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Decarbonization Shock? Not Yet - Barış Sanlı


Make no mistakes, climate change is real, and energy transition is happening. But also, there are backlashes to the energy transition. We have seen it before in nuclear. Nuclear energy is again hailed as the climate change-friendly baseload. Every 10 or 15 years or so, we keep talking about a new nuclear age. Alas, we found ourselves in the midst of another nuclear accident. When you look at the age of the nuclear fleet worldwide, technical problems have a higher chance of happening.


The “decarbonization shock,” mentioned by a fund manager in an Financial Times article, is an interesting term. But this is not the decarbonization shock for sure. But as the article goes, it may cause as much pain as in the 1970s. But from what we see so far, 2022 has a higher chance of becoming a mixture of 2008 (high energy prices) and 2011(high food prices). The only way out is the demand destruction, just like all other crises. “Energy crisis only end when demand drops.”


This is not a decarbonization crisis or shock. The decarbonization decisions have not contributed a lot to the deficiency in oil, gas, and coal investments. The only exception is China, where urgent coal reduction targets may have skewed the other commodities and prices. A decarbonization shock will be coming in the following decade.


The major problem about the whole net-zero policy is the naivety for believing that the deficiency created by coal plant closures will be filled by the magical green finger of solar and wind. This is a typical policy failure and will haunt global prices. The required way to do it was to take pledges from countries for firm renewable/solar capacities. A firm solar capacity is a capacity required for substituting the equivalent annual energy production of a closed or to be phase-out fossil plant. That is to say, 1000 MW solar is roughly 250 MW of coal capacity equivalent. We need a metric for that. I am not someone to offer that one, but my humble suggestion is MWbe - MegaWatt baseload equivalent.


Why does “decarbonization shock” make sense? Because we are looking for someone to blame. This year it will most likely be an environmental movement. This is wrong. Their effect has not been fully materialized yet. This shock is about high economic growth, drought, and geopolitical games. Sure, environmental motives have a part, just like anyone.


What is to be done by then? We are just sleepwalking into an energy crisis. Practically there is not too much to be done. The consumer expenditures will drop than the overall demand, and prices will stabilize for some time. The most dangerous thing to do in such a crisis is to increase demand. There are some instruments like block rate tariffs or increasing the payment period for the bills. But non of them will cheer up the consumer. We have to be honest that there is nothing in sight to increase the morale of consumers.


But what will the decarbonization shock look like? For a proper decarbonization shock, the investment environment should be permanently destroyed. Such as, Saudi Arabia stopped investing in oil and gas wells and reduced employment. The oil majors start proper electricity companies. The employment in the fossil industry must have been wiped out. At least for 2 or 3 years, no investments should be made upstream. The current crisis for oil and gas prices is partly a result of low oil and gas prices. The current level will stimulate more fossil investments.


So what shall we call this situation? If you enjoy these attentive terms, maybe a “simulated decarbonization shock” is a better term. The biggest problem is, we are not addressing consumption but for production. You can not starve society for energy. Therefore, either these pledges should be renewed with “firm renewable investments,” or fossil fuels will make an even bigger comeback. The tragedy of 2022 has not started because the bills have not arrived at homes around the world. If demand drops quickly, we may see some relief by February. But it is only wishful thinking for now.