A few months ago, it looked like a cascading global power crunch was about to turn back the tide of the energy transition.
In China, shortages of coal drove prices of solid fuel to 1,908.20 yuan per metric ton ($299.29), leading to power cuts and industrial shutdowns as generators refused to sell fixed-tariff power at a loss. In Europe, the great sucking sound as coal-starved Asian grids vacuumed up liquefied natural gas combined with weak supplies from Russia and the Netherlands to send gas prices soaring. They have now hit 146.93 euros ($165.74) per megawatt-hour, more than six times their level at the start of the year.
On the eve of the COP26 climate change conference in November, these ructions led to dire warnings: The shift to zero-carbon energy was being led by well-meaning naivety, rather than a sober consideration of what a 21st-century power system needs. The energy transition would now have to go into reverse to provide the secure electricity the world requires.
With the year drawing to an end, those prognostications do not appear to be panning out. If anything, the power crunch seems to be accelerating the push away from fuel-based energy, whose volatile prices caused this crisis, and into zero-carbon power, whose cost is fixed when the project is first developed.
Look at China, which accounts for nearly a third of the world's emissions and more than half its coal consumption. The country has seen a vast behind-the-scenes battle over the past few years between its dominant coal sector and the decarbonisation policies set by President Xi Jinping.
September's power crunch led to a surge of government-mandated solid fuel production to prevent further blackouts. The 371 million tons dug up in November was a record, and roughly equivalent to a year's worth of coal consumption in the European Union.
While that mountain of soot has firmed up thin stockpiles of power plant fuel and brought down prices, there has been little change in the direction of travel. Coal-fired generation actually fell in November from a year earlier, as wind and solar took a larger share of grid power. After a slow year due to the end of renewable subsidies and wider electricity market reforms, solar installations in 2022 will jump by about 50 percent to 75 gigawatts next year, the head of the China Photovoltaic Industry Association said this month.
Combined with about 45 gigawatts of wind turbines forecast by the Global Wind Energy Council, just maintaining that pace of growth should smash through Xi's relatively conservative renewable installation plans and allow China's emissions to peak years before his 2030 target.
The same pattern is playing out elsewhere. By 2026, wind generation will roughly double 2020's level, with 3,154.8 terawatt-hours produced globally, the International Energy Agency reported this month. Solar will be closing in on a threefold expansion over the same period, hitting 2,299.8 TWh and bringing total renewable electricity generation to 11,323.5 TWh, equivalent to about 42 percent of all grid power in 2019.
Fossil fuels are not seeing anything like that trajectory. Upstream oil and gas investment will not recover to its pre-Covid levels this side of 2025, according to consultancy Rystad Energy. Reinvestment rates, the share of upstream cashflows that go to developing new petroleum fields, will remain close to record lows of 40 percent in 2022, say consultants Wood Mackenzie. With such low rates, oil companies are not betting on the future of petroleum demand — so why should anyone else?
Fuels do have some crucial advantages that will not go away, even as renewables take up a larger share of the power mix. It is precisely because they are so easy to store and transport that they have seen such dramatic price swings in recent months. Even with battery back-up, there's no wind or solar generator that can react as nimbly to sudden large-scale shifts in power demand.
Still, the point at which the share of variable wind and solar starts to impose truly challenging expenses on the grid is well above where we are now, likely in the region of 80 percent. In the UK, power bills have fallen over the past decade, even as renewables penetration has gone from around 10 percent to above 40 percent.
Meanwhile, the bankruptcy of a string of British energy suppliers in recent months has provided a potent lesson about the dangers of getting caught in the middle of a regulated retail power tariff and a volatile wholesale commodity market.
Long-run futures pricing for European natural gas is up by about a third from a year ago, making generation by that route markedly less attractive. For utilities and major consumers of energy, fixing their expenditures with a higher share of renewables looks more crucial than ever.
That same desire to stabilise companies' expenses is one of the key functions of modern financial markets. There are $8.9 trillion of interest-rate derivatives and $2.4 trillion in foreign exchange derivatives out there, helping to steady the cost of hundreds of trillions of dollars-worth of transactions.
Electricity is heading in the same direction: The scale of power purchase agreements that companies have signed to give them access to long-term fixed-price renewables broke through 100 gigawatts of generation in October, according to BloombergNEF, equivalent to all the power plants in the UK. The capacity of such deals in Europe alone increased 70 percent this year in the face of surging power costs.
It is those fundamental cost benefits, rather than the earnest promises of executives, that are ultimately driving the energy transition. The past year has seen vast and compounding supply chain problems at the world's ports, but no one is suggesting that the best solution would be to reverse globalisation.
In the same way, the shift to a more efficient and low-carbon global power system will not be halted because of the one-off coordination problems we have seen in 2021. This year's power crunch did not kill off renewables. It just made them stronger.
David Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies.
Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.