What does the current global energy crisis mean for energy investment?

Dr Fatih Birol Dr Fatih Birol, Executive Director Commentary —

As well as causing a grave humanitarian crisis, Russia’s unprovoked invasion of Ukraine has had far-reaching impacts on the global energy system, disrupting supply and demand patterns and fracturing long-standing trading relationships.

It has pushed up energy prices for many consumers and businesses around the world, hurting households, industries and entire economies – most severely in the developing world where people can least afford it. And it threatens to derail efforts to tackle the world’s critical challenge of reducing global greenhouse emissions quickly enough to avoid catastrophic climate change. We cannot allow tackling climate change to become yet another victim of Russia’s aggression.

The global energy crisis and market tumult set off by Russia’s actions have significantly complicated the picture for governments, companies and investors as they try to determine what energy projects to encourage, develop or fund. As the leading global authority responsible for energy security and the clean energy transition, the IEA has been providing the data, analysis and policy advice to help decision-makers around the world – especially governments – make well-informed choices on energy investments that support secure and affordable energy supplies while driving down emissions.

We will publish a range of new insights next month in our World Energy Investment 2022 report, which will take into account the rapid changes the global energy system has experienced since last year’s edition, and the upheaval of the past few months in particular. These issues are at the heart of consequential deliberations taking place around the world today – in government ministries, parliamentary debates, company shareholder meetings and at international gatherings, including the World Economic Forum Annual Meeting in Davos later this month.

A world falling short on climate goals and reliable energy supplies

Even before Russia’s invasion of Ukraine, the world was far off track from achieving its shared energy and climate goals. Global CO2 emissions reached an all-time high in 2021, and fuel markets were already showing signs of strain. At the same time, investment in clean energy technologies has remained far below the levels that are needed to bring emissions down to net zero by mid-century – a critical but formidable challenge that the world needs to overcome if it is to have any chance of limiting global warming to 1.5 °C.

Positive steps were taken at the COP26 Climate Change Conference in Glasgow in November – and the amount of clean energy spending in governments economic recovery plans is increasing – but we are not yet seeing the massive level of policy and investment efforts worldwide that would be needed to move us onto a net zero pathway. Governments, companies and investors all need to do much more – and fast – in order to bring more affordable and clean energy into the system.

At the same time, Russia’s invasion of Ukraine appears likely to lead to a substantial and prolonged reduction in Russian energy supplies, most notably to Europe. Russia was the world’s largest oil and natural gas exporter in 2021. The disruption has thrown energy markets into turmoil and created major energy security and energy poverty risks worldwide today.

Investing to strengthen energy security and reach net zero

A key question is what today’s energy crisis means for fossil fuel investments if we are still to achieve our collective climate goals. Are today’s sky-high fossil fuel prices a signal to invest in additional supply or a further reason to invest in alternatives?

In the IEA’s landmark Roadmap to Net Zero Emission by 2050 published in May 2021, the analysis indicated that a massive surge in investment in renewables, energy efficiency and other clean energy technologies could drive declines in global demand for fossil fuels on a scale that would as a result require no investment in new oil and gas fields.

The need for this clean energy investment surge is greater than ever today. As the IEA has repeatedly stated, the key solution to today’s energy crisis – and to get on track for net zero emissions – is a dramatic scaling up of energy efficiency and clean energy.

The supply disruptions triggered by Russia’s war

Russia’s invasion of Ukraine has brought major disruptions to the global energy system. Taking these into account, it is clear to us that any immediate shortfalls in fossil fuel production from Russia will need to be replaced by production elsewhere – even in a world working towards net zero emissions by 2050.

On the production side, the most suitable options for this are projects with short lead times and quick payback periods. This includes, for example, shale oil and gas (which can be brought to market quickly), extending production from existing fields, and making use of natural gas that is currently flared and vented.  

Some new infrastructure may also be needed to facilitate the diversification of supply away from Russia. For example, many European countries are looking to install LNG import terminals and, with careful investment planning, there are opportunities for these to facilitate future imports of hydrogen or ammonia.

However, we must not lose sight of the fact that lasting solutions to today’s crisis lie in reducing demand via the rapid deployment of renewables, energy efficiency and other low emissions technologies, as highlighted in the IEA’s recent 10-Point Plan to Reduce the European Union’s Reliance on Russian Natural Gas. This includes making the most of nuclear power in countries around the world that see a role for it in their energy mix.

Nobody should imagine that Russia’s invasion can justify a wave of new large-scale fossil fuel infrastructure in a world that wants to limit global warming to 1.5 °C. We understand why some countries and companies are looking to move ahead with the exploration and approval of large longer-term supply projects. But it typically takes many years for such projects to start producing, so they are not a good match for our immediate energy security needs. Long-lived assets also carry a dual risk of locking in fossil fuel use that would prevent the world from meeting its climate goals – or of failing to recover their upfront development costs if the world is successful in bringing down fossil demand quickly enough to reach net zero by mid-century.

The repercussions of today’s turmoil

The higher near-term emissions we are witnessing today have serious consequences for our efforts to meet our climate goals. They need to be compensated for through even greater emissions reductions in the coming decades to remain within the stringent emissions budgets required to reach net zero by 2050. Today’s crisis risks passing an even larger environmental challenge to our younger and future generations – and it is imperative that we strive to make the additional burden as light as possible rather than adding to it.

The extraordinary financial windfall for the oil and gas sector from today’s high prices could provide a major boost to clean energy investment. Global net income from oil and gas production in 2022 is anticipated to be nearly $2 trillion higher than in 2021 and two-and-a-half times the average of the past five years, according to new IEA analysis for our World Energy Investment 2022 report that will be published in June. If the global oil and gas industry were to invest this additional income in low emissions fuels, such as hydrogen and biofuels, it would fund all of the investment needed in these fuels for the remainder of this decade in the Net Zero Emissions by 2050 Scenario. For oil and gas producing economies, this could be a once-in-a-generation opportunity to diversify their economic structures to adapt to the new global energy economy that is emerging.

There are many ways to respond to the immediate energy crisis that can pave the way to a cleaner and more secure future. I believe the world does not need to choose between solving the energy crisis and the climate crisis – and it cannot afford to ignore either of them.