Clean Energy Seen as ‘Immune’ to Hormuz-Style Shocks

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(Bloomberg) — The war in Iran has provided new impetus to the low-carbon transition as renewable energy is seen as less vulnerable to future price shocks, according to a group of corporate bosses and senior bankers.

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The secretariat of the Energy Transitions Commission, whose members include executives from ArcelorMittal SA, HSBC Holdings Plc and Shell Plc, said in a new report that the current Middle East crisis highlights “a structural vulnerability in the global energy system: heavy reliance on geographically concentrated fossil fuel supply and critical transit routes.” By contrast, “clean energy systems are structurally immune to this type of shock,” the group said.

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The ETC, which is co-chaired by former City of London finance regulator Adair Turner, joins a growing chorus arguing the war in Iran may ultimately strengthen the case for renewables. The conflict, which has disrupted oil supplies and pushed up fossil-fuel prices, has set the stage for a wave of investment as governments seek to boost energy independence. 

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“Almost every country in the world could be energy sufficient in renewable electricity in a way that it just couldn’t possibly be in fossil fuels,” Turner said in an interview. “The supply of fossil fuels is extremely unequally divided across the world, and so there are some countries that get enormous fossil fuel rents, while others are big importers.”

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Clean energy systems “change the physical and economic structure of energy supply,” making them more resilient than fossil-fuel alternatives, the ETC said. While oil and gas systems “depend on continuous flows of extracted, traded and transported commodities,” those built on green power rely mainly on “one-off installed capital assets” such as solar panels, wind turbines and batteries that, once installed, deliver energy for years or decades.

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In clean energy, as much as 90% of capital investment is made upfront, limiting the impact of price shocks to assets that need replacement or expansion, the ETC said. 

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“Renewables create a set of capital assets, which once you’ve got them, are just not susceptible to somebody cutting off a pipeline or somebody sending the LNG elsewhere because they got a better offer,” Turner said.

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The “key difference” between the current shock and past energy crises is the “availability of readily deployable alternatives” that are now cost-competitive and large enough to challenge fossil-fuel dominance, according to the ETC. Falling costs of wind, solar and batteries in recent years “make it possible for the response to the current crisis to be even stronger” in pivoting away from oil and gas, the group added.

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And the rationale for making that shift is particularly compelling in Asian economies that are heavily dependent on energy flows through the Strait of Hormuz, the ETC said. The impacts of the current energy shock are “most severe” in Asia, where fuel shortages and price increases are limiting transport, industrial production, immediate food availability and fertilizer application, according to the report.

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“Solar is so cheap, batteries are so cheap and EVs are getting so cheap that this is the first energy crisis where people say, ‘but there’s an alternative,’” Turner said.

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(Adds more about impact of Middle East conflict on Asia in ninth paragraph.)

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