Power grid issues are the leading cause of blackouts

by

Key points:

  • Electricity systems are complex networks where a failure in one component can lead to a cascade of failures elsewhere, resulting in widespread blackouts. These blackouts can have severe impacts on all aspects of society and the economy.
  • Blackouts are typically caused by a combination of interrelated factors, rather than a single event. Common causes include equipment failure – often due to ageing infrastructure and underinvestment – grid overload, human error, cyberattacks, fuel supply issues, and natural disasters or extreme weather.
  • While power generators have sometimes been blamed for blackouts, the 20 major blackouts described in this briefing are overwhelmingly driven by failures in network infrastructure, human error or severe weather.
  • As electricity systems evolve to accommodate renewable technologies, increased use of energy storage technologies and interconnections between different countries’ systems can enhance system security.
  • Grids need to expand and develop as energy systems decarbonise, but investment is currently inadequate. The IEA said there is a risk of grids being “the weak link” in the energy transition.

Introduction

Electricity systems are complex networks of interrelated components, including power plants, transmission and distribution lines, the technologies that control them, and large and small consumers. A failure in one component can disrupt other components or cause them to fail, creating a cascade effect that can result in a blackout covering a wide area.

The April 2025 Iberian Peninsula blackout affecting Spain and Portugal was characteristic of this complex cascade effect. Blackouts can have severe impacts on all aspects of society and the economy.

The briefing outlines the main causes of a selection of significant blackouts over the last 20 years. 

What causes blackouts?

Blackouts tend to be the result of a number of interrelated factors, rather than being caused by one single event. The different factors might include:

  • Equipment failure: Ageing infrastructure in transmission or distribution networks, faulty components like transformers, generators, and circuit breakers, and material fatigue – when materials crack and eventually fail from repeated stress – can all lead to system failures. This is often exacerbated by underinvestment in maintenance and upgrades.
  • Grid overload/instability: When electricity demand suddenly exceeds the available supply or the grid’s capacity, it can lead to cascading failures as parts of the system automatically disconnect themselves from the grid – known as tripping – to prevent equipment damage. This can be caused by high demand, like during heat waves, or unexpected loss of generation.
  • Human error: Mistakes during operation, maintenance or dispatching can trigger outages that can cascade across the system.
  • Cyberattacks: As grids become more digitised, they are increasingly vulnerable to malicious cyberattacks targeting control systems.
  • Fuel supply issues: Disruptions to the supply of fuel for power plants, like coal or gas, can lead to a sudden drop in generation capacity and cause grid disruption and blackouts.
  • Natural disasters and extreme weather: Severe storms, floods and earthquakes can directly damage infrastructure, while events such as heatwaves raise electricity demand and cause equipment strain. Climate change is increasing the threat that extreme weather poses to electricity systems, and large-scale power disruptions were experienced around the world in 2024.

Infrastructure failure was the leading cause of blackouts over the last two decades

Table 1 shows a selection of blackout events that occurred over the last twenty years and indicates the initial event likely to have led to a blackout. Appendix 1 provides more details on the events.1These events were selected because of the number of people affected and also to give a broad geographical spread. The list is far from exhaustive. There is a longer list on Wikipedia (which also may not be exhaustive). World Population Review provides an overview of some of the countries most affected by blackouts, and detail on the number of firms that experience electrical outages in different countries is included in the results of the World Bank’s Formal Sector Enterprise Surveys.

Of this selection, the most common initial causes are:

  • Infrastructure failure, often faults in transmission lines.
  • Human error, including failure to implement protection standards or to inform other system actors of changes in operating conditions.
  • Extreme weather, often damaging infrastructure or preventing it from working properly.

Table 1

Upgrading the grid can prevent blackouts and support renewables

Variable renewables have often been erroneously blamed for blackouts, including in relation to the recent Iberian Peninsula event. However, as can be seen in Table 1, blackouts are overwhelmingly driven by failures in network infrastructure, with the resulting grid disruption driving all types of power plants offline.

The increasing deployment of renewable energy technologies means that electricity grids will need to change and adapt to accommodate these new technologies and practices while also maintaining system security. 

While the technologies and practices exist to enable renewables and storage to make a greater contribution to grid security, they are not yet receiving adequate political attention or investment. The security and resilience benefits of decarbonised electricity systems are being missed because electricity grids have not yet been upgraded to cope with the new technologies.

With grid upgrades, renewables can provide a secure electricity supply

The security of electricity systems can be defined by three qualities: 

  • Adequacy: the system’s ability to meet demand at all times under normal operating conditions.
  • Operational security: The system’s ability to retain a normal state during any type of event, or to return to a normal state as soon as possible afterwards.
  • Resilience: the system’s ability to absorb, accommodate and recover from short- and long-term shocks.

Traditional electricity systems were designed around very large-scale fossil fuel, nuclear or hydroelectric power plants, relying on the transmission network to deliver their output over long distances. The qualities of system security tended to be provided by fossil fuel or hydroelectric plants.

The increased deployment of renewables means that there is a more diverse set of smaller power plants that often provide variable output in response to the availability of wind or sun. 

Renewable energy integration involves modernising electricity grids with innovative technologies and enhanced operational flexibility, creating a more dynamic and resilient power system. The technologies to ensure stability and security in decarbonised electricity networks already exist, but are often underutilised. 

A renewables-based system can meet the three qualities of a secure grid in the following ways:

Adequacy 

Operational security 

Resilience

  • Energy storage technologies such as batteries or pumped storage can help electricity grids restart after a blackout, a process known as a ‘black start’. These technologies have rapid response times, stable voltage and frequency, and can operate independently of the grid, known as ‘island mode’, meaning they can kickstart blacked-out areas of the grid.
  • To date, grid operators have not usually required renewable power projects to have black start capabilities. However, the increasing deployment of renewables has focused attention on whether they can deliver these services. ScottishPower has successfully shown that wind power can restore a blacked-out section of the transmission network, using grid-forming technology to regulate the voltage and frequency of the wind farm’s output and allow it to contribute to stabilising or even restarting the grid.

Renewables, ageing assets and increasing demand mean grids need more investment

Electricity grids urgently need investment to deal with future challenges of electricity production and use. While the growth in renewables is often highlighted as responsible for this need, in reality, there are several factors driving the need for investment to expand and upgrade electricity grids:

  • Integration of new generation: The rapid expansion of renewable electricity generation means that grid infrastructure has to be updated and expanded to allow these sources to connect. Often, renewable projects are based in new areas, rather than in places where generation has traditionally taken place, requiring new lines to be built. In addition, the operating characteristics of variable renewable projects may mean upgrading or replacing grid management technologies to maintain grid stability. Other power plants might also require grid construction or expansion.
  • Ageing assets: Much of the existing network infrastructure in mature electricity systems was built decades ago, often in the mid-20th century. This equipment is reaching or has exceeded its design lifetime. Investment is needed for the maintenance, refurbishment or replacement of ageing components.
  • Increased electricity demand: Global electricity demand is rising, driven by climate change, population growth, economic development, and increasingly, the electrification of other sectors such as transport and heating. Data centres are also emerging as a major driver of increasing electricity demand. Existing grids may not have the capacity to handle this growing demand, necessitating upgrades and expansion to prevent overloads and ensure a reliable supply. Electrolysers for hydrogen production are also expected to need grid investment.
  • Modernisation and digitalisation (smart grids and decentralised generation): This requires improved network monitoring and control, demand-side management techniques, and enabling two-way power flows on networks. The development of smart grids is often coupled with the decentralisation of electricity systems and the use of more locally generated power, sited on lower-voltage distribution lines as well as transmission lines. 

Data from Bloomberg New Energy Finance (BNEF) gives an indication of how investment will be split between these categories until 2050 (Figure 1). In BNEF’s Net Zero scenario2BNEF’s Net Zero Scenario describes a pathway to net zero greenhouse gas emissions by 2050 consistent with 1.75°C of warming. the deployment of renewable generation is the largest single driver (35%), but it is closely followed by the need to replace ageing assets (30%). Overall, drivers that are not directly related to decarbonisation (ageing assets, increasing demand and non-renewable generation) make up more than 50% of the projected investment in grids up to 2050. 

Figure 1

Although not explicitly addressed in the BNEF figures, the need to ensure grid resilience and security in the face of more frequent and severe weather-related damage due to climate change is also a key driver. Cybersecurity threats to grid control systems are also a growing concern, requiring significant investment in advanced security measures and monitoring capabilities. 

Grids risk being the “weak link” in the energy transition, says IEA

Grid investment has not kept pace with the rate of increase in electricity demand and the growing deployment of renewables, and falls far short of what is needed. The International Energy Agency (IEA) estimates that USD 390 billion was invested in electricity grids in 2024, an increase of nearly 20% since 2015, but still much less than the USD 600 billion a year needed globally by 2030 to ensure that grids can deliver a secure energy transition. 

Figure 2 shows that investment in renewables has more than doubled since 2015, while investment in grids has only grown by 24% in the same period. Although the level of investment compared to growing electricity demand has improved since about 2021, it still lags behind demand growth. The IEA believes that this disparity means that grids risk being the “weak link” in the energy transition. 

Figure 2

The IEA has also expressed concern that grid infrastructure is “one of the biggest energy security risks” at present due to the lack of investment. The recent blackout on the Iberian Peninsula focused attention on the state of the region’s grid, as well as on electricity generation. Figure 3 shows that, although investment in the Iberian grid has grown in the last couple of years, it still lags behind other similar economies. 

The challenges faced by the Spanish grid were reassessed as a result of the blackouts, with the Spanish government announcing an additional EUR 750 investment in increasing its resilience.

Figure 3

Appendix

What’s hot (and cool) about heat pumps?

by Leave a Comment

Key points:

  • A heat pump is an electrical appliance used to warm or cool a building, provide hot water, or provide heat for some types of industrial processes.
  • Heat pumps are powered by electricity and can be extremely energy efficient, and so are set to become “the cornerstone of sustainable buildings”, according to the IEA.
  • The technology plays a large part in decarbonising buildings in national climate and energy pledges – if all governments meet their climate targets on time, heat pumps will produce almost 20% of heat in buildings in 2030, twice as much as today.
  • In 2021 (before gas prices spiked), heat pumps resulted in lower total energy costs in some countries, including Korea, Japan, Italy, China and the US. 
  • Fluctuating gas prices and supply uncertainties make heat pumps particularly attractive.
  • Heat pumps are most energy and cost efficient when installed in well-insulated homes. Badly insulated buildings, high up-front cost and a shortage of manufacturing capacity and trained technicians are some of the principal barriers to heat pump uptake. 
  • The challenge for heat pumps is not developing new technology, as is the case with some clean energy technologies, but creating policy that encourages uptake.

What is a heat pump? 

A heat pump is an electrical appliance that can be used to replace a fossil fuel-based heating system. When run on clean, renewable electricity, they reduce emissions and protect consumers from fluctuating fossil fuel prices. Heat pumps can be used to warm or cool a building, heat water, or produce low and medium-temperature heat for industry. They can be effective even in very cold climates – cold-climate heat pumps are still able to heat a building in weather conditions down to about -30°C.

Unlike some other low-carbon technologies, heat pumps are not new – they use the same technology used in fridges and air conditioners. It was first demonstrated in the mid-1700s, and heat pumps were first installed in buildings in Switzerland in the 1930s. Inside a heat pump, a gas called a refrigerant absorbs heat from one location, is compressed to increase the heat, before the heat is released in another location (for a more detailed explanation of how heat pumps work, see Box 1). 

There are three main types, which are designed to absorb heat from different places:

  • Air-source heat pumps take in heat from the air. They often look like an air conditioning unit.
  • Ground-source heat pumps absorb heat from underground. They involve digging a trench or borehole, so are sometimes called geothermal heat pumps.
  • Water-source heat pumps, which source heat from a nearby lake or river.

Heat pumps come in various forms – a heating unit with fans, a water-based distribution system (like radiators) or a ducted ventilation system. They can also be used for hot water, either by retrofitting an existing hot water tank or by combining a heat pump and water heater. Excess heat from the pump itself can even be used to provide instant hot water.

Heat pumps can also cool buildings, and rising global demand for cooling presents an opportunity for increased uptake. In cooling systems, a heat pump works the opposite way, removing heat from inside a building and dumping it outside. Reversible heat pumps that provide both heating and cooling are also available.

Box 1: How heat pumps work

All heat pumps have the same basic mechanism – they absorb heat from a cold location (a source – e.g. the outside air) and release it into a warmer location (a sink – e.g. the inside of a building). The system is powered by electricity, meaning that when run on renewable power, heat pumps are the best clean energy alternative for space heating in most environments. 

Heat pumps contain a gas called a refrigerant, which is much colder than the air or ground, and this passes through a vapour-compression cycle. Heat (thermal energy) from the air or ground is absorbed by the cold refrigerant in an evaporator, warming it up. The high-energy refrigerant gas is then compressed, making it even hotter, and pumped into a building where it releases heat via a condenser. The refrigerant is then allowed to expand, cooling it and bringing it back to the start of the cycle.

Ground-source heat pump flow diagram
Source: Climate Emergency UK

How can heat pumps help reduce emissions? 

Heat pumps can be powered with renewable electricity, dramatically reducing emissions compared to fossil fuel-based heating. 

Taking into account the current energy mix in the power system, operating an air-source heat pump already produces fewer emissions than the most efficient condensing gas boilers in North America, Central and South America and the Asia-Pacific region, according to the IEA.

Heat pumps are very efficient, with an energy output several times the amount of energy put in. A typical household heat pump has an energy output four times greater than the energy (electricity) needed to run it.1The coefficient of performance (COP) of a heating appliance is the ratio of energy used to heat produced. An average household heat pump has a COP of 4, meaning it produces four units of heat for each one unit of electricity used. A standard electric resistance heater has a COP of 1 – it produces one unit of heat for every one unit of electricity used. This makes heat pumps three to five times more efficient than gas boilers, and around four times more efficient than conventional electric heaters. This is because the heat provided by a heat pump is absorbed from its surroundings, rather than produced. The exact efficiency of a heat pump depends on the type of pump, the climate and source of heat.2The larger the difference in temperature between the source of heat and where it is released (the sink), the more energy a heat pump uses to move the heat.

Other technologies for clean heat are not fully developed and remain more expensive than heat pumps or carry other risks. The technology for clean hydrogen heating is not yet available – hydrogen is currently made using fossil fuels, risking locking-in fossil fuel use for heating – and will be more expensive and less efficient than heat pumps, as well as carrying a risk of explosions. Biomass heating emits dangerous pollutants that are harmful to health. Solar thermal systems are another option for clean heat, but these generally need to be used alongside another heat source. 

How much can heat pumps help decarbonise buildings?

The IEA considers heat pumps to be “the cornerstone of sustainable buildings”, a technology that will play a fundamental role in decarbonising space heating and cooling, alongside energy efficiency measures. Buildings account for around four gigatonnes (Gt) of direct CO2 emissions annually – around 10% of total global CO2 emissions (see chart below). Over half of this is direct emissions from space and water heating.3In 2021, space and water heating resulted in 2.45 Gt of direct CO2 emissions, 60% of this from gas, 27% from oil and 14% from coal.

If all governments meet their energy and climate targets on time, heat pumps will produce nearly 20% of heat in buildings in 2030 – double that of today – with capacity growing in all regions. In this scenario, heat pumps will account for half of the reduction in fossil fuel use for building heat by 2030, and energy efficiency for the other half.4According to the IEA’s Announced Pledges Scenario (APS), in which governments meet their announced energy and climate related pledges in full and on time.

Global energy-related CO2 emissions by sector
Source: IEA

How much can heat pumps help decarbonise industry?

Industry is responsible for 23% of global energy-related CO2 emissions, with heat making up two-thirds of industrial energy demand. Estimates indicate that the heat pump technology available today could meet 10% of industrial energy demand, although the potential decarbonisation impact of heat pumps in industry varies sector-by-sector. 

The greatest potential impact is in sectors with high demand for low-temperature heat, like the paper, food and chemical industries. Heat pumps are currently used in industry to produce low to mid-temperature heat (>160°C) for processes like bleaching and de-inking paper, or evaporating water to concentrate food. Heat pumps can also be used to capture and raise the temperature of waste heat, producing heat up to 160°C for processes like drying paper and food, and distilling chemicals. Alternatively, heat pumps can take waste heat to warm nearby buildings. 

Heat pumps have been developed to produce heat up to 180°C and systems producing temperatures up to 200°C are under development. However, other clean energy technologies, such as direct electrification, currently offer more economical solutions for high-temperature heat. Clean hydrogen may provide a solution in the long term.

How can heat pumps help decarbonise cities?

District heating networks are large-scale heating systems that provide heat to multiple homes or businesses through a network of insulated pipes carrying hot water. Today, they cover around 9% of heat demand, particularly in very cold regions, including the EU, Russia and China. However, the majority of district heating is still produced with fossil fuels – just under half is produced with coal and 38% with natural gas. Research has shown that district heating systems have the potential to meet half of Europe’s heating demand, with heat pumps powering up to 25% of these systems.

Electrical heat pumps can be used to retrofit networks that burn fossil fuels. Heat pump systems function at a lower heat than combustion systems, circulating water at around 45-60°C, which reduces wasted heat and improves overall system efficiency. District heat systems incorporating heat pumps can also make use of waste heat from nearby industry or businesses. For example, a district heating network in Vienna uses waste heat from the Therme Wien thermal baths. Water leaves the baths at around 30°C and a heat pump raises the temperature to 85°C, supplying heat to 1,900 households.

Box 2: Types of heat pumps

Different types of heat pumps collect heat from different places and can be used in different locations, depending on the climate, building density, existing infrastructure and geological features. The main categories are:

  1. Air-source heat pumps

Air-source heat pumps currently dominate the global market, accounting for around 60% of sales in 2021. This type of system absorbs heat from the air, and can either be installed as a one-block system, where one unit both absorbs the heat and emits it, or a split system, where heat is absorbed by one unit outside and emitted by another inside. Air-source heat pumps are generally quicker and cheaper to install than other types. They don’t require much ground space and do not need to be close to water, so can be installed in apartment buildings or dense urban areas. These systems can be used in almost all climates, but work most efficiently in temperate climes where air temperature does not change significantly.

  1. Ground-source heat pumps

The second-most common type of heat pump is ground-source, which accounted for around 2.5% of heat pumps installed in the EU in 2021. These systems source heat from the ground, from either a vertical heat collector in a deep borehole or a horizontal heat collector laid in trenches and buried underground. These systems are more efficient than air-source heat pumps in areas with big changes in air temperature, as ground temperature remains more constant. Ground-source heat pumps are more expensive to install than air-source systems, due to the earthworks required.

  1. Water-source heat pumps

This third type of system collects heat from water, like a lake, sea or underground water (ground water). Water-source heat pumps are especially efficient, as water is an excellent energy carrier, but can only be installed if the building is close to water. 

  1. Hybrid systems

Heat pumps can also be used alongside other clean heating technologies in a hybrid system. These are useful where a heat pump alone would be inefficient (or there is not enough space to install one big enough to make it efficient). In places where there’s a big temperature difference between the inside and outside, a very powerful and expensive heat pump would be needed to provide heat all year. Instead, a smaller heat pump can be installed, but swapped in for an electric heater on very cold days.

In the future, there is also the potential for hybrid heat pump-hydrogen systems. Hydrogen fuel cells are already being used in some countries, including Japan and South Korea, but heat pump and hydrogen boiler systems are still being developed. However, the IEA’s Net Zero Scenario foresees that hybrid heat pump systems for cold climates will meet no more than 5% of heating demand in 2050.

Ground-source, air-source and water-source heat pumps
Source: Zero Carbon Analytics

How widely used are heat pumps today? 

Heat pumps are set to be “the central technology in the global transition to secure and sustainable heating”, according to the IEA. Over the past year, the technology has received more attention as a way to reduce dependence on fossil fuels, especially natural gas in Europe, and to ensure energy security.

Heat pumps are already in use around the world – in 2021, 190 million were operating in buildings globally, meeting around 10% of building heating needs. In some countries, the technology represents a big proportion of heating appliances – 60% of buildings in Norway have heat pumps and 40% in Sweden and Finland. 

Sales of heat pumps increased by more than 13% globally in 2021, with particularly high growth in Europe (35% year-on-year). In the first half of 2022, Italy saw 114% growth compared to the same period in 2021, while the Netherlands saw 100%, Poland 96%, Finland 80%, Germany 25%, Norway 11% and the US 7%. Meanwhile some countries have had relatively stable heat pump markets for decades, including Japan. Despite this, fossil fuel air and water heaters still accounted for almost half of all heating equipment sold in 2021.5This number dropped below 50% for the first time in 2021.

Increase in heat pumps sales, 2020-2021 (%)
Source: IEA

Do heat pumps save money on heating?

According to the IEA, heating a home with an air source heat pump works out cheaper over its lifetime (without subsidies and including up-front costs) than a gas boiler in the US, Korea, Japan, Italy and China, and marginally cheaper in Canada.6The levelised cost of heating (or cooling) is the average price of one unit of heating or cooling (in this case, 1 MWh) over the lifetime of the product. This price includes upfront costs and operating expenses. It is also cheaper than gas in the UK and Germany when subsidies are taken into account. These calculations were made in 2021, before the Russian invasion of Ukraine caused spikes in gas prices, which led to a rapid increase in energy bills.

Despite saving consumers money on heating over time, heat pumps are usually more expensive to buy and install than gas boilers which can deter consumers. Purchase and installation costs vary between countries, types of heat pumps, and according to the infrastructure and energy performance of the building – the heating system may need to be upgraded (see below). The unit costs for heat pumps are unlikely to go down at the same dramatic rate seen in other clean energy technologies, like EVs and solar PV, as the technology is already mature. 

The local cost of electricity will also impact the cost of heating a home with a heat pump. In places where gas is cheaper than electricity, potentially because of government subsidies, heat pumps are less economically appealing. As a result, some clean heating policies include measures to make the price of electricity more competitive compared to gas.

Barriers to heat pumps

Thanks to their technological maturity and existing use, it should in theory be easy to scale up heat pump production and rollout. However, there are a number of barriers that require policy support and new technical solutions to overcome.

Poorly-insulated buildings and infrastructure limitations

A building must be well insulated for a heat pump to warm it efficiently. The better insulated the building, the less powerful the heat pump needed to heat it, meaning lower upfront costs, lower electricity bills and less strain on the power grid. The technology produces lower-temperature heat than gas boilers and is most efficient when left on all the time, meaning good insulation that allows heat to build up is paramount. In Denmark, heat pumps installed in houses with the highest energy efficiency rating (A+) have been found to consume 30 times less energy than those with the lowest energy efficiency rating (G).

Although new buildings can be built to the energy efficiency standards needed to operate heat pumps efficiently, heat pumps also need to be installed in existing buildings. In order to meet the REpowerEU goals, around five million will need to be installed in existing buildings by 2030 in Europe. This presents a greater challenge in countries where existing buildings are poorly insulated, like the UK. Similarly, existing district heating networks are designed to carry high-temperature heat, which is not suitable for integration with the low-temperature heat produced by heat pumps.

A resident who has decided to install a heat pump may also run into problems with local regulations, landlords or other tenants. In some regions, heat pump installation is subject to a lengthy or unclear approval process, especially if a ground-source heat pump involves digging or drilling a borehole.

Labour and manufacturing bottlenecks

A lack of skilled technicians trained to work with heat pumps is creating supply bottlenecks, for example in the EU. Expensive and non-standardised training schemes can be a barrier to workers becoming qualified. A study carried out in the UK found there is no clear training pathway for a career in clean heat, plus a lack of retraining incentives – either financial or in terms of clear career opportunities.

The forecasted rapid growth in heat pump rollout will require an increase in workers across the heat pump supply chain, and especially in installation. The same UK study estimated there are currently 3,000 heat pump engineers in the country, a number that will need to increase by 4,000-6,000 annually for the next six years for the country to reach its net-zero target. The IEA estimates that 450,000 people worldwide were already working with heat pumps in 2019, but if governments are to meet their pledges, employment in the sector will have to almost triple to more than 1.3 million workers by 2030.

Concerns over grids and energy demand

Electrifying all sectors of the economy will contribute to an increase in total electricity demand. Some have questioned whether existing power grids will be able to sustain the additional burden, raising concerns about energy security, grid instability and blackouts. Electricity industry body Eurelectric estimates that updating the European and UK power distribution grids will require EUR 34-39 billion in investments each year between 2020 and 2030 – around 0.2%-0.3% of current EU GDP. 

According to IEA estimates, if all current government pledges are met, heat pumps will contribute around 9% of the increase in electricity demand expected by 2030, and will only add moderately to peak energy demand in cold months. This impact can be limited if heat pump installation is paired with improving building energy efficiency, installing smart systems and grid planning that allows for flexibility. Heat pumps even have the potential to act as a demand-side response to help balance the grid – when used in combination with energy storage and smart systems, they can help balance grids by storing excess energy or reducing electricity demand at peak times. However, this application requires smart and integrated systems in well-insulated buildings, and as such is still in early development.

Information availability and public perception

In countries where heat pumps are rare, a lack of information about their benefits and how to choose the right kind of pump can deter consumers. A study carried out in the UK found that although 90% of respondents felt that reducing CO2 emissions was important, many did not know that heating played a role in emissions reduction, while only a minority said they were aware of low-carbon heating technologies. Concerns around appearance and noise, installation works and learning how to operate a new system can also dissuade consumers.

In some countries, however, heat pumps have achieved broad public acceptance. In Norway, 60% of buildings have them installed thanks to decades of government support, high taxes on fossil fuels, low electricity prices and a 2020 ban on oil-powered boilers. Heat pumps need to be affordable and accessible for consumers to choose them. Increasing access to clear information about upfront costs, installation and how to use them efficiently can help sway consumer’s choices.

Refrigeration chemicals

Heat pumps move heat energy by pumping a gas, called a refrigerant, around a closed system. Most heat pumps produced since the 1990s contain a hydrofluorocarbon (HFC), a type of fluorinated gas. HFCs are powerful, short-lived greenhouse gases producing a warming effect that can be thousands of times worse than that of CO2 over a few decades.7According to the Climate and Clean Air Coalition, the most abundant HFC is 3,790 times more damaging than CO2 over a 20-year period (CCAC). Exact global warming potential varies between different HFCs – see the list here adapted from IPCC AR4 (2007). However, HFC gases are only emitted when heat pumps leak or are dismantled or destroyed without proper measures being taken to ensure the refrigerants are not released.8HFCs don’t destroy the ozone layer, as was the case with chlorofluorocarbons, which were banned in the 1980s and 90s. Other types of refrigerants are already being used in heat pumps and governments are making moves to limit HFC use.

What does the future hold for heat pumps?

Unlike some clean technologies, the challenge with heat pumps is not in technology development, but in implementing policies that both address the challenges outlined above and make the most of the opportunities available to encourage heat pump rollout.

Heat pump capacity in buildings in the IEA’s Announced Pledges Scenario and Stated Policies Scenario9The IEA’s Stated Policies Scenario (STEPS) looks at the policies already in place today, assuming they are implemented.

Source: IEA

Lowering costs

Because the technology is already well developed, the sector is unlikely to experience swift technological development that leads to a sharp drop in price, as was and is being seen with solar PV and wind power. However, producing more heat pumps will result in lower unit costs, while fiscal and financial incentives, such as grants, rebates and subsidies, can be used to reduce the upfront cost of a heat pump.

When gas prices are high, heat pumps gain a competitive edge, but high electricity prices raise operating costs and make heat pumps less appealing. Policy is needed to control electricity prices to ensure heat pumps remain competitive as gas prices fluctuate. Furthermore, carbon taxes or tax relief on electric power can help balance costs. 

Building policy momentum

Governments are putting in place national climate policies that aim to reduce emissions from heating, many of which are combined with direct support for heat pumps. The most common policy support for heat pumps is fiscal or financial incentives. As of November 2022, 30 national governments offered grants for residential heat pumps, 24 offered low-interest loans, nine offered income tax rebates and five offered VAT rebates.10In many cases, this financial support is only available if existing fossil fuel heating is replaced. The 30 countries offering grants are responsible for almost three-quarters of global space heating demand.

This existing policy momentum was boosted by fluctuating gas prices and gas supply shortages, meaning governments are likely to continue strengthening policy to accelerate the heat pump rollout. In March 2022, the EU announced the REPowerEU plan, aiming to install 10 million heat pumps between 2023 and 2028 to reduce reliance on Russian gas. Germany and the Netherlands have announced bans on heating systems that run on 100% fossil fuels from 2024 and 2026 respectively, combined with improved training, scaling up production and financial support for purchasing heat pump systems (100% and hybrid). As of December 2022, 10 EU countries and the UK had a current or announced ban on some or all fossil fuel heating – all of which come into force before 2030.

Building codes, insulation regulations and clean heating mandates are also being used to encourage heat pump installations in new and existing buildings. France’s building energy code, which came into force in 2022, limits the emissions intensity of space heating and cooling. There are a few examples of heat pumps specifically being mandated for new buildings, including in Washington State (from July 2023). Such policies can take advantage of the natural replacement cycle of old heating appliances, as is the case for the UK’s boiler upgrade scheme.

In other regions, heat pumps are being encouraged through national and sub-national clean air initiatives and renewable energy targets. Through its 2017 Clean Heating Act, the Chinese government has encouraged the uptake of heat pumps in northern China to replace coal heating and improve air quality. Today, China is the global leader in heat pump installations. 

New, green jobs and increasing manufacturing capacity

In order to meet growing demand for heat pumps, governments and manufacturers will need to work together to expand production capacity. Governments are setting targets to scale up manufacturing – for example, the UK government’s Heat and Buildings Strategy sets aside GBP 450 million for subsidies to switch out gas boilers for heat pumps. It also aims for a thirtyfold increase in heat pumps manufactured and installed in the UK by 2030, with support for supply chains and industry. Manufacturers also announced plans in 2022 to expand production and open new manufacturing sites, including Mitsubishi in Turkey, Daikin in Poland and Panasonic in Czechia.

Meeting government targets for heat pump installation will also require a big push to train and reskill technicians to carry out the work. In the IEA’s announced policies scenario, the number of installers (around half of the heat pump workforce) will increase by 650,000 by 2030. Technical professionals from related fields, especially those working in fossil fuel heating, can be retrained to work with heat pumps. Research indicates that workers are willing to retrain as the new skills and expertise are needed and jobs involving fossil fuels come under increasing threat. New people will also need to be trained to enter the sector, particularly in regions where a significant proportion of the energy workforce is approaching retirement, including in the UK and US.

Governments and industry are working together to update certification and provide incentives for technical training and retraining. For example, the Dutch government announced it is working with the installation sector and manufacturers to ensure there is a training centre in every region. Pressure for installers can also be eased by standardising heat pump design and making them easier to install, reducing the need for extensive specialised training.

Better, cleaner heat pump technology

Current research and development aims to improve heat pump performance in different contexts and to reduce costs and environmental impact, as well as making them more appealing to consumers. According to the IEA, key areas for heat pump R&D are:

  • Developing smart control systems to optimise building (or whole district) energy use and to integrate heat pumps with heating storage or on-site renewable energy generation.
  • Improving efficiency to produce higher temperatures for industry and more efficient systems for colder climates
  • Improving the appearance of heat pumps and reducing noise
  • Reducing the environmental impact of materials, including refrigerants 
  • Improving drilling techniques to reduce the amount of surface space needed for ground-source systems.

New business models

Another way of reducing the upfront cost of heat pumps is through innovative business models. These include heat-as-a-service (HaaS), in which energy suppliers sell heat as a ‘service’, usually for a monthly fee that covers the loan of heating equipment, maintenance and the amount of heat generated. Such models are increasingly being tested in Europe, with energy companies in Estonia, France, the Netherlands and Switzerland offering HaaS contracts in some form. 

Other business models for heat pumps include:

  • Energy performance contracts: An energy provider installs, owns and operates a heat pump on a long-term contract with a customer, guaranteeing shared energy savings.
  • Pay-for-performance: The customer pays a rental fee for the heat pump, based on energy savings.
  • On-bill financing: The customer pays for heat pump installation gradually through their utility bill, which can be transferred to future tenants. This model is used in some parts of Canada.
  • Property-assessed clean energy: The customer buys the heat pump using a loan that is attached to the property and is paid back at the same time as property tax. The loan can be transferred to future tenants.
  • Conventional equipment lease: The customer leases the heat pump over a defined period, after which they own the heat pump.

Increasing demand for cooling

Heat pumps can provide combined heating and cooling, or cooling or heating only. Therefore, the increasing global demand for cooling creates an opportunity to boost the rollout of heat pumps. In Europe, Japan, the Republic of Korea and the US, air-source heat pumps are already generally used for both heating and cooling. In the North of China, heat pumps are primarily used for cooling. Taking a combined approach to the two uses could also accelerate the rate of innovation, meaning more efficient appliances may be developed more quickly.

  • 1
    The coefficient of performance (COP) of a heating appliance is the ratio of energy used to heat produced. An average household heat pump has a COP of 4, meaning it produces four units of heat for each one unit of electricity used. A standard electric resistance heater has a COP of 1 – it produces one unit of heat for every one unit of electricity used.
  • 2
    The larger the difference in temperature between the source of heat and where it is released (the sink), the more energy a heat pump uses to move the heat.
  • 3
    In 2021, space and water heating resulted in 2.45 Gt of direct CO2 emissions, 60% of this from gas, 27% from oil and 14% from coal.
  • 4
    According to the IEA’s Announced Pledges Scenario (APS), in which governments meet their announced energy and climate related pledges in full and on time.
  • 5
    This number dropped below 50% for the first time in 2021.
  • 6
    The levelised cost of heating (or cooling) is the average price of one unit of heating or cooling (in this case, 1 MWh) over the lifetime of the product. This price includes upfront costs and operating expenses.
  • 7
    According to the Climate and Clean Air Coalition, the most abundant HFC is 3,790 times more damaging than CO2 over a 20-year period (CCAC). Exact global warming potential varies between different HFCs – see the list here adapted from IPCC AR4 (2007).
  • 8
    HFCs don’t destroy the ozone layer, as was the case with chlorofluorocarbons, which were banned in the 1980s and 90s.
  • 9
    The IEA’s Stated Policies Scenario (STEPS) looks at the policies already in place today, assuming they are implemented.
  • 10
    In many cases, this financial support is only available if existing fossil fuel heating is replaced.

Offshore wind in Japan: The untapped potential

by Leave a Comment

Key points:

  • Japan has enormous offshore wind resources. Its total technical potential for offshore wind generation is over 9,000 TWh/year, more than nine times its projected electricity demand in 2050.
  • Japan is particularly rich in potential for offshore wind generation. It is therefore ideally placed to be at the forefront of a rapidly expanding global industry, particularly if it can develop a floating offshore wind industry
  • Offshore wind costs are falling rapidly. By 2030 it is expected to cost less to build than new nuclear power or coal with carbon capture and storage (CCS)
  • Expanding the use of offshore wind would reduce dependency on imported fossil fuels. A 1 GW offshore wind farm could replace the 0.8 billion cubic meters of gas which would be needed to generate the same amount of electricity. In 2022, this 1GW wind farm would have avoided USD 928 million in imported gas costs, and the 30 GW target for 2030 would have avoided USD 27.8 billion.

The current state of offshore wind in Japan

In 2022, there was 91 MW of offshore wind in Japan, 5 MW of which was floating offshore wind. These small scale demonstration projects are expected to deliver valuable technical lessons for the offshore wind industry in Japan. This capacity increased in February 2023 when the country’s first large-scale offshore wind project (140MW) began commercial operation at Noshiro Port in Akita Prefecture.

While this is a low level of deployment compared with some other countries, the government has increased its commitment to the technology and increased targets for awarding contracts for offshore wind energy to 10 GW by 2030 and 45 GW by 2040. The aim is to construct 1 GW a year between now and 2030. However, reaching the 2030 target will be challenging given that offshore wind projects can take several years to develop and construct – the IEA expects that only 0.5GW of new capacity is likely to be commissioned between 2022 and 2027 in total, meaning that the additional 9.5GW will have to be delivered in the three years between 2027 and 2030. 

Japan is currently running a tender for contracts to lease the rights to generate electricity from offshore wind. 1Tenders (or auctions) are competitive bidding processes for fixed-price contracts for a plant’s output.  Developers submit bids for the price they would like to receive for output, and the lowest priced bids are awarded contracts. The auction covers four sites that are expected to deliver 1.8 GW of new offshore wind capacity. Bids for contracts are due by the end of June 2023, and the results of the auction are expected from the end of 2023 to April 2024.

The potential for offshore wind

Japan has considerable wind resources offshore, particularly in the north of the country (see Fig. 1), with most of the potential in deeper waters further offshore. The Global Wind Energy Council (GWEC) estimates there is potential for around 128 GW capacity for fixed bottom projects in shallow waters, and 424 GW for floating offshore wind in deeper waters.  

Fig. 1: Mean wind power density in Japan 2Mean wind power density is a measure of the wind resource. It is presented as the mean annual power per metre of the operating turbine (W/m2). The higher the density, the better the wind resource. This figure shows mean wind power density at a turbine height of 100 metres.
Source: Global Wind Atlas

Given this large resource, the IEA estimates that Japan’s total technical potential for offshore wind generation is over 9,000 TWh/year.3Technical potential is the achievable energy production of a given technology in the context of topographic, environmental and land use constraints. It does not take into account the costs of production or market issues such as investor confidence or policy and regulatory issues. This is more than nine times its projected electricity demand in 2050 (922 TWh/yr). Offshore wind farms in shallow water could generate around 40 TWh/year of this, with the rest coming from wind farms sited further offshore, including floating offshore wind installations (see Box 1).

Box 1: What is floating offshore wind?

Floating offshore wind uses floating foundations for the base of turbines, unlike the more traditional fixed base turbines. There are three main types: spar-buoys, semi-submersible/barge and tension leg platforms. There are also variants of these three approaches.

They are being developed for use in deeper water (60-2,000 metres) where it would be too expensive to build traditional fixed-bottom turbines. The designs build on expertise developed in the offshore oil and gas sectors.

There are a number of small demonstration projects already in place or in development, including in Scotland (Hywind and Kincardine), Portugal, Norway and France, as well as Japan (Nagasaki-Goto and Kitakyushu). The industry is using the experience of building and operating these projects to bring down costs, establish supply chains and move towards mass production of components. GWEC expects the technology to be fully commercialised by around 2030.

Because the projects are sited further offshore, they can make use of stronger, more consistent winds, meaning that they can operate more efficiently. They can also reduce public opposition to new projects. Projects also require less material resources than more conventional fixed-bottom turbines, and installation causes less environmental disruption  to install.

The floating offshore wind industry is considered to be in its pre-commercial phase, and ready to scale up with commercial-scale, cost-effective projects ready for installation as early as 2025.

Japan is reportedly considering extending offshore wind construction beyond its territorial waters (22 km from the coast) into its Exclusive Economic Zone (EEZ) (around 370 km from the coast). This approach will allow Japan to access more of its offshore wind resources, particularly if it implements floating offshore wind turbines. Developing offshore wind farms in EEZs has already taken place in Europe and has allowed the Netherlands, the UK and Belgium to access more sites for their offshore wind farms.

Offshore wind plants operate more efficiently than onshore wind plants. This reliability means the IEA classifies offshore wind as a ‘variable baseload’ technology that can contribute to the security and reliability of electricity systems.4Baseload is the minimum amount of constant power required over a period of time. Offshore wind projects in Japan currently have a capacity factor (the ratio of the actual electricity generated to the theoretical maximum amount that the plant could generate) of 35%-45%, and the IEA expects this to increase by an additional 5% by 2040 as a result of taller turbines with larger rotors. A capacity factor of 40% compares favourably with the current performance of Japan’s nuclear reactor fleet (around 15.5%), though it is less than coal (64%) and gas (47%). 

Siting turbines further offshore is also projected to lead to significant additional improvements in capacity factors as a result of higher, more constant wind speeds. Sea surface winds at around 10 km offshore are 25% higher than winds onshore.

The costs and benefits of offshore wind

Fixed-bottom offshore wind is increasingly seen as a mature technology that competes with new fossil fuel generation thanks to established supply chains and very rapid reductions in the cost of building and operating projects. The global weighted Levelised Cost of Energy (LCOE) fell 60% from USD 0.188/kWh to USD 0.075/kWh between 2010 and 2021 and is expected to fall further, with prices ranging from 0.10/kWh and USD 0.050/kWh by 2024.5The Levelised Cost of Energy (LCOE) is the cost of electricity generation over the lifetime of a power plant. It is based on a calculation of the current value of the costs of building and operating a power plant over its lifetime. It allows a comparison of the costs of different technologies even if they have different fuel costs, life spans, capacities and financial profiles.  This makes new offshore wind plants competitive with fossil fuel generation (Figure 2).

Fig. 2: Global weighted average LCOEs from newly commissioned, utility-scale renewable power generation technologies, 2010-2021
Source: IRENA
Note: This data is for the year of commissioning. The thick lines are the global weighted average LCOE value derived from the individual plants commissioned in each year. The LCOE is calculated with project-specific installed costs and capacity factors, while the other assumptions are detailed in Annex I of the IRENA report. The single band represents the fossil fuel-fired power generation cost range, while the bands for each technology and year represent the 5th and 95th percentile bands for renewable projects.

Prices for materials and freight transport have been increasing since the start of 2021 as a result of Covid impacts and increased demand. This has had a knock on impact on the costs of building new renewable projects, including offshore wind and other electricity generation projects. Despite this, the IEA finds that the increase in these costs do not negatively impact the competitiveness of wind and solar because fossil fuel and electricity prices have risen at a much higher rate. 

In Japan, the government aims to reduce the price of electricity from fixed-bottom offshore wind to around USD 0.06 – 0.07/kWh (YEN 8 – 9/kWh) by 2030-35, which compares well with current prices in other countries.

Much of this price reduction is expected to come from the reduced costs of building new offshore wind farms through economies of scale and learning effects. The IEA expects the costs of new offshore wind farms in Japan to fall rapidly by 2030 and even more by 2050 (see Fig. 3) as the country establishes supply chains and gains more experience of the technology. By 2030, it is expected to cost less to build than new nuclear power or coal with carbon capture and storage (CCS) and by 2050 to have comparable costs to  coal and gas with CCS. The costs of operating and maintaining offshore wind farms also show impressive reductions thanks to a high rate of learning leading to improved performance.

Fig. 3: Capital and O&M costs for selected electricity generation technologies in Japan (Stated Policies Scenario)
Source: IEA World Energy Outlook 2022, Tables for Scenario Projections

Similarly, a survey of industry experts found that the LCOE for fixed-bottom offshore wind is expected to fall by 35% from 2019 levels by 2035, and floating offshore wind to fall by 17%, largely as a result of improved performance and larger turbines leading to economies of scale. These cost reductions are expected to continue up to 2050 (see Fig. 4). A further survey of mid range forecasts for the LCOE of offshore wind in 2050 put it at around half of today’s cost (USD 40-60/MWh).6Beiter, P. Cooperman, A. et al (2021). Wind power costs driven by innovation and experience with further reductions on the horizon, WIREs Energy and Environment, 10:e398, doi 10.1002/wene.398.

Fig. 4 : Levelised cost of energy survey estimates for onshore and offshore wind 2019 – 2050
Source: Beiter et al (2022).

Understanding the value of renewable energy projects also involves considering other factors. Generating electricity from domestic renewable sources reduces dependency on importing fossil fuels in an increasingly volatile global market. Japan relies on gas for about 34% of its electricity generation, and coal for around 31%. IRENA estimates that in 2022, Japan saved over USD 1 billion from displacing fossil fuel generation with renewable sources of energy added to the system in 2021 alone.

Offshore wind therefore has an important role in reducing import dependency and exposure to high fossil fuel prices. The IEA estimates that a 1 GW offshore wind farm could replace the 0.8 billion cubic meters of gas needed to generate the same amount of electricity. In 2018, the 1 GW wind farm would have reduced import fuel bills by over USD 300 million. If this is updated to 2022 prices, the 1GW wind farm would have avoided USD 928 million in imported gas costs, and the 30 GW target for 2030 would have avoided USD 27.8 billion.7This assumes that gas cost USD 34/MMBtu, which was the average LNG price in Asia in 2022.

A recent study in the US projected that Japan could reduce its reliance on fossil fuels and instead generate 70% of its electricity from renewable sources by 2035.8The remaining 30% of electricity generation is projected to come from nuclear power (20%) and gas-fired generation (10%).  Coal would be phased out by 2035 and no new fossil fuel plants would be built. This could be delivered without compromising grid security if it is complemented by increased storage capacity and improved electricity transmission infrastructure. Despite the need for investment to deliver this, the study found that average wholesale electricity costs could be 6% lower in 2035 than in 2020 because imports of fossil fuels could be reduced by 85%, and CO2 emissions for the electricity sector could decline by 92% in the same time period. While solar power is likely to make up most of the new generation in the 2020s, offshore wind is expected to dominate in the 2030s (see Fig. 5).

Fig. 5: Average annual renewable capacity additions (GW/yr) (Clean Energy Scenario)
Source: Lawrence Berkeley National Laboratory

In addition to reduced import dependency, renewable power projects are quick to build compared with both fossil fuel power stations and new nuclear power stations. Average construction times for offshore wind farms have fallen from two years in 2010-2015 to around 18 months in 2020. This is due to a combination of experience and improved supply chains, particularly the availability of installation vessels, ensuring that new offshore wind capacity can be delivered more rapidly than conventional generation.

Offshore wind in a global context

The global technical potential for offshore wind is enormous – the IEA believes that it could produce more than 420,000 TWh/year, 11 times projected global electricity demand in 2040. GWEC estimates that 80% of this potential is in water that is more than 60 metres deep, and as a result the global market for floating offshore wind will expand as countries with established industries look for new areas to develop further offshore. The floating offshore wind sector is undergoing rapid growth in Europe, with the US and Asian countries expecting to make significant contributions in the medium term (see Fig. 6). 

Fig. 6: Projected floating wind installations worldwide 2021 – 2031 (MW)
Source: GWEC Global Offshore wind report 2022
Note: CAGR = Compound annual growth rate

Consultancy firm McKinsey expects that the majority of long term growth for offshore wind will be delivered by the Asia Pacific region. The region has deep seas and can be subject to extreme meteorological conditions, meaning that turbines need to be optimised for these conditions. This in turn presents commercial opportunities for countries and companies that are able to develop fixed-bottom and floating offshore wind turbines that can operate efficiently in these conditions. 

The US government has recently set out comprehensive plans to drive the development of a domestic offshore wind industry to deliver decarbonisation as well as take advantage of global demand for the technology. Establishing expertise in floating offshore wind is a major focus of this initiative (see Box 2). Japan’s impressive offshore wind resource also makes it well suited to developing global leadership in the floating offshore wind sector.

Box 2: Building a floating offshore wind industry in the US 

The US has a huge technical potential for offshore wind. A recent government report identified 1.5 TW for fixed-bottom projects and 2.8 TW from floating offshore wind.  Together they could supply three times the annual electricity consumption in the US.

The US government has recently announced plans to deliver a rapid expansion of its offshore wind industry. It currently has 42 MW of offshore wind in operation, but plans to achieve 30 GW by 2030 and 110GW by 2050.  

Floating offshore wind is a key focus of this target, with the aim of making the US a global frontrunner in the technology.  The Floating Offshore Wind Shot initiative focused on delivering 15 GW of floating offshore wind by 2035 and reducing the cost USD 45/MWh by 2035, a 70% reduction.

Achieving the 2030 target will mean that secure supply chains have to be established quickly to deliver the components, vessels, port facilities and workforce needed. This in turn will require significant investment to ensure the skills and infrastructure are in place.  Without this investment, it is likely that delivering the 2030 target will be delayed. The government estimates that achieving this target will support 77,000 US jobs.

How the potential for offshore wind in Japan can be realised

Despite its huge potential, offshore wind is relatively undeveloped in Japan compared to other countries.  

Fixed-bottom offshore wind is now seen globally as an established technology, with secure supply chains and dominant industrial players. Floating offshore wind is still developing and therefore presents significant commercial opportunities for countries at the forefront of development. Japan’s offshore wind resource means it is ideally placed to take advantage of these opportunities.

Japan already has policy commitments to developing offshore wind technology and supply chains. The Vision for Offshore Wind set out targets of 10 GW by 2030 and 30-45 GW by 2040. These, however, are short-term targets, and will not necessarily give confidence to investors needing to recoup investments they make in establishing supply chain infrastructure or constructing offshore wind farms. The government should, therefore, develop long-term targets for both floating and fixed-bottom offshore wind as well as ensuring that carbon pricing is effective at encouraging investment in low-carbon technologies.

The country’s slow development of offshore wind to date is due to a number of factors, including perceptions of high technology risks and challenges related to permitting processes. In particular, the IEA identifies the length of the environmental permitting process and grid connection process as important barriers to faster deployment of wind. 

Development and permitting processes

Slow or complicated permitting processes can delay project development, or even discourage companies from participating in the market at all. Permits can involve all stages of project development, from initial site investigation to construction, and can be expensive and complex to navigate, especially if they involve multiple government departments. In particular, the Environmental Impact Assessment process in Japan has been seen as both costly and lengthy. 

The government is seeking to streamline the development process for developing sites by providing a centralised service for wind resource measurements, seabed and community surveys and environmental impact assessments. It has also introduced some measures to mitigate project challenges, such as designating areas of the sea for development, and improving community engagement processes. The IEA recognises that these measures may have a positive impact on development of new projects after 2027, but the measures do not apply to those projects already in development.

Grid connections

Successful deployment of offshore wind relies on developing onshore grid capacity to accommodate the output. A failure to upgrade or expand the onshore network could mean that a significant amount of offshore wind potential is not used.

Historically, Japan had a very fragmented electricity network, with 10 General Electric Utilities owning and operating the distribution and transmission networks. In addition, there are two separate grids operating with different technical standards.9The East region grid operates at 50 Hertz, while the West region grid operates at 60 Hertz. This means that connecting the two grids is expensive and complicated. This meant that strategically planning for grid upgrades, interconnections and expansion to include more renewables generation was problematic due to the number of different interests involved.  

Strategic planning is particularly important to ensure efficient investment in the new networks necessary to transmit the power from offshore to where it is needed. It can also save consumers money – a recent report by the economic consultants Brattle found that a proactive approach to transmission grid planning in the US could result in at least USD 20 billion in transmission-related cost savings, as well as reducing the number of transmission cable installations needed, thereby enhancing grid reliability and resilience and delivering savings for consumers. A similar study by the UK’s National Grid ESO also found that adopting an integrated approach from 2025 could potentially save consumers around USD 7.2 billion in capital and operating costs up to 2050, as well as delivering other benefits. 

Some action to enable a strategic approach to network development has taken place. The Organization for Cross-regional Coordination of Transmission Operators (OCCTO) was established in 2015 to manage cross-regional interconnections, develop a network code for transmission and distribution and plan the development of the transmission network, as well as a range of other duties. However, if Japan is to achieve a rapid transition to a clean energy system with a thriving offshore wind industry, more needs to be done to change policies, regulations, markets and the use of land.

  • 1
    Tenders (or auctions) are competitive bidding processes for fixed-price contracts for a plant’s output.  Developers submit bids for the price they would like to receive for output, and the lowest priced bids are awarded contracts.
  • 2
    Mean wind power density is a measure of the wind resource. It is presented as the mean annual power per metre of the operating turbine (W/m2). The higher the density, the better the wind resource. This figure shows mean wind power density at a turbine height of 100 metres.
  • 3
    Technical potential is the achievable energy production of a given technology in the context of topographic, environmental and land use constraints. It does not take into account the costs of production or market issues such as investor confidence or policy and regulatory issues.
  • 4
    Baseload is the minimum amount of constant power required over a period of time.
  • 5
    The Levelised Cost of Energy (LCOE) is the cost of electricity generation over the lifetime of a power plant. It is based on a calculation of the current value of the costs of building and operating a power plant over its lifetime. It allows a comparison of the costs of different technologies even if they have different fuel costs, life spans, capacities and financial profiles.
  • 6
    Beiter, P. Cooperman, A. et al (2021). Wind power costs driven by innovation and experience with further reductions on the horizon, WIREs Energy and Environment, 10:e398, doi 10.1002/wene.398.
  • 7
    This assumes that gas cost USD 34/MMBtu, which was the average LNG price in Asia in 2022.
  • 8
    The remaining 30% of electricity generation is projected to come from nuclear power (20%) and gas-fired generation (10%).  Coal would be phased out by 2035 and no new fossil fuel plants would be built.
  • 9
    The East region grid operates at 50 Hertz, while the West region grid operates at 60 Hertz. This means that connecting the two grids is expensive and complicated.

Bangladesh’s reliance on LNG increases heat stress, finance and energy risks

by Leave a Comment

Key points:

  • Bangladesh has increased reliance on LNG since starting imports in 2018, relying on the fuel for 22% of the country’s gas demand. Since then, Bangladesh has failed to meet its targets for increasing renewable generation, which now accounts for just 2% of the country’s electricity.
  • This reliance on imported LNG means the impacts of the current energy crisis have been acute, with widespread power cuts hitting both industrial production and the availability of air conditioning during hot weather.
  • The energy crisis is set to continue, with LNG prices forecast to remain high throughout 2023 and up to the late 2020s, with similar consequences. 
  • The global LNG industry is accelerating climate change, to which Bangladesh is highly vulnerable. 
  • Heat stress from fossil fuel expansion will have severe impacts on human health, labour productivity, income and overall economic growth of the country. 
  • Extreme weather and rising sea levels are already affecting the country and, by 2050, there could be nearly 20 million internally-displaced climate migrants.
  • Bangladesh has the potential for major expansion of renewable generation, but is not on track to increase capacity in the near-term. To provide cheaper, cleaner, more reliable power, the government of Bangladesh and international finance should prioritise scaling up renewable power.

LNG has boomed while renewables have stagnated 

Bangladesh has traditionally relied on gas as its main source of electricity generation, supplied from domestic extraction since the early 1960s. Gas made up 59% of Bangladesh’s energy supply in 2020 and fuels more than two-thirds of electricity generation. However, the country’s reserves of gas are declining, while electricity demand is increasing – in 2022, the government estimated that domestic gas supplies would last for less than 11 years.

In 2016, the government set out a plan to address this shortfall, laying out a vision for a huge growth in imports of liquified natural gas (LNG). The plan set a target of starting LNG imports in 2019 at a level that would meet 17% of the country’s gas demand, rising to 40% in 2023, 50% in 2028 and 70% in 2041.

The first stage of this vision was largely achieved, with the country signing two long-term contracts to import gas from Qatar, with LNG imports starting in the 2018/19 financial year and nearly doubling in 2020/21. In 2021, Bangladesh also started buying LNG from the spot market – where gas is bought for immediate delivery and prices are far more volatile than those bought under long-term contracts. By 2022, LNG imports accounted for 22% of the country’s total gas demand.

While the government achieved ambitious targets for increasing LNG, it was nowhere near as successful in meeting its targets for renewables. In 2008, the government set a target of meeting 10% of electricity demand with renewable sources by 2020, with similar targets included in the 2016 power plan. By 2022, renewables generated just 2% of Bangladesh’s electricity, according to analysis by the Centre for Policy Dialogue, making up just 3.75% of installed capacity.

Reliance on LNG left Bangladesh exposed to the energy crisis

The country’s increased reliance on imported LNG, combined with very low domestic renewable generation, has left Bangladesh highly vulnerable to global energy supply shocks. This risk became a reality in 2021 and 2022, when global LNG prices increased dramatically, first as Russia reduced gas exports to Europe and again following Russia’s invasion of Ukraine. 

In the year running up to the invasion, Asian LNG prices rose by 390% before rising a further 48% in the five months after the invasion – reaching a peak more than ten times higher than prices in the same month in 2020. The benchmark price for LNG averaged USD 34 per million metric British Thermal Units (MMBtu) in 2022, compared to USD 15/MMBtu in 2021. 

As well as facing significantly higher prices for LNG imports, Bangladesh also saw reductions in the LNG supplied through its long term contracts from Qatar, according to analysis by the Centre for Policy Development.

Faced with such high prices, Bangladesh stopped making spot market purchases of LNG in July 2022. As a result, the country faced widespread power cuts in the second half of the year. In mid-July, 20% of the country’s electricity demand was not met due to gas shortages, with the country cutting power on 85 of the 92 days up to the end of October, according to analysis by Reuters. At its worst point in October, blackouts affected 75%-80% of Bangladesh, leaving 130 million people without power, as a third of the country’s gas power units faced a gas supply shortage. The electricity that could be supplied also came at a huge cost – electricity generation costs rose by 47% from financial year 2020-21 to 2022.

The impacts of this on Bangladesh have been significant. Industrial production, including the garment sector, fell by a reported 25%-50%, placing further pressure on the country’s balance of payments. 

Up to a quarter of the country’s power demand comes from air conditioning, so cutting off power supplies left people – particularly older people, disabled people and children – at greater risk of heat stress, with temperatures in places exceeding 40°C. 

Bangladesh’s energy crisis is set to continue

Asian LNG importers such as Bangladesh are currently experiencing a reprieve from the record high prices of 2022, with regional prices currently lower than all of 2022 and on a par with mid-2021. In February, the country re-started purchases on the spot market with a purchase from TotalEnergies at USD 19.78/MMBtu, with the country aiming to keep purchases below USD 20/MMBtu this year.

But this drop in prices is not forecast to last. After a steep drop in 2022, Asian gas demand is expected to rise by around 3% in 2022 due to the lifting of China’s zero-Covid policy, which, combined with Europe’s increased demand for LNG, will put upward pressure on prices:

Fig. 1: Historic and forecast Asian LNG prices
Source: International Monetary Fund, S&P Global, Reuters

Global LNG prices are set to remain high at least until 2025 or 2026, when new LNG supplies are set to come onto the market. Bangladesh is reported to be looking for new long term LNG supply contracts, however there is very limited availability and competition from European buyers prepared to pay high prices. Until then, maintaining or growing Bangladesh’s recent levels of LNG imports will have to rely on expensive and highly volatile spot markets.

The impacts of such high prices on Bangladesh look set to continue. In January 2023, the government increased gas prices to commercial users by between 14% and 179% (household prices were left unchanged). This presents a significant challenge for the garment sector, which makes up more than 80% of the country’s export earnings. Producers must either pass on higher production costs to international buyers or face falling sales and profits. Power sector subsidies reached BDT 297 billion (USD 2.74 billion) in the financial year 2021-22, and are likely to rise further in 2023. It is highly likely that Bangladesh will experience further blackouts due to a shortage of LNG, with knock-on impacts on the availability of air conditioning during heatwaves and the productivity of the economy.

Despite the outlook for LNG prices, Bangladesh is planning to double its LNG import capacity with a more than 150% increase proposed, according to Global Energy Monitor (GEM). LNG imports are forecast to rise by more than 350% between 2020 and 2030, according to analysis by the Centre for Policy Development. This increase goes hand in hand with an expansion of gas power installation. The country has 11.5 GW of gas power currently installed, another 2.3 GW under construction and further 33.3 GW proposed, according to GEM.

LNG investment: Finance and stranded asset risks

Asia is expected to witness a surge in gas infrastructure investments, with the total investment in proposed projects reaching USD 379 billion. Bangladesh has one of the most extensive expansion plans, with USD 16.5 billion of investment in new gas infrastructure. This investment includes the construction of LNG terminals, pipelines and new power plants.

Table 1: Bangladesh planned investment for fossil gas infrastructure
Source: Global Energy Monitor, 2021

The reliance on gas for energy development raises concerns about the country’s large and unsustainable debt burden. Building additional gas infrastructure for the power sector, often under the guise of a ‘bridging fuel’, entails high financial risks to a developing country, particularly as the levelized costs of electricity from renewable energy are lower than for gas and will continue to fall. As the competitiveness of renewable energy prices persists, Bangladesh’s pivot toward gas will result in a poor investment and wasting valuable capital. For example, Bangladesh is reportedly currently facing a hefty debt bill of USD 2 billion every year from the power sector’s mega projects, specifically fossil fuel development. Amidst the global transition towards clean energy, gas infrastructure could potentially become stranded assets, posing a significant financial risk to Bangladesh, leading to broader and more severe socio-economic problems.

LNG expansion is accelerating climate change

While the lack of power increases the health risks from heatwaves in Bangladesh, increasing the use of LNG is also accelerating climate change, which will make extreme weather events in the country more severe and frequent.

Natural gas is the fastest growing source of CO2 emissions from fossil fuels, responsible for more than half the increase in the last five years. Worldwide, a 173% increase in LNG export capacity is in development, an expansion that puts the Paris Agreement climate goals at serious risk. The Intergovernmental Panel on Climate Change (IPCC) has found that emissions from existing and planned unabated fossil fuel infrastructure would push the world past 1.5°C of warming, unless they are phased out early.

The extraction and transportation of gas emits methane, a powerful greenhouse gas that is responsible for around a quarter of the 1.1oC of warming the world has already experienced since pre-industrial times. Transporting gas as LNG is also emissions intensive due to the energy required to super-cool the gas. In the US alone, the seven LNG terminals currently operating have the equivalent emissions to almost nine coal power stations. 

If all LNG terminals globally had the same emissions intensity as those in the US, together they would have the same emissions as 46 coal power stations, with emissions greater than Malaysia’s and the Philippines’ coal fleets combined. An analysis of multiple studies of US LNG shipped to Europe found that “emissions from the extraction, transport, liquefaction, and re-gasification of LNG can be almost equal to the emissions produced from the actual burning of the gas, effectively doubling the climate impact of each unit of energy created from gas transported overseas.

Increasing impacts of climate change

Bangladesh is widely recognised as being one of the most vulnerable countries to the impacts of climate change, largely due its natural geography on a low-lying delta with a high risk of cyclones, extreme rainfall, flooding and droughts, combined with high population density. Fifty-six per cent of the population – more than 90 million people – live in areas with a high exposure to climate change, compared to a global average of 14%. Thirty-three per cent of the population – more than 53 million people – face very high exposure to climate change, compared to just 6% globally.

These risks are not just a future possibility, but are already impacting Bangladesh. Between 2000 and 2019, the country experienced 185 extreme weather events due to climate change. Tropical cyclones are estimated to cost Bangladesh USD 1 billion annually, and around 20 million people are already having their health affected from saltwater-polluted drinking water linked to sea level rise. In 2022 alone, over 7.1 million Bangladeshis were displaced by climate change, according to the World Health Organisation.

Fig. 2: Proportion of population exposed to climate risks
Source: USAID

These impacts are set to get worse as the climate warms. The IPCC has found that wind speeds and rain rates of tropical cyclones will increase as global temperatures rise. By 2050, Bangladesh could have up to 19.9 million internal climate migrants, according to the World Bank, almost half the projected internal climate migrants for the whole of South East Asia. By 2100, one third of the population of Bangladesh could be at risk of displacement. 

The extent of these impacts will be determined by the speed at which the world can reduce greenhouse gas emissions – the science is clear that an immediate and rapid reduction in the use of gas is required to avert the worst impacts of climate change.

Impacts of heat stress due to fossil fuel and LNG expansion in Bangladesh and around the world

Bangladesh is predicted to experience more frequent and severe heatwaves, which have been shown to increase mortality rates by as much as 31.3% for every 1°C increase in the universal thermal climate index. 

Heat stress can exacerbate respiratory problems, such as asthma and chronic obstructive pulmonary disease (COPD), which are already common in Bangladesh due to air pollution. These can result in reduced productivity, increased absenteeism and long-term health issues.

Vulnerability to heat-related diseases is exceptionally high among people over 65, who often have underlying medical conditions. Children are also vulnerable to heat events, due to their susceptibility to vector-borne diseases, as are individuals with low literacy levels who may not be fully aware of the dangers of extreme heat events.

Vulnerable communities are also more likely to experience economic impacts from heat stress, such as lost wages from illness or decreased productivity. Low-income households may also struggle to pay for cooling, or live in housing without adequate ventilation or insulation, increasing the risk of heat stress and heat-related illness.

Psychological impacts of heat

Recent research has highlighted the impact of climate change on mental health in Bangladesh, revealing a link between elevated temperatures and mental health-related morbidity and mortality. A Lancet Countdown report projected deadly heat problems for densely populated areas, such as Dhaka and Chattogram, where the urban heat island effect exacerbates the vulnerability of residents. 

Vulnerability to mental health impacts is particularly acute for older populations, women, individuals with physical disabilities or illnesses, and households experiencing economic shocks. 

Heat impacting productivity at work

The warming planet will increase the health and well-being risks associated with working in hot and humid conditions. This is especially true for low and middle-income tropical countries like Bangladesh, where a significant proportion of the population are manual workers in agriculture and construction. Workers exposed to heat stress are at risk of a range of health impacts, including dehydration, heat exhaustion, heat stroke and other heat-related illnesses. 

Extreme heat exposure is also affecting working hours, resulting in a significant loss of labour. The International Labour Organization (ILO) has identified Bangladesh as one of the South Asian countries that faces a high risk of lost working hours due to heat stress, especially in the agricultural sector. At present temperatures, the country loses 254 hours of labour per person annually due to heat exposure. This figure increases significantly to 573 hours of labour loss per person annually if the temperature rises by 2°C.  

Workers are less able to perform physical tasks in high temperatures and humidity, leading to decreased output, increased downtime and reduced economic efficiency, which in turn can reduce income and economic growth. Additionally, the costs of providing medical care and preventative measures to reduce heat stress can be significant. 

Fig. 3: Heat exposure and working hours lost
Source: Parsons, L. A., Shindell, D., Tigchelaar, M., Zhang, Y., & Spector, J. T. (2021).
Table 2: Working hours lost to heat stress, by sector and country, southern Asia, 1995 and 2030 (projections)
Source: ILO, Working on a Warmer Planet (2019)

According to the ILO, heat stress caused more than 5% of GDP loss in Thailand, Cambodia, and Bangladesh in 1995. By 2030, heat stress could have a similar impact on GDP in Thailand, Cambodia, India and Pakistan. Bangladesh is projected to lose around 4.9% of its GDP to heat stress by 2030 – a potential loss of USD 95.75 billion. The significant impact of these losses on the country’s population and economy underscores the urgency of implementing measures to mitigate the effects of extreme heat on working conditions and productivity.

Renewable energy offers a better alternative

In contrast to the huge growth in LNG import capacity and gas power generation, the pipeline for renewable energy projects in Bangladesh is very limited. In its 2021 climate submission to the UN Framework Convention on Climate Change (UNFCCC), Bangladesh aimed to increase renewable energy capacity by just 0.9 GW by 2030 and only 4.1 GW if the country receives international financial support. This would lead to renewables generating just 4% of the country’s electricity by 2030. In the same submission, Bangladesh proposed increasing gas capacity by 5.6 GW with international financial support, reaching a total capacity over three times higher than that for renewables.

Fig. 4: Proposed gas and renewable capacity by 2030
Source: Bangladesh 2021 Nationally Determined Contribution submission to the UNFCCC

Unless significant policy changes are introduced, the growth in renewables in Bangladesh is set to be very limited. According to the National Solar Energy Roadmap, under a business-as-usual scenario, the country would only have 2.4 GW of solar power installed by 2030 and 6 GW by 2041, with solar making up the majority of the country’s renewable generation.

Despite the limited pipeline for new projects, Bangladesh has the potential to greatly increase the deployment of renewable energy. In 2021, the government launched the Mujib Climate Prosperity Plan (MCPP), setting out a vision of how the climate-vulnerable country could become resilient and prosperous through adapting to and mitigating climate change. The MCPP laid out different scenarios for the potential deployment of renewable energy. In the most ambitious, the country would reach a 30% share of renewable energy by 2030, with a capacity of 16GW, rising to 40% in 2040 with a capacity of 40GW. The Sustainable and Renewable Energy Development Authority (Sreda) has also reportedly proposed a target of generating 5 GW from wind power by 2030, up from virtually none today.

Renewable energy represents a far better alternative to gas to meet Bangladesh’s growing electricity demand. Renewable energy is cheaper than gas – in late 2022, the Institute for Energy Economics and Financial Analysis (IEEFA) estimated that the cost of energy from rooftop solar and utility scale solar are BDT 5.5 and BDT 7.6, well below the current average electricity generation cost of BDT 10. Worldwide, new solar is estimated to be between 11% and 40% cheaper than the cost of new gas plants. Renewable energy is also more reliable than bidding for LNG supplies in a volatile and competitive international market, where buyers in richer regions like Europe can outbid Bangladesh. 

Despite these advantages of renewable energy, the country is well off course to meet the ambitious targets in the MCPP. If the country had followed the most ambitious pathway in the MCPP for solar power deployment, Bangladesh could have reduced the volume of its spot market LNG imports by 25% between 2022 and 2024 compared to the current trajectory, saving USD 2.7 billion, according to analysis by Ember.

Fig. 5: Solar power projection and Bangladesh’s spot LNG purchases
Source: Ember

Bangladesh has now set a target of achieving 40% renewable energy by 2041, but is not currently on course to grow its share of renewable energy in the near future. Expanding LNG imports and gas power generation is set to come at a significant cost to Bangladesh, and is far from guaranteed to be able to supply reliable power to the country. The costs of these projects would be better spent supporting an immediate and rapid increase in the deployment of solar and wind power, to provide cheap reliable power to the country. International donors and financial institutions should also dramatically increase the level of financing available for renewable energy projects – between 2000 and 2020, renewables only received 17% of the USD 10.9 billion in public finance for electricity generation in Bangladesh.

In March 2023, the government of Bangladesh is expected to publish its Integrated Energy and Power Master Plan, updating the 2016 power sector plan. This review gives Bangladesh the opportunity to learn the lessons of the ongoing global gas price crisis, revise down the planned expansion of gas power and LNG imports and instead focus on rapidly scaling up wind and solar power.

Energy markets one year after the Ukraine invasion

by Leave a Comment

Key points

  • The EU has already substituted nearly 75% of Russian gas imports
  • Gas demand in the EU dropped 10% in the first nine months of 2022, and is set to fall by 43% by 2030 if the EU delivers on its long-term climate pledges
  • Significant excess import capacity is being built in the EU – new LNG capacity in development could provide 65% more gas than Russia was supplying in late 2022
  • Global gas demand is now forecast to peak before the end of the decade, with 88% of the growth in electricity demand being met by renewables over the next three years compared to just 1% for fossil fuels
  • High gas and coal prices accounted for 90% of the increase in electricity costs around the world in 2022, with European governments committing over EUR 750 billion to shield consumers from the immediate impacts of high energy prices
  • The EU spent EUR 252 billion on gas imports in the first nine months of 2022, up EUR 186 billion on the same period the previous year, a rise of 286%
  • Western energy sanctions are estimated to be costing Russia EUR 280 million per day, with the country’s deficit having reached USD 25 billion

“Energy markets and policies have changed as a result of Russia’s invasion of Ukraine, not just for the time being, but for decades to come… Government responses around the world promise to make this a historic and definitive turning point towards a cleaner, more affordable and more secure energy system.” 1https://www.iea.org/reports/world-energy-outlook-2022

Fatih Birol, head of the International Energy Agency (IEA)

The response to Russia’s invasion has accelerated the energy transition

Europe
Source: European Council analysis of European Commission data
Data: EU gas imports.xlsx
Source: Zero Carbon Analytics analysis. Gas import volumes from Breugel analysis of ENTSO-G data, share from Russia from European Council analysis of European Commission data, LNG capacity under development from US Energy Information Administration.
Data: EU gas imports.xlsx
Global
Source: PORT PC – Polish Organization for the Development of Heat Pump Technology
Data: Heat pump sales.xlsx
Source: EMBER, IEA

Renewable energy has saved taxpayers and consumers billions

Continued use of fossil gas has cost taxpayers and consumers billions

Source: Cambridge Economics: France, Germany, Italy, Poland, Spain
Source: European Commission
Data: EU gas demand and costs.xlsx
Source: IEEFA, IHS Markit

Russia has been hurt financially while European industry has grown

Russia
Europe
  • European industry had been widely expected to be hardest hit by high gas prices. Gas demand in European industry fell by an estimated 15% in the first eight months of 2022 compared to the same period in the previous year.30https://www.iea.org/reports/gas-market-report-q4-2022
Source: Eurostat
Data: EU industrial output.xlsx

How climate action can address the cost of living crisis

by Leave a Comment

Key points

  • The world is facing an energy crisis of “unprecedented depth and complexity”. The dramatic rise in fossil fuel prices has fuelled inflation across the world
  • The resulting cost of living crisis has left many households struggling or unable to access adequate energy to heat or light their homes
  • Leading institutions such as the International Energy Agency recognise that the crisis is caused by gas prices in particular, not renewables
  • Energy efficiency measures, such as insulation and smart meters, are a relatively quick and low cost way to reduce energy demand
  • Renewables are considerably cheaper than fossil fuels, so expanding renewable capacity can cut the cost of electricity, as well as reducing energy market volatility, enhancing energy security and helping achieve climate goals
  • Heat pumps offer a cheaper, cleaner alternative to gas heating, so can reduce energy bills significantly
  • Policy measures to reduce car use can help address cost of living issues as well as reducing emissions.

Energy and the cost of living crisis

The cost of energy began to soar across the world in 2021. This was caused by a rise in global energy demand as economies recovered from the Covid pandemic and a lack of investment in supply to match it. The Russian invasion of Ukraine also reduced supply significantly, causing prices to shoot up. Price rises in gas have been particularly extreme in Europe and reached an all time high in August 2022. The IEA estimates this was the main factor behind the dramatic increase in wholesale electricity prices in the EU. Along with nuclear outages in the European summer, these price hikes have all contributed to a rise in the cost of living for consumers, creating an energy crisis of “unprecedented depth and complexity,” according to the International Energy Agency (IEA). Increasing energy prices also contribute to wider inflation as the costs of producing goods and services also increase. Indeed rises in energy prices caused half of annual Consumer Price Index inflation in Europe in May 2022.

The rise in fossil fuel prices has been reflected in consumer energy bills across Europe. As a result, the International Monetary Fund (IMF) estimates that households in the EU will face, on average, a 7% rise in their cost of living in 2022. Clearly within this average, some households and countries will be impacted more than others, depending on how much of the increase energy companies pass on to customers and what protections governments offer their citizens.

Consumers are being hit in other ways too. Rising oil prices have pushed petrol and diesel prices up significantly – in the UK, for example, prices are up over 40% since May 2020, while diesel prices in Germany have risen over 70% in the same period. 

Rising fossil fuel prices are also feeding through to higher food prices, as increased energy, transport and fertiliser (the bulk of which is made using natural gas) costs drain household budgets even further.  Increases in food prices are being exacerbated by the war in Ukraine, as Russia and Ukraine account for around 30% of global wheat exports as well as being major exporters of fertiliser globally.  

Some commentators have blamed the cost of living crisis on the costs of implementing policies and measures designed to make our energy systems net zero by 2050.  This briefing explains why renewables and energy efficiency are in fact an essential part of the solution to the cost of living crisis.

Who is being hit hardest?

Poorer households are impacted disproportionately, given that energy bills take a greater share of their income compared to wealthier households.

Rising energy prices have led to many households falling into energy poverty, where they experience a combination of low income, high energy costs and inadequate energy efficiency measures, to the point where they cannot afford to warm their homes adequately. In 2021, before the worst of the energy crisis, nearly 7% of EU citizens could not afford to keep their homes adequately warm. The European Commission recognises that rising energy prices since 2021 are likely to have exacerbated this situation.

Many factors influence household energy costs, such as the price of gas for heating and the level of energy efficiency in the home – both the building itself and the appliances within it. Lower income households are less able to respond to price rises by investing in measures to improve the efficiency of the building, installing renewable technologies such as solar panels or heat pumps, or buying new appliances to replace less efficient ones.

In addition, a high proportion of lower income households rent their homes rather than owning them. As well as being unable to afford to pay for measures to reduce their bills themselves, they may also find that their landlords are unwilling to invest in energy saving options, such as insulation.

What is being done?

Many governments have introduced subsidies, tax cuts or price controls to protect consumers from the full extent of energy price rises. The cost to European governments of these measures since the summer of 2021 is estimated to exceed 3.5% of GDP, or EUR 705 billion, by the end of 2022.

However, these are only short term responses. In many cases they are also badly designed and targeted equally to all consumers, rather than providing more support to vulnerable consumers that need it most. In the longer term, a different approach will be required, not only because these short term measures do not address the underlying problem, but because limiting the impact of energy price rises actually reduces incentives to use less energy, improve efficiency and install renewable technologies, thereby maintaining demand for energy and ultimately keeping prices higher than they would otherwise be.

What could be done to reduce energy prices?

The IEA, World Economic Forum and World Bank among many others all agree that a well managed energy transition, away from fossil fuels to renewables, could help reduce the volatility of energy markets. As the head of the IEA has said: “This is not a renewables or a clean energy crisis; this is a natural gas market crisis.” 

A recent study by the IMF found that renewables generation reduced the wholesale price of electricity in Europe – for every 1% increase in renewables, there was a reduction of 0.6% in wholesale prices.1The study looked at the period 2014-21, before the worst of the energy crisis. It might well be that the dampening effect on prices is more pronounced now given the rises in gas prices. The higher the level of renewable generation, the greater the reduction in the price of electricity. This is known as the Merit Order Effect, where renewables such as wind and solar, which have no fuel costs and low operating costs, displace generation such as natural gas, which has high fuel costs.

Electricity price fluctuations due to the Merit Order Effect
Source: Clean Energy Wire

In other words, investing in renewables, energy efficiency and other low carbon options is key to reducing volatility and high prices in energy markets. This in turn will help address the impacts of energy price rises on the food system. Governments must, therefore, now shift their focus away from ‘sticking plaster’ responses such as price caps to energy price rises and instead invest in these longer term solutions to the underlying problems.

Improving energy efficiency

Reducing demand for energy is the most effective long term solution to ameliorate poor households’ exposure to volatile energy markets, while also reducing carbon emissions. As the saying goes, ‘the cheapest energy is the energy you don’t use’. Measures range from relatively simple interventions such as installing or improving loft insulation and draft proofing, to more complex steps such as solid wall insulation. Even a simple switch to using more efficient thermostats could collectively save EU citizens up to EUR 12 billion in energy bills.

Europe has some of the oldest and least efficient buildings in the world and they are responsible for one third of Europe’s CO2 emissions. Addressing this problem is a relatively low cost and quick way to reduce energy demand – The European Consumer Organisation (BEUC) estimates that ambitious housing retrofit policies could pay for themselves in less than two years. 
Improving energy efficiency can also have health benefits, including improved air quality, reduced respiratory and heart illnesses, improvements in mental health and fewer winter deaths.

Increasing renewable capacity

Zero carbon electricity from renewables can provide us with sustainable power, heat and mobility. Increasing the level of renewably-generated electricity is the key to unlocking decarbonisation across the energy system.  

Renewable technologies such as solar and wind are now cheaper to build and operate than conventional fossil fuel plants following a dramatic decline in costs over the last decade. Indeed new onshore wind and solar projects are 40% cheaper than new coal and gas-fired power plants, BloombergNEF calculates, while savings from renewable capacity added in 2021 alone will save at least USD 55bn in electricity generation costs globally in 2022, according to IRENA (see chart below). One of the main reasons is that most renewables have no fuel costs, unlike fossil fuel plants.

Estimated savings in 2022 from renewables added in 2021 displacing fossil fuel generation
Source: IRENA

Rystad Energy estimates that current high gas prices mean it would, in fact, be 10 times cheaper to build new solar pv capacity in Europe than to operate gas fired power stations in the longer term. The savings are so big, that a rapid green energy transition is likely to result in trillions of dollars of savings compared to investing in fossil fuels.

Building and operating renewable energy plants also avoids having to import fossil fuels from outside Europe, so improving the security of energy supply. IRENA estimates that the use of solar pv and wind power avoided around USD 50 billion worth of fossil fuel imports between January and May 2022 alone.

The way power markets operate in Europe is also a factor in high prices. The wholesale price that generators are paid for electricity is set by the highest cost generator – gas fired plants. This is known as marginal, or pay-as-clear, pricing. The European Commission has put forward proposals on how this might be reformed so that the lower costs of renewables are better reflected in consumer bills. These include increasing the levels of electricity storage and demand-side measures to enhance the system’s flexibility and encourage the development of smart grids, all of which can help reduce reliance on fossil fuels and lower prices.

Installing heat pumps

Investments in household energy efficiency also pave the way for low-carbon heating technologies. Using electricity to provide heat can save money, particularly when using heat pumps, which are more efficient than both gas boilers and traditional electric heaters. When powered by renewable energy, they also avoid burning fossil fuels. A study has shown that the use of heat pumps in the UK could save households up to 27% on their heating bills compared to a gas boiler, while the IEA found that, in the context of current high gas prices, US households could save USD 300 a year and those in Europe USD 900 if they installed heat pumps. Using heat pumps at off-peak times could allow people to reduce their heatings costs by up to 31% compared with conventional fuels.

If heat pump installation is paired with renovating buildings to make them more energy efficient, the average European bill for heating could be halved by 2050, according to one study. Moreover, those installations would allow Europe to cut its annual spending on gas imports by EUR 15 billion by 2030.

Electrifying transport

Transport accounts for around a quarter of carbon emissions in the EU and, unlike other sectors, emissions from transport are rising. Addressing the climate impact of the transport sector is, therefore, vital if the EU is to achieve its net-zero targets. As about 60% of transport emissions come from driving cars, changing personal transport is key.

While electric vehicles (EVs) still cost more to buy than conventional vehicles, the cost of batteries for EVs has tumbled over the last decade – a battery pack cost USD 684/kWh in 2013 but had fallen to USD 151/kWh in 2021. The rate of this decline has slowed in recent years, partly as a result of lithium supply chain issues, but some car manufacturers such as Renault and Ford have announced battery pack targets of USD 80/kWh by 2030, substantially reducing the future cost of EVs.

Despite the rise in electricity prices, a recent study in the EU found that, when using private home chargers, EVs are still cheaper to run than combustion-engine vehicles.  As discussed above, increased levels of renewables in our electricity systems will help bring prices down further in future.

In addition to the climate impacts of internal combustion engines, they are also responsible for causing premature deaths and illness. The European Environment Agency reports that there were more than 300,000 premature deaths in 2020 caused by exposure to particulates, nitrogen dioxide and ozone, the first two of which are emitted directly by cars.

Some countries have taken short-term measures to encourage people to use public transport as a way of addressing cost of living pressures. For example, a €9 monthly ticket introduced for regional transport in Germany during 2022 led to reduced car use as well as a 1.8Mt reduction in CO2 emissions and a 7% reduction in local air pollution.  Well thought out policy measures can contribute to increasing the use of public transport, addressing the cost of living crisis and reducing emissions and other environmental damage.

However, a sustainable reduction of cars per capita requires better infrastructure such as more EV charging points or more cycle lanes to make lower carbon alternatives more viable. According to The European Cycling Federation, EU citizens could save up to EUR 2.8 billion each year on fuel bills if 30% of journeys were cycled instead of driven. Policies need to be put in place to promote walking, cycling and greater use of public transport.

  • 1
    The study looked at the period 2014-21, before the worst of the energy crisis. It might well be that the dampening effect on prices is more pronounced now given the rises in gas prices.

European jet fuel: How big a role does Russia play?

by Leave a Comment

Key points

  • Five per cent of the jet fuel imported to Europe last year came from Russia (13,000 b/d), representing more than USD 1 million a day
  • This accounted for 1.3% of total jet fuel consumed in the EU
  • Pre-Covid, imports were much higher – 36,000 barrels a day in 2019, for example
  • Among major European airlines, British Airways-owner IAG was the biggest user of Russian jet fuel last year
  • UK airports Heathrow and Gatwick have been the biggest consumers of Russian jet fuel.

Country breakdown

The EU imported 13,000 b/d of jet fuel from Russia in 2021. This equates to 1.3% of total jet fuel consumption, or 5% of imports. It also represents USD 1,001,000 a day flowing from the EU to Russia (at an average price of $77 per barrel). This is a significant drop in volume from pre-Covid levels – in 2015-19, annual jet fuel imports from Russia averaged 30,200 b/d (USD 1,751,600 a day, taking the average price of jet fuel across the five-year period). This equated to 2% of total average annual consumption.

For comparison, 20% of the EU’s imported jet fuel in 2021 came from the UAE, 16% from Kuwait, 12% from India, 10% from South Korea and 8% from Saudi Arabia.

Between 2011 and 2019, the main growth markets of imported jet fuel were Russia, the UAE and Saudi Arabia. Imports from Russia increased 620%, while those from the UAE (168%) and Saudi Arabia (127%) more than doubled. Despite the dramatic drop in demand brought about by the pandemic, imports from Russia in 2021 were 160% higher than in 2011.

However, Covid has started to reshape the landscape. Between 2020 and 2021, imports from Saudi Arabia, the UAE and Russia were down 30%, 21% and 13% respectively. Meanwhile, imports from Turkey (11%) and India (20%) rose. 

In 2021, 71% (699 of 988 b/d) of the jet fuel consumed by the EU was produced (refined) in Europe, 14% in the Middle East and 11% in Asia Pacific. 2% came from Russia and the former Soviet Union states. 

Airline breakdown

In 2021, British Airways-owner IAG was by some distance the biggest consumer of jet fuel imported from Russia. The airline used on average 586 b/d of Russian jet fuel. This equates to USD 45,122 a day. Again this is a significant drop from pre-Covid levels – between 2015-19, it used on average 1,974 b/d (USD 114,492 a day, again taking the five-year average price) of jet fuel from Russia. Over this same period, SAS was the biggest user of Russian jet fuel, averaging 3,277 b/d (USD 190,066).

At 308 b/d, Scandinavian Airlines (SAS) was the next biggest consumer of Russian Jet fuel last year, followed by Wizz Air (169 b/d), Easyjet (166), Ryanair (150), Turkish Airlines (106), Lufthansa (57), Air France (29) and Pegasus (25).

Airport breakdown

In 2021, among Europe’s leading airports, London’s Heathrow was the biggest consumer of Russian jet fuel, at 874 b/d (USD 67,298 a day). This is a significant drop from pre-Covid levels, when the airport’s annual average from 2015-19 was 4,101 b/d (USD 237,858 a day, using the five-year average price). Airports in London – namely Heathrow and Gatwick – were by far the largest consumers of Russian jet fuel between 2011 and 2021, accounting on average for 92% of consumption of Russian jet fuel.

Last year, the next biggest consumer of Russian jet fuel was Paris’ Charles de Gaulle (706 b/d), followed by Amsterdam’s Schiphol (225 b/d) and London’s Gatwick (126 b/d).

The data upon which this briefing is based was commissioned from Energy Aspects last year, before the Russian invasion of Ukraine

European energy crisis factsheet

by Leave a Comment

Key points

  • A severe demand/supply imbalance has sent gas prices soaring
  • High electricity prices are the result of high gas prices, which have risen stratospherically due to historic underinvestment in the sector, and recent outages
  • Climate policies have had negligible impact on current energy prices
  • Renewables helped shield customers from even greater volatility.

Record energy prices have caused a crisis in Europe

  • Gas and electricity prices have risen dramatically. At its peak in December 2021, the European benchmark for gas prices had risen 850% from the start of the year, according to Bloomberg data. Since then, they have fallen dramatically, but they remain at elevated levels – over four times higher than this time last year. Electricity prices too have been surging, notably in France, Germany and the UK. Energy markets have buckled under the pressure. German electricity prices increased by over 500% over 2021. In the UK, 23 energy retailers have gone bust, impacting some 3.7 million customers, and taxpayers are potentially on the hook for billions of pounds. 
  • The crisis has sparked a fierce debate, with some blaming the energy transition. The oil and gas industry has pointed to climate policies and investment pressures that have forced a premature departure from fossil fuels. Others state that low wind speeds are to blame. On the surface, these explanations appear plausible, but they are not borne out by the data. While wind plays a crucial role in supplying electricity in Europe, gas sets the price for electricity in Europe’s power markets. Therefore, the complex dynamics of supply and demand in international gas markets are at the heart of Europe’s energy crisis today. 

High electricity prices are the result of high gas prices

  • Gas supply has not kept pace with demand. A rapid, if chaotic, recovery from the pandemic has increased demand for gas, but supply has struggled to keep up. For at least parts of 2021, supplies from Russia and Norway, which together account for 60% of exports to the EU, were at some of their lowest levels since 2015. In Norway’s case, extended maintenance and outages were to blame. Notably, a protracted outage at Norway’s Toll field, Europe’s biggest gas field, alone cut supply by 27 million cubic metres a day, almost 3% of the EU’s gas imports at the time. A marginal outage, but one that can move the dial on prices. Since then, more Norwegian facilities have come back onstream and supply has risen sharply. Prices, however, remain high. This is largely due to the low levels of Russian exports, prompting some to suspect that Putin is playing geopolitical games. 
  • Geopolitics has not helped Europe, but domestic factors in Russia are also at play. Russian gas flows to Europe have been lower than in previous years, despite Gazprom meeting its contractual obligations. The European benchmark price for gas has closely followed signals from Putin about whether or not Russia will increase supply. Some observers have surmised that Russia’s actions are motivated by the controversial Nord Stream 2 pipeline, whose approval German regulators have suspended. Indeed just this month, Fatih Birol, Executive Director of the International Energy Agency (IEA), accused Russia of creating “artificial tightness” in European gas markets to ratchet up prices. But domestic reasons also explain why supply from Russia was much lower in 2021. For one, the need to fill its own domestic storage facilities has kept much of Russia’s gas capacity out of the market. Russia’s storage was largely depleted following a bitterly cold winter early in 2021. Exacerbating this, its production of gas has struggled to increase in tandem with demand. Russia had to scale back its production after demand dropped dramatically during the height of the COVID-19 pandemic in 2020. Owing to the mechanical complexity of these facilities, bringing them back to full capacity takes time.
  • Lower pipeline imports have sent demand for shipped liquefied natural gas (LNG) soaring, which has caused a dramatic increase in prices. Through LNG, gas markets have become more global. Europe pivoted towards LNG to reduce its dependence on piped gas, predominantly from Russia. In 2021, LNG represented approximately 25% of the EU’s gas imports. However, a global market is vulnerable to global shocks, and extreme weather events in 2021 helped fuel competition for scarce LNG. A cold snap in Northeast Asia in January sparked a buying spree from Japan and South Korea, while droughts in Latin America crippled hydro capacity, leading countries like Brazil to purchase more LNG. Again, suppliers could not meet demand. At least 10 LNG facilities were either offline, had planned maintenance or did not have enough gas in October, according to Rystad Energy. Norway, Nigeria and Trindad, which together supplied 10% of LNG in 2020, all faced severe supply constraints in the third quarter of 2021, pushing up prices further.
  • High gas prices have pushed electricity prices higher. Gas supplied approximately 20% of Europe’s electricity in 2020 and it plays an important role in most EU member states’ power mix. As a result, higher gas prices have a direct impact on electricity prices. Once gas prices started to rise sharply, electricity prices followed (see chart below). Lower supplies from Russia led to the sharp spike in December, while an increase in LNG deliveries pushed prices down right at the year’s end.  

Climate policies have not had a material impact

  • Carbon taxes are not the reason for high energy prices. Some, such as Poland, have blamed Europe’s rising carbon price, but, as the chart above shows, this has not been the primary cause of rising electricity prices. For the first nine months of 2021, electricity prices moved more or less in tandem with fluctuations in the carbon market. However, around September, when gas prices began to surge, electricity prices were decoupled from the carbon market and were directly impacted by changing gas prices. A report from the EU’s Agency for the Cooperation of Energy Regulators (ACER) also unequivocally laid the blame on gas for the surge in electricity prices.
  • A sharp decline in oil and gas prices in the 2010s led to a dramatic fall in investment in the sector. Fossil fuel investors are increasingly ESG-minded and are putting pressure on companies to tackle their emissions. But that pressure is not the reason there is a supply crisis today. The origins of the supply shortage lie in the collapse of energy prices in 2014. Increased production capacity from US shale producers and from OPEC, notably from Saudi Arabia and Russia, together with a decrease in demand due to an economic slowdown, particularly in Europe, led to a significant supply glut in the global oil market. Subsequently, US oil prices fell from a peak of USD 107 a barrel in June 2014 to USD 44 a barrel seven months later. Between 2014 and 2016, the broader energy price index collapsed 67%. This led to a precipitous decline in energy investments, which fell over those two years from about USD 1.1 trillion a year to around USD 800 billion and hovered at that level until the COVID-19 pandemic, according to the International Energy Agency (IEA). This under investment is the key cause of the supply shortage which has led to soaring energy prices.
  • The crisis demonstrates that there needs to be more investment in the energy transition. The investment in clean energy and the infrastructure needed for the energy transition has hovered at or below USD 1 trillion since 2018. Dramatic price declines for technologies like solar (89%), onshore wind (62%) and batteries (82%) over the past decade have meant that this steady USD 1 trillion in investment has enabled more capacity for each dollar spent. Indeed, annual installations of renewables have increased each year since 2014. But it is not enough. In its net-zero emissions scenario, the IEA illustrates that investment in clean energy and infrastructure needs to more than triple to USD 3.3 trillion a year to replace fossil fuel supply and keep pace with growing demand. 
  • Renewables are a solution to the energy crisis. The IEA has stressed that a well-managed clean energy transition is a key component to shielding consumers from energy price volatility. As gas prices surged, solar, wind and other clean energy sources shielded consumers from a EUR 33 billion gas bill in the EU and EUR 2.3 billion in the UK, a recent CREA analysis reveals. Moreover, as gas prices rose stratospherically in the fourth quarter of 2021, wind and solar output actually rose 3% and 20% respectively year-on-year, helping protect customers from even higher prices.

Follow Us