Europe’s energy crisis exposes hidden dangers of ignoring security and reliability

As published in The Globe and Mail

The Russian invasion of Ukraine has changed the world. It is a dark and demoralizing moment in history, with a huge loss of human life, massive destruction of property and untold suffering.

It has also triggered an energy crisis, exposing Europe’s reliance on Russia as an oil and gas producer and the continent’s inability to depend on its own sources. But this dilemma will not lead to an end or move away from global decarbonization commitments. Nor will it lead an end or a reversal of environmental, social and governance, or ESG, aspirations.

What it does mean is the emergence of a more holistic and pragmatic mindset. This will support a reordering of the priorities of energy and climate policy, and will catalyze reconsiderations of supply chain, trade-policy and market-concentration risks. It may also change the dynamics of global climate leadership. Finally, it is very likely to alter the time frames of decarbonization, at least for certain key countries.

The long road to decarbonization has shifted from ambition to implementation, and the current crisis in Europe is the first major “in your face” example of implementation risk.

Consider which of the following objectives is the most important: The reliability of energy for heat within a cold winter? The security of supply to avoid extreme disruption caused by geopolitical events? Avoiding the affordability shock of runaway energy prices? Or meeting carbon-emission targets as part of long-term decarbonization commitments?

Surely it is all of the above. However, in the rush by European leadership in moving the world toward a low-carbon future, the energy-policy basics of reliability, security and affordability were all neglected. The imperative of meeting decarbonization objectives created a narrowness of perspective that had a blinding effect.

Well before the Russian invasion, the reliability of energy in most European countries was already showing alarming signs of vulnerability. Energy prices had increased by 40 per cent to 50 per cent in the latter half of 2021, largely because, strangely, the wind stopped blowing and backup capacity was lacking.

The reliability challenge foreshadowed a larger problem: a willingness to accept extreme security risk. As Europe was phasing out base-load coal, zero-emitting nuclear power and inhibiting or rejecting natural gas development – all for environmental reasons – they walked right into a massive energy-security issue with an overdependence on a notoriously unreliable supplier.

Then there’s the affordability challenge: As energy usage cuts across all activities of society, the painful impacts of price shocks are felt by everybody, and the knock-on effects are alarming. The price of fertilizer derived from natural gas has gone vertical. The same for diesel fuel for farm equipment.

The Governor of the Bank of England recently claimed that Britain faced “apocalyptic” rises in food prices. There are also disturbing impacts on social and political stability. The IMF has noted that 60 per cent of low-income countries are now at high risk of debt distress, compared with 30 per cent in 2015.

The narrowness of policy-driven decarbonization has also exposed the limitations of ESG. These aspirations are fantastic, but they represent an incomplete set of society’s needs and priorities. It is harmful if the basics of economics – affordability, jobs, income, investment, competitiveness and productivity – are ignored in pursuit of these important ideals.

As we continue the implementation stage of the energy transition, other profound risks are coming into view. The risk of sustained weak international co-operation, which the IEA estimates could add 40 years to the net-zero-by-2050 goal; relatively weak and potentially unattainable capital investment to enable the transition; and a supply and demand mismatch for the essential minerals needed in the energy transition, with sources concentrated in China and Russia, and long time frames to develop new supply.

The consequence of these major risks are many, but all will most likely increase costs and extend the time frames for decarbonization and net zero.

The main lesson learned from the Europe crisis for Canada, and all countries of the world, is the danger of rigidity and narrowness of perspective. The mindset needed to support the energy transition must be holistic and grounded in practical realities, including realistic time frames and a deep understanding of risks.