Are the increasing energy costs caused by the energy transition?

Published on: 14 January 2022

Topical issues in the field of economy, (responsible) investment, pension and income: every week, one of APG's experts provides a clear answer to this week's question. This episode: equity investor Martijn Olthof on the increasing energy costs and the energy transition. “The transition is currently not carried out in an ideal way.”


The switch to and the supply of renewable energy is far from in line with the demand for energy. That has an upward effect on the price of fossil fuels and contributes to inflation. To what extent has the energy transition anything to do with that?

The current extreme increase in the costs of gas and electricity is largely caused by matters that don't have anything to do with the energy transition, Olthof says. “People are sometimes trying to attribute the acute problem we experience at the moment to the transition, but I believe that's way too easy and also unfair. Moreover, we don't have any other choice but to switch to renewable energy, that is to say if we want to limit global warning to a maximum of 1.5 degree. The energy transition will be costing a great deal of money in the long-term, that's a fact. But that's not the reason why gas is nearly four times as expensive now as it was prior to Corona. The high energy costs are caused, among other things, by a frosty winter last year in Asia, less investments in gas production, the rapidly increasing demand in periods with less Corona infections, a higher supplement on CO2 and because less gas is derived from Russia.


Demand and supply
Switching to clean energy is therefore not the underlying cause of the current peak in energy costs. However, it does lead to the question what the transition still has in store for us. “The tricky thing is that we are always looking for a solution that seems easy, but is not necessarily ideal,” Olthof says. “An example is that the blame for the climate change is easily imposed on the energy companies these days, as these companies are the ones producing those polluting fossil fuels. If society demands that those companies produce less, people believe the problem will resolve itself. And so energy companies are forced to produce less fossil fuels by referring the matter to the court, as we witnessed happening to Shell recently.”


According to the International Energy Agency (IEA), the decreasing investments in oil and gas currently are the only part of the energy transition that's going well. The supply of fossil fuels may be decreasing, but that is not the case for the demand for energy. That demand remains undiminished. And the current supply of clean energy cannot compensate for the lower supply of fossil fuels. “Too much demand and too little supply of energy creates scarcity which results in high energy costs. It is my opinion that, due to the major focus on the supply-side and too little attention for the demand-side, the transition is currently not carried out in an ideal way. Even though it is also more difficult to lower the demand for energy as that affects every citizen.” 


Olthof expects the energy transition is going to cost a great deal of money in any event. “Oil and gas are simply very efficient fuels, both in terms of transport costs and energy density. Switching to renewable energy is costly. In order to accelerate that transition, the polluting fossil fuels should become more expensive, for example by increasing the supplement on CO2 . “We already have a supplement on CO2 in Europe but that's not high enough yet to be the decisive factor. Moreover, that supplement does not apply to aviation and shipping. Without these types of measures we just have to wait until renewable energy naturally becomes cheaper than fossil energy. And that's the big problem. The IEA also clearly states that the current policy falls short. The EU may take the lead establishing plans to reduce the CO2 emissions, but those plans immediately face resistance. Because those plans affect citizens directly in their wallet. But if we continue to put off the energy transition, the consequences of climate change will only become bigger.” 


Hasty conclusion
The question remains how much the transition to renewable energy will be costing exactly. “If the transition is carried out properly, the costs will be lower than when we continue to follow the same path: with hasty conclusions,” Olthof says. “By that I mean solutions as the ones we see at the moment and that are mainly aimed at the supply-side. Think about pressuring companies to produce less or to invest in (currently) unprofitable alternatives. But I don't think that is the way to solve the problem. The solution lies in lowering the demand for fossil energy and in making investments in clean alternatives more attractive, meaning the supply of the latter will increase. And that will cost money. But if politicians don’t make those choices convincing enough, the problem will only get bigger over time. And with that, the resistance from society. Eventually, that may lead to us having to live with the catastrophic consequences of global warning exceeding 1.5 degrees.”


Olthof: “What has to happen in my opinion, is for politicians to take action and to implement unpopular measures that cost money. Not an easy message, but an important one. The question is how we are going to do this in such a way that the costs and the effects on inflation and economy stay as limited as possible and that the burden is divided as fairly as possible. If the policy remains the same, the impact will become so big that it will undermine the support for the energy transition. The current policy causes us to head towards global warming by roughly 2.6 degrees. The consequences thereof in the financial, social and civil field are vastly outweighing a high energy bill.”