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Opinion

Energy crisis should force Europe and China to rethink green agendas

Gas, power shortages point to serious flaws in transition policies

| China
China is facing a severe scarcity of coal.   © Reuters

Vandana Hari is founder of Singapore-based Vanda Insights, which tracks energy markets.

The last thing the world economy needed as it struggled to regain momentum after the COVID delta variant wave was a widespread energy crisis fanning the flames of inflation, dealing a blow to manufacturers already hamstrung by supply chain snarls, and jeopardizing the ability of central banks to sustain monetary stimulus.

A confluence of factors, brewing over several months, has culminated in the severe gas and electricity shortages and price spikes that are plaguing Europe and threatening to worsen through the winter peak demand season. The same is true for China, which is facing a severe scarcity of coal, its main source of power generation.

COVID-induced disruptions and free-market forces have played a part, no doubt. But shortsighted, ham-handed government policies to decarbonize the energy sector are also to blame, and the sooner countries realize this, the better their chances of averting more such disasters.

Some see poetic justice in major European economies desperately lapping up supplies of natural gas and coal at any cost after eschewing their production and withdrawing financing to focus squarely on greener alternatives, such as renewables for power generation, even though they are not very scalable or reliable.

Others see the irony in this situation coming to pass just ahead of next month's 26th U.N. Climate Change Conference of the Parties, or COP26, where countries are expected to double down on pledges to forsake traditional fuels faster than before to meet net-zero emission targets.

Another set of industry stakeholders and activists have renewed calls for hastening the move away from fossil fuels, puzzlingly implying that it will somehow avert a recurrence of future energy shortage upheavals.

In short, the situation has generated a lot of noise and confusion, especially for the average person in the street, who has been sold the utopian dream of being able to enjoy clean air and blue skies without giving up on any of the modern-day comforts made possible by a reliable and growing supply of electricity and other sources of fossil fuel-reliant energy.

This costly, debilitating energy crisis should serve as a wake-up call for policymakers. They can neither afford confusion nor naivete over the perils of racing through an energy transition that jeopardizes the security of supply.

A steady, reliable and affordable supply of coal, gas, oil, electricity and all available forms of energy is nonnegotiable to protect the world's fragile post-COVID economic recovery, especially as it is already being threatened by the specter of stagflation -- high inflation accompanied by slow economic growth -- and the erosion of consumers' purchasing power.

With European natural gas in storage running precariously low and benchmark prices at a Dutch trading hub surging nearly 400% since January, the region's despairing power producers have begun asking Russia for more coal. However, ever since Europe began shunning that dirty fossil fuel, Russia has rerouted its exports to Asia.

That means Europe may now need to turn to the U.S. for coal. Adding insult to injury, the EU's own climate policy requires the purchase of carbon permits, whose prices have doubled since the start of the year, heaping more pressure on the cost to consumers.

Thanks to fierce competition for imported gas, especially with China stepping up buying, spot liquefied natural gas prices in Asia hit all-time highs at the end of September, the oil equivalent of nearly $200 per barrel.

A super large LNG ship berths at the Xin'ao Zhoushan LNG terminal: spot LNG prices in Asia hit all-time highs at the end of September.   © Imaginechina/AP

The crisis has spiraled out beyond Europe and China, thanks to highly interconnected global energy markets. High LNG prices have prompted some power utilities in Japan, despite their higher tolerance for steep prices, to switch to oil. Some power producers in India, caught between high imported gas prices and abnormally low coal stocks because they had reduced costly imports, are now turning to oil feedstock.

With the market expecting rising demand for oil as a substitute for gas and coal, and the OPEC and non-OPEC alliance deciding at its meeting on Oct. 4 not to put any more supply into the market than its pre-agreed 400,000 barrels per day monthly increment, Brent crude prices have surged to three-year highs. Oil prices percolate through the global economy much more than gas or coal, causing wider inflationary pressures.

In Europe, ministers are struggling to agree on a common or concerted response to secure supplies and relieve pressures, even as European Commission officials have warned them not to overreact, and to take targeted and temporary action to avoid contradicting EU climate goals.

In China, the central government played a key role in precipitating the current crisis by imposing strict curbs on more than a dozen provinces and regions to slash their energy usage, and dampen coal mining and burning in pursuit of its environmental agenda.

Then it recently performed a volte-face by instructing state-owned energy giants to do everything necessary to procure adequate supplies of all kinds of fuels for winter. That means China is now effectively exporting pollution as well as inflation.

The biggest mistake these governments risk making is treating their current predicament as either transitory or a one-off occurrence and continuing to write off traditional fuels in pursuit of ambitious environmental targets with little regard to energy supply security.

The need of the hour is a swift switch to a more balanced approach, involving technological solutions to burn fossil fuels more efficiently with minimized carbon emissions while continuing to accelerate development of cleaner alternatives that are economical and can be scaled up.

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