Global energy shock could accelerate transition to renewable energy

Analysts told CNBC that the fallout from the Iran war is likely to accelerate the transition away from fossil fuels and change the way countries think about the role renewable energy can play in strengthening energy security.

The Middle East crisis has significantly disrupted oil exports through the strategically important Strait of Hormuz. The Strait of Hormuz typically transports about a fifth of the world’s oil and liquefied natural gas (LNG), making it a key choke point for the fertilizer trade.

The study sheds light on how dependent the world remains on fragile fossil fuel trade routes, even as soaring oil and gas prices disrupt energy markets and raise widespread inflation concerns.

Asia is currently at the forefront of the global fossil fuel crisis due to its dependence on imported energy, but supply disruptions have also hit Europe and Africa hard, as countries grapple with rising fuel costs and serious threats to food security.

The head of the International Energy Agency said the energy transition was progressing “very strongly” before the Iran war began. However, the impact of the resulting energy shock means countries are likely to direct even more investment towards clean energy sources.

“We expect that one of the responses to this crisis will be an acceleration of renewable energy, not only because it contributes to emissions reductions, but also because it is a domestically produced domestic energy source,” IEA Director-General Fatih Birol said Monday at the National Press Club in Australia’s capital.

For example, clean energy sources accounted for the majority of new power generation capacity last year, with renewables accounting for 85% of new capacity worldwide, Birol said, citing solar as a key driver of this trend.

“It’s amazing. Ten years ago, solar power was a romantic story, but now solar power is a business,” Birol said.

Analysts said a unique element of the impact of the Iran war, unlike previous oil shocks, is that renewable electricity has become more competitive in many countries around the world.

However, fossil fuels such as coal, oil and gas will continue to dominate the global energy mix, meeting around 80% of global demand by 2023, according to the IEA.

“The Iran crisis is accelerating the transition to renewable energy and electrification. Rising fossil prices are driving the switch, making already cheap electric technologies even more competitive,” Sam Butler Sloss, research manager at global energy think tank Ember, told CNBC in an email.

“In the old fossil fuel world, energy security meant diversifying fuel supplies. Thanks to electrotechnology, countries now have the tools to increasingly eliminate imported fuels completely.”

In an analysis published in December, Ember revealed that electrotech, which refers to solar, wind, batteries, electrified transport, heating and industry, was the main driver of global energy growth last year. This was led by China’s emergence as the world’s first so-called “local state.”

Butler-Sloss said the adoption of electric vehicles was already increasing rapidly around the world, particularly in Asia, and the crisis would give that trend a further boost. He estimated that expanding EVs could save importers more than $600 billion a year in oil imports, describing the switch as a “security superlever.”

“This is Asia’s Ukraine moment. Just as Ukraine forced Europe to reduce its dependence on gas, Hormuz will force Asia to reduce its dependence on oil, but cheaper technologies will become available,” Butler-Sloss said.

Ana Maria Jarrah Makarewicz, chief energy analyst for the European team at the Institute for Energy Economics and Financial Analysis (IEEFA), said the energy shock from the Iran war was a “wake-up call” for the European Union.

Jarel Makarevich said Spain is a good example of how countries have been able to limit their exposure to fossil fuel price fluctuations.

He noted that while Spain’s government has come under intense criticism after last year’s devastating power outages, which some policymakers blamed on renewable energy, the country is now benefiting from investments in wind and solar technology.

Spain, along with Portugal and some Nordic countries, has one of the lowest petrol prices in the entire 27-nation bloc since the start of the Middle East conflict.

“What we need across Europe is investment in the grid. Investing in the grid means modernizing and expanding the grid. For me, the winner is the European grid,” Jarrah Makarevich told CNBC in a video call.

But while the Iran crisis is widely expected to accelerate the energy transition in the medium to long term, some warn that the transition away from fossil fuels could be derailed in the short term.

Gonzalo Escribano, senior energy and climate researcher at the Royal Institut Elcano think tank in Madrid, cited pressure on policymakers to subsidize fossil fuel pumps and the possibility of a temporary resurgence of coal in some producing countries if the conflict drags on.

But Escribano said countries’ attitudes toward renewable energy had “obviously” changed in the wake of the conflict. The transition to clean energy sources is now not necessarily considered greening, but rather an attempt to strengthen domestic energy security.

“Renewable energy and related technologies are now generally recognized as tools for energy security, no longer just a means to combat pollution and climate change, but a geopolitical asset supported by pragmatism rather than idealism,” Escribano told CNBC via email.

“Even among governments and people who have little interest in environmental issues,” he added.