Russia-Ukraine: short-term risks for electricity, but an acceleration of the energy transition

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As the Russian-Ukrainian conflict continues to rage, global energy markets are experiencing unprecedented volatility, with the power and renewables sector being no exception. On the back of global fuel markets already strained since last year, the conflict has pushed spot prices for coal and gas at record highs, sending wholesale electricity prices skyrocketing around the world.

A recent report by S&P Global titled “Russian-Ukrainian Crisis: Implications for Global Electricity and Renewables” looks at the implications of the conflict for global electricity and renewable energy markets.

Electricity prices on the rise around the world

Coal and gas markets are expected to remain tight in the near term, which will continue to put pressure on electricity prices. While the situation is particularly significant in Europe given its reliance on Russian fuel imports, the impacts are being felt globally, although to varying degrees depending on regional exposure. spot fuel markets. Asia, for example, is less dependent on spot LNG purchases, with much of the region’s LNG supply under long-term contracts.

As Europe seeks to reduce its dependence on Russian fuel imports, the region seeks alternative sources of fossil fuel supply and is willing to pay a premium, putting further pressure on prices . In response, fuel suppliers are beginning to divert supplies from growing markets such as Asia to Europe.

With coal prices rising, markets in South and Southeast Asia are shunning coal imports as prices remain out of their reach and many are expected to cut power generation. A few markets with abundant domestic coal resources, such as Indonesia, China and India, could boost domestic production.

On the other hand, high and volatile coal and gas prices serve as a catalyst for more investment in alternative energy, discussed below.

Russia-Ukraine-impact-of-the-war-on-the-electricity-markets

The risk of power cuts on the rise

High coal and gas prices are likely to further complicate the reliability of global electricity supply, which has already been under increased stress recently.

In particular, the risks of electricity supply disruptions are expected to be higher in markets such as South and Southeast Asia, where accessibility is a concern. In markets with a regulated tariff structure, such as India and South Korea, the financial position of utilities and distribution companies could also be strained, as they are unlikely to pass on the spike in fuel prices on consumers, which will further strain the system and increase the risk of charging. loss.

In China, the situation is less severe compared to last year given weaker electricity demand growth expectations following recent Covid-19 lockdowns, although the risk of electricity disruption remains, especially if demand picks up later and weak hydro conditions in the south return.

In some Latin American markets, such as Brazil, heavy rainfall is reducing the region’s exposure to global gas prices.

Meanwhile, in Europe, the concern is currently less about electricity supply disruptions and more about affordability, with European governments starting to step in with measures to reduce the impact of high energy prices. on consumers.

Short term: Focus on energy security; potentially higher coal and nuclear generation

The Ukrainian crisis has brought energy security to the fore, in addition to a renewed focus on cybersecurity.

In Europe, reducing dependence on gas in the near term will likely lead to the return or postponement of coal or nuclear capacity shutdowns, although the region is also dependent on uranium from Russia.

The surge in LNG prices could also lead to increased coal production in Asian markets, depending on international coal prices and production in domestic coal markets. In Southeast Asia, returning to coal is not difficult, given the region’s relatively young coal fleet, and could also alleviate cost concerns for countries with domestic coal resources such as India. Indonesia.

Sustained high gas prices could also keep coal production high in the United States. Higher coal production could in turn lead to increased carbon emissions from the electricity sector in the short term.

In Asian OECD markets, such as Japan and South Korea, governments are also focusing on increasing nuclear power. For example, South Korea’s newly elected President Yoon Suk-yeol said he would reverse the previous administration’s policy of phasing out nuclear power and instead make the country an energy leader. nuclear.

Medium-long term: accelerating the energy transition

While in the short term some markets may revert to coal generation to ensure supply reliability, in the medium to long term there will likely be momentum to accelerate the energy transition and eventually wean off reliance on fossil fuels. , even if the rhythm of the transition probably differs according to the regions. An accelerated energy transition could also mean a decrease in cumulative carbon emissions, even if emissions increase or stagnate in the short term.

However, accelerating the transition to clean energy highlights other challenges that will need to be addressed. A major challenge concerns infrastructure.

In Europe, local opposition to the development of renewable energy and associated infrastructure remains a significant obstacle to the region’s renewable energy ambition.

In the United States, hundreds of gigawatts of renewable energy capacity are tied up in interconnection queues, driving up costs and limiting the rate of additions.

Another challenge is clean energy supply chains. Already, wind and solar investment costs have risen over the past year, a reversal of more than a decade of rapid declines – although the magnitude of the increase pales in comparison to the price spike coal and gas.

As power systems decarbonize, new flexible, carbon-free technologies – some of which are still expensive today and not yet commercially available for large-scale deployment – ​​will also be key to ensuring grid reliability. , especially as climate change brings more extreme events and unpredictable weather. These challenges are explained in more detail in this previous article.

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Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.