6 ways Russia’s invasion of Ukraine has reshaped the energy world

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Stefan Ellerbeck, Senior Writer, Formative Content

• Russia’s invasion of Ukraine has created shock waves in global energy markets, leading to price volatility, supply shortages, security issues and economic uncertainty.
• Poorer countries will bear the brunt of the negative consequences of the energy crisis.
• Here are six charts from the IEA’s World Energy Outlook 2022 that explain the key changes to the energy sector post-invasion.

Russia’s invasion of Ukraine in February 2022 has had a profound effect on global energy markets. Price volatility, supply shortages, security issues and economic uncertainty have contributed to what the International Energy Agency (IEA) is calling “the first truly global energy crisis, with impacts that will be felt for years to come”.

As ever, poorer countries — many still recovering from the effects of the global pandemic — will bear the brunt of the negative consequences of the energy crisis.

The myriad consequences of a global energy reboot means that there may be some positive developments, too. However, with so much in a state of flux, it is difficult to predict with much certainty. As the IEA notes, “many of the contours of this new world are not yet fully defined, but there is no going back to the way things were”.

How the Ukraine invasion led to energy crisis

Here are six charts from the IEA’s World Energy Outlook 2022 report that explain the key changes to the energy sector post-invasion.

1. Higher energy prices

A graph showing how Russia’s invasion of Ukraine has led to energy crisis. Image: IEA

Perhaps the most noticeable change for most people is that energy prices are rising. The IEA says high fuel costs account for 90% of the rise in average costs for electricity generation worldwide.

Coupled with the impact of the global pandemic, the energy crisis means 70 million people who recently gained access to electricity can no longer afford it. And 100 million people may no longer be able to make food with clean fuels, returning instead to biomass, the IEA says.

One potentially positive aspect of higher fossil fuel prices is they provide strong reasons to accelerate towards sustainable alternatives. That said, the need for energy security may prompt further investment in fossil fuel projects.

2. Changing trade flows and supply shortages

Russia’s gas exports to the EU were drastically cut, causing a rapid shift in trade flows. Image: IEA

Russia cut gas flows to the EU by around 80% between May and October 2022, leaving the bloc with a significant shortfall in its energy mix, and a pressing need to find energy alternatives from other places.

While many of Russia’s former international partners have reduced or cut ties with the country, Russia has broadly kept its oil production and exports at close to pre-invasion levels by increasing exports elsewhere, including to China, India and Turkey.

3. Energy policy changes

Policy changes have accelerated the push for more renewable energy, but short-term energy security is also vital. Image: IEA

The change in traditional energy trade routes means that affected countries have had to rally quickly to create new energy policies that not only prioritize long-term energy security, but also allow for existing energy demand to be met in the short term.

Governments are also developing plausible pathways to net-zero emissions by 2050, so the issues brought about by the current energy crisis need to be addressed with that in mind. In some cases — notably the US’s Inflation Reduction Act — the crisis is pushing renewable energy projects forward, rather than backward, says the IEA.

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4. Economic impacts of the energy crisis

Higher costs due to energy crisis are contributing to rising interest rates, which could jeopardize the energy transition. Image: IEA

Higher energy costs are likely to lead to rising prices of goods and services. Higher interest rates coupled with falling incomes in real terms are pushing the world towards a recession, and the number of people falling back into extreme poverty is rising, says the report.

As many countries seek to increase the cost of borrowing money to counter inflation, clean energy projects that require financing could get caught in the economic fallout.

5. How emissions are being impacted

A bar chart showing annual change in CO2 emissions from global fossil fuel combustion. Image: IEA

Some countries are accelerating their emission targets, others are increasing their use of coal, and some countries are doing both at the same time. The longer-term impact of the energy crisis on emissions is unclear, and many people are concerned about the impact on plans to reach net-zero emissions by 2050.

However, even though CO2 emissions will continue to go up in 2022, according to projections, the growth is less than 1% higher than in 2021, mainly thanks to the rapid rise of renewable energy and electric vehicles, according to the IEA.

6. A push towards renewables

A bar chart showing global energy investment by region. Image: IEA.

Broken relationships between Russia and its energy customers have led to a rapid focus on maintaining energy security. Having a robust and diverse energy mix is at the heart of energy security policies, and the IEA says it is possible that the crisis could accelerate the move to more sustainable fuels.

But this is not yet known, and the negative economic outlook and short-term policy choices to ensure energy for today’s needs could slow momentum in the push towards renewables.

The world’s energy problems did not start with Russia’s invasion of Ukraine, but the subsequent energy crisis created a number of seismic changes to the energy sector. Some changes will be temporary, some will be permanent, but the decisions being made today are reshaping the energy sector forever.

And as the IEA warns, “we know from past energy crises that the process of adjustment is unlikely to be a smooth one”.