How Frictional Energy Helps Explain the Geopolitical Consequences of the Energy Transition
While COP26 concluded with a seemingly promising narrative in 2021, the conference failed to agree categorically on the need to “phase out” coal. And since last year, we have seen coal, the most emitting fossil fuel, being purchased proactively to keep Europe’s energy grid secure as winter approaches.
These measures were a counterbalance measure intended to compensate for the compression of natural gas supply, which led to record gas prices.
So, on the one hand, the focus on greener energy supplies (via COP26) continues. On the other hand, the use of conventional energy sources (such as coal) clearly remains a priority.
This presents what the author calls “frictional energy” where rhetoric and reality diverge. As we see this divergence taking shape at the start of this decade, keep in mind that it could continue into the next as well.
Among other things, this is essential to consider because frictional energy has geopolitical consequences. This was exemplified by the EU’s decision in December 2020 to restrict investments for gas projects in favor of those geared towards renewable energy projects.
Around the same time, Nord Stream 2 was again in play to supply gas from Russia to Germany (the largest EU member), although the flow of gas had not yet started.
In particular, the EU is currently examining the advisability of allowing certain gas projects to be eligible for the “green” investment label. Such investments in gas could circumvent supply shortages that have recently “spiked prices in Europe…to the equivalent of around $180 a barrel of oil.”
The policy change could also reduce Europe’s dependence on Russia (the biggest importer of gas to the EU) and its Nord Stream pipelines. As it stands, U.S. liquefied natural gas (LNG) exports hit a new record high last December, with half of those shipments going to Europe to fill its supply gap.
As a reminder, the United States – as part of its commitment to the energy transition – recently joined the Paris Agreement (the antecedent of COP26).
Additionally, frictional energy explains the impacts on human life, as access to sufficient coal reserves can avert a humanitarian crisis when a grid is shocked in winter. This is one of the main reasons why, last year, Europe began to aggressively source coal stocks. By protecting its network, Europe was also protecting its population.
The 2021 polar vortex, which severely affected the United States, illustrates what can happen when a grid (in Europe or elsewhere) is left unprotected for millions of people because energy sources are not protected against a basic supply shock. When energy-rich Texas saw its power grid collapse almost overnight, the cost was measured in deaths and significant economic losses.
However, if we assume that coal’s new role is primarily to offset a shortage of gas to protect grids, this erodes the intent of the Paris Agreement and increases emissions that are meant to be reduced for the sake of future generations. by 2050 – the key to ‘net zero’ for many large companies and nations.
Coal in 2022 again challenges the energy transition, as we have seen in Indonesia which is the world’s largest exporter of thermal coal but recently banned exports to avoid domestic power cuts. That has raised concerns among its biggest customers, including China and Japan, as they head into the winter peak of electricity demand.
The juxtaposition here is particularly notable in the case of Japan, which is one of the main signatories of the Paris Agreement but also one of the main importers of energy in the world.
The Frictional Energy Dilemma
Frictional energy as a dilemma is visualized in the triangle diagram below.
It underlines the juncture where the rhetoric of transition and reality diverge. Following on from the military doctrine of Carl Von Clausewitz, friction is here defined as “the only [concept distinguishing] the real war of war on paper.
The current energy transition crisis, as some have viewed it, has three interconnected components.
The first is defined by energy security, according to which countries need to source coal to fill the supply gap. This effectively replaces a low-emitting fossil fuel (e.g. natural gas) with a higher-emitting one.
According to this logic, oil, the second most emitting fossil fuel, can replace the use of gas, if coal, the most emitting, is excluded.
The second component of the triangle is defined by access to coal, as a country’s grid requires it. Critically, even if a country can access coal, it can come at a high cost (especially during a volatile supply shift), exposing citizens to government bailouts.
We recently witnessed this in Spain, where the intermittency of renewables led to spikes in electricity prices, prompting the government to step in and protect prices. For this reason, lack of access to affordable energy is an important measure of energy poverty. Nevertheless, coupling such intermittency – in winter – with accessibility to coal can have disastrous consequences, especially for countries with colder climates.
Finally, the third component of the triangle leads to an increase in emissions. This, in turn, goes against the Paris Agreement and exacerbates the current climate crisis (as stated in the IPPC report). However, consuming more fuel also averts a current crisis by ensuring networks can be powered on demand.
Geopolitical dimension of frictional energy
So far, the geopolitical consequences of frictional energy are arguably most pronounced in the Western Hemisphere.
In its effort to spur the energy transition, the United States last year made statements against the further development of fossil fuels. However, as the Biden administration felt the friction of rising energy prices, it made a quick turnaround by openly pressuring OPEC+ to provide greater access to affordable oil.
US senators across the political spectrum had previously chastised the Biden administration’s moves, issuing an argument that echoes the concept of frictional energy. In a joint statement, they noted that “we see [the administration’s] OPEC+ demand [for affordable oil] be incompatible with the announced climate objectives… [the] the administration’s approach to power generation will shift production to less stringent countries [environmental and emission] standards.”
Given the current focus on climate change and energy sources, we can expect many more titles and engagements that reflect the reality of frictional energy. For key stakeholders, this should lead to policies and actions that reduce the volatility of the triangle.
The above is paramount, as renewables (according to 2021 data from BP) represent only 5.7% of the global energy mix, which is a record.
In summary, friction energy management requires critical consideration by policy makers, as renewables have a lot of ground to gain, despite their current growth rate.
Looking at the energy basket as a tool, nations can more realistically and pragmatically align their climate policy rhetoric with the reality of their energy needs. This approach reduces friction while protecting the energy supply now and long into the future.