Businesses will need to consider where to place investments as the geopolitical landscape shifts
FOCUSED MINDS
The ongoing conflict in Ukraine has focussed minds across Europe, and beyond, to secure
SUPPLY CONCERNS
Vital supply chains are being dominated by only a few markets risking conflict and the energy transition
KEY QUOTE
Renewable energy will not merely influence the balance of power between countries. It will also reconfigure alliances and trade flows, and create new interdependencies around electric grids and new commodities
It is often said that some of the major conflicts of the past 50 years have been over oil and the security of supply, demonstrating that geopolitical and energy issues are inextricably linked.
This has never been more evident than in a turbulent 2022, as Russia’s unprovoked invasion of Ukraine sent already-climbing energy prices spiralling even higher and politicians around the world searching for alternatives to Russian natural gas and answers to their energy security challenges.
The necessary transition to a decarbonised economy risks being jeopardised by geopolitical fallout while at the same time the transition itself represents a threat to the status quo.
RENEWED FOCUS
The war in Ukraine has both helped and hindered the energy transition. Germany’s decision to expand its coal production and the European Commission’s move to secure a supply of liquified natural gas from other sources, for instance, are not in keeping with the aims of the Paris Climate Accord from 2015 to limit global warming to well below 2°C.
However, the fallout has also focussed minds more than ever on energy security, distributed supply and energy efficiency. “Is the energy transition causing or impacting geopolitical events or are geopolitical events impacting the energy transition? It goes both ways but not necessarily at the same time,” says Thomas Boermans from E.ON, a German power company.
Boermans acknowledges that today’s energy system is changing as a direct result of the conflict—not always in a positive way in the context of the energy transition—but he also believes one consequence of the crisis is that people’s readiness to make necessary changes has increased. “People now recognise we need to talk about saving energy and [reduce] resistance to renewables projects,” he adds.
BALANCE OF POWER
Reaching net-zero emissions will require a transformation of the global economy. As people and their governments take steps to slash emissions, the flow of money, private investment and power will also shift.
“Renewable energy will not merely influence the balance of power between countries. It will also reconfigure alliances and trade flows, and create new interdependencies around electric grids and new commodities,” writes the Global Commission on the Geopolitics of the Energy Transition. The Commission was formed by the International Renewable Energy Agency (IRENA) in 2018 and is headed up by former Icelandic president Ólafur Ragnar Grímsson.
In 2019, the Commission released a report which concluded that all nations should prepare for the changes brought about by decarbonisation. “A state’s relative position in the international system is influenced by a range of attributes, including its gross domestic product, population, land size, natural resources, geostrategic location, military resources, and ‘soft power’,” the Commission’s report says.
“Having control over and access to significant energy resources and markets is an important asset because it enables states to protect vital national interests at home, and leverage economic and political influence abroad. States without such assets, by comparison, have less leverage and are more vulnerable,” the Commission’s report adds.
ADAPT OR DIE
The changing energy landscape means countries with a history of oil and gas production need to adapt their economies to retain income and influence.
“Fossil fuel-exporting countries may face instability if they do not reinvent themselves for a new energy age; a rapid shift away from fossil fuels could create a financial shock with significant consequences for the global economy; workers and communities who depend on fossil fuels may be hit adversely; and risks may emerge with regard to cybersecurity and new dependencies on certain minerals,” the report warns.
These countries—fundamentally the members of OPEC—may use their oil and gas profits to pay for their energy transition. “You see this with countries that have and export large amounts of fossil fuels. They know that there are limits to earning money on fossil fuels. What they’re doing is cashing in on the ‘Last Man Standing’ philosophy and starting to invest in green hydrogen production and related facilities,” says E.ON’s Boermans.
“Especially if these countries have possibilities for wind and solar, it is very likely that they will use the money they earn on fossil fuels, and currently they are earning billions.”
Private enterprises will also face similar challenges with the energy transition. Companies that rely on fossil fuels—or even just profit from them—will need to adapt and find new business models, new business partners, and new markets in which to do business. All this while also navigating a potentially challenging geopolitical landscape.
“The same goes for oil majors, they have the initial resource and can now earn a lot of money. And then let’s say with money, you can do everything. So that holds in itself the notion that old kings can be new kings as long as they invest wisely,” Boermans states.
NEW GAME, OLD PLAYERS
The energy transition will democratise the world more widely, with new countries able to be responsible for their power generation—perhaps for the first time since industrialisation.
Still, as Boermans points out, countries that have held the power in modern times could seek to retain their influence as major economies adapt to the new reality of the energy transition, with potentially damaging consequences for the energy sector.
“Whether we can talk about a clear shift in geopolitical power remains questionable. Energy-exporting countries are likely to remain highly influential in the international energy market in the short- and medium-term. Just look at the power of LNG-exporting countries today,” says Erkki Maillard from French energy giant EDF.
Industry observers are warning of a new cold war in which instead of collaborating on energy matters, the world’s major economies enter an arms race of technological hardware and software, including components central to the energy transition.
“The energy industry, like other industries, must consider the impact of geostrategic rivalries, specifically in the procurement of essential hardware and software. This includes make-or-buy decisions for mission-critical components, products and services,” warns E.ON’s trend radar warns, which looks at topics and issues that could affect the energy sector in the future. “For customers of energy services, it will be important that systems comply with, operate and can be sourced also under changing geopolitical situations,” it adds.
The ongoing trade war between the United States and China may escalate as both nations flex their financial muscle and adopt strategies with clean energy at their core. In its’ Top Risks 2021 report, Eurasia Group, a political risk consultancy, says, “As the US scrambles to catch up to China in what will quickly become a global clean energy arms race, it will make climate and the energy transition a matter of industrial and national security policy.”
Julia Hammelehle of the Munich Security Conference (MSC), a forum for debate on international security, notes that China already dominates the supply chain for many of the materials and components essential to the energy transition, with Europe and the US looking to catch up. “We could hope that countries with strong potential for solar and wind would be more self-reliant. But the potential for renewables alone is not sufficient. Access to technology and capital is key,” says Hammelehle.
SUPPLY CHAIN
Instead of wars over oil and gas then, conflict could arise as countries seek resources for the energy transition—particularly, rare earth metals for batteries and solar panels which only exist and are manufactured in a few select areas of the world.
“China has a dominant role in the manufacturing of clean technologies. It accounts for three-quarters [of the manufacturing market] for solar modules. In EV batteries it is roughly the same,” Hammelehle says.
This limited source of components leaves the potential for conflict—hot or cold—and further delays to decarbonisation pathways. “Let’s think of a case where sanctions are planned to be imposed (for whatever reason) on a country that is crucial for delivering materials, products or know-how for the global energy transition. You would jeopardise your energy transition in almost all of the countries,” says Boermans. “This requires new compromises and definition of red lines.”
EDF’s Maillard agrees. “Competition is high especially when it comes to clean energy technologies. Rather than an arms race, we are facing a tech race with countries putting in place measures to build up domestic production capacities for low-carbon technologies and critical raw materials. Although a ‘cold war’ style of confrontation is not desirable as free flows of goods and technologies are necessary to fully achieve a cost-effective energy transition, the emergence of trading blocs and the weaponization of energy could lead to increasing tensions between major powers.”
HOME SECURITY
To lessen the dependency on Chinese industry, Europe and the US are taking steps to expand production and diversify supply chains. But this entails additional costs—and another threat to the energy transition.
“China is incredibly strong and the US and Europe are trying to catch up. If the US and Europe try to foster the sort of domestic production capabilities, it will be more expensive. And the concern is that this reduces the pace of deployment of green technologies. I think this is a very important geopolitical aspect to it as well,” Hammelehle says.
“Vulnerability towards China is still very high and it will remain high in the foreseeable future,” Hammelehle adds. “This is also the case for critical minerals needed for these technologies. China’s position is particularly strong in processing operations [more than in mining]. For rare earth elements, for example, China accounts for over 90% of global processing,” she says.
Europe and the US are looking at establishing production for these key elements of the energy transition but have some catching up to do. “The EU’s solar cell production capacity stands at only around 0.8 gigawatts (GW),” says trade association SolarPower Europe.
Meanwhile, China’s total annual solar cell and module production capacity is reportedly set to increase from 361 GW at the end of last year to up to 600 GW at the end of 2022. “China has invested over $50 billion in new PV supply capacity—ten times more than Europe—and created more than 300,000 manufacturing jobs across the solar PV value chain since 2011,” according to the International Energy Agency.
SolarPower Europe, EIT InnoEnergy and companies involved in the Solar Manufacturing Accelerator, have launched the European Solar Initiative, which looks at the industrial readiness of the solar sector and supports new investment into solar manufacturing projects, with the aim to establish around 20 gigawatts of manufacturing capacity in Europe by 2025.
“Researchers are looking for batteries that need less rare metals, to be more efficient, to be cheaper, but to also be less dependent on the current countries or companies. It needs new agreements, new friendships,” Boermans notes.
Limited supply Europe and the US are trying to boost solar production capacity to counteract China’s dominance
“Climate change and the energy transition remain global challenges that require global solutions, including dialogue and cooperation with China and other major international actors,” Maillard adds. “Beijing remains one of the major players when it comes to clean technologies, its capacity to scale up the production of these technologies might be essential to achieve a cost-effective energy transition. The question is how to ensure energy security of supply and protect our strategic interests including by protecting our industry from hostile countries while defining global governance to tackle global issues,” he says.
NEW ARRIVALS
As governments adapt their economies to the fight against climate change and maximise their resources—while boosting energy security—other nations could see their influence on the global stage increase. “We will be seeing a new set of players come into the new energy ecosystem,” says David Burns of Linde, a German industrial gases and engineering company.
“Regions with access to renewable energy and carbon sequestration sites—here we see places like North Africa and Australia—have the potential to position themselves as important players.
“In addition, countries that enjoy access to substantial renewable energy sources can now play a significant role in the clean energy market. In this category, we find places like South America, Southern Europe and South Africa. All in all, there is a real opportunity for a more equitable energy ecosystem in the future,” Burns adds.
The Global Commission on the Geopolitics of Energy Transformation report identified the types of countries that could emerge as new renewable energy leaders.
Firstly, countries such as Australia and Chile could gain influence if they can export their huge renewables generation potential as electricity or fuels. “Australia’s economically demonstrated solar and wind energy resources are estimated to be 75% greater than its combined coal, gas, oil and uranium resources,” the report says, adding that these countries’ remote geographical location might hamper exports. Laos and Bhutan also export a lot of their renewable energy regionally.
Secondly, mineral-rich countries such as Bolivia, Mongolia, and the Democratic Republic of Congo can grow influence as part of the value chains necessary for renewables technologies. “The energy transition will ‘reward’ countries capable of producing key enabling technologies and controlling renewable energy sources while building robust and resilient value chains and ‘injecting’ geostrategic thinking into their energy policy planning,” says EDF’s Maillard.
MSC’s Hammelehle agrees that more countries could find themselves influencing global geopolitics as they flex their energy transition muscles. “We will have more players on the field, not only countries with renewables resources but also those that have materials needed for green products and technologies. While others will assume a leading position in new energy sources such as hydrogen or in the manufacturing of key technologies such as electrolysers. But it’s still very open how these trade networks will evolve,” says Hammelehle.
As part of their plans to set up their own processing and manufacturing facilities, Europe and the US should work with these countries with natural resources to also improve the lives of their citizens. China is often criticised for ignoring human rights abuses in its quest for raw materials. “[Europe and the US] have to work on being a better alternative for countries in the Global South to partner with,” believes Hammelehle.
“They have to make sure that the local communities are profiting from the resources as well and want to partner with Western companies. We are highly critical of Chinese companies, and rightly so because there have been grave human rights concerns and environmental concerns. But western companies haven’t always been that great either,” Hammelehle adds. •
PHOTO AerialPerspective Works, Vlad Gansovsky and Yuangeng Zhang