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Synopsis: In CoP 26, world leaders need to discuss how best governments can help each other stay on the “green” course and also manage shorter-term political compulsions.
What is the current scenario?
Rise in price of natural gas: The price of natural gas in Europe has shot up by approximately 600 per cent over the past 12 months. A year back, it was trading at just under $4/mmbtu (Metric Million British Thermal Unit), and today it is hovering around $25/mmbtu.
Reversal of the conventional feedback loop: Conventionally the price of oil would lead to a change in the price of gas, this time it is the price of gas that has pushed up the prices of oil and coal. This is because as the former became increasingly unaffordable, consumers turned to the latter.
What is the dilemma in front of governments?
The price hike of natural gas would incentivize an increase in the production of fossil fuels and that would run counter to not just public sentiment but also the efforts to shift to a clean non-fossil fuel energy system.
The dilemma is to find a way to navigate the long-term imperatives of decarbonization and also manage the political and social backlash from consumers impacted by high electricity and fuel costs.
What are the reasons for the price surge of natural gas?
On the demand side: the strongest driver has been the global economic recovery. Added to that are the micro factors of the drop in hydropower in Brazil and China because of drought, the reduction in wind power because of unfavourable wind conditions in the North Sea and the underperformance of nuclear reactors in Europe. The severe summer heat in the US, Europe and China has also been a factor.
On the supply side: The economic blockers were the cold wave in Texas this year, which froze gas wells and throttled the export of US LNG, the start-up of the maintenance work suspended since 2020 on account of Covid-19 and the declining production profile of the giant Groningen field in the Netherlands.
This field is slated to close down in two years. Matters have been compounded by the diversion of US LNG cargoes destined for Europe to Asia and low inventories.
The geopolitical factor: Russia has provided approximately 40 per cent of Europe’s gas requirements but it always had the capacity to supply more and could have come to Europe’s rescue this time. But it decided not to. The reason is Nord Stream 2 gas pipeline from Russia to Germany.
The US has been an opponent of this pipeline on the grounds it strengthens Russia’s leverage over Europe. In consequence, the EU has not yet approved its operationalisation.
Integration of markets: the gas market today is different. It is global, integrated and liquid. That is why, what happens in one region quickly spill over into other geographies. For instance, the CIF price of spot LNG landed in Hazira, Gujarat averaged around $6/bbl a year back.
What is the way forward?
First, World leaders will assemble in Glasgow next month for COP 26 and since they are aligned on the nature of the climate crisis and the steps that must be taken to address it.
Second, leaders will have to work together to smoothen the green transition to reduce dependence on fossil fuels.
Third, the sustainable response is to leverage this price shock to improve energy efficiency, intensify demand conservation, intervene to prevent the switch to coal and increase investments in battery and storage technology and transmission infrastructure to scale up solar and wind energy supplies.
Source: This post is based on the article “Staying the Green Course” published in Indian Express on 4th Oct 2021.