Without any doubt, 2021 has been a better year than 2020 in the energy sector. It’s been a more progressive year and there are positive signs that the energy transition is gaining momentum.
It has not been without its challenges, some of which may appear to be becoming greater to overcome and not so straightforward.
We began the year in lockdown, largely unvaccinated against Covid and, for many, furloughed. On 01 January, 2021, Brent Crude was priced at $51 a barrel. As the year progressed, and as more people were being vaccinated, economies around the world gradually came out of hibernation with signs of recovery clear across many sectors.
Recovery bounced back so quickly that, on a global scale, the supply chain struggled with increased demand for everything from food to cars and computers and in the energy sector the story was no different.
At the time of writing, Brent Crude is priced at $82 a barrel which is a 61 per cent increase from the turn of the year. In the same period a lack of gas in Europe led wholesale gas prices in the UK to increase by almost 400 per cent.
Simple economics can explain why this is happening – there is insufficient energy supply to meet a much higher demand and so prices increase. The reasons for insufficient supply are broad and complex – from geopolitical and environmental, to insufficient investment and, in the UK, not enough wind over the summer to drive our turbines.
As the economy continues to recover it is also digitising and steadily converting to electrification. This is driving an unquenchable growth in demand for energy.
Is this an elephant in the room of energy transition?
2021 saw the renewables sector ramp up, trying hard to keep up with demand with technology and infrastructure developments in wind and tidal technology. We also saw encouraging participation in initiatives such ScotWind, the first round of offshore wind leasing in Scottish waters for a decade.
Such developments take time to come to fruition. Before renewables can take a more dominant role in energy supply, there is a lot of work to do. Grid infrastructure will need major improvements so that they are able to handle the intermittent nature of wind and solar energy. While this is happening, sufficient reliable base-load power needs to come from other sources notably gas and possibly nuclear.
This year, it has been promising to see that the supply chain and larger, more traditional energy companies have become more engaged and integrated with renewables too.
It cannot be denied that energy transition is happening but there is still a very long way to go. Wind has a strengthening place in the energy portfolio but other sub-sectors such as tidal, geothermal, hydrogen and carbon storage are less developed and require more time, resources and investment.
The emergence of mini nuclear reactors in the UK is an interesting development that emerged in 2021. In November, Rolls-Royce secured more than £400 million of funding to create a Small Modular Reactor (SMR) business. It is hoped this new company could create up to 40,000 jobs by 2050. This may become a key component in supporting and balancing the energy transition.
As in 2020, a significant development that continues to trend upwards is greater wholescale acceptance and recognition of the importance of renewable energy and its role in combatting climate change and meeting net zero ambitions.
COP26 delivered the Glasgow Climate Pact, what we all hope will be a step change in global responsibility over the next decade. We have also seen the rise in prominence of ESG (Environmental, Social & Governance) in the business sector and how this has found its place at the top of the agenda for companies and investors alike.
Energy transition is happening and it is safe to say we will not go back to old, polluting and traditional ways, in the long term anyway.
In the short term, if we want to continue to develop, modernise and create a position where we are not reliant on fossil fuels forever, we need to manage a balanced transition.
To achieve this in an affordable and responsible way, it can be argued that an important source of plentiful energy to bridge this gap may well be fossil fuels – after all, in 2021 they accounted for 83 per cent of primary energy use.
Managed well and responsibly, and with the long game in mind, we cannot afford for it to be shunned in 2022 or anytime soon.
Alasdair Green is a Director and Head of E&P at Anderson Anderson & Brown (AAB)
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