It’s a year since Russia invaded its westerly neighbour Ukraine in a surprise move that launched the biggest war on European soil in generations. International sanctions levied against Russia and the broader geopolitical fallout of its aggression have driven up the cost of numerous commodities, fuelling the highest levels of inflation in decades. Higher oil and gas prices, Russia is one of the world’s biggest producers of energy commodities, have been particularly influential.

Source: Trading Economics

Oil and gas prices have eased recently thanks to a warm winter in Europe, slowing global economies hurting demand and supply chains adjusting to compensate for lower levels of Russian energy imports to the West. But the current international production capacity of both oil and gas is already close to being fully accounted for.

And despite the rush of cash flowing into them from oil and gas sales over the past year, investment in new capacity is well below levels of a decade ago, before accounting for inflation. As such, supply of fossil fuels is only expected to rise slowly, if at all, over coming years. That should keep both oil and gas prices higher than historic averages until the end of the decade.

Higher energy prices have different short and long-term consequences for fossil fuels and the clean energy transition

Two notable consequences of the war in Ukraine driving up energy prices have been a quick pivot back towards coal in Western Europe and record profits being raked in by oil and gas producers. However, recent studies suggest the coal comeback and boom times for oil and gas companies could be short lived. High energy prices might mean big financial incentives to keep the oil and gas taps open wider than many Western governments had been planning over the next decade. But they also provide additional incentives for consumers to reduce their reliance on fossil fuels and significantly improve the investment case for renewables and other clean energy alternatives like green hydrogen.

A recent study by The Economist points out that tt €257 per megawatt-hour (mwh), the average wholesale energy price in Germany in December, a typical solar plant takes less than three years to become profitable. Against the average €50 per mwh spot price between 2020 and 2022, 11 years were needed to secure a return on investment.

Consumers are taking micro-level steps to reduce fossil fuel-powered energy bills

One way that the market has reacted to the recent spike in energy costs has been for consumers to make their own investments, often aided by state support, to reduce reliance on more expensive fossil fuels. The extent of these micro-level investments in energy efficiency and renewables at the level of households and companies is highlighted by a number of statistics.

Around the world, the number of rooftop solar panel installations, used by households and companies to reduce the amount of billed electricity consumed from the grid, grew by 50% in 2022. That’s a huge leap supported by a combination of a big drop in the cost of solar panels over the last several years and the extent of savings that the energy produced provides against more expensive supply from utility companies.

Higher energy prices have also further incentivised energy efficiency. Last year the global economy became 2% more energy efficient, as measured by the amount of energy consumed per unit of GDP. Energy efficiency has been especially improved in Europe, where energy prices have risen most. A combination of greater frugality, investment and thankfully warm winter weather has seen electricity consumption in the Old Continent drop 6% to 8% compared to last year.

In total, governments, households and companies around the world spent a huge $560 billion on energy efficiency over 2022. The lion’s share of that spending was on just two technologies, heat pumps and electric vehicles. Sales of EVs almost doubled in both 2021 and 2022 and the transition to hybrid and fully electric vehicles is expected to continue to accelerate until the end of the decade. Higher petrol prices at the pump are convincing many to make the switch to electrification earlier than they may have otherwise.

High-level investment in renewables and clean energy installations also soaring

At a higher level, big established energy companies and newer market entrants generously funded by public and private capital markets are also upping levels of investment in clean energy installations.

Last year, ground was broken on new onshore-wind installations that represent 128gw of new capacity. That represented a 35% rise on new capacity broken ground on in 2021 and wasn’t even heavily influenced by the new reality of higher fossil fuel prices catalysed by the start of the war in Ukraine. With the process of making an investment decision, selecting and acquiring sites, securing permits and designing large wind and solar farms a process that can take years, last year’s sector growth would have happened anyway.

But the amount of capital being channelled towards new projects last year is indicative of a leap in activity and investor interest, spurred by a more attractive business case supported by higher energy prices. The Economist reports that global spending on wind and solar assets was, at $490 billion compared to $357 billion a year earlier, higher than for new oil and gas investment for the first time in history.

The sums invested in wind and solar capacity are also expected to continue to grow over the next couple of years, predicts energy sector consultancy Rystad Energy. That will be supported by high spot electricity prices, particularly in Europe, changing the utility wind and solar investment narrative.

The consultancy says potential payback periods of under a year for wind and solar installations benefiting from optimal conditions are now possible. And that could start a race to develop renewable assets purely based on project economics rather than forward-looking strategy and government incentives and regulation.

Source: Rystad Energy

Government support is key

China is not known for its progressive clean energy policies but is sensitive to market forces and energy security concerns. As well as growing unhappiness among its population at air quality in its urban centres and more general pollution resulting from industry. The huge country whose equally huge manufacturing sector is a phenomenal consumer of energy, is expected to add more clean energy capacity than anywhere else in the world over the next few years.

The IEA expects its to build new renewables capacity of 1000 terawatt-hours by 2025. To put that into context, it represents more energy than the whole of Japan currently consumes. China is also investing heavily in other clean energy technologies like green hydrogen, which is seen as a low carbon solution to technologies that are, for one reason or another, hard to electrify with current technologies.

China’s changing attitude towards clean energy is highlighted by the fact a goal has been set for new capacity for the first time in the traditional five-year plan authorities work to. The plan sets a target of 33% of all Chinese power generation to come from renewables by 2025.

In the USA, the Biden administration’s Inflation Act stipulates $369 billion in subsidies for clean tech. The EU has committed to at least $270 billion of funding for clean tech companies and has also brought forward its target to double solar capacity by five years from 2030 to 2025. At a national level, Germany has upped its 2030 target for renewables share of overall power generation capacity to 80% from 65%.

The net result of this surge in investment and renewables capacity building is that the International Energy Agency (IEA) has released new projections indicating a substantial rise in global renewable-energy capacity in the coming years. It anticipates an increase of 2,400gw between 2022 and 2027, which is equivalent to China’s current installed power capacity.

Crucially, the latest forecast is almost 30% higher than the agency’s 2021 projection, which was released before Russia’s invasion of Ukraine. Renewables are expected to contribute to 90% of the overall expansion in global generation capacity over this period.

Higher energy prices resulting from the war in Ukraine will see emissions fall faster than they would have otherwise

The result of all of this new energy efficiency and renewables capacity investment is that emission levels are expected to drop sooner and faster than predicted just over a year ago. The data company S&P Global now estimates emissions from buring fossil fuels will peak in 2028. Without the war in Ukraine driving up fossil fuel prices, that wasn’t expected to happen until 2032.

Big oil and gas may have revised its strategy to invest more in short-cycle fossil fuel projects in the near term to benefit from higher prices. A lot of that money will also then be recycled into funding new renewables capacity. The short term windfall hasn’t changed the long term reality that fossil fuels are on their way out.

The evidence suggests it has even hastened their demise.