Europe’s Energy Crisis That Isn’t

Adam Tooze

Source Link

Russian President Vladimir Putin’s war on Ukraine has led to a reassertion of national security concerns in every facet of Western countries’ policy. The most obvious aspect is military security, with the United States and the Europeans ramping up ammunition production and wrangling over tank deliveries. But as far as Europe is concerned, the even more urgent priority is energy security. As Russia’s natural gas supplies were cut off and prices surged to record levels, European governments have spent more on subsidizing the energy bills of their populations, stockpiling gas, and bailing out bankrupt energy companies than they have either on their militaries or on supporting Ukraine.

The emergency energy programs were short-term expedients. The urgent question now is which direction long-term energy security is to be found.

The crisis struck Europe in the midst of an accelerated energy transition away from fossil fuels, one driven by climate concerns and a program of green industrial policy. Since 2020, Europe has been doubling down on green energy policy, with the Next Generation EU investment program, the Fit for 55 energy transition framework, rising carbon emissions pricing, and a flood of national programs. Britain recently celebrated a day without any use of coal. Spain celebrated a day entirely on solar and wind. European utilities are driving sectors such as offshore wind. Costs for clean energy were falling, in part due to the parallel efforts being made by China in the cheap mass manufacture of solar panels. The European car industry was setting a course for electrification by the mid-2030s. European car producers and engineering companies saw not risk but huge opportunities in China, which is the dominant global force in electric vehicles.

Moscow’s aggression, on top of deteriorating relations between Washington and Beijing, has troubled this outlook. Indeed, some hawkish voices in the United States have gone so far as to suggest that the new geopolitical configuration puts the entire European vision of energy transition in question. They argue that the basic math in favor of fossil fuels is now triumphing over green ideology. History has pronounced its judgment against Europe’s naive and unrealistic ambitions for the renewable energy transition and in favor of fossil fuels as a key element of Western grand strategy and nuclear power as a carbon-neutral power source.

Germany’s decision to shut down nuclear and exit coal, for example, left it dependent on Russian gas and intermittent renewables. Little wonder that it is now scrambling to buy liquefied natural gas from around the world. When you are up against Putin’s tanks, so Europe’s critics argue, what you need is not sun and wind energy but gas from a safe source, such as Texas.

This conservative, national security-based case for fossil fuels and nuclear power has the ring of hard-boiled realism about it. It is true that renewables are still undergoing development and China is right now the world’s premier supplier of solar panels. The problem of intermittency is real. We need more batteries and pumped water storage. Shutting down Germany’s nuclear fleet has not helped the cause of decarbonization; Berlin has had to scramble to open gasification terminals. And when gas supplies seemed unreliable, European utility companies imported more coal than they had in a while.

But though superficially compelling, is this really a fair assessment of Europe’s energy transition? How bad has the European crisis actually been? How far did Europe and the rest of the global energy system actually retreat from renewables in 2022? And what does this portend for the energy transition going forward?

Let us start with the simple fact that Europe’s lights have stayed on and no one has actually gone without power. Europe’s situation should not be confused with that of Texas in 2021. The story of 2022 European energy policy is one of stress, not of open crisis and blackouts.

To understand why, all you have to do is to consult the 2022 data for energy demand and supply. What it shows is not a wholesale return to fossil fuels, but rather an ongoing transition to a new and more diversified energy mix in which the most rapidly growing components are renewables.

One point that critics of European energy policy commonly get wrong is the balance of demand and supply. Criticisms tend to focus on the failure to invest in reliable sources of supply, which are said to be fossil fuels and nuclear. In fact, the crunch in global energy markets in 2021 and 2022 was first driven not by supply shortfalls but by an unusual demand surge linked to the recovery from the COVID-19 lockdowns. This started in China in 2021 and rippled through to Europe in 2022, sending global gas markets into shock.

By the same logic, in the second half of 2022 the most important contributor to managing the European gas crisis was not switching to coal, but a reduction in demand. Industrial lobbyists who insisted that it could not be done were proven wrong. In Germany, for example, energy-intensive industries curbed production but less energy-intensive production remained robust, a rebalancing that enabled a reduction in energy consumption without a collapse in output. All told, European electricity consumption fell by 3.5 percent in 2022. Between August 2022 and January 2023, gas consumption in Europe was 19.3 percent lower than in the previous five years.

Admittedly, there were problems on the supply side in 2022. Hydropower production was cut back by low rainfall. And the nuclear fleet proved unreliable too. Germany’s closures had long been planned for and did not prevent Germany emerging as a net electricity exporter in 2022. The real problem was in France, where nuclear generation plunged to a historic low. But although France has clearly neglected its reactor fleet, this was more a matter of penny-pinching management and unfortunate timing than a strategic turn against atomic power. Certainly, Paris cannot be accused of giving excessive attention to renewables at the expense of nuclear power; France has seen one of the slowest build-outs of solar and wind anywhere in Europe.

This combination of demand and supply factors put pressures on gas and coal stations. Coal consumption did rise in the first half of 2022, which generated an unwelcome blip in emissions. Across Europe, the 26 coal power plant units were reactivated or had their lifetimes extended. This provided a reassuring cushion of reserve capacity. But because the utilization rate of these power plants was as low as 18 percent, it entailed little extra coal consumption. Even at its peak in late summer 2022, total coal consumption remained well below pre-pandemic levels, and since September 2022 coal consumption in Europe has resumed its downward trend. As Lauri Myllyvirta, an analyst at the Centre for Research on Energy and Clean Air, comments, the net result is a marginal shift from gas to coal, but since coal consumption is dropping it seems tendentious to speak of a return to coal. All told, Europe’s crisis-driven adjustments in 2022 added only 0.3 percent to global coal emissions in 2022. In 2023, with hydropower making a larger contribution and the French nuclear fleet recovering, we should expect demand for coal to fall to record lows.

Meanwhile, there is absolutely no sign of any retreat by investors from renewables, rather the reverse. Far from falling back in love with gas, oil, and coal, the world clearly realized in 2022 that fossil fuels are an expensive and fickle trap. Investment in solar in Europe is booming. The latest data from SolarPower Europe, an industry trade body, shows that nearly 32 gigawatts of solar capacity were installed across Europe in 2022, a growth of 33 percent from 2021. In terms of generation, 2022 will go down in history as the year in which solar and wind overtook every other form of electricity generation in Europe—gas, nuclear, or coal. And 2023 is likely to see the trend continued.

This investment is happening because solar and wind offer power at unbeatably low cost. Far from depending on subsidies, as critics allege, European wind power now operates on such a profitable basis that it returns revenue to European treasuries. Current tenders for power-supply contracts are attracting bids from wind farms at price levels so low that they redefine the meaning of cheap electricity.

By contrast, the two largest nuclear reactor projects currently under construction in Europe, in the U.K. and France, are viable only with outlandish levels of price subsidy. Smaller or less technologically ambitious atomic power stations may be less uncompetitive. But Hungary is relying on Russian subsidies to make its nuclear program viable. And Poland is flanking its nuclear enthusiasm with a new commitment to renewables.

Meanwhile, the electric vehicle (EV) revolution is proceeding apace. Purchase of EVs has taken off across Europe. In the Netherlands, Norway, and Sweden, they are now the norm. In a significant new development, Chinese EV producers are entering the European market at a large scale, which will drive down prices, as has happened with solar. The giants of the motor vehicle industry are beginning the process of running down and halting the development of new internal combustion engine drive trains. The European commitment to end the sale of new internal combustion engine vehicles by 2035 remains intact, despite a last-minute effort by the German government to carve out an exemption for high-end vehicles running on synthetic biofuels.

The United States’ self-appointed realists are fond of accusing Europe’s energy policy-makers of making strategic choices whilst blinded by green ideology. But who is wearing the ideological glasses? As far as Europe is concerned, the suggestion from the U.S. side that Putin’s war has proven the indispensable importance of fossil fuels and provoked a general retreat from the energy transition is quite simply at odds with the facts.

European governments, businesses, and society are accelerating the energy transition. And they aren’t doing so on ideological grounds, or because they are blind to the risks of new dependencies (notably China). They are doing so because—in a world of tough choices and uncertainty, including about U.S. politics, mounting ecological crisis, and geopolitical risk—the green energy transition simply looks like the smartest bet.