Solving the potential energy crisis

22 September 2021

Robert Minter, director of Investment Strategy, Aberdeen Standard Investments, analyses the energy issues that have arisen in the UK and the US and says in Populist world there will be political consequences.

There are 1.5 million UK households are currently affected by energy supplier failure, that’s close to 20% of households. With input prices, variable and market prices capped some firms have been forced to stop trading energy.

There are parallels to the Texas power crisis in February where at its peak 4.5 million households were affected representing 47% of households. Both crises occurred during maintenance season and weather anomalies. Undoubtedly both have political consequences.

The current energy transition is partially to blame as the argument has too simple of a choice, either 100% intermittent renewable energy or a continued reliance on full-time coal.

The issue in both Texas and the UK electricity crises was that spare electricity was modeled for a different system. In the old system, the spare capacity was needed to react to last-minute day ahead unexpected changes in weather-related demand.

In the new system, spare capacity needs to be dramatically higher to allow for changes in weather-related supply outages in addition to the demand surges. This will make electricity systemically more expensive.

Additionally, many governments worldwide have sought to restrict capital flows to fossil fuel companies. Companies representing $14 trillion of AUM have agreed to restrict capital committed to fossil fuel companies. The global depletion rate of oil production is 5-7% per year, meaning if no investments are made into future production the oil supply constricts naturally by 5-7 million bpd.

The plan of governments has been to restrict capital, allow oil supply to fall by this amount or more, and force users, the demand side, to shift to alternatives. While this is a ‘cheap policy’ that doesn’t affect government budgets, it does nothing to incentivise people to demand more renewable energy. We expect government policy to focus more on creating demand for EV and renewables rather than supply restriction going forward.

We live in an easily excited populist world and energy prices that jump by 10x will have political consequences. The answer is to use renewables in as mass quantity as can be achieved based on backup capacity from nuclear, natural gas peaker plants with sufficient storage.

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