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

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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

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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

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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.

Ukraine war and the global food system

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Key points

  • Russia’s invasion of Ukraine has unsettled an already unstable global food system and placed additional pressure on the global economy
  • Rising food and energy prices are having ripple effects across the economy, as seen by a jump in inflation, and are deepening the hunger crisis in developing nations
  • The food crisis will continue if trade disputes persist and no political consensus is found.

The global food system is in the midst of its third major food crisis in 15 years. Droughts in major producing regions, excessive speculation in agricultural markets and demand for biofuels disrupted the market in 2007/8. Between 2010-2012, spiraling oil prices, biofuel mandates and trade barriers triggered a new crisis. This year, extreme weather, the worldwide pandemic and a conflict between two agricultural superpowers have pushed cereal and vegetable oil prices higher than during the 2008 crisis, while the FAO Food Price Index reached its highest level since its inception in 1990 in March 2022.

Together, Russia and Ukraine account for 12% of global calories, supplying 28% of globally-traded wheat, 29% of barley, 15% of corn and 75% of sunflower oil. Russia’s invasion has thrown these supplies into disarray and unsettled an already-fragile global food system. By blockading Ukrainian ports and suspending its fertiliser exports, Russia has put Ukrainian farmers and the region’s food production under extreme stress – for example, an estimated  30%-50% of the country’s wheat fields will not be planted this year, while 20%-30% of winter cereals, maize and sunflower seeds currently planted will not be harvested during the 2022/2023 season.

Market disruption

This has led to substantial global supply constraints for such foodstuffs, causing prices to jump. Wheat prices soared by 68% in May, compared to the January average, while fertiliser costs have risen by 30% since the beginning of 2022, following an 80% spike last year triggered by high natural gas prices (a key component of fertiliser prices) in Europe. 

According to the World Bank’s April 2022 Commodity Markets Outlook, high food price inflation has hit several countries across different income divides. The Ukraine conflict has disrupted global patterns of commodity trade, production and consumption in such ways that are likely to keep prices at historically high levels until the end of 2024.

Hunger on the rise

African countries rely heavily on Russia and/or Ukraine for food supplies, having imported 44% of their wheat from both countries between 2018 and 2020. Countries such as Somalia, Senegal and Egypt rely on one or both of Russia and Ukraine for between 50% and 100% of their wheat. Eritrea, for instance, sources all of its wheat from the two countries. Since the start of the year, wheat prices in Kenya have risen by 58%, largely due to the deficit in imports from Ukraine and Russia. These price spikes, along with trade and import disruptions, are having a devastating impact.

The UN has said the war’s impact on the global food market alone could cause up to 13 million more people to go hungry, with Arab and African countries most at risk. The World Food Programme estimates that the number of severely food insecure people (defined as those that have run out of food and gone a day or more without eating) doubled from 135 million pre-pandemic to 276 million at the start of 2022. The ripple effects of the war in Ukraine are expected to drive this number up to 323 million in 2022.

Protectionism intensifying crisis

After months of Russian embargo, Ukraine and Russia reached an agreement on 22 July to enable the resumption of grain and other agricultural commodity shipments from Ukrainian Black Sea ports. However, ongoing Russian provocations on Ukrainian territory have brought the agreement to a standstill. Amidst this uncertainty, the world’s economies have been trying to find solutions to ensure better food access, although these have been undermined by the introduction of protectionist measures – in an effort to secure domestic sufficiency, governments have been stockpiling, restricting food trade and banning fertiliser exports.

Argentina has increased taxes on soybean oil and meal exports and lowered the cap on wheat exports. India has banned wheat exports while Malaysia has halted chicken exports. Export restrictions are generally taken in order to protect the domestic consumer and ensure there are no supply shortages, however they can intensify global food insecurity and cause price jumps – during the 2007/08 food crisis, export restrictions accounted for 40% of the increase in agricultural prices. The scale of current restrictions is greater than in 2007/08, affecting 17.3% of total calories traded globally.

Other governments, such as the US, Ireland, Canada, Mexico and the EU, have suggested increasing food production, which may result in an expansion of cropland. However, according to an analysis of the EU market, increasing cropland is problematic. One driver of the food price crisis is the cost of fertilisers and the fossil fuels used to produce and transport them. Producing more food would need the use of additional fertilisers and fossil fuels, which could exacerbate climate change and biodiversity loss and result in minimal price reductions.

Cooperation and support key

We have more than enough food to sustain us. To appropriately address food security and increase access, experts call for a proactive approach focused on the engagement of governments and international development partners. It is also essential to continue funding the World Food Programme’s emergency-relief efforts. But beyond immediate humanitarian assistance, governments must equip the world’s most vulnerable with the safety nets they require to overcome the current crisis, according to the International Food Policy Research Institute. Measures such as cash transfer programmes and enhanced aid to smallholder farmers, such as access to credit schemes, markets and healthy food, have the potential to strengthen food system resilience in affected regions such as Sub-Saharan Africa and the Middle East.

Meanwhile the G7 has urged all nations to “keep their food and agricultural markets open” and work to maintain free trade flows. Protectionist policies are harmful to the global market and governments must work together to prevent stockpiling. Comprehensive action and consensus on what needs to be done in the medium-to-long term will be critical to avoid a lasting crisis.

European energy crisis factsheet

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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.

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