Expert perspectives on Norway’s energy future

This latest report from UK think tank Chatham House looks at the implications for Noway of a global shift towards renewable energy.

With international efforts to limit increases in global temperature to 2°C, and as close as possible to 1.5°C, appearing increasingly off-track, there is an urgent need for a rapid move away from the unabated use of fossil fuels. An accelerated energy transition will have deep implications for future oil and gas demand. There is now a debate over when global demand will peak. However, what happens after demand has peaked is perhaps more critical – will there be an extended plateau, a gentle decline or a sudden collapse? The post-peak trend will impact oil exporters to varying degrees, in terms of reduced volumes and lower prices, as they compete for a shrinking market. There is also a debate over whether gas can act as a bridge between coal-powered electricity and renewables, or whether renewables directly replace coal. There is growing public and political pressure across most EU member states for more ambitious action on climate change. This particularly affects Norway as a supplier of energy to the EU, and as a member of the European Economic Area obliged to adopt at least similar binding domestic carbon reduction legislation. More challenging climate targets will accentuate many of the uncertainties of the energy transition, such as the rate of change and the costs of technologies including renewable energy and electric vehicles (EVs). While market developments will heavily influence the deployment rates of these technologies, policy interventions and investment in core infrastructure will be crucial to their scaling up. Meeting ambitious climate targets will require the decarbonization of heavy industry, which will rely on technologies that are yet to be tested at scale, such as green hydrogen or blue hydrogen with carbon capture and storage (CCS). The success or failure in commercializing these technologies will have a profound impact on the use of fossil fuels across sectors, particularly heavy and processing industries, and on existing transport and production infrastructure. Fossil fuel-producing companies have embraced the pivot to gas as part of the transition. However, the move to a net-zero-emissions economy will be disruptive, initially impacting the power and coal sectors, followed by heavy industry and the gas, transportation and heating sectors. The faster the transition, the more difficult it will be for energy exporters to adjust. Norway has one of the most decarbonized power sectors in Europe. Its renewable resources – primarily hydropower – are an important part of the Nordic power market, helping to balance supply and demand for domestic industry and across the region. The construction of additional power lines to Germany and the UK is likely to expand Norway’s role as a key supplier of low-carbon electricity in Europe. Norway has the capacity to increase the system flexibility of the internal European electricity market, which is vital for strengthening renewable energy in the power sector. Power system flexibility may also come from an increase in the use of EVs, which will lead to lower battery production costs and the possibility of vehicle-to-grid balancing. These two innovations alone may devalue investments in interconnectors. • The fall in electricity costs from renewable sources may negate the economic advantage of establishing heavy industry in certain areas and cause companies to relocate. Finally, Norway has a crucial role to play as an exporter of capital. With the largest sovereign wealth fund in the world, Norway’s policies and investment decisions can have real impact at home and abroad, helping to support an orderly transition through its effective management of climate-related financial risk and investment in low-carbon sectors.

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