Are new technologies redrawing the world's energy map?  - energy

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  • In 2020, global trade in fuels reached $1.5 trillion.
  • There is a growing awareness about the transformation of minerals and the need for the world to produce more minerals.
  • There is recognition that China has a leadership position in low carbon energy supply chains.
  • The shift from resource extraction to manufactured goods provides opportunities for new industrial clusters.
  • The energy transition presents an opportunity to reconsider the commercial relationships forged decades ago.
  • The most important policy choice for all countries is the importance of relying on global trade.

The shift from fossil fuels to low-carbon energy sources will redraw the world’s energy map, change perceptions of international trade and reshape global economic relations, and this shift will present significant strategic challenges.

Despite the repercussions of the outbreak of the Corona epidemic “Covid-19”; Global trade in fuel reached $1.5 trillion in 2020; That is roughly one-tenth of all trade in goods. Oil, gas, coal and chemicals together accounted for 39% of all freight traffic in 2020.

This came in an article entitled “How the Energy Transformation Will Reshape International Relations” by Nikos Tsavos, a researcher in the Energy Security and Climate Change Program at the US Center for Strategic and International Studies. The article was published on the center’s website a few days ago.

The energy transformation of the world

The energy transition represents two transformations. One is an industrial transformation, the other a transformation in the use of minerals; What redraws the energy map of the world.

This comes amid a growing awareness about the transformation of minerals, the need for countries to produce more of the minerals found around the world, and that mineral extraction and processing will create tremendous value in addition to external factors.

By contrast, industrial transformation is often portrayed in a distorted and exaggerated way, despite the recognition that China has a leadership position in low-carbon energy supply chains.

Likewise, there is a desire to reconnect industries and ensure that some investment in supply chains is located in the West.

The shift from resource extraction to manufactured goods provides opportunities for the emergence of new industrial clusters and the emergence of new trade routes, which represents a new reshaping of the world’s energy map, while the way these dynamics develop is not entirely clear.

What is clear is that the energy transition offers an opportunity to reconsider and reformulate trade relationships that have been forged for decades, and the energy transition provides an opportunity for countries to participate in energy value chains that have hitherto been closed to them.

Although the world is redefining energy security; The desire to manufacture products locally runs counter to the logic of scale and global supply chains; The energy transition will redraw the world’s energy map and shape global trade relations, without defining the extent of cooperation between countries.

Energy transformation in buildings
A picture that expresses the energy transition in the buildings and real estate sector

The impact of industrial policy on energy markets

Climate policy is industrial policy, and similarly, industrial policy often becomes climate policy, even if it is an afterthought.

For example, Australia’s hydrogen strategy mentions the word “climate” 13 times in 136 pages, not in the context of climate being a driver of this strategy.

The motive lies in politics and economics; The development of hydrogen resources could enhance Australia’s energy security, create jobs for Australians, and create an export industry worth billions.

This represents a fundamental shift in energy policy making, and suggests that climate benefits may come from places that pursue industrial strategies rather than decarbonization.

In turn, Saudi Arabia, Russia, and Australia are investing in hydrogen not only (or primarily) to reduce their emissions, but to build export industries.

Japan and South Korea have formulated hydrogen strategies rooted in their fuel cells.

In the US, it is not enough to deploy clean energy technologies: from solar and offshore wind to batteries and hydrogen, to focus on supply chains.

The success of deploying these technologies is measured by the financial returns and jobs saved, not just by reducing the emission of tons of carbon dioxide.

Some secondary shifts may occur as a result of the merging of climate policy with industrial policy.

First, the policy toolkit changes; Countries support industries to build efficiency in climate-related sectors.

By doing so, countries are seeking to dispense with previous tools that were supposed to speed up the deployment of technologies (such as feed-in tariffs).

The degree of interest in free trade in the United States declined, and although the Rebuilding Improvement Act had not yet become law, it was full of incentives to favor domestic production.

The conflict of such laws with the rules of the World Trade Organization became minor and almost insignificant.

The rush to implement a carbon tax in the United States, without setting a domestic price for carbon emissions, is likely to violate trade rules as well, but support for a carbon tax is growing.

Even in the European Union; Where support for global trade rules remains high, climate policy and industrial policy are blended together, and there is a strong domestic bias in climate policy, the Washington, DC-based Center for Strategic and International Studies website reported.

The EU’s climate policy has increased the manufacturing capacity of electrolyzers 10-fold in Europe, the EU continues to recognize the importance of trade and global supply chains, and trade complements what cannot be developed domestically.

decarbonization

On the other hand, the shift in trade relations raises important questions about decarbonization, and economies of scale have been necessary to reduce the cost of solar, wind and batteries over the past 15 years, and this volume has led to increased trade exchanges.

The International Energy Agency’s “Carbon Neutrality 2050” report sees a case for global supply chains that governments must carefully manage local job creation and local business advantages with the collective global need to deploy clean energy technology.

Without this coordination, the path to carbon neutrality would be difficult. Although global supply chains are inherently risky, according to Nikos Tsavos, researcher in the Energy Security and Climate Change Program at the US Center for Strategic and International Studies.

In the US, there is a familiar case against solar energy based on China’s dominant position in the industry. Some question the feasibility of replacing Chinese solar energy with domestic gas.

Human rights abuses in China’s Xinjiang region have reinforced this sentiment, and similar challenges will emerge as new technologies take off.

Hydrogen is changing the map of energy trade - Photo by IRENA
Hydrogen is changing the map of energy trade – Photo by IRENA

world energy map

Whereas in the past the world’s energy map linked natural resources to markets; the new energy map will be more chaotic; So whoever wants to map the energy of the world today should look for 4 components.

  • First: the current industrial competencies that may be useful for the future; Countries will invest in the resources they have.
  • Second: Resources that may represent an asset, for example, superior wind or solar energy, sites for storing carbon, important minerals, etc.
  • Third, infrastructure that might be useful, either as is (eg, transmission of electricity) or repurposed (eg, gas pipelines converted to hydrogen or shipyards reused for offshore wind).
  • Fourth, the existence of institutions that govern complex relationships that depend on success.

The US offshore wind industry provides an example of how climate ambition and industrial strategy are converging, and there is an ambitious federal target to deploy offshore wind turbines, backed by a detailed space rental schedule.

Likewise, there is a willingness to cooperate between US states to purchase (and pay a premium for) offshore wind electricity.

There is a clear component of the supply chain that combines public money with private investment and a focus on existing assets that need a new purpose (eg ports), with emerging institutions of coordination between industry, government, labor and civil society.

Moreover, there is a strong transatlantic relationship with European companies investing in the United States.

Such industrial clusters are emerging all over the world, from northwest Europe to the Middle East to Australia, and together, these clusters are redrawing the world’s energy map.

The energy map of the world will continue to be rooted in the physical world and constrained by it, and these limitations appear especially in the hydrogen production sector.

Energy importers – Germany, Japan and Korea – fear the lack of space and resources for hydrogen self-sufficiency, said Nikos Tsavos, a researcher in the Energy Security and Climate Change Program at the US Center for Strategic and International Studies.

Exporters think the same way, which is why Australia, the United Arab Emirates, Saudi Arabia and others have hydrogen strategies.

There is an existing trade structure that countries will try to build on; Because the old system will not disappear, but will evolve.

The impact of geopolitics on the new energy system

The energy transition geography will consist of 3 overlapping maps; First, there is trading in strategic metals. And it will be different, in terms of location, than oil, gas or coal.

In form, the trade would be familiar: in one part of the world the resources would be extracted, transported to refineries and processing centers, and from there transformed into final products.

Many of the old fears – diversification, bottlenecks, struggles over extraction, rent-seeking – will be considered in different detail.

Second, there will be trade in new energy sources: hydrogen, ammonia, biofuels, carbon (which will be stored), and others.

Some of this trade will follow current routes: with countries in the Asia-Pacific reciprocal interest in reorganizing the hydrogen trade now in oil and gas.

The world will continue to trade in oil, gas, and electricity, and perhaps this trade will go further, and that map will also be familiar.

The third map will be more complex; It will consist of trading in low-carbon products: solar panels, wind turbines, electrolyzers, new engines, etc.

The location of this activity has not been determined in advance, and what is the best place to build solar panels? And what is the ideal place for low carbon steel or cement? And who will make the best low-carbon fuel engine for ships or planes?

As the world shifts to low-carbon energy sources, countries have an opportunity to rethink their strategic relationships.

The Russian invasion of Ukraine raised this question for debate, but before the war, many European countries were considering importing hydrogen from Russia.

The dilemma also applies to other importers: Should Northeast Asian countries replicate their dependence on hydrogen as oil and gas from the Middle East?

This raises a related question: Is it better to encourage hydrocarbon producers to diversify into new energy sources, thus preserving and renewing old trade routes, or is it better to use the energy transition to engineer a clean break from geopolitically thorny relationships? These questions are difficult but important.

Supply Chain Maps

Importing oil from Saudi Arabia is different from importing solar panels from China, but it is hard to say that the country should be indifferent to the source of the solar panels.

Over the past year or so, the importance of tracking solar supply chains has become clear, and the same logic will apply to other commodities.

Do policymakers have access to the data needed to map supply chains?

The most important policy choice for all countries is the importance and extent of dependence on global trade.

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