Clean energy transition not to blame for market volatility, says IEA

Reports suggesting that volatility in gas and electricity markets is the result of the clean energy transition are “misleading”, according to Fatih Birol, executive director at the International Energy Agency (IEA).

In recent weeks and months, natural gas and electricity prices have reached record highs, most notably in Europe and some major Asian markets, causing potentially significant economic impacts, Birol wrote in a recent blog. These include major negative effects on power companies, other businesses and industrial sectors, and consumers, resulting in government interventions to limit the damage.

However, claims are circulating blaming the clean energy transition for the problem. Birol said these assertions are “misleading, to say the least”.

“This is not a renewables or a clean energy crisis; this is a natural gas market crisis,” he wrote. “It is important to work from a sound evidence base on the causes of the current market turbulence.

“As we showed in our recent World Energy Outlook 2021, well managed clean energy transitions can help reduce energy market volatility and its impacts on businesses and consumers. The underlying causes of today’s crisis lie elsewhere.”

Birol noted the IEA is focused on the data, which shows that a range of issues are affecting the natural gas sector. These issues include the exceptionally rapid global economic rebound in 2021, outages and maintenance of key gas infrastructure, and a lack of sufficient supply from Russia.

“While LNG shipments are providing some additional supply to European gas markets, their timeliness is limited by longer transportation times than for pipelines,” said Birol. “Underground storage remains the principal source of short-term flexibility for gas markets in Europe.

“However, lower than average inventory levels (around 50% full as of early January compared with an average of nearly 70% over the past decade) create further security of supply concerns, especially in the event of late winter cold spells. This is why uncertainty over prices and supply remains high in early January, with most of the heating season still to come.”

Additionally, Russia has reduced its exports to Europe by 25% in the fourth quarter of 2021, compared with the same period in 2020, and by 22% compared with its 2019 levels. This is despite high market prices for natural gas seen in recent months.

The IEA estimates Russia could increase deliveries to Europe by at least one third. This equates to 10% of the EU’s average monthly gas consumption and would be equivalent to a new LNG tanker delivering a full cargo of natural gas to Europe daily. Together with the high level of LNG inflow, this would provide “significant relief” to European gas markets.

The natural gas market volatility has also affected European electricity markets, said Birol, which typically rely on gas as a marginal fuel. This has been exacerbated by lower-than-average hydropower output and low nuclear output, highlighting the need for adequate investment in sources of baseload supply and flexibility.

“Higher carbon prices have also played a role in pushing up electricity prices, but this needs to be kept in context,” Birol commented. “We estimate that the effect on European electricity prices of the sharp spike in natural gas prices is nearly eight times bigger than the effect of the increase in carbon prices.”

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