The ‘de-risking’ dividend: The energy transition as insurance against energy price shocks Why we should swap geopolitical risks for technical challenges that we can shape. An interview with Jakob Schlandt (HIC Consulting).

Our dependence on fossil fuels makes our electricity system vulnerable to global price shocks. A recent study by Montel Analytics, commissioned by BUND, now offers an alternative approach: A hypothetical scenario for the year 2030, with renewables accounting for 80 per cent of the mix, could reduce the electricity price under crisis conditions (based on 2022 levels) by around 64 per cent compared with a system heavily reliant on fossil fuels, such as that of 2011 – and this despite rising demand. Particularly impressive: periods of extreme price volatility would be drastically reduced. We speak to Jakob Schlandt, Head of Policy & Markets at HIC-Consulting, about the systemic importance of the energy transition as a factor in economic and security stability.

Through the energy transition, are we swapping an uncontrollable external risk – the volatility of global fossil fuel markets – for a controllable internal, technical risk, namely managing grid stability and storage requirements? And is this ‘risk swap’ ultimately a genuine economic gain for our energy system?

Yes, this swap is a gain. We have little control over international stability. Who would like bet that the US president two terms from now will still be willing to supply gas, when even the current one wanted to annex Greenland? Who wants to remain dependent on the Middle East? In my view, national risks – and, to a certain extent, European risks too – are at least much easier to manage. By moving away from fossil fuels, we are taking our economic destiny more firmly into our own hands and reducing volatility. The Russian pipeline gas supply cut in 2022 resulted in a loss of energy on a scale that would be practically impossible in a more renewable and resilient system.

However, the cost structure of the energy system then shifts from fuel to capital. The price risk thus becomes, at least in part, a financing and interest rate risk. Land requirements are, of course, also an issue – greater self-sufficiency does not come about overnight.

The bottom line, however, is clear: in a world without a rules-based order, the climate transition and, ultimately, electrification also bring a massive de-risking dividend. We recently found in a resilience study by the HIC for the BDEW that many countries are specifically focusing on renewable energy to reduce their risks. And on a side note: whilst we should not take China as a role model, they did recognise their dependence on fossil fuels at an early stage and are electrifying their economy more consistently than any other major country. It is already evident that, as a result, China is significantly less affected by the price spikes caused by the war in Iran.

 

An interesting detail of the study is that, whilst a broader supplier base reduces dependence on fossil fuels, it does not completely eliminate exposure to global price shocks. How ‘resilient’ is a system with a high share of renewable energy really in the face of global geopolitical upheavals?

High dependence on a single gas supplier was – as should now be clear to everyone – a grave folly. In reality, however, we must not expect too much too soon: in a system dominated by renewable energy, gas sets the price for significantly fewer hours, but still for some – as the study also shows. Added to this is European market coupling: Germany’s electricity grid is interconnected with some countries that have a higher share of fossil fuels. Furthermore, our industry will not be able to replace gas with renewable energy as quickly as the electricity generation sector.

However, the energy supply will still be exposed to risks. We can cushion the impact of periods of low wind and sunshine and extreme weather years by investing in flexibility, grids and storage. But that is not the end of the story: hybrid attacks, damage caused by climate change and cyberattacks can still affect us, to name but a few risks.

A renewable energy-based system is significantly more robust in the face of supply shocks and, in some cases, even completely independent of them; however, it also presents a vulnerability to other threats because it is more digital and more dependent on the grid. This is by no means an argument against the energy transition, but rather in favour of explicit and systematic planning for resilience.

As well as climate protection, decarbonisation also leads to more stable pricing in the energy sector | Credit: pixbay/dragondash

At what proportion of renewables does the system actually become ‘immune’ to global fossil fuel price shocks, or is there always a residual exposure that we must factor into the system design?

This is essentially a linear relationship: the fewer fossil fuel sources, the less impact fossil fuel price shocks have. With the following caveat: if we allow fossil fuel sources to retain a small but crucial role in the system – for example, as the sole and complete safeguard against periods of low wind and low sunlight – then the impact of a shock can, of course, be disproportionately greater than their share would suggest. In my view, however, this risk can be mitigated in a controlled manner through government-mandated stockpiling.

 

Is Germany, through the energy transition, shifting its dependence from fossil fuels to critical raw materials and technologies? Does this give us energy autonomy, or merely create different vulnerabilities?

The market concentration in PV value creation, battery cells and magnets in China is not a spectre, but a reality and a significant problem. With inverters and other components of a digital, renewable energy system, the issue of remote controllability comes into play; this is a genuine security policy concern. Greater autonomy and a functioning, less risky system cannot aim for complete self-sufficiency; this is, firstly, illusory and, secondly, extremely expensive. However, it does aim for diversification, takes recycling into account, ensures the stockpiling of critical components and sets security requirements for networked systems.

 

If the energy transition can serve as an economic tool for price stability, why has this argument not yet become the dominant narrative in the current political debate?

In my view, it has now become so. Resilience, and the immense costs and price fluctuations caused by our dependence on imports, are a huge issue in our society. It is causing discontent and, quite rightly, making us nervous. You can see this at petrol stations across the country, but also in Berlin’s political circles and within businesses. To put it rather bluntly: we’ve all had enough of the gas price shock, the Hormuz shock and our new, heavy dependence on gas from the unpredictable US. Hardly anyone considers the fossil fuel import system in its current form to be sustainable, quite apart from climate protection – which, incidentally, is still supported by a clear majority. However, when it comes to transformation issues, an approach based on both emotion and reason is now more effective through the concept of resilience than through purely climate-related arguments. We see this every day in our work as a consultancy firm.