Research paper
Published 29 June 2020
Updated 14 December 2020
ISBN: 978 1 78413 387 0
The world is undergoing a transition away from fossil fuels towards renewable energy. However, the speed and depth of this transition is uncertain and controversial. This will have significant implications for Norway, one of the world’s largest exporters of both energy and capital.
Within the EU there is growing public and political pressure across a majority of member states for more ambitious action on climate change. Some have already adopted a 2050 net-zero carbon emissions target and proposed legislation for the EU as a whole. This would have significant implications for energy consumers and fossil fuel producers inside and outside the EU. It will particularly affect Norway, not only as a supplier of energy to the EU, but as a member of the European Economic Area, as there would be pressure to adopt similar binding domestic carbon reduction legislation.
More ambitious climate targets will accentuate many of the uncertainties of the energy transition, such as the rate of change and the costs of innovations, for example in renewable energy technologies and electric vehicles. While deployment rates for these technologies will be heavily influenced by market developments, the drive to deliver more ambitious climate targets will require greater policy interventions and investment in core infrastructure. The more interventionist the policies, the greater the political risk.
Meeting ambitious climate targets and transforming industry rely on the adoption of new technologies that are yet to be tested at scale, such as CCS or CCU and the use of hydrogen. The success or failure of the commercialization of these technologies will have a profound impact on the use of fossil fuels across sectors, and on the fate of existing transport and production infrastructure. Despite these uncertainties, it is clear that there will be significant disruption to all elements of the fossil fuel industry and the sectors that are dependent on it. Key for energy producers will be to create technologies and business models where there is a clear first-mover advantage in rapidly reducing GHG emissions.
Key for energy producers will be to create technologies and business models where there is a clear first-mover advantage in rapidly reducing GHG emissions.
Oil demand may peak and decline considerably faster than many anticipate today. As a result, global competition will intensify between the large, low-cost oil producers and the rest. This will likely drive prices down, increasing the risk that productive assets are stranded and prospective ones left undeveloped. In contrast with previous eras, declining prices are unlikely to be offset by rebounding demand, as governments seek to implement sales taxes or reform subsidies, and as clean technologies increase their market share, permanently destroying global demand. Accounting for around 3 per cent of global oil supply, Norway will have limited influence on market dynamics, but it can carve out an influential role as a responsible producer that assesses the climate risk presented by policy decisions relating to oil supply. On the demand side, Norway can share its experience with EV roll-out and help other countries transform their transport sectors, as the tipping point for EVs approaches.
Some fossil fuel-producing countries have embraced the pivot to gas as part of the transition. However, the transition will be disruptive, initially affecting the power and coal sectors but eventually impacting gas and oil. The slower that emissions are reduced, the more disruptive transition is likely to be if carbon targets are still to be met. There are serious questions concerning the role of natural gas as a bridge fuel, given the general acceptance of the need for decarbonization and therefore the phase-down of natural gas and/or the phase-up of green gas (biogas and green hydrogen). Norway has an opportunity to help shape such a long-term strategy because of its interests as an incumbent producer and preferred supplier to Europe, and its potential growth capacity in CCS and green gas markets. However, this will require meaningful engagement with the end goal of net-zero emissions.
Due to its renewable resources – primarily hydropower – Norway has one of the most decarbonized power sectors in Europe. These resources are an important part of the Nordic power market, helping to balance supply and demand efficiently and economically across the region. Construction of additional power lines to Germany and the UK will expand Norway’s role as a key supplier of low-carbon electricity in Europe and, perhaps more importantly, provide increased system flexibility for the European internal electricity market – a vital element of a renewable energy-dominated power sector. However, system flexibility can come from different sources, for example an increase in the use of EVs will lead to lower battery production costs and the possibility of vehicle-to-grid balancing, both of which can change the economic value of interconnectors.
The continual deployment of renewables and the consequential fall in their associated electricity costs may challenge the economic advantage of the current locations of heavy industry. Large-scale deployment of offshore renewables, particularly wind, offers a competitive advantage to countries such as Norway with offshore and marine experience and industries.
Finally, Norway has a crucial role to play as an exporter of capital. With the largest sovereign wealth fund in the world, Norway’s policy approaches and investment decisions can have real impact at home and abroad, helping to support an orderly transition through the effective management of climate-related financial risk and the growth of low-carbon sectors.
