2022, the most extreme energy-year- ever

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The year 2022, the most extreme energy-year- ever

How do we move on?

The year 2022 might go into the history books as the year with the first truly global energy crisis. So how do we move on? Did we only focus on short term solution or did we actually make long-term progress on the energy transition? Here we look back at the energy year 2022 and discuss what our New Year’s resolutions should be.

Arguably 2022 presented the first truly global energy crisis ever1. Compared to the crisis of 1973 which was largely limited to oil, 2022 demonstrated shocks across all fossil fuels in a world that since the 70’s has become much more globalized, resulting in an energy crises that is felt across the world. 

Although in 2021 the first signs of upcoming turmoil could already be noticed in The Netherlands (e.g, gas storage levels reached a record low in 2021), 2022 started off with a new coalition agreement with the most ambitious climate policy agenda ever. The agreement raised CO2 reduction targets to a 55% decrease by 2030, backed-up by policy aiming for a 60% decrease. Other plans included ambitious steps beyond 2030 (e.g. 80% CO2 reduction in 2040) and an additional transition fund of €35 bln next to existing subsidy schemes such as SDE++2

However, the year had just started when Russia invaded Ukraine. Next to the horrible consequences for Ukraine and its people, the war, reinforced by the closing down of the Groningen gas field, a lack of investment in alternative energy sources3 and a rebounding economy after the pandemic, resulted in unparalleled effects on our energy system; record high energy prices4 and extreme volatility. Dutch day ahead TTF gas prices increased from €70/MWh in January to a peak of €330/MWh (+370%) in August and took Oil (+52%), Coal (+230%) and CO2 (+67%) along in volatile swings.Combined, these heavily interlinked events made that,  energy security and short term energy affordability central topics in public discourse along with sustainability. In other words, the energy trilemma was rebalancing itself. 

These concerns around energy security and energy affordability led to an unprecedented reaction by the European committee in terms of scale and speed. The REpowerEU plan, together with the earlier announced Fit for 55 package made ~€300 bln available for energy transition and emission reduction provisions5. It also decided on a gas price cap6 and put embargos on Russian oil products7.

Although the energy industry was heavily impacted by the war in Ukraine in 2022, the need to transition our energy system only further increased and progress was made as our top 10 of energy news of this year shows. The new Dutch wind energy roadmap for example was published, creating a clear roadmap to 2030 and increasing capacity targets to 70GW in 20508. Tangible nuclear power plans were published and the hydrogen market kicked off with the firstof €800mln of subsidies and the start of construction of Shell’s 200MW electrolyzer just to name a few.

 

So where are we now in the bigger scheme of things?

Although our top 10 shows we made big steps in 2022 (next to short term crisis management), our belief in the achievability of limiting global warming to 1.5°C was further challenged e.g., by new scenarios by energy thinktanks such as the IEA. On a national level this is further underpinned by yearly report by the Dutch Environmental Agency (PBL) that showed that the gap towards the 2030 national CO2 target (55% reduction compared to 2019) is widening given current policies9

But it’s not all negative. The newest IEA stated policies scenario shows global median surface temperatures in 2100 have risen less than 2.5°C. Although this will still lead to dramatic effects, past efforts clearly have caused the fading of the potential of 3.5°C or more degrees global warming (previous scenarios showed the possibility of up to 8°C)10 which would have been truly disastrous. This shows that our efforts of the last decades, on a global level, but also in The Netherlands, have been fruitful. It has just not been enough, yet. 

Our suggested new year’s resolutions

Aside from a moment of reflection, a new year also brings a moment to articulate new year’s resolutions. You might find some inspiration in our suggestions:

Change focus from electricity to molecules: To date, the most impactful subsidy mechanism in The Netherlands, SDE++, has granted €66bn in subsidies since 2011, predominantly funding renewable electricity projects (56%)11. However, only 25% of our energy mix consists of electricity. Molecules take up 75% of our energy system, and although electrification will decrease this substantially, around 50% of our energy system will require molecules that need to be net-zero. Fortunately in 2022 we saw the subsidies shift from renewable electricity to other emission reduction technologies (predominantly Carbon Capture and Storage) but also for the first time subsidy was granted for hydrogen. Hopefully this continues in 2023. Therefore the shift of focus from electrons to molecules (green ammonia, methanol, hydrogen and biofuels) which started in 2022 (with the introduction of fences for molecules in the SDE++) should further continue in 2023.

Look beyond 2030: In 2023, we are only seven years from the end of the decade. As we move from pure renewable electricity projects (with relatively short timeframes) to more complex projects (e.g., integrated offshore wind / hydrogen projects) to decarbonize the harder-to-abate sectors such as heavy industry, freight transport, construction and aviation, project timelines outstretch these seven years. The risk of long lead times, the consideration of asset lifetimes of fossil fueled alternatives (e.g., airplanes, ships, trucks, industrial installations) and large stakeholder ecosystems inherent to these sectors force us to take a longer time horizon. This will also require us to not solely focus on  quick fixes to reach 2030 targets but always think of structural solutions that yield long-term results. Therefore in 2023 we should also look beyond 2030 targets keeping an eye on our 2050 goals of achieving net zero. 

Don’t let perfect be the enemy of the good: Unfortunately, the challenges society is facing are daunting. To achieve our goals, we should rethink whether we are letting perfect be the enemy of the good. In a perfect situation, subsidies would be granted only when markets fail and in a way that is optimally cost effective. But is there time to wait for the perfect policy to be designed and implemented? 2022 Showed us that when a crisis is imminent government can act fast. This would mean for example that hydrogen infrastructure (i.e. electrolyser capacity) should be developed in parallel with its renewable energy feedstock at the risk of having to fuel the electrolysers with grey electricity in the meantime. A striking parallel exists with the Dutch approach to achieve net-zero mobility goals. In the first half of 2022, the Dutch electricity supply was only 44% renewable12, yet 19% of new car sales were electric vehicles made possible by intensive government support over the years (with subsidy-intensities of above 1000 €/tCO2 avoided13). This pragmatic policy enabled the role out of required charging infrastructure enabling a net-zero mobility when the electricity system is fully renewable. So, can we copy this thinking in other areas such as hydrogen? Or will we be penny wise, but pound foolish? Can we further accelerate the energy transition, by accelerating permitting procedures for large energy transition related infrastructure projects to give another example? In other words, will we let the quest for perfect, delay us to go after good alternatives?  

In conclusion, the year 2022 might go into the history books as the year with the first global energy crisis which prompted short-term actions to address the immediate crisis. However, as we move into the year 2023, next to the necessary measure to manage the current crisis, it is important that we create the necessary space to act on longer-term pragmatic strategies that will set us up for a successful energy transition.

1. IEA, Global Energy Crisis, Retrieved: Dec 2022
2. Rijksoverheid, Coalitieakkoord 'Omzien naar elkaar, vooruitkijken naar de toekomst', 2021
3. ESB, Extra Gronings gas zou de gasprijs substantieel verlagen, 17-10-22
4. Commodity prices based on ICE Endex
5. Deloitte, 2023 oil and gas industry outlook
6. Kate Abnett, EU countries agree gas price cap to contain energy crisis, Published by Reuters 19-12-2022
7. European commission, Sanctions adopted following Russia’s military aggression against Ukraine, Retrieved: 12-22 
8. Rijksoverheid, Nederland maakt ambitie wind op zee bekend: 70 gigawatt in 2050, 16-09-22
9. PBL, Climate and Energy Outlook, 2022
10. IEA, World Energy Outlook 2022
11. RVO, Feiten en cijfers SDE(+)(+), Retrieved: 12-22
12. Klimaatakkoord.nl, Halfjaar 2022: Groei hernieuwbaar bespaart 5% aardgas, 05-07-22 
13. Autobelastingen als beleidsinstrument – Algemene Rekenkamer, 2020 

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