I analyze energy economics and related public policy issues.
The International Energy Agency is at it again. In May 2021, it issued an astonishing report calling for an end to all investments in oil, gas and coal to reach the fantasy goal of net zero by 2050. Now, as the world grapples with an energy crisis with surging prices of fuels, fertilizers and food, the organization issued its new report on Renewables 2022 last Tuesday. The organization’s chief Fatih Birol tweeted “big news”, claiming that “the world is set to add as much renewable power in the next 5 years as it did in the whole of the past 20 years as countries seek to take advantage of renewables’ energy security benefits”. The mainstream press loyally reported the IEA’s claims of a “renewable energy rollout ‘turbocharged’ by global energy crisis”.
Let’s look under the hood, shall we?
Renewables 2022-27: The IEA’s Outlook
In the report’s 159 pages, 52 figures and 8 tables, the IEA lays out its 5-year outlook with glowing forecasts of a ‘turbocharged’ future for solar PV and wind energy along with a limited amount of non-intermittent sources such as biofuels, hydropower, geothermal and concentrated solar power. It starts off with the observation that the world’s first “truly global” energy crisis caused by the Russian invasion of Ukraine “sparked an unprecedented momentum for renewables”.
The IEA finds that the disruptions to Russia’s supplies of fossil fuel exports have shown “the energy security benefits of domestically generated renewable electricity, leading many countries to strengthen policies supporting renewables”. The report asserts that higher fossil fuel prices worldwide have improved the competitiveness of solar PV and wind generation against other fuels.
In the 5-year forecast, the report expects renewables to account for over 90% of global electricity capacity expansion, driven by energy policy developments in China, the European Union, the United States and India. The IEA predicts that solar PV installed capacity will “surpass” that of coal by 2027. This is backed by the claim that “utility scale solar PV is the least costly option for new electricity generation in a significant majority of countries worldwide”. There is, the IEA says, “growing policy support to help consumers save money on their energy bills”.
The report encourages governments to adopt policy improvements so that they “can drastically increase renewables expansion” in line with net zero emission goals. Such “policy improvements” “would require governments to “reduce permitting and licensing timelines, extend auction schemes with clear schedules, redesign auctions to reflect the increasing cost of renewables and their energy security benefits, and improve incentive schemes for distributed solar PV generation”.
While China dominates the global solar PV supply chain overwhelmingly, the IEA believes that the US and India will progress in diversifying global manufacturing of solar modules. Global biofuels use will expand by over 20% and policy efforts are turning hydrogen production from wind and solar power (“green hydrogen”) into a “new growth area”. In sum, renewable energy development will be rapid over the next 5 years and governments need only to pursue policies that support even faster growth of the sector.
Now Back To The Real World
Along with the mainstream media, the IEA lays the blame for the energy crisis afflicting the world — the EU region in particular— on the war in Ukraine. This is myopic and dishonest. Between June 2021 and January 2022 prior to the Russian invasion of Ukraine which commenced in late February, Dutch TTF natural gas prices almost quadrupled, South African coal export prices increased by 50% and Dated Brent crude oil prices by 17%. Crude oil prices had begun their ascent earlier as the global economy recovered from the covid lockdowns leading to a recovery in oil demand while supply remained constricted. Brent crude more than doubled in price in January this year from its $40 per barrel level in October 2020.
Surging energy prices weren’t merely a result of the Russian invasion which accentuated the price shock. The spikes in fuel prices were a cumulative result of government policies in the West that focused exclusively on speculative model-based forecasts of the climate impacts of carbon emissions. These policies starved the oil, gas and coal sectors of capital investments and diverted trillions of dollars of public funds to subsidize intermittent wind and solar technologies which could not replace fossil fuels. Last month, Jeff Currie, Goldman Sachs’ Head of Commodities Research, pointed out in an interview that at end 2021, fossil fuels accounted for 81% of global energy consumption, down from 82% a decade previously. The cost for this marginal change? A cool $3.8 trillion!
The German example is illustrative. The country’s hugely expensive Energiewende (“energy transition”) strategy was adopted in 2010, aiming for a rapid transition away from fossil fuels towards reliance on renewables for the country’s energy needs. Germany shut down most of its coal and nuclear plants in short order and expected solar and wind energy to replace its dependence on fossil fuels. What transpired in fact was that its Green Party-driven imperatives to “save the planet” by replacing fossil fuels led to an over-dependence on imports of Russian fossil fuels. On the eve of Russian invasion of Ukraine, the country imported 60% of its natural gas, 50% of its coal and 35% of its oil from Russia. One looks in vain for these facts in the IEA’s report.
Fatih Birol’s assertion that the Ukraine war has led countries seek to take advantage of renewables’ “energy security benefits” is nothing short of preposterous. With Europe’s energy crisis worsening, Germans were looking to firewood to survive winter as gas prices soared, Chancellor Olaf Scholz welcomed a 15-year deal with Qatar to import LNG for its energy security benefits and the country demolished a wind farm to make room for a coal mine expansion. Europe is now shifting back to coal as its sanctions on Russian energy exports boomerang, importing coal from exporters such as South Africa, Colombia and Indonesia. The Irish are now turning to burning peat, as their forefathers did in the days of yore.
In what can only be described as a case of utter moral depravity, the EU which did all it could to force a moratorium on fossil fuel investments in Africa now calls for such investments to be encouraged provided that the fossil fuel products are exported to Europe. Ugandan president Yoweri Museveni called this situation “a truly perverse twist” and “the purest hypocrisy.”
In the UK — which leads even Germany in its zeal to replace fossil fuels — Bloomberg journalist Javier Blass tweeted two days ago that the “UK wholesale day-ahead electricity prices surge to a record high as cold, dry and calm weather cripples wind production and sends demand soaring”. While the baseload price of electricity on Monday cleared at £674 per MWh, the evening peak load cleared at a shocking price above £2,000 per MWh. As large swathes of Britain were blanketed in snow with the cold snap that descended on Monday, natural gas was producing more than half of the country’s power supply.
Intermittent wind power failed to make an appearance in calm cold weather that Germans call the “dark doldrums”. In a further paradox, Prime Minister Rishi Sunak re-introduced the ban on fracking gas in the UK — which was discarded previously by the short-lived government of Liz Truss — while agreeing to import fracked gas from the US at far greater expense. The “security benefits” of renewable energy indeed.
The IEA report states that solar will overtake coal as the largest source of electricity generation. But elsewhere in the report, it refers to solar becoming the largest source of power capacity in the world. The statement that “by 2027, the biggest source of the world’s electricity will be solar power, followed by coal, natural gas and wind” is highly misleading. It is only solar capacity which will be greater, not actual power generated.
The comparison made by the IEA between solar and coal power contributions to power supply is false, given that the average global utility-scale solar power capacity utilization factor stood at 17.2% in 2021, compared to coal which is typically over 80%. For instance, in Japan’s efficiently-run coal power plants, the capacity utilization factor stood at 95.2% in October 2022. The daily capacity factors for Europe’s offshore and onshore wind farms stood at 13.4% and 22.9% respectively two days ago. However large the capacities of wind and solar power may be, they are irrelevant when the wind does not blow and the sun does not shine.
Yet another example of misleading comparisons in the IEA report relates to costs. It asserts that utility scale solar power is the “least costly option for a significant majority of countries worldwide”. The standard method for comparing costs of electricity sources is called “Levelized Cost of Electricity (LCOE)” which is calculated by adding up the total costs of a source over its lifetime and dividing it by the total energy expected from that source over the lifetime. But this metric ($ per MWh) fails when comparing costs between “dispatchable” (available on demand) sources of electricity such as coal or natural gas with those that are intermittent and subject to the vagaries of weather such as wind and solar.
Intermittent sources of electricity such as wind and solar are parasitical in the true sense of the word. They impose costs on the electricity grid since they need back-up from coal or gas-generated sources whenever solar and wind power fail to deliver needed energy. The costs of integrating fluctuating sources of power into an electricity grid are substantial. By destabilizing the grid with intermittency, unreliable renewable energy imposes costs borne by ratepayers. Added to these are the costs of building and running transmission lines from remote grid-scale solar or wind farms to places where people actually live. Any full assessment of the costs of renewables needs to take these necessary investments into account.
If renewable energy were indeed cheaper than coal or gas generated power, as the IEA assures us, why would it be necessary to call for government restrictions on fossil fuels or subsidies to renewables, as the IEA does? Aren’t competition and market prices the best means to deliver affordable and reliable energy to consumers? It is no surprise that electricity is costliest in those countries that have achieved the greatest penetration of renewables in their power grids via green mandates such as Germany, California and South Australia.
Neither Economics Nor Physics But Green Politics
The glowing forecasts for renewable energy presented by the IEA seem free of the laws of physics and written to promote an agenda. The descent of the once leading organization — devoted to rigorous analysis of energy economics and its policy consequences for its OECD member countries — into advocacy and shoddy analysis for the Green cause is complete. Fixated on spurious models that allegedly link carbon dioxide emissions to apocalyptic forecasts of global warming, the IEA couldn’t care less about the intolerable financial burdens imposed on ordinary people that need affordable food, heating (or cooling), lighting and mobility. Worse still, it is intent on imposing its climate change predilections on the vast majority of the world’s population that live in developing countries. But people are connecting the dots between the West’s incoherent ideological energy policies and the adverse impacts on their livelihoods.
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I have worked in the oil and gas sector as an economist in both private industry and in think tanks, in Asia, the Middle East and the US over the past 25 years. I focus on global energy developments from the perspective of Asian countries that remain large markets for oil, gas and coal. I have written extensively on the areas of economic development, environment and energy economics. My publications include “Singapore in a Post-Kyoto World: Energy, Environment and the Economy” published by the Institute of Southeast Asian Studies (2015). I won the 1984 Robert S. McNamara Research Fellow award of the World Bank and received my Ph.D. in Economics in 1992.