Energy crisis: not losing sight of net zero

British drivers bought more electric cars in March 2022 alone than in the whole of 2019, despite the wider car market slumping and supply chain difficulties making it hard to buy electric vehicles – or any car – at the moment.

The shift towards electric vehicles had been well underway before the recent spike in energy prices, but this has accelerated as high oil prices render traditional internal combustion engines pricier for consumers. “Gas and coal prices are four times higher than they were a year ago, making the comparative economics of renewable energy sources significantly better,” says Felix Odey, Portfolio Manager for the Schroders Global Energy Transition Team.

While soaring oil and gas prices have been exacerbated by Russia’s invasion of Ukraine, energy costs were already increasing. Oil and gas markets have seen new supply dwindle as a result of underinvestment in recent years. For one thing, energy companies have been reluctant to increase production: “The international focus on reaching net zero means that many management teams have been looking down the barrel of a gun, not knowing what demand there is going to be for their end products in ten years,” says Felix.

In addition, fewer investors and lenders are willing to finance new fossil fuel development. The combination has led to a tighter market, higher prices and strong returns from conventional energy markets.

Does the current energy crisis mean we will have to ‘front-load’ carbon emissions?

“The practical net zero challenges that countries are facing – namely how to wean their economies off fossil fuels whilst maintaining or achieving energy security – were already clear before the invasion of Ukraine. What’s changed is that those issues are now front and centre,” says Catherine Hampton, Sustainable Investment Lead at Cazenove Capital. She argues that the current energy crisis is likely to shift countries’ net zero pathways, with some countries potentially front-loading their carbon emissions as they ramp up production to ease the cost on consumers of rising energy prices.

If this crisis had happened anytime previously, I don’t think that would have been the default response. You have seen a political step change.

“What’s been positive, particularly in Europe, is policymakers responding to the recent energy security crisis with plans for greater renewable energy deployment,” says Alex Monk, Portfolio Manager for the Schroders Global Energy Transition Team. Therefore, despite higher fossil fuel use in the short term, the medium-to-long-term strategy is for renewables to dominate the energy mix.

This is something new within policy, Alex points out: “If this crisis had happened anytime previously, I don’t think that would have been the default response. You have seen a political step change.” The conclusion is that, if countries see higher emissions in the next few years, they will need to increase the pace of decarbonisation – for example, by ramping up renewables significantly – to achieve their net zero goals.

Take the German government, for example. It has approved wide-ranging energy reforms that should triple renewable energy sources by 2030 and ensure energy security in the wake of Russia’s invasion of Ukraine. Some EU and US policymakers have suggested that people work from home to reduce the amount of fuel required for transport too.

Despite these steps, there has still been an increase in the amount of coal and gas Europe has used, which may consequently mean moving countries towards their emissions targets at a faster pace than they may have planned. Some UK politicians have discussed adding greater incentives for rooftop solar and reducing red tape around renewable energy sources. But, only small actionable steps have been taken in this area so far.

The crisis in Ukraine is supportive of the energy transition in the long-term, regardless of any short-term slowing down by some policymakers.

Alex argues there is plenty more that can be done to create dual benefits here. By further incentivising solar panels, consumers can reduce their energy bills and help the country to hit emissions targets, for example. “The crisis in Ukraine is supportive of the energy transition in the long-term, regardless of any short-term slowing down by some policymakers,” Alex adds.

However, these types of schemes tend to reduce bills for the middle classes rather than those who need it most. The poorest in society cannot afford to pay for solar panels, even at a reduced rate. Millions have been plunged into poverty by the cost of living crisis, with many having to choose between energy bills and food. As governments face serious questions around how they can cut fuel costs without further exacerbating the widening gap between rich and poor, using more coal and gas could be an attractive short-term fix.

If you would like to discuss any of the issues raised in this article or would like to find out more about our sustainable investment offering, please email wmteam@cazenovecapital.com or call 0207 658 3100.