One year after Russia’s invasion of Ukraine, The Energy Podcast investigates the impact of recent events on the global energy transition, drawing on Shell’s two latest Scenarios: Sky 2050 and Archipelagos.

Presented by Julia Streets, featuring László Varró, head of Shell’s Scenarios team, and Dr Nat Keohane, President of the Center for Climate and Energy Solutions (C2ES).

Read more about the Energy Security Scenarios here.

The Energy Podcast is a Fresh Air Production for Shell, produced by Annie Day and edited by Sophie Curtis.

EPISODE TRANSCRIPT:

00:00:00

Julia Streets: Today on the Energy Podcast...

MUSIC BED COMES IN

Dr. Nat Keohane: The energy security concerns from the Russian invasion of Ukraine actually accelerate the pace of the energy transition.

Laszlo Varro: There was no single global response. Europe is the eye of the storm. It is Europe where the energy crisis had by far the biggest impact. This is a situation where the average European consumer needed no explanation that there is a crisis.

00:28:41

Julia Streets: When Russia invaded Ukraine, the world was already facing a challenging set of circumstances with post-COVID- 19 austerity looming, energy prices rising and security tensions growing. The invasion amplified many of these challenges and brought the need for secure supplies of affordable, sustainable energy to the very top of the global agenda. Today, we will be exploring the tensions that have been unleashed just over one year after the invasion, with security issues, global energy supply and geopolitical alliances all in flux. We'll also be discussing how these tensions could be resolved in a world that needs to decarbonize, drawing on Shell's latest scenarios research.

Hello, I'm Julia Streets and today on the Energy Podcast, can a divided world tackle climate change?

MUSIC ENDS

Allow me to introduce my guest today. Our first guest is Laszlo Varro, who joined Shell in 2021 as the VP of Global Business Environment, looking at scenarios and pathways. He joined, after 10 years at the International Energy Agency, where he was most recently their chief economist. In his role at Shell, he leads up the scenarios team, which explores how the global energy system could evolve right the way through to the end of the century. So Laszlo, it's great to have you on the show.

Laszlo Varro: Thank you very much. It's a pleasure to be here.

Julia Streets: And joining us today is Dr. Nat Keohane, who is the president of C2ES, the Center of Climate and Energy Solutions. Before taking on that role in July 2021, Nat served for eight years as a senior vice president for climate with the Environmental Defense Fund where he led all of EDF's climates work in the United States and globally. So Nat, thank you so much for being with us.

Dr. Nat Keohane: Thanks very much for having me.

Julia Streets: So Laszlo, in the introduction, I mentioned that you lead the scenarios team at Shell. Can you talk us through what we mean when you talk about these scenarios?

02:34:18

Laszlo Varro: Scenario analysis came out of Cold War strategic assessments. Shell was historically the first company to use it for strategic analysis, so we are continuing a time- honored tradition. Scenarios have decision makers navigating uncertainties by reflecting on plausible futures. The Shell scenarios are not Shell's predictions, they are not Shell's commitments and they're not Shell's strategy. They are part of the information base that the leadership had navigating through the uncertain world.

Now in 2022, it's fair to say that history was teaching us some very tragic lessons about uncertainties. Even before the war, there were tensions and fissures in the energy system. The post- COVID recovery in 2021 was exceptionally energy-intensive. Global carbon dioxide emissions stabilized at a level which is entirely unsustainable. Geopolitical intentions were already emerging, and debates were already emerging on the future of globalization.

Now, on top of these existing tensions, the Russian aggression against Ukraine is not only a human tragedy – most importantly, it is a human tragedy – but it was also a geopolitical energy shock, which hasn't happened since the 1970s shocks of the Yom Kippur War and the Iranian Revolution. It created a new energy reality. Some of the impacts are helping the energy transition, other impacts are hindering the energy transition. There are regionally divergent responses and, basically, we were assessing the regionally divergent political, social, economic responses and asked the question how they can shape the energy system in a direction where humanity would like to go.

04:27:16

Julia Streets: So let's explore these scenarios a little further if we may. So there are two that I think are particularly salient today. Could you just talk us through those two scenarios? Then I'd love to bring in Nat for your reaction and your thoughts. Laszlo.

04:39:29

Laszlo Varro: We felt that, in the world of 2022-2023, social and political priorities on security are a given. They are just a fact of life. But the two scenarios, the two pathways, are distinguished by what is the actual interpretation of security. What do we mean by security and how do we try to achieve that? In one of the pathways, we call that Archipelagos, security is achieved by sticking to the existing well understood conventional energy system, energy infrastructure and capital stock, and security increases the importance of domestic hydrocarbon resources or hydrocarbon imports from friendly countries. There are signals and signposts in that direction. Last year, we have seen a surge of domestic coal production all around the world. China, for example, expanded its domestic coal production in energy terms by seven exajoules. Just for the sake of comparison, all the oil and gas that Shell produces worldwide is around six exajoules in energy terms. So the increase in domestic coal mining in China last year was more than the entire hydrocarbon production of Shell.

Now we also designed another scenario - we called it Sky - in which the interpretation of security is very different. In this scenario, society regards the fossil fuel dominated energy system itself as a security risk. Very clearly, the fact that it was Russia, a major oil and gas producer which launched a geopolitical aggression, it reinforced the already existing political and media narrative that oil and gas are the problem and renewable energy is the solution. This is a scenario in which society flees forward and achieves security by an accelerated transformation of the energy system.

06:41:37

Julia Streets: Thank you for setting out those two scenarios because what strikes me is that one of them very much starts with the premise of where we are today and where we're headed, and that is the Archipelagos. The second, Sky, as you call it, starts with a future point and then works backwards from that. Nat, I know you've looked at these. I'd love to get your reactions.

07:05:06

Dr. Nat Keohane: Any scenarios like this are primarily useful for making comparisons. Any individual scenario is bound to be wrong in the details, so these aren't crystal balls, but by comparing the scenarios and looking at where they have consistent themes and where they diverge, we can learn a lot. So that's how I want to be approaching these.

So under both scenarios that Shell has released, renewables increase while fossil decreases. The difference is how fast. And because of those dynamics, as well as similar consistent transitions in transport and industry, in both scenarios, we see global CO2, carbon dioxide emissions peaking and starting to decline within a decade. One interesting finding in fact from the Archipelagos scenario that Laszlo mentioned is that the energy security concerns from the Russian invasion of Ukraine actually accelerate the pace of the energy transition.

It's also important to note this isn't the only evidence we have for this. The International Energy Agency in a recent report and the other oil major BP, and it just published Energy Outlook, both found similar conclusions. In other words, even under projected trends, we're turning the corner on fossil fuel consumption and emissions in the near term. The low carbon energy transition is no longer a matter of if but when.

And so this is where it's useful to look at the divergence between those scenarios because that divergence points to what we need to do to accelerate that transition much faster than it would otherwise happen. And it's very clear. We need to rapidly decarbonize, clean up the electric grid, even as we expand energy access in developing countries, and even as we shift much of our economy, including transportation and industry to run on electricity. We need to develop new fuels for aviation and new technologies to make heavy industrial products like cement and steel. We need to develop and deploy new technologies from scratch like green zero- carbon hydrogen and carbon removal technologies to take carbon out of the atmosphere and we need to scale them up and we need to transform land use so we store much more carbon in soils and forests.

All of those things are highlighted in the scenarios. To do all of that, we really need government policies at a much more ambitious scale than we have now.

09:26:29

Julia Streets: I'm really curious now to know what the current shifting dynamics are. As I mentioned in my open, we are one year into conflict. And what impact has the war in Ukraine had on the pace of change? Nat, can I come to you first?

09:42:43

Dr. Nat Keohane: My sense in terms of what Russia's invasion of Ukraine has done is that by highlighting energy security concerns, it turns out many of the ways to improve energy security align with reducing fossil fuel use, at least in the medium and long term. Not right away, and that's a problem. Right away, we see a bump up in the use of coal in some areas, and if that locks in, we're in real trouble. But at least what the scenarios are showing us is that the shift to a focus on energy security can actually help shift towards more renewables, and so, that's an important additional dynamic.

10:17:24

Julia Streets: Laszlo, let me get your reactions to that.

10:21:26

Laszlo Varro: I broadly agree with everything that Nat said. We tried to enrich the analysis by going into the regional dimension, because there was no single global response. Europe is the eye of the storm. It is Europe where the energy crisis had by far the biggest impact. Now, Europe mobilized very large amounts of money for the short-term crisis management essentially buying liquified natural gas at whatever price from anywhere around the world and also supporting consumers. But Europe also, as Nat mentioned, very strongly reinforced its clean energy policies. Essentially, the clean energy transition in Europe emerged as the overarching organizing principle of policy.

And very importantly, this is a situation where the average European consumer needed no explanation that there is a crisis. So last year, there was a warm winter in Europe and a warm winter reduces heating energy demand. That's well understood. But when you statistically analyze the demand data and you adjust with the temperature, it turns out that the demand decline in European heating gas use was around 10 billion cubic meters more than the temperature can explain. So 10 billion cubic meters of gas, which is like switching off the heating in 5 million homes, was delivered by people voluntarily changing their behavior.

Now you jump over to the United States. So the United States is embarking on a journey to decarbonize a high energy consumption American lifestyle, which requires innovation and requires investment. You could observe the main US policy reaction, the Inflation Reduction Act, primarily focuses on increasing investment in clean energy supply. There is no carbon pricing in the Inflation Reduction Act, but there are very, very strong incentives to build, build and build more and more clean energy supply.

Again, when you jump further, China. China, up until recently, was largely self- sufficient from coal. Their domestic coal production played an important role in maintaining energy security, but at the same time, in all the relevant clean energy technologies - wind power, solar power, nuclear power - China's investment activity is comparable to Europe and the United States combined. It's a massive scale leapfrogging from domestic coal to domestic solar and from domestic coal to domestic nuclear.

Last but not least, the developing world outside China, we call them the surfers in our analysis because these are countries that are surfing the waves of opportunity. These are countries which were very badly hit by the European energy crisis. One good example is Pakistan. There was even a European company which defaulted on a contractual obligation to supply gas to Pakistan because even after the penalties, it was more profitable to bring the gas to Europe. Pakistan recently had a gigantic blackout, 200 million people without electricity. And the Pakistani government essentially announced recently that, "We are going to increase our qualified power generation capacity by a factor of four and we are going to dig out our domestic coal and just burn it and maintain security that way."

So there have been divergent responses, but overall, what we see in our analysis is that even our more conservative, scenario, is actually a considerably lower temperature increase than what was feared just a couple of years ago in the climate assessments. There is no such thing as a business as usual scenario anymore.

14:09:19

Julia Streets: What does this mean for the energy transition ambition? Are we going to hit that ambitious target or are we going to fall short?

14:19:28

Dr. Nat Keohane: Maybe I can start with just a little bit of context on where we are relative to those global targets. The Paris Agreement on climate change sets that goal of keeping that rise in average global temperatures well below two degrees above pre- industrial levels and striving for 1. 5. The more science we have and the more we learn, the more we realize that 1. 5 is really a much, much safer place to be.

So where are we? We're at 1. 1 today and the scenarios as we were talking about, the more conservative scenario goes to 2.2. There's a lot of uncertainty. Let's say 2 to 2. 5 degrees Celsius by the end of the century. On the one hand that is a lot of progress since before the Paris Agreement. Before the Paris Agreement, we were looking at 3. 5 to 4 degrees in terms of projected temperature increase. Now we're looking at 2 to 2. 5. Again, everything is uncertain, but 2 to 2. 5 under this conservative scenario.

Why is that? The technology changes we've talked about, the accelerations in innovation, but also the Paris Agreement gets some credit for that. The Paris Agreement has created a framework for cooperation that is starting to work. And, the theme of the day, we need to accelerate that much faster if we're going to get below 2 and down to 1. 5, all of those things that the scenarios talk about, how are we going to do that? We need to leverage the Paris Agreement and government policies at all levels, national, state, local. We need to leverage them to really accelerate that clean energy transition.

15:52:20

Julia Streets: Laszlo.

15:55:21

Laszlo Varro: A timely energy transition which satisfies the objectives of the Paris Agreement, and that includes the Sky scenario, which was explicitly designed to satisfy the ambitions of Paris, is consistent with our roughly 2, 3 thousand billion dollars per year increase in average annual clean energy investment. Total capital investment in clean energy globally is thousand billion dollars per year today. A very sizable chunk of that is wind and solar, but biofuels, hydrogen, other technologies also play a role, and this roughly a thousand billion dollars per year, will have to go to, depending on how you model it, somewhere around 4, 000 billion dollars per year.

Now, in order to achieve that, a couple of things are needed. First of all, the money. Now in the Western financial system in Europe and the United States, there is a very strong appetite for clean energy investment, but 90% of that clean energy investment funding stays in the Western world and only 10% flows to developing countries, where clean energy is critically underfunded.

So one factor where the two scenarios start differing from each other, that in Sky, the financial system effectively channels that capital into clean energy investment in the developing world. The only way to achieve that is to mobilize the power of modern capitalism and turn the energy transition into a profitable investment opportunity.

The second thing that you need after you have the money is the equipment. You need the wind turbines, the solar panels, the batteries. You need the metals that they are made from, so you need the copper, the nickel, the lithium. You need the manufacturing capacity and you need value chains which are secure and are trusted from a political point of view. So again, Sky is a scenario in which the scale up of the clean energy value chains and the metal supply is managed appropriately. In Archipelagos, this emerges as a barrier.

And last but not least, after you have the money and you have the equipment, you need to have a legal permission to build those things and you need to be able to connect them to the grid, and the legal processes and the licensing and permitting environments in many countries in the world are not in line with the need to rapidly scale up green energy investment. So there's a very important task for governments to modernize the regulatory environment and enable this industrial investment to go ahead.

18:12:21

Dr. Nat Keohane: I'm really with Laszlo in what he said about the finance that's needed and how we mobilize that. We need trillions of dollars. He said thousands of billions. Trillions. That's the same thing. I just want to underscore that. That's what we need in terms of driving more climate finance.

Now some of that does need to come from governments. The US, the richest country in the world – we need to be providing more climate finance. It's shameful, frankly, that the US only... It provides a fraction of the climate finance commitments we've pledged. Only a few billion dollars in climate finance a year. That needs to be much greater. And that's talking about billions and we need to be talking about trillions. How are we going to do that with government policies at the national and international levels that mobilize the private sector?

The scenarios talk about the importance of carbon markets and carbon trading. Article six of the Paris Agreement provides a framework for that. We need to accelerate that. The best policy to align incentives and mobilize capital is always a price on carbon. The European Union has that. Other countries are putting that in place through various market- based approaches. If we can't do that, then we ought to look for other ways to create incentives to drive capital into those new technologies.

Final point, we've talked a lot about increasing the build out of clean technologies and accelerating innovation in zero carbon technologies like wind and solar and hydrogen and so on. That's really important, but it's not sufficient. We also have to accelerate the phase out of the fossil fuel that we're already consuming, starting with coal plants, but also going to oil and gas. We need to accelerate the phase out of the high-carbon fuels even as we are accelerating the build-out of the clean technologies because we have to do both of those things if we're going to meet our targets.