The Business Times

Climate policy is the new energy policy

Eric Yep
Published Wed, Sep 7, 2022 · 04:40 PM

THREE distinct trends are dominating global energy systems.

The first is extreme weather. Southern China is in the grip of severe drought, with the Yangtze River basin recording its lowest rainfall for this time of the year in decades. India’s fabled mango crop has not materialised, with farmers blaming erratic weather conditions for low yields. The European Commission Joint Research Centre (EC-JRC) says the drought in Europe could be the worst in 500 years, and parts of the US saw multi-year dry conditions this summer according to the US Drought Monitor. Vietnam and Taiwan are also evaluating the impact of low hydro on their energy mix. These are just a few examples.

The second trend is record high energy prices, as a surge in demand tightens energy supply already hit by the Russia-Ukraine war. Asian economies have been reeling from oil prices at around US$100 per barrel, and natural gas-dependent countries like Singapore are seeing electricity prices hit record levels. On Aug 22, European gas prices on the Dutch TTF gas hub hit a record 282.375 euro megawatt hour (MWh), and the UK NBP daily gas prices posted its largest ever day-on-day increase, according to S&P Global Commodity Insights data.

The third trend is the economic impact of high energy prices and growing inflationary concerns. The social unrest in Sri Lanka was accompanied by scenes of petroleum tankers unwilling to discharge unless payments were guaranteed. Even decades ago, the recessions of 1974-75 and the early 1980s were characterised by energy prices driving inflation and economic growth, given the key role of energy as an input across goods and services sectors.

What is notable is that the linkages between extreme weather, energy prices and economic disruption are becoming more evident, more acute and more troubling.

Droughts and low water levels at rivers have triggered hydropower shortages, disrupted transportation of petroleum products and coal on inland waterways, and caused nuclear reactors to shut due to insufficient water supply for cooling. Extreme weather is breaking down the very energy systems designed to handle emergencies, exacerbating energy shortages.

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What has also been unprecedented this year is the scale of government intervention to ration energy usage to manage these shortages and curb wasteful energy consumption. But shutting factories only puts people out of jobs, slashes incomes and exacerbates economic pain, creating a vicious circle.

For instance, China’s Sichuan province has asked energy-intensive industries to shut production to conserve electricity; Pakistan shut gas-fired power production and cut electricity supply to its vital textile export sector, and countries across Europe are drafting plans to curb industrial energy consumption this winter. Much of Asia’s inelastic energy demand will be tested this winter as demand destruction across industrial sectors spreads.

In an eerie parallel with the pandemic, climate change is hitting back at the global economy that is behind its emergence in the first place.

New role for Asia’s state energy firms

So what can be done? Among the myriad solutions proposed, one is for governments to make climate policy the bedrock of any energy policy.

Asian governments, and their line-up of national oil companies tasked with maintaining domestic energy supply, have been obsessed with energy security as defined by the narrow confines of the geopolitics of oil and the Middle East.

The likes of PetroChina, Petronas, Pertamina, PTT, PetroVietnam, ONGC and others still largely define long-term energy security on the basis of oil and gas reserves, upstream investments, new discoveries, production forecasts, supply contracts and managing supply disruptions due to a war in the Persian Gulf.

This is not inappropriate, but it is becoming increasingly inadequate. Long-term risks from climate change outweigh any risks posed by regional conflict, and as seen in recent months, are far more unpredictable.

As the Monetary Authority of Singapore’s Ravi Menon said in a recent speech, climate change is the mother of all challenges facing the world today, and “long after our conjunctural challenges of war, disease and inflation are behind us, the climate crisis will still be with us, only more intense, more urgent, more disruptive”.

Asia’s governments must go back to the drawing board and redefine the role of state energy firms in taking charge of emissions reductions, preventing further loss of the biosphere such as forest cover and glacial ice, and tackling ocean acidification and atmospheric pollutants.

An immediate need is for Asia’s governments to reconfigure their power grids from a system based on fossil fuels to a system based on clean energy sources. This will have a large upfront cost attached to it and will take tremendous effort. But it is even more relevant for Southeast Asia’s economies whose power grids are still nascent and underdeveloped.

This also means that Asean’s state energy firms have a much more vital role in mitigating climate change risk from the standpoint of the nation state, and the vulnerabilities of its populations, than they are willing to admit.

Eric Yep is LNG and energy transition lead editor, S&P Global Commodity Insights

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