The energy transition continued apace in 2022 despite Russia’s invasion of Ukraine in February of that year, ongoing disruptions to supply chains and inflationary pressures – all of which translated into high energy prices around the globe. However, sustained high prices may mark an inflexion point in shifting the global energy system away from a dependence on hydrocarbons and towards lower-cost clean energy resources.
Hydrocarbons are unevenly distributed around the world, require supply chains that are vulnerable to disruption, and carry the financial uncertainties associated with the cyclical and often volatile pricing of commodities. In 2022 hydrocarbons-producing countries reaped record revenue on the back of high oil and gas prices. At the same time, renewable energy capacity increased by more than 8% that year, surpassing the 300-GW mark for the first time, according to the International Energy Agency (IEA). Global electricity demand growth, meanwhile, slowed to 2.4%, down from 6% in 2021. While an accelerating energy transition poses short-term challenges, it also offers emerging markets opportunities if they can embrace the clean technologies and sources that will shape the future energy mix.
Alternative Sources
Energy security took centre stage with the disruption of Russian hydrocarbons supply to Europe in the aftermath of its invasion of Ukraine. Russia has the world’s largest natural gas reserves and has historically accounted for some 40% of Europe’s gas imports – and as much as 55% of Germany’s in recent years. As European countries scrambled for alternatives to Russian hydrocarbons, new policies and initiatives advanced the move towards new sources of imports and alternative energy sources.
In May 2022 the EU announced a ban on seaborne imports of Russian oil, which presented an opportunity for oil-exporting emerging markets − both Organisation of the Petroleum Exporting Countries (OPEC) members and non-members − to increase production to meet demand. When the ban was instituted in December of that year, the EU found itself with ample supply thanks to increased cargoes in the intervening months from Africa, Latin America, the Middle East and the US.
Members of OPEC and other allied oil-producing nations, collectively known as OPEC+, cut production in September 2022 as global demand softened, which has thus far avoided the oil-supply shortages envisioned by the EU ban. To curtail Russian revenue from natural gas, the EU decided in February 2023 to set two price caps for petroleum products originating in or exported from Russia. The first price cap for petroleum products traded at a discount to crude is set at $45 per barrel, while the second price cap for petroleum products traded at a premium to crude was set at $100 per barrel. The price caps came into effect February 5, 2023, though a transition period of 55 days was put in place for vessels carrying Russian petroleum products that were purchased and loaded onto vessels before February 5, 2023 and unloaded prior to April 1.
The EU’s attempt to limit Russian hydrocarbons has encouraged countries in Latin America to focus on developing green hydrogen from clean energy resources that can be exported to Europe and consumed locally. Argentina announced plans in June 2022 to invest $6bn in the province of Tierra del Fuego − located at the southernmost tip of South America − to develop a hydrogen and ammonium industry powered by wind and transform the country into a major exporter to Europe and Asia. Brazil has similar ambitions and is seeking to leverage its position as the world’s second-largest producer of hydroelectric power, with substantial wind and solar resources.
Electricity & Emerging Markets
Going forwards, the speed and effectiveness of the energy transition hinges on the electricity sector, where replacing coal with solar and onshore or offshore wind could go a long way towards meeting global electricity demand. Among these sources, solar began to take the lead in 2022, eclipsing wind in China and Australia. Of the more than 300 GW of growth in net renewable energy capacity in 2022, solar photovoltaic (PV) accounted for 60%, or 190 GW, marking growth of 25% compared to 2021.
Overall, the IEA expects that the imperatives of energy security will drive global renewable power capacity to expand by 2400 GW between 2022 and 2027, 30% more than was forecast in 2021. Global solar PV capacity is set to triple during this period, while wind capacity is expected to double. Handling this volume of clean electricity will present a challenge, as the world requires an estimated $14trn in investment in power grids by 2050 to keep pace with renewable energy gains.
New Technologies
Technological advances are helping to revive traditional clean energy resources that are domestically generated, most notably hydroelectric power. Severe drought in China and elsewhere resulted in lower output in 2022, but the IEA forecasts that the adoption of pumped storage hydropower (PSH) will expand the role of hydropower in the global energy mix. The technology is projected to account for 65 GW of additional hydropower capacity by 2030, mostly in Asia and Africa. New cross-border trade deals were signed in 2022, with Nepal planning to produce and transfer hydropower to India through the West Seti and Seti River projects, and Ethiopia offering 200 MW to Kenya as part of the Kenya-Ethiopia Highway Project.
At the same time, biogas and biomethane are set to bolster the green circular economy in emerging markets. Formed by breaking down organic waste − agricultural, food, municipal or animal, including manure and sewage − through a process known as anaerobic digestion, biogas can power national grids and supply heating for households, while residue from anaerobic digestion can be used as fertiliser.
Although the biogas industry is well established in Europe and North America, it has ample unexplored potential in emerging markets, especially in Asia, where crop residue and animal manure could be harnessed to help biogas account for up to 20% of global natural gas supply. For example, in October 2022 Thailand launched a scheme that uses feed-in tariffs to reach power-purchase agreements, with plans to add 335 MW of biogas capacity between 2026 and 2030.
Green Climate Finance
As emerging markets continue to add capacity to generate renewable energy, some of the world’s wealthiest countries could help finance their energy transitions. In 2022 the focus for such efforts was Indonesia, the world’s eighth-largest emitter of carbon, where officials from several developed nations discussed ways to accelerate decarbonisation, including the possibility of launching a Just Energy Transition Partnership to bring in donor governments, development banks, climate-focused organisations and the private sector to fund clean energy projects that provide attractive returns on investment.
In 2022 there was also a pronounced rise in climate-friendly debt issuance in emerging markets, which takes the form of countries leveraging their natural environments to fund environmental projects in so-called green or blue bonds. Many emerging markets in Africa have turned to creative climate financing to address shortfalls in public finance and would welcome bond issuances from international organisations and the private sector to fund climate-related projects.
Southern and East African nations are also seeking to use blue bonds to build the Great Blue Wall initiative, which aims to protect coastal and marine areas running from Somalia to South Africa in the Indian Ocean, sequester 100m tonnes of CO₂ and create 1m blue jobs by 2030. The Bahamas put a slight twist on this approach, offering $300m in blue carbon credits from mangrove forests, seagrass beds, and other ecosystems that absorb and store significant amounts of carbon to companies that want to offset their emissions.
Global Collaboration
While financing is the most critical component of the energy transition, international diplomatic efforts through multilateral organisations and conferences are also acting as a catalyst. The COP27 UN Climate Change Conference in Sharm El Sheikh, Egypt in November 2022 was held after a year that saw a spike in natural disasters, most notably drought in India and devastating flooding in India, Pakistan, South Africa and West Africa. One of the most salient outcomes of COP27 was an agreement on a loss and damage account to protect the nation’s most vulnerable to climate disasters.
An encouraging development for the energy transition occurred in December 2022 with the announcement that scientists in the US had achieved a breakthrough in nuclear fusion after decades of research and billions of dollars of investment. In February of that year a different nuclear fusion project in France – a collaboration among 35 countries including China, EU member states, Russia and the US – also achieved a major technological breakthrough. While scaling up the technologies to deliver fusion-derived power to the public will take years if not decades to achieve, along with commensurate development of electricity grids, the importance of these developments for the ongoing energy transition cannot be overstated.
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