An energy crisis like never before? A turning point for the global energy system...

Russia’s attack on Ukraine has sent shock waves through global energy markets. While all the eyes are rightly on the humanitarian crisis emerging from the conflict, the scale and potential impact on the global economy should not be overlooked. There are multiple reasons why the current situation needs to be taken into high account but also something good could come out from this tragedy in terms of sustainability and cleaner future. To be clear - that would be just a very very small partial compensation to today’s horror

The starting point is to what extent this crisis compares with the past. While we are not experiencing rationalisation of energy supplies and line ups in the street as it has been the case in the 70s, the magnitude of current shock risks to not be second to anything else. The massive push to inflation that comes from skyrocketing energy prices is already well known. On top of that, we need to add four elements that are quite relevant:

1. The first one is that this crisis erupts with inflation levels already at 40-years record high in many economies. In early 2022, before the start of conflict the inflation in US reached 7.9%, the highest value since 1982, while in euro zone exceeded 5%, the highest level since record-keeping started in 1997.
2. The second is an unprecedented level of global debt – both in absolute values and as a share of GDP – as countries around the world have implemented huge stimulus plan for recovery from Covid. This could drain important financial resources from capacity of investment and spending both in the public and private domain
3. The third is that today’s world is much more interconnected compared to the time of previous oil embargos. Global trade is a much bigger component of world’s economy.
4. Last, but not least, the epicentre of the conflict involves regions that are giants also for food production and exports, as well as fertilizers, anticipating a very important impact on food prices.

The combination of those different elements suggests that the world might be facing its real 1st global energy crisis. We are also seeing a serious tightness across all key energy markets, including oil, gas and coal supplies, and serious bottlenecks in supply chains for other commodities, raw materials and critical minerals that are the basis of clean technologies.

While governments' first priority is to find policies and mechanisms to ease the strain of consumers and economic activities, the current context can also foster that wave of innovation and solutions that is absolutely critical to embark on a different pathway. As often it is the case, looking at the past and consider the lessons learnt might be a wise approach.

The oil embargos in the 1970s had strong impact on global economy and consumers behaviour – causing deep recessions and skyrocketing inflation - but were also very instrumental in triggering an unprecedented wave of innovation and technology progress. A large part of nuclear power capacity operating today was deployed in that period, while the performance of car engines made a gigantic increase: again, efficiency took the centre of stage in many societies. Consumers reacted with practical measures such as reducing driving mileage, prioritising insulation at home, etc.

At the same time, it is also fair to recognize that the crisis triggered an enhanced confidence in the role of natural gas, something that was then seen as second-level by product. This contributed to the development of those infrastructures that for many countries in Europe makes the dependence on this source and Russia supplies so relevant today

However the “benefits” of that painful season cannot be ruled out: the use of oil for electricity generation needs has almost disappeared in most countries; new technologies were developed and society became more aware of the value of energy supply and security.

One important thing that was missing at that time was the concept of climate change or sustainability, that nowadays has moved at the centre of the debates. From there is where we might or should start to re-emerge from this crisis.

Even before the Russia-Ukraine conflict, the world was trying to approach a tipping point for clean energy transition. More than 80% of the global economy has commitments to move towards a carbon neutrality and several new clean energy technologies were at a decisive crossroads: becoming finally mainstream or disappoint expectations.

Actually, 2021 has been a record year for all the most promising clean technologies including:

• record sales for electric vehicles and heat pumps;

• battery storage deployed at levels never seen before;

• enthusiasm and interest on hydrogen and CCUS reached new highs;

• renewables kept dominating new electricity capacity and mark record after record.

Those should be the key incentives for taking a different direction. Similar hope took centre stage also during the early stages of the pandemic eruption. Data today shows that the confidence in a sustainable recovery has been largely missed, as rebound has been largely driven by traditional sources.

The mistakes cannot be repeated and calls for a truly change of direction now that no excuses are left and it is clear universally that climate change and energy security strictly belongs to the same domain.

But such change cannot be given for granted and it is better this time make it loud and clear: it will not be easy and smooth; it will not be like eating a piece of cake.

The 1970s crisis triggered a turbulent period for global economy, employment and purchasing power but it also marked the emergence of a new era for new energy technologies. Likewise, today the risks of a prolonged period of stagflation cannot be ruled out, at global level and in particular in the Europe zone.

Both the Euro zone and the US are discussing the possibility of important stimulus packages. The adoption of policies and lending strategies that target investments in strategic sectors, and particularly energy, are key tools to offset such important risks and could conjugate the evident needs of enhanced energy security and urgent goals of climate change.

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