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Will the energy crisis be the push we needed for a green transition?

Russian invasion of Ukraine has triggered a massive energy crisis by causing an increase in the cost of fossil fuel. All consumers of energy have felt the impact of the crisis by experiencing an increase in their bills. But the changes may not be just temporary and the crisis could potentially set some structural changes in the way in which we consume energy, increasing the pace of the transition to clean and renewable resources.

The increase in prices showed the criticality for countries to rely on fossil fuels. Firstly, this exposes them to the the changes in price on the market. Moreover, the fact that these resources are coming from other countries, makes the consumer countries subject to the availability of fossil fuels in exporting countries which makes importing countries not self-sufficient. The imminent necessity to switch to renewable sources also raises the need for countries to develop their own capabilities when it comes to the energy market, in order to become competitive at an international level.

However, the increasing prices of non-renewable energies have the potential to boost investment and speed up the switch to clean sources of energy. Data from the International Energy Agency (IEA) shows that countries are responding to the surge in prices by reinforcing their rate of investment in clean-energy technologies. Acceleration of investment is supported by the favorable policy context which includes projects like the Fit for 55 package and REPowerEU in the European Union, America’s Inflation Reduction Act in the US, Japan’s Green Transformation Program and ambitious investment programs in China and India.

It is important to point out how these push towards clean energy has been driven by economic needs rather than by environmental concerns. On the one hand, what matters is that the change finally happens, whatever the driving cause, on the other, however, this will likely result in a less orderly transition, which will carry some consequences.

When discussing the need for an energetic transition, economists have often suggested the implementation of a tax on fossil fuels. Because of the energy crisis, however, the switch is happening without any tax being implemented and this will likely have some redistribution effects. Had governments set this tax, this would have generated government revenues which could have been redistributed to those who were hit by the effects of the transition or directed towards projects of innovation. But because no tax was involved in the process, the increase in the use of renewable sources will instead lead to the redistribution of wealth in a way in which producer countries will benefit from the ability to export these new sources of energy, while consumer countries will suffer the cost of importing it.

Indeed, one issue to consider when thinking of a green transition is its effect on the least developed countries. Because of the high costs of energy, developing and emerging countries could face a significant divide from the developed ones. Consider the cost of the infrastructure necessary to support these projects. For example, the cost of capital for a solar panel in emerging countries like Brazil and Indonesia was between two and three times higher than in developed countries in 2021. For this reason, richer countries will need to take an empathetic and morally coherent approach to the transition by boosting the chances to successfully go through with this development for countries which need it the most.

As mentioned, the conditions in which the need for a fast transition rose, leave a lot of room for a messier transition. What this means is that, because of the increasing inflation caused by the increase in prices of fossil fuels and the tightening monetary policies put in place by central banks, the cost of capital is likely to increase significantly. This problem is accentuated by the increase in price volatility. As a consequence, investments will likely not be easy to obtain. The clean energy sector is still very new and the returns that it will generate are not certain. This causes investors to refrain from putting their money in these projects, which results in delays in investments.

Here is where public banks start to play a key role. They play an important role in directing investment, hence they could grant some large sized loans to finance the transition. Moreover, they could use technical assistance facilities to help clean energy companies set up new projects and they could furthermore grant these companies access to financing.

Will the energy crisis be enough of a wakeup call to finally make a change? What is for sure is that institutions need to make the best out of this situation and provide efficient solutions for the power of green energies to break through.

By Alice Sleiman

Sources:

https://www.eib.org/en/stories/energy-crisis-net-zero-transition

https://www.economist.com/by-invitation/2022/11/05/the-global-energy-crisis-may-be-accelerating-decarbonisation-efforts-says-fatih-birol

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