of wind available in higher levels of the systems. Once orchestrated through real-time, the energy system will minimise the usage of fossil molecules at every corner of the energy system.”