COP26 May Still Be Ongoing, But Revenge of the Fossil Fuels Has Begun

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Fossil fuels have begun “striking back,” just as efforts to tackle the challenge of decarbonization have begun around the world. Prices for fossil fuels such as coal and natural gases have been rising rapidly on the world market.

China, for example, is being hit by a succession of large-scale electrical outages, leading to a serious energy crisis against the backdrop of soaring coal prices. Moreover, the power supply crisis from surging fossil fuel prices is now spreading from China to India.

At the same time, the 26th U.N. Climate Change Conference of the Parties (COP26) started in Glasgow, the United Kingdom at the end October, as many countries came together to compete with each other on greenhouse gas emission reduction goals. The reality, however, is that fossil fuels have remained the world’s major source of energy. 

Power Crunch in China 

In addition, there are predictions of liquefied natural gas (LNG) shortages in this coming winter, which the pundits say might be even worse than that in January 2021. Should Japan – heavily dependent on foreign countries for natural resources – be negligent of fulfilling its own fuel requirements as a result of placing too much weight on decarbonization, this country could suffer painfully.

In China, regions subject to power supply restrictions have expanded since September, with frequent power outages in about 20 provinces, including Guangdong, Zhejiang and Liaoning. In Guangdong Province, where there is a concentration of manufacturing industries, factories serving companies of Japan, America and other nationalities are being driven into suspending their operations in succession.

In China, where coal-fired thermal power generation accounts for more than half the country’s electricity, steep rises in coal prices have resulted in curbs on the operations of thermal power stations, triggering acute power shortages. Beijing’s ban on coal imports from Australia, which is on bad terms with China, has also spurred hikes in coal prices.   

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In Europe, the spot price on natural gases has jumped six times since the end of 2020. In the U.K., which Japan uses as a model for liberalization of its electricity and gas markets, retail companies in those commodities have been unable to withstand the dramatic price rises, going bankrupt one after another.

For Japan, these are no longer “somebody else’s problems”. In Japan, where electric power rates for households are designed to reflect fluctuations in fuel prices, power bills have been on the rise since the beginning of 2021 because of the increase in coal and LNG prices. The electric bill for an average household in the TEPCO (Tokyo Electric Power Company) service area is expected to be ￥7,371 JPY ($65 USD) in November, an increase of more than 10 percent since April 2021.

The price of gasoline is also increasing. According to the Oil Information Center of the Institute of Energy Economics, Japan, the average retail price of regular gasoline nationwide was ￥160 per liter in early October, the highest it’s been in the past three years.

Decreased Resource Development

The worldwide surge in fossil fuel prices is attributable to the recovery of demand alongside a trend toward decarbonization. In the past, when fossil fuel prices spiked, resource-rich countries moved to expand production to cool down the market. However, with the spreading decarbonization movement along with increasing reliance on renewable energies, resource-rich countries are also changing their behavior.

An early October meeting of the OPEC Plus, composed of OPEC members (Organization of the Petroleum Exporting Countries) and non-OPEC producers such as Russia, postponed expansion of crude oil production in early November. The OPEC Plus decision, which ran contrary to expectations that the rising oil prices would be followed by expanded oil outputs, caused the U.S. benchmark oil prices to rise to more than $78 USD a barrel at one point for the first time in seven years.

Oil-producing countries have traditionally been wary of oil demand tapering as a result of price rises. Now, however, it seems global demand for fossil fuels is likely to trend downward in the future, due to worldwide decarbonization movement. Given the circumstances, oil producers have recently been “keen to keep oil prices higher while they can,” said an official of a major oil company.

Decarbonization initiatives have been gaining momentum in industrially advanced countries through the withdrawal from fossil fuel developmental projects of such resources as coal in rapid succession. U.S. shale gas production has hardly risen in spite of the current soaring prices for LNG. The reluctance of financial institutions to fund fossil fuel projects is a major factor in this connection.   

In response to the energy crisis, China has partially lifted the ban on Australian-produced coal and is procuring LNG in large quantities. While China says it’s goal is to reduce greenhouse gas emissions to zero by 2060, at least for the present Beijing is expanding its acquisition of fossil fuels while it weathers the current energy shortage.  

Getting to a Stable Supply

Japan, which is fully dependent on imported resources, must remain vigilant. The government has set a target of attaining net zero greenhouse gas emissions by 2050, but a breakdown of power sources for fiscal 2019 shows that power generation using fossil fuels such as LNG and coal accounted for more than 70 percent of the country’s energy consumption. Japan cannot achieve decarbonization if it forgets this reality and acts at the expense of a stable supply of electricity.

In the Sixth Basic Energy Plan, scheduled to be approved by the Cabinet in the near future, the government will hammer out a policy for switching from the current LNG-based thermal power generation to renewable energies as the national electricity source. That is envisioned to project Japan’s posture in the quest for decarbonization. 

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However, it is necessary to continue using certain amounts of fossil fuel in order to maintain energy stability. Success or failure of a comprehensive energy strategy, including technological development capabilities of capturing and storing carbon emissions underground, is now at stake.

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(Read this article in Japanese at this link.)

Author: Shigeyuki Ii, 

Shigeyuki Ii is a member of the Editorial Board, The Sankei Shimbun