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OCT 20, 2021

Good morning!

Today, we’re debuting a new recurring section of Cipher: Explained, where I’ll break down a variety of topics. First up: what’s causing the energy crisis that’s unfolding worldwide and how our clean-energy transition fits in.

We also have new data showing the role of different sectors in meeting President Biden’s climate goals.

News this morning: Big fossil fuel producers' plans far exceed climate targets, U.N. says — Reuters

EXPLAINED
What’s really driving the energy crisis and how cleantech fits in
BY: AMY HARDER
Much of the world is facing an energy crisis with skyrocketing prices of oil, natural gas and coal—or even worse, no fuel at all.

The crisis is stirring debate over this conventional wisdom: Higher prices of oil, natural gas and coal would push our society to adopt cleaner energy resources that have otherwise been too expensive.

This is generally true, but this energy crisis is not just about higher prices. It’s about higher prices in a volatile, sudden and unpredicted way brought on by a (mostly unpredicted) pandemic.

What we need is less expensive clean-energy technologies and a gradual, permanent transition to higher fossil-fuel prices.
Let’s liken it to a diet.

You could lose weight by suddenly stopping eating altogether. However, such a decision wouldn’t end well. You’d die if you stuck with it long enough. More likely, you’d eventually binge eat and counteract any weight you lost. That’s a volatile situation.

Instead, you should gradually eat fewer calories and healthier food. You should lose weight over months and years, not days and weeks.

The same goes for our energy system (except on even longer time horizons).

The global economic shutdowns caused by the pandemic last year were the equivalent of a starvation diet. Everything, including fossil-fuel production, ground to a halt.

Now, as the economy roars back, everythingincluding fossil-fuel productionis out of whack. We’re in the part of the analogy where we’re overeating. It’s not going well.

Several factors are driving the current energy crisis. Here’s three: the way electricity markets price energy, a more global market for natural gas and the variability of offshore wind power.

This last dynamic is one of the few direct connections between renewable energy and this current crisis (and it’s not the main factor). Our clean-energy transition has likely made this crisis worse, but it would have happened regardless because of the pandemic.

The crisis is unfolding at different intensities across the globe. It’s particularly acute in Europe, where German lawmakers are cutting a renewable-energy fee to ease the burden of higher energy bills. China and India are scrambling to handle fuel shortages and subsequent high prices.

Frans Timmermans, the European Union’s climate chief, recently said that about a fifth of the spike in energy prices on that continent are likely due to climate policies.

American households are projected to pay more for heating this winter, too, the U.S. Energy Information Administration said last week. U.S. gasoline prices are up more than a dollar from this time last year.

While it’s less bad in the U.S. than elsewhere, it’s still entering the political debate. Sen. Joe Manchin (D-W.Va.) cited the energy crisis as reason to not pursue big climate policy in ongoing congressional negotiations.

This crisis is likely to get worse before it gets better. But it eventually will get better, and prices will fall from their current highs. That’s because almost everything happening was not by policy design but by the knock-on effects of the pandemic.

Consumer sentiment about cars is a clear example of this dynamic. Car buyers make minor, short-term shifts in shopping habits to more fuel-efficient cars when gasoline prices are high. Once price-spikes ease, consumers revert to earlier choices.

"Economics and history suggest only sustained higher fuel prices would move the needle in terms of a permanent shift toward more efficient vehicles," said Bob McNally, president of consulting firm Rapidan Energy Group. "Any sustained higher price would require taxes. But the political will to impose higher fuel taxes remains low."

This crisis is mostly about things other than the energy transition, but the energy transition may well be the lead cause of volatility in the future if we’re not intentional about investments, the International Energy Agency said in its flagship annual report released last week.

The IEA is warning of a potential imbalance between the amount of investment going into oil and gas resources and the demand for these fuels in the future. If the demand doesn’t drop, but the investment into those resources does, that raises "the risks of higher and more volatile prices," the IEA wrote in its report.

As recently as 2018, IEA Executive Director Fatih Birol said more investment in oil and gas was needed to fix supply and demand imbalances.

The world’s zeitgeist has changed since then: Governments, finance leaders and activists all agree the world must tackle climate change.

Last week, Birol instead implored the world to invest more in cleantechnot oil and gasto fix the imbalance and ensure this crisis doesn’t derail the energy transition. Birol joins Timmermans, the EU climate leader, who has said similar things.

Amy’s Lunchtime Reads
and Hot Takes

Can Fortescue’s Andrew Forrest, a Carbon-Emitting Iron Ore Tycoon, Save the Planet?The New York Times
My take: Question headlines are a no-no in my book (you should answer, not ask questions of your readers), but that aside, this is a fun and inspiring read, particularly this quote from Forrest on his quest to help make clean steel and more: "It’s like being there at the beginning of the industrial revolution. Someday you’ll look back and say, ‘I was there.’ "

Why giant turbines are pushing the limits of possibilityBBC News
My take: For all the important talk of innovating technologies for the future, the offshore wind industry is an incredible example of innovation happening now.

Vietnam’s coal-fired power may double by 2030 under draft energy planReuters
My take: Such a plan is a stark contrast to an effort John Kerry, President Biden’s current climate envoy, was working on after his secretary of state run, which was to get Vietnam off coal.

Plant-Based Food Companies Face Critics: Environmental Advocates The New York Times
My take: This is the latest reminder that every single technology, idea, etc. willsooner or laterface criticism related to the problems they’re trying to solve. The important thing is not to dismiss these criticisms but to anticipate and address them.

How the IEA Embraced its Role as an Energy Oracle in the Climate TransitionBloomberg
My take: This article does a great job explaining the view that the IEA should change the way it presents its scenarios. The IEA has said for a long time it should present things first as they are, instead of how they should be to tackle climate change. This article explains that much of the world has used this as reason to maintain the status quo, even if the IEA never intended it that way. Still, we need to be careful that we don’t ignore reality for scenarios that may never come to pass.

Germany to slash renewable power fee to ease burden of higher energy billsReuters
My take: Here’s a prime and unfortunate example of how cause and effect don’t necessarily matter when energy prices are skyrocketing. German politicians want relief for their population, so they’re slashing energy surcharges where they feel they can and must, not because it’s renewable energy’s fault.

More of what I’m reading:
  • ‘Brown recovery’ wipes out hopes that pandemic stimulus would drive climate spending – POLITICO
  • U.S. 'faltered badly' on clean energy tech — report – E&E News (paywall)
  • India set to update 2030 climate targets under Paris Agreement – The Economic Times
  • France bets on more nuclear power in face of Europe’s energy crisis – Financial Times (paywall)
  • Big Energy Companies’ New Pitch: ‘Carbon-Neutral’ Oil and Gas – The Wall Street Journal
DATA DIVE
Heavy lifting on slashing emissions—now and later
Source: Rhodium Group
President Biden’s pledge to the Paris Climate Agreement to cut America’s emissions in half by 2030 could be met largely by reductions in the electricity sector, according to a report by the research firm Rhodium Group released Tuesday.

The report underscores two things: 1) The importance of cleaning up the electricity sector today with zero-emission sources such as wind, solar and nuclear power; and 2) the need to invest in technologies today that can clean up other sectors later to meet Biden’s 2050 goal of net-zero emissions.

The policies the group analyzed includes most of the provisions in the Senate-passed infrastructure bill and the budget reconciliation package under debate now, along with federal regulations, state policies and private company commitments (check out page 13-15 for the whole list).

Importantly though, the analysis doesn’t include provisions whose inclusion in final law is particularly uncertain, including the Clean Electricity Performance Program or a direct price on any emissions.

AND FINALLY...
Century-old hydro
Dr. Raymond Krommenacker, Cipher reader and independent economics and trade consultant in Geneva, Switzerland, writes: "This is a small local dam at Aubonne, which brings today very cheap electricity to 60,000 households. Today the total production of the 1895 dam and 2006-2008 installations amounts to some 38 million kilowatt-hours."
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