Why we need to rethink energy security in the transition to net-zero

As we look back at 2022, energy security has reclaimed its spot as the top concern of energy policy-makers and industry leaders. Since the oil crises of the 1970s, broad complacency set in about energy security. People developed a collective amnesia about the risks to energy security in an era of abundance and affordability.

As concern has grown over the dire state of the climate, the risks to energy security have not gone away; in fact, new ones have emerged, and 2022 offered a reminder that energy security demands attention not only to avoid economic and geopolitical turmoil but also to avoid undermining the energy transition itself.

Putin’s unjustified invasion of Ukraine triggered the past year’s energy crisis. However, attributing all of today’s crises to the war would also be ignoring other underlying risks to energy security. Even in the absence of the attack, risks to energy security would loom on the horizon as an unprecedented upheaval of the energy sector unfolds in unpredictable ways. The transition to clean energy is among the most geopolitically disruptive forces of the 21^st century, even while the prospect of a net-zero future will mitigate some traditional energy security risks.

For decades, geopolitical risks to energy have largely centered on the availability of sufficient oil and gas at affordable prices, whether it be the Arab oil embargo of 1973 or the controversial Nordstream 2 pipeline. These “traditional” threats to energy security will be greatly diminished in a world of clean energy. Yet new risks will emerge – both from new clean energy sources and from the multi-decade process of transition during which the old geopolitics of oil and gas will coexist alongside the new geopolitics of clean energy.

The risks of a disorderly energy transition were apparent even before Russia invaded Ukraine. Indeed, Europe faced an energy crisis last winter that led to soaring electricity prices and utility bankruptcies as it struggled to cope not only with initial cuts to the Russian gas supply but also with more intermittent electricity sources and fewer buffers to handle unexpected shocks.

A key risk to energy security today is a mismanaged energy transition that fails to synchronize reductions in fossil fuel supply and investment with reductions in fossil fuel consumption. At present, the world is underinvesting in all forms of energy. Years of mounting pressures to divest from oil and gas and poor industry returns have reduced oil and gas investment to levels consistent with all nations meeting their announced climate pledges. Yet few countries are on track to do so; the International Energy Agency recently projected that coal consumption will reach a record high in 2022. Meanwhile, clean energy investment needs to increase by a factor of 2.4 by 2030 in order to change the current outlook for oil and gas demand and get countries on track for their stated targets.

If investment in oil and gas falls, but demand does not, there are two consequences for energy security. First, prices spike in a tight market, increasing the geopolitical leverage of producers such as Saudi Arabia, which can buffer shocks. Second, because the pullback from oil and gas investment is largely coming from publicly-owned Western banks and oil firms, there are more opportunities for state-owned companies to fill the void.

Consider that while the global majors – including Shell, Chevron, Exxon, BP, and Total – attract the most attention, they only produce 15% of the world’s oil and gas supply. Indeed, Saudi Arabia and the United Arab Emirates are spending tens of billions of dollars on increasing the oil supply in the coming years to do just that. And once the energy transition starts to curb oil demand, a growing share of the shrinking pie will come from OPEC members. Petrostates may thus enjoy “feast before famine,” with several decades of heightened geopolitical influence during the energy transition before their roles wane.

Eventually, the old geopolitics of oil and gas will fade, but the new world of clean energy will also present many of its own geopolitical risks, several of which were already evident in 2022. A clean energy future, for example, will require a vast increase in materials such as lithium and copper that are needed for batteries, solar panels, and other clean energy components. If all governments follow through on their current pledges, demand for these materials will more than double by 2030.

Today, the vast majority of these minerals are refined and processed in China and many are mined by Chinese firms around the world. Western governments have taken steps to diversify the supply chains for critical minerals, but face challenges such as the long timelines for mine development, difficulty in permitting such projects, and the geographic concentration of certain minerals.

An energy system based on clean electricity would reduce the security risks presented by fossil fuels, but also present risks of its own. Because wind and solar power are intermittent, the need for flexibility of other sources of electricity to pick up the slack becomes greater than today’s system can deliver. Moreover, a decarbonized system requires far more electricity for cars, heat, and other needs met by oil and gas today. For countries that depend on trade across borders for those sources of zero-carbon electricity, new energy security risks may arise, as electricity is harder to store or buy from other suppliers than oil and gas. A more electrified, digitalized, and connected smart grid may also be more vulnerable to cyberattacks.

As countries seek to secure supply chains, create jobs, and boost clean energy, industrial policy is also back in vogue – bringing with it the risks of a trade conflict. Protectionist impulses risk both energy security and the clean energy transition, as achieving ambitious goals like net zero by 2050 will require vastly greater trade in critical minerals, low-carbon fuels, and other clean energy technologies. The hostile European response to the large tax incentives in America’s Inflation Reduction Act – many of which come with “Made in the USA” requirements – is an example of the trade risks on the horizon. Further trade risks will come from using economic tools such as tariffs to compel other countries to take stronger climate action. The recent agreement between the US and the European Union to restrict imports of steel and aluminum that do not meet certain emission standards is just one example.

Finally, the clean energy transition risks exacerbating already growing tensions between wealthy and poorer countries that were on full display at this year’s UN climate meetings in Egypt. Leaders in emerging economies are increasingly resentful of pressures to increase their climate ambition. This frustration has intensified as developing countries see many rich nations fail to offer promised climate assistance or refuse to finance hydrocarbon projects in poorer parts of the world, even as Europeans rush to build more gas infrastructure to cope with today’s energy crisis.

To be clear, these new energy security risks arising from clean energy are not a reason to delay that transition. On the contrary, the pace of decarbonization must accelerate. Whatever the security risks of a clean energy transition, they are dwarfed by the risks of not making that transition, as more severe droughts, floods and heatwaves threaten food and water security and increase both conflict and migration. Rather, the reason to identify the coming energy security risks arising from the transition is to allow policy-makers and business leaders to prepare for them and develop new tools to mitigate them. Failure to do so will not only be economically and geopolitically harmful, but will risk stymying the energy transition itself by undermining public support for the actions needed to get the world on track for a net-zero future.