What Higher and Volatile Energy Prices Mean for the Clean Energy Transition

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After Russia invaded Ukraine, energy prices skyrocketed. U.S. crude oil prices hit $130 on March 6, the highest since July 2008. About a week later U.S. gasoline prices hit a record high of $4.33 the gallon. Around the same time, natural gas futures in the European Union reached an all-time high of €345 per megawatt hour.

Since then, gas and natural gas prices have peaked, and gas prices should eventually come down, albeit more slowly than President Joe Biden would like.

Higher and more volatile energy prices will be a catalyst for individual and global efforts to decarbonize energy networks, essential to meeting climate change goals. But energy prices alone will not be a tipping point that prompts society to adopt cleaner energy sources, experts say. Government intervention and widespread education are also essential.

Oil producers will drill more

If oil prices remain high, it could lead to a rush to drill more oil as oil companies seek to profit from higher prices, according to John Larsen, a partner at Rhodium Group where he leads the company’s research on the energy system and climate policy in the United States.

This, in turn, could flood supply and possibly drive prices down.

That’s exactly what Energy Secretary Jennifer Granholm asked when oil was $109 a barrel and gasoline was $4.25 at the pump.

“We are on a war footing – an emergency – and we need to responsibly increase near-term supply where we can at this time to stabilize the market and minimize harm to American families,” Granholm said. , speaking to an industry of energy executives in Houston earlier in March. She then called on leaders to produce more oil and gas.

Increasing fossil fuel production runs counter to urgent calls for decarbonization to slow global warming. But it’s temporary, and therefore reasonable, according to Larsen. “Personally, I don’t think this will compromise the achievement of long-term climate goals, as long as there is a serious dual commitment to move from here to this transition,” he told CNBC.

Additionally, the oil and gas industries face the same tight labor market as the rest of the country, and so they may face challenges in ramping up the digging and production of oil wells as fast as they want.

“Like almost everything else in the United States, labor is really scarce. It’s hard to hire people, it’s hard to get equipment. Supply chains are really tight” said Ryan Kellogg, an affiliate professor at the University of Chicago’s Energy Policy Institute. (EPIC) and professor at the Harris School of Public Policy, told CNBC. Overall unemployment fell to 3.8% in February, according to the Labor Department.

Consumers will seek more efficiency

High gas prices at the pump will encourage consumers to switch from a conventional car to other types of transport, whether it’s a fuel-efficient car or an electric vehicle, said Kellogg at CNBC.

“These higher prices — even if short-lived, just exposed to this higher price volatility — are going to get consumers thinking about alternatives,” Kellogg said.

Consumers may struggle to find an electric vehicle even if they want one. Inventories of new cars and trucks, including electric vehicles, are very low due to, among other things, supply chain issues.

Frank Dalene, president and CEO of Telemark, a luxury building services company he co-founded with his brother Roy in 1978, specializes in energy efficiency and building renewable energy homes on Long Island At New York. Energy price increases are driving interest in its services, but it’s more important to educate consumers about the money they can save by increasing inefficiency.

“Education is, I believe, the most important thing,” Dalene told CNBC. “We justify everything based on cost,” Dalene said, which means they clearly explain how many years it will take before the customer gets their money back. “And it was very successful.”

Investors will take a fresh look at renewable energy

“All else equal in the medium term, higher prices are good for clean energy,” Larsen told CNBC.

In addition to their decarbonization benefits, clean energy investments are also becoming attractive as a way to protect the US economy from fluctuating energy prices due to geopolitical shifts.

“‘Drill drill’ is going to help with the awards now, next year,” Kellogg said. “It won’t help us every time the next crisis comes in 10 years, or every time it does.” But decarbonization will help protect against geopolitical oil shocks.

While conditions make new energy infrastructure more attractive, modifying existing technology is met with resistance, simply because it is new and requires change. Higher energy prices serve to reduce investment anxiety and risk, says Steve Crolius, president of Carbon Neutral Consulting and former climate adviser at the Clinton Foundation. Crolius advises entrepreneurs and project developers interested in investing in alternative fuel sources.

“If one of them feels anxious, they probably feel less anxious,” Crolius said. “The mountain to climb becomes much smaller.”

government is needed

Even though more volatile and higher energy prices will generally be a catalyst for renewable energy investments for consumers and large investors, the price differential will not be enough to fully shift to energy conservation. own.

“The only thing that really accelerates the deployment of technology at the scale you really need is something like serious EPA regulation of vehicles and power plants coupled with tax credits, like those of Build Back Better,” Larsen said, referring to Biden’s Policy Agenda which included more aggressive climate provisions. This bill languished in Congress after being opposed by Sen. Joe Manchin, D.-W.Va.

Even though the installation of renewable energy has accelerated, Rhodium’s projections show that investments need to be twice as high as the 2021 peak, every year by 2030, to reduce CO2 emissions from electricity generation by 80% – a milestone on the White House’s proposed path to 100% clean energy by 2035.

“I don’t see how a simple change in fossil fuel prices catalyzes that,” Larsen said.

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