As the energy flow (supply chain) normalizes towards pre-pandemic level, the energy prices are falling back.

This should be good news, especially when it comes to controlling inflation and avoiding recession.

However, there are some reasons to be cautious.

1. Energy transition

Renewable (green) energy is the future, for sure. The question is, how to get there. Fossil-fuel energy (e.g., coal, gas) still accounts for more than 50% of world electricity generation.

For every single 1GW of fossil-fuel energy to be put offline, there must be an additional 1GW of renewable energy put online.

Green energy tends to be land intensive, especially solar power and wind power. Nevertheless, over a lifetime more energy can be generated compared to fossil-fuel energy according to one research.

 

2. Underinvestment

During pandemic, demand dropped causing power oversupply. Subsequently, some energy projects were put on hold.

As the economies recover, demand for energy increases back to pre-pandemic level. Huge investments in energy projects, especially renewable ones, will be needed to keep up with the demand.

3. Funding / Incentives

High interest on debt funding makes it less compelling to invest in energy projects. Viability of a project becomes an issue, especially when the payback period is quite long.

There are several schemes that are being considered by governments and financial institutions to incentivize the investments, and some are already in place.

Regardless all supports and incentives offered to renewable projects, the main cost, i.e. capital cost, remains challenging. It costs nearly as much as building fossil-fuel power plant for every MWh capacity.

4. Carbon tax

Introducing a carbon tax will hit the energy bills hard, as shown in a 2019 report.

Not easy for households to cope with, especially at a time where recession fear is lurking.

In hindsight, energy security is essential to the economy and people’s welfare. The energy price should be affordable for working families, at sustainable basis for decades to come.

Disclaimer: NOT FINANCIAL / INVESTMENT ADVICE. This article is of writer’s personal opinion. Any information contained here is for education and informational purpose only. Readers should seek other sources or professional advice for further clarification where deemed necessary.