Brenda Shaffer
The European Union and its 27 member states have invested more money, effort, and political capital in energy policy than any other region in the world. Until this year, Europe was admired globally as the gold standard for energy and climate policy. Germany’s Energiewende—or energy transition—was especially touted as a shining example of how to green the energy supply.
No one aspires to emulate the Europeans today. Germany and the EU have spiraled headfirst into the globe’s worst energy crisis since the Arab oil embargoes of the 1970s and 1980s. All across the continent, Europe’s energy policies have led to astronomical price increases, industry shutdowns, potential energy shortages, and geopolitical vulnerability. Germany, in particular, is in crisis mode and will likely see much worse, as its entire economic model—based on energy-hungry manufacturing, cheap Russian gas, and a self-mutilating shutdown of nuclear energy that Berlin still won’t reverse—is on the verge of collapsing without a plan B. In short, Europe is in a mess of its own creation.
Recently, the EU has taken several steps in hopes of improving its energy security and extricating itself from its current crisis. The steps include asking natural gas producers other than Russia to supply additional volumes, a recent decision by the European Parliament to classify natural gas and nuclear energy as eligible for investments dedicated to green energy, and new gas storage mandates for member states. These steps, however, will not be enough to avert a major energy crisis in Europe in the coming months. Europe needs to do better—and fast.
If the EU is going to significantly improve its energy security, it will need to move beyond policy tweaks. Instead, what’s called for is a much broader paradigm shift that abandons the failed policies of the past decade or more. Europe built is energy policy along several main policy lines: incentives and mandates for renewable energy; restrictions on domestic and other natural gas supplies to boost demand for renewables; reliance on market mechanisms, such as trading hubs for energy sales; and the complete separation of energy from national security considerations.
Brussels has taken steps to break with its policy of crowding out natural gas to ensure more room for renewables. EU representatives have reached out to natural gas producers—including the United States, Israel, Egypt, Azerbaijan, and Qatar—asking them to send additional volumes to Europe. These efforts have resulted in increased imports, including shipments of liquefied natural gas (LNG) and a modest increase of pipeline gas from Azerbaijan. Imports from Norway are set to increase as well, and the Netherlands is considering reopening a major gas field shut down due to environmental concerns.
The problem, however, is that Europe is still refusing to give suppliers a clear horizon for these deliveries, which will artificially restrict supplies. Europe’s continued fixation on an unrealistic schedule for eliminating all fossil fuels—including relatively clean natural gas—from its energy supply means that Brussels is actively discouraging gas buyers from concluding long-term contracts with producers. However, LNG and pipeline gas is usually sold on lengthy contracts, since gas production and export infrastructure require substantial investments that are normally recouped over many years. Producers cannot take the risk of a major project without a guaranteed market. That is why Chinese companies have been snapping up long-term LNG supplies from the United States while Europe has tied its hands. Instead, European countries are restarting their mothballed coal- and fuel oil-fired power plants and seeing sharply higher uses of the dirtiest fuels—and rising emissions to go with it. It seems Europe is more comfortable with increased coal consumption over cleaner natural gas, since access to coal supplies does not entail long-term commitments. Although every bit of energy helps, Europe’s self-imposed restrictions on gas contracts condemn the continent to a continued crisis.
This policy makes a mockery of Europe’s vaunted green goals. The energy crisis in Europe—which, contrary to the popular narrative, began long before Russia’s invasion of Ukraine—has shown that when European countries don’t have enough gas, they turn to coal and fuel oil. By restricting new gas contracts, Europe ended up with higher coal and oil consumption and thus higher air pollution and carbon emissions.
Securing additional gas volumes to replace Russian supplies is not enough. Brussels needs to ensure not only sufficient supply but reasonable prices. Russian gas has been a cheap source of energy that Europe says it now wants to phase out—by two-thirds by year’s end and entirely out within a decade. Moscow’s weaponization of the gas supply—it has shut down deliveries to several countries already—has encouraged Europe to stick to this goal. However, Brussels needs to ensure that any new imports are priced so they don’t paralyze Europe’s economy. Countries such as Germany and Italy rely on manufacturing, where energy is one of the biggest costs. Their industrial goods cannot be competitive if energy is expensive.
Brussels, therefore, needs a plan for more pipeline-supplied natural gas, which is generally cheaper than LNG and has less volatile pricing. Even if the Ukraine crisis in resolved and European countries like Germany return to high volumes of Russian imports, they will need to reprioritize energy security by diversifying sources and types of fuels, creating redundancies in infrastructure and ensuring ample energy storage.
Brussels’s recent decision to allow natural gas and nuclear energy to receive investments from green funds is an important step toward better energy security. However, several commercial hurdles still stand in the way. In new EU legislation, natural gas was granted a window of operation only until 2035—not enough, in most cases, to realize a sufficient return on investments in major new production or export infrastructure. In addition, global nuclear capacity around the world is shrinking, mainly because the current generation of reactors, which is safer than past ones, is also very costly. This new legislation will not change the bottom line; and thus, new nuclear capacity will remain challenged in Europe, even if extending the life of existing nuclear reactors has now become more likely. Potentially, the new EU policy approach could lead to the introduction of small module reactors, which require less upfront investments and may resolve many of the remaining safety concerns, but the timeline for their introduction to Europe is still unclear. These new reactors would require a risky bet on infrastructure that has not yet been built or even received commercial support.
The crisis makes it all the more urgent that Europe finally treats energy as a part of national security, not just a subcategory of climate policy. Europe’s energy security problems long predate Russia’s invasion of Ukraine. Europe set itself up to be vulnerable and already experienced energy crises over the past two winters. Still, most EU countries did not change course—for example, by diversifying gas suppliers or expanding storage.
To be sure, the EU’s new mandates to increase gas storage will help reduce its vulnerability. However, Europe will also need to examine the geopolitical implications of many of the energy market rules it designed. Exhibit A is the mechanism for setting gas prices at trading hubs instead of promoting bilateral, long-term contracts between suppliers and consumers. Hub trading has actually increased the Kremlin’s power over European gas prices: As the swing producer, Russia can rev up or reduce supplies to create its ideal price—which, right now, is one that produces maximum pain for Europe as punishment for supporting Ukraine. In addition, Brussels should review its unbundling policy in the energy sector, which requires the supply, storage, and distribution of gas to be owned by different entities.
In the coming weeks, several more European utilities will face insolvency, and European governments should prepare a policy response. Germany seems to be supporting bailouts while France has already decided to nationalize a utility. European countries need the utilities to keep supplying energy to their publics and will need to design a model that allows these companies to continue to operate in volatile price environments.
Ironically, the beginning recession and reduction in economic activity will likely lower energy prices and ease supply shortages in Europe. With the EU’s systemic energy security challenges still unresolved and barely addressed, any temporary easing of the crisis should not be an excuse to sit back and return to its previous policy approach.
No comments:
Post a Comment