November 2021 – @alvaroriosroca – The energy transition to renewables to protect the planet from global warming is an irreversible process. It is already in the minds of the world’s population, and public policies to make this transition are moving in that direction. In 2020, in the midst of the pandemic, Europeans bet on hydrogen, the USA, with the Democrats, began to curb hydrocarbon activities and promote renewable energies, and China committed itself to becoming carbon neutral by 2060.
However, the planet continues to grow in two vectors. The world population in 2050 will have 9.7 billion inhabitants vs. The current 7.7 billion. An annual growth of 3%. Moreover, all countries around the globe are eager to grow their economies as much as possible to provide greater welfare to their citizens. Economic and vegetative growth is an explosive mix for energy demand.
Since mid-2021 we have seen an unusual increase in the prices of raw materials and also of natural gas and oil. In January WTI oil was at 52 USD/Bbl and this October it is at 80 US/Bbl average. An increase of 5% per month. Likewise, the natural gas marker for Asia (JKM) rose from an average of 9.0 USD/MMBTU in January to over 20 USD/MMBTU in October.
More population, more economic growth and more restrictions on oil and natural gas production can drive prices where we do not want them to go. Intermittent renewables are not prepared for this.
The pronouncements of the presidents of the European Union, President Biden in the USA and many other presidents have made themselves felt in the face of the protests of their populations due to the increases in energy prices and inflation. In several Latin American countries exactly the same thing is happening, especially in those countries whose fuels follow international prices and do not subsidize. In those where rigid and immovable subsidies are still practiced, nothing happens yet, everybody is happy, because the State funds are there, but they are not eternal.
The best example is Venezuela, which practiced perverse subsidies for several years and took its toll. They are on the way to an energy transition, but with firewood and in parallel under the table to a drying neoliberalism. There is an almost absolute dollarization, prices are no longer controlled, there are deprivations under the table and the market has been opened to import and trade oil derivatives at international prices and in free competition. That’s right, those who can pay international prices and for those who cannot or do not want to pay, there is a three-day queue at a service station.
The high prices of hydrocarbons make the energy transition to renewable energies much faster. The latter, technology aside, have fallen in costs and prices much faster than anticipated by the industry and are rapidly becoming more economical and competitive than their fossil counterparts.
What is not yet in place is their intermittency. For the time being, until storage batteries and hydrogen reduce their costs drastically, natural gas is the transitional and backup energy for this intermittency. Inflexible gas is the buzzword. Therefore, its exploration and production cannot be penalized or paralyzed as they are trying to do, and even worse if it must replace huge amounts of coal-fired generation.
Now, what happens in countries with strong subsidies to hydrocarbons (LPG, natural gas, diesel, gasoline, etc.), as several in our region? The entry of renewables so that end users can opt for distributed generation with solar panels or wind turbines does not generate savings to make the investment. It is not profitable and they are comfortable.
Nor will the private sector be able to make investment in generation for the larger integrated generation systems, because they would not be able to dispatch, unless they are given preferential tariffs or dispatches. Therefore, when we see state investments in renewables, it is that the states are still subsidizing in one way or another.
Moral of the story, subsidies are perverse and sooner or later they take their toll as we have seen in Venezuela. Without subsidies, the road is flat for investment. For those who do not, the productive and commercial sectors, as well as citizens, should analyze investment alternatives in renewable energies, no longer with the idea of saving, but with the signal that soon the transition will be to firewood or at international prices, whether they like it or not.
*Former Minister of Hydrocarbons of Bolivia and current managing partner of Gas Energy Latin America.