The US$369 billion energy and climate investment bill included in the US "Lower Inflation Act" will exacerbate inflation, at least in the short term, which is contrary to the original intention of the "Lower Inflation Act".
The "Reducing Inflation Act" runs counter to the original intention
On August 12, 2022, Democrats in the U.S. House of Representatives passed the "Reducing Inflation Act", which includes a US$369 billion energy and climate investment plan. This is the largest investment in the energy field in US history. It includes tax breaks and incentives for renewable energy projects, which are highly likely to boost investment in renewable energy and accelerate the energy transition in the short to medium term.
Energy transition will push up the demand for fossil energy.
However, rapid energy transition - from fossil energy to intermittent renewable energy, will increase the price of metals and minerals needed in the manufacturing of solar panels, wind turbines and new energy vehicles, such as copper, cobalt and lithium carbonate, forming the so-called "green inflation". Fossil energy prices, one of the main causes of inflation, will remain high or even continue to rise amid tight supply and strong demand globally.
Fossil energy prices, one of the main causes of inflation
Some people may wonder why the energy transition should reduce the demand for fossil energy. Why does it push up the demand? In the long term, when the energy transition is complete, this may be true. However, in the decades of energy transition, fossil energy has played an irreplaceable role in ensuring a stable energy supply. This means that people's demand for fossil energy will still be very strong, for two reasons:
First, current global energy consumption is still absolutely dominated by fossil energy. According to global energy statistics from BP, as of 2021, fossil energy accounts for 82% of global primary energy consumption. For the United States, renewable energy will only account for 20% of total power generation in 2021. Nie Sen, professor and former chairman of the Department of Mechanical Engineering at the Catholic University of America, once said, " New energy is like dessert at dinner, and the main meal is fossil energy. Very few people can fill their stomachs with desserts."
Secondly, the renewable energy output of wind energy and photovoltaic is directly affected by natural conditions. When there is no wind, the output of wind energy is very limited. At night, solar energy doesn't do much good. If extreme weather conditions occur, the renewable energy resources that people have invested heavily in will seem to be in vain. The 2020 California blackout is a practical example of overreliance on renewable energy.
Renewable energy also needs to match fossil energy to form stable power for transmission through the traditional power grid. Most transmission and distribution lines transmit electricity in the form of alternating current . Maintaining a stable frequency is critical to the safe and reliable operation of the power supply infrastructure and ancillary equipment. This is difficult to achieve with intermittent new energy sources. Although upgrading the traditional power grid to a smart grid and developing energy storage technology can solve this problem to a certain extent, this requires considerable investment. At present, the development of energy storage has not fully achieved economical and large-scale operation.
Domestic UHV line network
Taking China as an example, the areas rich in renewable energy are mainly in the northwest, but the local energy demand is not high, and power curtailment is easy to occur. If wind turbines located in the northwest are to be transmitted to East China, where power demand is higher, not only UHV lines are needed, but also thermal power plants adjacent to UHV lines are required to provide a basically stable base load power. It can be said that under the traditional power grid, in order to transmit renewable energy, corresponding thermal power plants need to be matched. So, is this a repeated investment? The operation of thermal power plants backed by these renewable energy sources will also increase the demand for fossil energy.
From a supply perspective, the political and public opinion pressure caused by the radical energy transition plan not only caused many oil and natural gas suppliers to reduce investment in traditional energy fields and switch to new energy sources, but also caused financial institutions and investors to reduce their financial support for traditional energy sources. Banks are increasingly reluctant to lend to fossil energy projects, investors in the capital market are no longer optimistic about traditional energy projects and are instead investing in green projects. In addition, environmentalists are condemning traditional energy, and the development and supply of traditional energy projects will become increasingly tense. Tight supply worldwide will also keep prices high.
Global energy prices will remain high
Global energy prices, especially natural gas prices, will rise rapidly in 2021. BP statistics show that British BNP natural gas prices will increase by more than 350% in 2021, and oil prices will increase by more than 70%. By 2022, energy prices continue to climb. The U.S. Energy Information Administration (EIA) predicts that the price of Brent crude oil will reach US$104.78/barrel in 2022, an increase of 47.8% from the price of US$70.89/barrel in 2021. Natural gas (residential) prices will also rise further from US$12.27/thousand cubic feet in 2021 to US$14.56/thousand cubic feet in 2022.
Rising European oil prices
According to Bloomberg reported, European Central Bank Executive Board member Schnabel said in January 2022 that although energy prices have often fallen as fast as they have risen in the past, if we are to achieve the goals of the Paris Climate Agreement to combat climate change, this may mean that fossil fuel prices will not only remain high, but also continue to rise.
High energy prices are directly reflected in people's bills. U.S. residential electricity prices will increase by an average of 4.3% in 2021. The U.S. Energy Information Administration (EIA) predicts that residential electricity prices will continue to rise by 6.1% to 14.6 cents/kWh in 2022. People will really feel the inflationary pressure during the energy transition.
