Without a doubt, 2021 has been a better year than 2020 in the energy sector. The year has been more gradual and there are positive signs that the energy transition is accelerating.
It has not been without challenges, some of which may seem increasingly difficult to overcome and less straightforward.
We started the year in confinement, largely unvaccinated against Covid and, for many, on leave. On January 1, 2021, Brent Crude was valued at $ 51 per barrel. As the year progressed and more people were vaccinated, economies around the world gradually came out of hibernation with obvious signs of recovery in many sectors.
The recovery has rebounded so quickly that globally, the supply chain has faced increased demand for everything from food to cars and computers, and in the energy sector, the story was no different.
As of this writing, Brent crude is priced at $ 82 per barrel, a 61% increase from the start of the year. During the same period, a shortage of gas in Europe drove UK wholesale gas prices to rise by almost 400%.
Simple economics may explain why this happens – the energy supply is insufficient to meet a much higher demand and therefore prices are rising. The reasons for the shortage of supply are large and complex – from geopolitics and the environment to insufficient investment and, in the UK, not enough wind in the summer to run our wind turbines.
As the economy continues to recover, it is also digitizing and gradually converting to electrification. This leads to unquenchable growth in demand for energy.
Is it an elephant in the energy transition room?
2021 saw the renewable energy sector accelerate, striving to meet demand with technological and infrastructure developments in wind and tidal technologies. We have also seen encouraging participation in initiatives such as ScotWind, the first round of offshore wind leasing in Scottish waters in a decade.
Such developments take time to materialize. Before renewables can play a more dominant role in energy supply, there is a lot of work to be done. Grid infrastructure will need major upgrades to be able to handle the intermittent nature of wind and solar power. During this time, sufficient and reliable base power must come from other sources, in particular gas and possibly nuclear.
This year, it has been promising to see that the more traditional supply chain and large energy companies have also become more engaged and integrated with renewables.
It cannot be denied that the energy transition is underway, but there is still a very long way to go. Wind power has a prominent place in the energy portfolio, but other sub-sectors such as tidal power, geothermal energy, hydrogen and carbon storage are less developed and require more time, resources and energy. of investments.
The emergence of mini nuclear reactors in the UK is an interesting development that emerged in 2021. In November, Rolls-Royce secured over Â£ 400million in funding to set up a small modular reactor (SMR) business. It is hoped that this new company will be able to create up to 40,000 jobs by 2050. This could become a key element in supporting and balancing the energy transition.
As in 2020, an important development which continues to follow an upward trend is a greater acceptance and wide-scale recognition of the importance of renewable energies and their role in combating climate change and achieving clear ambitions. zero.
COP26 delivered the Glasgow Climate Pact, which we all hope will be a sea change in global responsibility over the next decade. We have also seen the rise of ESG (Environmental, Social & Governance) in the corporate sector and how it has found its place at the top of the agenda for companies and investors.
The energy transition is underway and we can safely say that we will not return to old, polluting and traditional lifestyles, in the long term in any case.
In the short term, if we are to continue to grow, modernize and create a position where we are not eternally dependent on fossil fuels, we must manage a balanced transition.
To achieve this in an affordable and responsible manner, it can be argued that a major source of abundant energy to bridge this gap could well be fossil fuels – after all, in 2021 they accounted for 83% of primary energy use.
Managed well and responsibly, and with the long game in mind, we can’t afford to have it avoided in 2022 or anytime soon.
Alasdair Green is Director and Head of E&P at Anderson Anderson & Brown (AAB)