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05 May 2022

Has Russia Inadvertently Sped up the Shift to Renewables?

There is no sugar-coating the fact that Russia is the globe’s leading energy exporter, which makes for a complex situation following Russia’s invasion of Ukraine and the use of political and economic sanctions.
 
In recent years, Europe has become dependent on importing cheap Russian energy. Around 25% of Europe’s crude oil imports and 40% of its natural gas imports come from Russia, partly due to a natural gas production decline in Europe and production limits in the Netherlands and the Black Sea. Recent events have underlined the risk of this dependence and opponents of Russia’s activities, particularly countries of the West, are becoming more open to the idea of targeting Russian oil and gas exports for sanctions, even if it damages their economies in the process. Germany has halted the final approval of the Nord Stream 2, an £8.3bn, 745-mile pipeline stretching across the Baltic Sea. The project was completed in September 2021 and was awaiting necessary European regulatory approval to officially permit its operator, Russian state-owned Gazprom, to turn on the taps. Now, the future of the pipeline is in question, even though it would have supplied mainland Europe with additional cheap natural gas. The situation may turn more dire, as Russia, in response to becoming the most sanctioned nation in the world, is now contemplating shutting off the Nord Stream 1 pipeline. This would exacerbate problems in the energy market as last year alone the pipeline supplied 38% of gas imported into the EU. Canada, which consumes a very small proportion of Russian energy, has already blocked oil imports and its western allies, such as the UK and US, have followed suit, with the potential for more countries and companies looking to isolate Russia. As of early 2022, Russia ranks second in the world in terms of crude oil production, generating just under 11 million barrels per day. They account for a large proportion of the petroleum supply and, as further embargos are placed on Russia’s energy exports, there is a threat of cost-push inflation pressures pricing oil at all-time highs. So far, Saudi Arabia and the United Arab Emirates, two large exporters of oil, have shown little to no interest in ramping up their production to help satisfy demand and suppress the supply issues, though they could do so with little effort.
 
The transition to green energy has been widely spoken about, with renewable energy representing just under a quarter of the energy consumed in the EU. Many nations are opting into legally binding ‘net-zero’ commitments targeting 2045 or 2050. Information from the UN shows more than 130 countries have set or are considering setting a target of reducing emissions to net-zero by 2050. Needless to say, a key driver of accomplishing these goals is the widespread adoption of renewable energy. Germany initially had a target to reach a goal of 100% renewable electricity by 2040, but it is now looking to move the date up by five years to 2035. Currently, Germany buys around half its natural gas from Russia and, due to geopolitical pressure and the closures of its last two nuclear plants in early 2022, it is looking to make a faster transition. Germany assumes it will spend around €200bn by 2026, committing to its goal of 100% renewable energy by 2035. An essential factor that will determine the outlook for green energy is the desire by the leadership of varying nations. Currently, EU policymakers in Brussels are finalising a new plan to slash Russian gas supply by more than two-thirds over the next nine months. This would combat the reliance on Russian energy, posing less risk in terms of the volatility relating to inflation and the energy markets and limit geopolitical leverage as well as being cheaper in the long run.
 
In the wake of the invasion of Ukraine, outspoken CEO and well-known proponent of green energy Elon Musk tweeted “…we need to increase oil & gas output immediately. Extraordinary times demand extraordinary measures. Obviously, this would negatively affect Tesla, but sustainable energy solutions simply cannot react instantaneously to make up for Russian oil and gas exports.” While it is easy to say renewable energy is the cure to the energy problem, there is a time-lag for new renewable energy as systems and equipment cannot be installed immediately and there is only so much wind to catch and sun to soak up by current renewable energy infrastructure While prices of raw materials for solar panels and wind turbines are rising, it is nowhere near as much as the surge in the cost of fossil fuels, which may incentivise policymakers to think long-term and hence pro-green energy.
 
For countries such as Denmark, a transition to renewable energy is far simpler than it may be for other nations, such as the UK. In Denmark’s case, more than half of its electricity supply comes from renewables and the path to 100% renewables is far clearer than it is for the UK, which is more reliant on fossil fuels, meaning a quicker and easier fix is available to the British - switching to an alternative supplier. Kwasi Kwarteng, the Secretary of State for Business, Energy, and Industrial Strategy, has alluded to continuing to source gas from the North Sea and introducing a new nuclear power station, the first new plant in a generation. The UK is still committed to the longer-term play of renewable energy. In the short term, we may see an uptick in the use of ‘dirty’ energy, but only to cover the shortfall in supply. In the long term, policymakers are certainly pushing for an increase in renewable energy. One way to boost renewable infrastructure developments would be to smooth out the process for approving permits. Speeding up permits, mandating that all new homes come with rooftop solar panels and ensuring buildings that produce more energy than they use can sell it back to the grid would be enough to prompt the installation of as much as 45 gigawatts of solar this year, according to estimates from BloombergNEF. A change like this could place Europe six years ahead of schedule.
 
It would seem that Russia has accelerated the renewable energy race, especially in Europe. Becoming more reliant on green infrastructure is part of the solution to the risks associated with energy supply would limit the volatility that is created by the energy markets. Since renewable infrastructure cannot be used as an instant source of energy - taking time to be permitted and built, there is a shortfall that countries will need to plug with alternate suppliers of fossil fuels. Nevertheless, this conflict may accelerate the transition, as it makes economic, environmental, and now political sense to do so.
 
This article was taken from the March 2022 issue of Market Insight. To subscribe to our investment publications, please visit www.redmayne.co.uk/publications.
 
Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned. The value of investments and any income derived from them may go down as well as up and you could get back less than you invested.
 
Has Russia Inadvertently Sped up the Shift to Renewables?
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