- Europe’s energy crisis exposed that gas isn’t so fungible after all
- Electricity might seem fungible, but not in a crisis
- Renewable energy’s intermittency is only part of the threat
One of the challenges that made last winter’s energy crisis so dangerous was the difficulty of moving gas. In theory, gas is a fungible form of energy, meaning it can slosh around the global economy easily. A shortage in one place isn’t a problem because gas is the same everywhere, so supplies can be adjusted by being moved there.
However, in practice, this turned out to be… problematic. You need pipelines or ships and gas import terminals to participate in the global gas trade. Central Europe had bet on the wrong pipelines to Russia.
As a result, the gas price went berserk in Europe, up to sevenfold higher than in the US. Gas tankers on oceans around the world literally U-turned and headed for Europe while the Germans furiously built import terminals to accommodate them.
Bloomberg reported that, “Getting LNG to gas-starved Europe is so profitable that one tanker carrying the fuel made a U-turn in the Pacific Ocean, crossed the Panama Canal twice and spent nearly $1 million in tolls just to get there.”
Consider, for a moment, what the energy crisis would have looked like if the gas market had failed to adjust in this way. What if gas tankers hadn’t been able to U-turn halfway to Hawaii from the US, or if there hadn’t been enough gas terminals for Europe to snatch other countries’ gas from under their feet by paying such high sums that even breaking contracts was worth it for the companies selling the gas?
While you ponder the issue, let’s take a look at the opposite example. Coal is easy to move and store, making it highly fungible. That makes it a good basis for an energy system because it is so flexible. A sudden coal shortage in one country wouldn’t cause much disruption because coal is such a global market and the same coal can be burned anywhere. The shortage would just cause an increase in local coal prices and coal sellers would meet the demand.
In terms of resilience, then, coal is top dog. That’s why the Germans are turning back to coal today. They need the resilience and flexibility it provides in a crisis, not just its baseload power.
Now let’s apply this idea to renewable energy – supposedly the future of our energy system. Electricity, too, might seem fungible at first. I mean, it’s the same in one place as another. You can move it via transmission lines incredibly quickly and cheaply.
But attempt to move renewables’ electricity around the world to deal with fluctuations in demand or problems with supply and you quickly get into trouble. The vast amount of energy infrastructure needed to shuffle electricity around the world would cost a lot of money. By definition, an energy crisis is one where the current system doesn’t work and needs to adjust. How quickly could transmission lines be built to adjust for any such crisis, and how cost effectively?
A shortage of electricity in one place cannot simply be met by shipping a boatload of electricity there, in other words. Hence the popularity of hydrogen, by the way. It solves the fungibility of electricity by using electricity to create a form of energy that is fungible and can then be turned back into electricity easily. But it’s a bit of a round trip…
The intriguing conclusion is that, in the future, we will face energy crises of a very different kind than what we are used to, when they do happen. Instead of seeing prices of oil, gas or coal spike as there’s a scramble to shift them to the places that are in crisis, we will simply see those places go without energy at all. Electricity will simply not be able to get to them. We won’t be able to move the windmills or build the transmission lines to get them there.
This is especially risky for places that are isolated in terms of their electricity networks, such as Singapore, Perth in Australia and isolated islands around the world. They won’t be able to import the energy they need in an unexpected energy crisis.
These are two very different scenarios: expensive energy and none. I don’t need to elaborate on the more obvious consequences of the two, but consider the incentives here.
When prices spiked in Europe due to the continent’s energy crisis, what incentives did this create? The opportunity to profit from Europe’s self-imposed energy debacle incentivised a vast flood of gas to turn around from wherever it was going and head to Europe. Politicians hate profiteering, but it is really the easiest way to make resources available in a crisis.
Without the ability to move the form of energy we’ll be relying on, this effect won’t be possible. It won’t be possible to sell energy to the place that desperately needs it at any price because the infrastructure doesn’t exist to move it.
However, what sorts of energy crises might we experience in the future? War and geopolitical standoffs, for example. One country would literally have the power to shut down another almost indefinitely if it controls any vital infrastructure. Hackers could sabotage so-called “smart energy infrastructure”. Or we might just see a Dunkelflaute in some part of the world – a prolonged period without wind and sun – without the ability to send electricity to the affected region.
A prime example of this in action was Japan’s Fukushima nuclear power disaster, when nuclear power plants were shut down across the nation and so gas, oil and coal imports went berserk there too. What if Japan hadn’t had the fossil fuel infrastructure to replace nuclear? What would’ve happened if it couldn’t have imported and burned it?
My point is that the intermittency of renewable energy is only half the energy reliability problem of shifting a system to renewables. Its lack of fungible power means that any potential energy crisis will be much more difficult to deal with. We won’t be able to move the energy needed to places anywhere near as easily, cheaply or quickly.
However, this only creates opportunities for those who recognise the problem early enough. In Germany, for example, backup power sources like diesel generators are becoming very popular for businesses that need stable power, even in a crisis. Bigger businesses around the world are seeking to secure their own more reliable energy supply too.
The companies producing products that offer energy autonomy will boom.
Later this month, we’ll reveal who they might be…
Until next time,
Nick Hubble
Editor, Fortune & Freedom
