By Gabrielle Reid , Associate Director, Strategic Intelligence, at S-RM
Last year, countries across the globe had to not only adapt to a post-pandemic environment and the economic consequences that followed, but also deal with the outbreak of war in a key region for European energy supply – with similar global economic effects. Now in 2023, heightened anxiety around Russia’s spring offensive plans and China-Taiwan tensions are deepening this economic uncertainty, prompting global energy leaders to revisit how they balance energy security and the energy transition.
This is understandable given the global backdrop. Current economic headwinds cannot be ignored, particularly by an industry as systematically important to society as the energy sector.
In the West, rising inflation and the cost-of-living crisis will more than likely cause a spike in unemployment numbers, labour action, and potential anti-government protests. When looking at emerging markets, they too could be facing even harsher ramifications such as food insecurity and extreme levels of poverty.
In the ‘West versus the Rest’ game, countries such as Turkey, India, and Saudi Arabia – the latter a vital player in the global oil supply within OPEC+ and therefore crucial in achieving global net zero ambitions – will also increase their influence. However, with a global recession on the cards, this may bring limitations to these goals.
More recently, many consider that short-term results will be the priority. Security trumps transition.
However, this period of geopolitical instability has also shone a light on the global dependency on fossil fuels, meaning that governments are perhaps more conscious than ever of continuing the energy transition, accepting the associated costs and disturbance to achieve longer-term energy security despite short term disruption.
This longer-term thinking is good for the planet, but also good for building greater resilience to our energy supply.
The hurdles ahead
And yet, progressing the energy transition is equally subject to the supply, security and stability issues facing the global energy industry today.
To start, there is now greater attention being paid to the cluster of minerals such as cobalt, lithium, copper and rare earths that are integral components in the technology used in renewable energy generation.
Many of these minerals are mined in countries more exposed to geopolitical disruption and this has caused further issues to both production and the associated supply chains. A number of factors cause this vulnerability, encompassing both geopolitical risks – deriving from trade restrictions or the dominance of key producers such as China – as well as local market risks. One need only look at the current situation in Sudan, a source of cobalt and nickel, amongst other minerals, to see how one nation’s instability can disrupt an entire region.
Looking at legislation too, countries are on high alert to keep their local resources protected, which translates to more regulation and protectionist-leaning laws. We are seeing a rising trend of retaliation and tit-for-tat when it comes to trade restrictions. As competition heats up for the materials required for renewable energy production, security of supply again becomes an issue.
Looking up the value chain, customers will be searching for new, innovative solutions to their dilemma between choosing affordable and sustainable products. This applies to their energy providers as much as their retail spending.
Planning is key
Amidst all this change for the energy sector, there is a silver lining. In the midst of our unsteady geopolitical backdrop, businesses fighting this constant battle between sustainability and practicality have learned plenty of lessons from the challenges of past events.
If the Covid-19 pandemic highlighted anything, it was that companies should be well-informed of their vulnerabilities, especially around global supply chains and their ability to withstand and tackle a widespread crisis.
The invasion of Ukraine, in turn, has demonstrated that preparing for a restructuring of markets from friends to potential enemies is vital. Although it’s impossible to plan for every Black Swan event, planning for archetypal consequences of large-scale disruptions will prepare energy providers for various scenarios, whether the exposure is around business reputation, compliance, or operational risks.
Lastly, the unforeseen switch to a high-interest rate, high inflation economic background in the West has put a spotlight on the macro effects of downstream costs of energy disruption to consumers. In an effort to tackle inflation, governments are now working more closely with energy suppliers to curb prices, creating partnerships that benefit the energy transition, too.
While industry professionals may worry that the past few years have jeopardised the progress made towards the energy transition, this stress has actually highlighted the resilience of many essential organisations. We’ve seen that when organisations properly invest in their resilience they are able to mitigate high levels of risk.
Indeed, with enough planning and recognition of lessons learned over the past years, it could be that the energy sector will be able to address security and transition in one fell swoop.