The Infinite Variety of Circumstances

A decade after COP21 in Paris, countries are not following the "leadership" of Western energy transition pioneers. Who can blame them?

The Energy Transition is the spawn of the familiar Net-Zero Objectives - the reduction of greenhouse gas emissions (often reduced to just carbon emissions) to “Net Zero”. In an ideal world we can simply swap out coal, oil and gas with green alternatives and carry on.

In the real world it is a bit more complicated. OK, a LOT more complicated, and every country will have a different energy transition pathway. Some may be surprising.

Framework

As with any complex system it is useful to have a conceptual framework to help cut through the noise and conflicting narratives.  For Energy, the usual place to start is with the Energy Trilemma – which proposes a form of equal triangle of

• Affordability,

• Security of Supply and

• Environmental Impact.  

This representation belies the fact that it is essentially “unsolvable” because we cannot optimize for all three degrees of freedom simultaneously.  There are inherent trade-offs, improve on one axis and what do we lose the anothers?   Studying, ignoring or simply arguing about these trade-offs is what most discussions on energy are about.

Security, Affordability, Environment?

Briefly, the Energy Trilemma is not a balanced equation, it is not an equal triangle.  Rather, it is a hierarchy – with energy affordability and energy security being the foundations.  The environmental impact of energy choices should come after the foundations are well established. This will not be a popular statement, and indeed will outrage many. However, it follows from the concepts in Maslow’s hiererchy of needs.

“A person who is lacking food, safety, love, and esteem would most probably hunger for food more strongly than for anything else,” Maslow explained in his paper. Everything else, he posited, has to come after. (CNN)

And what is true of individuals, is true of societies. Leaders can comfortably suggest that Climate Change is the biggest problem facing humanity whilst there is no famine or plague aflicting their people. This approach is less appreciated when people are concerned about making it to the end of the monthly bill cycle.

Radio Silence

The existential threat of climate change has been remarkably absent from the Democratic party in recent weeks - they of the New Green Deal and Inflation Reduction (sic) Act. This surely has nothing to do with polling showing that “the climate” has dropped way down people’s priroities in the face of real and percieved threats to their immediate economic well being?¹ As I have noted prevously, the Overton Window of public opinion has shifted, but policy is like an ocean tanker that is slow to turn. Nowhere is it slower to turn than in Germany, so let’s start there.

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Germany - the Poster Problem Child

There is no doubt that in Germany environmental issues take top billing, even as they confusingly seek to decarbonization and simultaneously shut of nuclear power plants. Twenty years of this environmental myopia has completely buried any notion of realistic Energy Policy.

The Energy Transition: Switch to the future

Germany sets the course for an environmentally friendly, secure and affordable power supply.

"Energiewende," the energy transition, is Germany's path to a secure, environmentally friendly and economically successful future. It is the decision to fundamentally reform our energy system: away from nuclear power, towards renewable energy sources. (BWK 2015)

Ah yes, the usual word-salad about solving the Energy Trilemma all at the same time… that elusive “optimization”, which unfortunately isn’t aging very well….

Germany had to scramble when Russia invaded Ukraine, the sabotage of the NordStream pipeline clearly didn’t help.

Whilst the war was an important event for European electricity, we should emphasise that the problems started many months earlier and focused with the September 2021 Daunkeflaute.

Electricity Prices rise throughout 2021, well before the invasion of Ukraine (Source)

What has been demonstrated is that the “German Economic Miracle” - of having a massively powerful manufacturing economy - was predicated on abundant and cheap Russian gas. Without this, even with eye-watering amounts of wind and solar, Germany is starting down the slippery slope of deindustrialization. This sounds anodyne, but is anything but. “Deindustrialization” means fewer jobs, less tax revenues (income and corporate), reduced social services, reduced spending in infrastructure - choices about where a reduced budget will be spent. This is potentially a collapse spiral.

The UK has chose this same path and will have a similar (and potentially quicker) outcome, because it doesn’t have the industrial economy to act as a shock-adsorber.

China: It’s Complicated

Cheap energy has been a necessary foundation for becoming the world’s factory, but it came at an environmental cost. Air quality became so bad that it was politically untenable

This is certainly an environmental disaster and a public health crisis. But it also has the potential to become a huge political problem. BBC 2014

So when China ratified the Paris Accord (COP21 2015) in 2016 there was as much mention of clear skies as there was of climate change.

To protect the environment is to protect productivity and to improve the environment is to boost productivity,” Xi said. (The Guardian 2016)

Since then China has replaced old dirty coal plants with new cleaner ones, as well as installing more wind and solar than the rest of the world combined. Oh, and its on a bender with nuclear also. There is an obvious fact that as China’s prosperity grows, so its energy consumption will continue to rise - and for once the trope of “All of the above” is probably relevant. Of course that includes much more oil and gas also.

Whilst China is the fourth largest producer of oil, it is the worlds biggest importer at 11 mmbbls/day in 2023. And therein lies the deal.

Vox

If China were to act on its stated goal of “reintegtating” Taiwan by force if necessary, one of the easiest responses for Taiwan’s allies would be to cut the oil route from the Middle East and Africa. Socially and militarily this could exert extreme pressure. It is perhaps not surprising that China has a huge strategic oil reserve, potentially greater than half a billion barrels, which would clearly buy China significant time, but not enough.

Whilst China can be held up as a leader in wind and solar, batteries and EVs, one can argue that it is deploying such vast resources because it needs to reduce its strategic weakness: oil (and LNG) imports.

By this logic, China has made a different calculation – actively installing renewables to reduce its dependence on foreign sourced oil, gas and coal – and the cost is managed through the central planning and the overall strength of the economy and the fact they are buying the materials from themselves – they really do have millions of “green jobs”.

Thus for China, I would argue that energy security is the top priority, affordability is a managed downside and the much touted environmental elements (with exception of air quality), are a smoke-screen (if you’ll excuse the metaphor).

India: “Moral duty to ensure the best deal”.

The world's second-largest country and sixth-largest economy was called out for buying Russian oil after the West tried to impose sanctions. India emerged as Russia’s largest oil customer after China.

"We have been very open and honest about our interests. I have a country with a per capita income of USD 2000. These are not people who can afford higher energy prices. It's my moral duty to ensure the best deal" Jaishankar said.

It is clear from this that affordability is India’s priority - and it is hard to argue with that.

“As the world’s third-largest consumer of oil and gas, a consumer where the levels of income are not very high, it is our fundamental obligation to ensure that the Indian consumer has the best possible access on the most advantageous terms to international markets” said India’s Foreign Minister, Subrahmanyam Jaishankar in 2022

This pragmatic view necessitated a posture of "strategic ambivalence," balancing relations between Washington and Moscow. It could be argued that such an approach could risk having less security of supply - had the West been more draconian with sanctions - but a $35/bbl discount was too important.

Pakistan: A Painful Slap in the Face

As noted above, in 2022 Europe was paying “whatever it takes” and “buying up everything on the market”. This was expensive and was felt by European consumers, but there was a knock-on effect. The amount of gas available was finite and this new demand (and Russia not being able to divert its gas to new markets) meant that there was someone missing out - price rationing. Pakistan may have felt good about itself - it had LNG cargos locked-in at contracted prices for delivery.

Shockingly Gunvor (and ENI) broke their LNG delivery contracts, paying a break fee but still making a reported 550m Euros on price arbitrage by selling to Europe.

Pakistan had to scramble and plan for a world in which it could be shut out of the global energy market in the blink of an eye. Security of supply and affordability took precedence: Coal was the obvious candidate, cheap, locally available and reliable. Discounted Russian oil was also a no-brainer. Pakistan has a population of 230million and cannot have disrupted energy supplies.

Japan - Resource Poor, Energy Smart

Japan is famously “resource poor” and probably because of this it has a high “Energy Intelligence” – cheap and reliable energy are not taken for granted. Without resources, Japan became an industrial powerhouse through manufacturing and technology. Security and Affordability were and are key.

In 2022, net imports accounted for 90 percent of Japan’s total energy supply (the energy required to supply end users, including through transformation into fuels or electricity). This import dependence shapes Japan’s energy choices and planning.

Transition pathways will vary in every country, and Japan naturally takes a different view on energy matters than resource-rich countries. (CSIS)

The latter sentence we can translate from policy-speak to be “A person who is lacking food, safety, love, and esteem would most probably hunger for food more strongly than for anything else” Everything else has to come after.

Transition pathways come after security and affordability.

One could continue country by country: the UK doubling-down on Germany’s failing model, NZ reversing its oil and gas exploration ban, Canada teeing up a Carbon Tax election - but you get the idea.

Formerly Rich Countries

Within the club of rich nations after COP 21 in Paris in 2015, there was a happy consensus (and equally as much conceit) that simply providing "leadership" in the Energy Transition would be sufficient to "bring everyone along".

Almost a decade later, we see that energy transition pathways vary significantly from country to country. Unsprisingly, we see "horses for courses" due to unique economic, political, and social contexts.

Ironically, the more pragmatic energy policies of many of the non-leader countries are now looking quite attractive to voters in the (formerly) rich-country club.

1. A well argued opinion piece suggesting that this is pure electioneering - with the NGD/IRA ready to be accelerated post a Democratic election win, despite being mum on it whilst campaigning. A Trojan Horse of epic proportions