This commentary was published by the International Renewable Energy Agency on Feb. 24, 2022.
By Dolf Gielen, Michael Taylor, Barbara Jinks
Outdated perceptions of the costs of clean energy remain a major barrier to the energy transition. Despite the dramatic fall in prices across these technologies, the dialogue surrounding ‘cheap’ fossil fuels and ‘expensive’ renewable energy endures, and must be changed.
Over 2021, the cost of gas increased by a factor of ten to reach a record high, whilst the cost of landed thermal coal in Europe rose by a factor of three – to which the increasing costs of CO2 in the European Trading Scheme (ETS) can be added.
Daily Dutch “TTF” fossil gas prices, 2020–2022
Note: Data is for February 2022 contracts. Source: ICE, 2022. TTF denotes Title Transfer Facility.
These eye-watering price increases have been passed on to electricity markets in Europe, hurting homes and businesses as the costs for heat and power rise – in some cases by as much as 40 per cent – triggering government intervention in several countries.
The current high gas and coal prices in the EU have not been caused by renewables. Rather, they are the result of tighter natural gas supplies to Europe, under-utilized gas storage, soaring global liquefied natural gas (LNG) prices as the EU is outbid in its efforts to secure LNG supplies, and a variety of other policy inadequacies.
Monthly (gross) injections into EU natural gas storage by year, 2016–2021
Source: GIE AGSI, 2021.
We are not powerless in facing this vicious gas price cycle – although there is no short-term remedy to lower prices, short of another extended period of warm weather – we can avoid a repeat of this situation in the future, as renewables and energy efficiency offer effective solutions to reducing our exposure to gas prices.
The lessons from the gas crisis in Europe are clear: we need to rapidly increase renewable energy production; promote true accounting and awareness of the costs of fossil fuel price volatility and the environmental impacts of its use; reduce gas demand through the electrification of heating and building renovations; and design robust policies to support the use of green gas.
However, all of these goals are undermined by the repeated, systematic failure to adequately factor-in fossil fuel price volatility, which is holding back investment in viable renewable solutions.
Greater investment in renewable power generation earlier in the last decade would have saved European and Asian countries billions. Similarly, in industry and buildings, lacklustre progress in deploying renewables and scaling up energy efficiency programmes is now costing businesses and individuals dearly.
Contrary to prevailing perceptions, renewable electricity is already competitive with fossil fuels, and, given today’s high gas prices, significant volumes of biomethane and green hydrogen will also now be economical. Indeed, we vastly underestimate the value of green gas. Unlike prices for traditional gas, renewable energy costs are generally known upfront and can be locked in for the entire project lifetime, which brings us to the question; with falling renewable energy prices and extreme gas price volatility, can blue hydrogen stay competitive?
Today’s fossil-based energy crisis, which is almost certain to be repeated in the future, should fundamentally change our perception of green gases as “expensive” alternatives. Furthermore, the prices attributed to fossil fuels do not reflect costly externalities, such as the health, environmental and climate impacts, all of which should be taken into account in the economics of the energy transition.
Governments must take account of the true cost of energy and consider the opportunities that renewable energy offers us to future-proof our economies and insulate them from the volatility and insidious long-term costs of fossil fuels.