Monday 7 March 2022

How will the war in Ukraine impact the energy transition?

How will the war in Ukraine impact the energy transition?

Three main financial impacts will be seen on the energy market from the Russian invasion of Ukraine, according to a new report.

The report by Schroders outlines inflation, higher energy prices and a shift of equities, as some of the possible outcomes of the ongoing crisis – but what does this mean?

The authors state that due to Russia’s dominance of the world’s oil and gas supplies, which stand at 12% and 17% respectively, a huge risk on energy flows will ensue – leading to a further hike in energy prices.

Russia also has a heavy hand in the supply of metals and agricultural commodities and with sanctions imposed, the report estimates that prices will rise for customers to make up the lost money in supply chains.

“History has shown that energy shortages and conflicts resulting in higher energy prices can slow down economies significantly,” the report reads. It continues: “The risk of such a slowdown was already there before the escalation in Ukraine and it is certainly higher now.”

Many European countries have announced their desires to reduce the reliance they have on Russian energy but for the time being that will leave a gap in the supply chain, of which consumers may be seen to bare the brunt from a financial standpoint.

The study also points towards changes in investment throughout the industry, as the risk of investment is heightened, leading to less flows into equity funds and a shift to bonds for safety.

The value of global energy transition stocks and equity is expected to drop, as stock prices rise and the potential for growth gets smaller.

A positive note of the report is that there may be a shift to more renewable power, as the resources that energise it are more equally spread and not so heavily reliant on Russia, as with gas.

It also estimates that as conventional energy prices hike, renewables will become more attractive from an economic perspective, as they’ll be cheaper than fossil fuels.

The report concludes that although positives may be seen in the long-term for greener energy, the short-term impacts will still be seen in high prices and disrupted supply chains.

Written by

Bruna Pinhoni

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