See also:Â Europe’s 16,000 terawatt hour question: How to survive without Russian gas
Politics and energy have never been far apart. In fact, if you look at history energy is often the reason why wars have started (think the US led invasion of Iraq in 2003) and energy access has also been the reason why wars have been won and lost (WW2 for instance).
What the Russian invasion of Ukraine is showing is how utterly dependent Europe is on Russia for not only natural gas, but oil and coal. And what those tanks have done is broken the trust between, in particular, Germany and Russia – and that is a game changer for European geopolitics and energy.
This begs the question what should Europe do? In a nutshell, we need to rewire Europe.
Europe needs bold ideas that help it in the short and long term and it needs to be brave in the implementation of these ideas.
In the short term, Europe needs to:
1. Reduce demand for natural gas – We may need to pay customers to not use gas and to reduce the usage of natural gas in the electricity system it may mean keeping nuclear and coal plants running for the foreseeable future. Practically, Germany and Belgium may both have to delay closures of nuclear plants and the same may need to happen for coal plants across the continent.
2. Move energy purchases away from Russia – This is not an easy task given that over one third of European fossil fuels come from Russia, but the reality is that every euro spent on Russian fuels can be used to strengthen the ability of that country to make war. Practically, we may need to rethink the closure of North Sea gas wells but also be prepared to import energy at higher prices from other parts of the world.
3. Fill up storage tanks – Europe needs to buy as much as it can in terms of uranium and fossil fuels to ensure we have enough energy to keep the lights on and our economies working. Practically, this means working very closely with other partner nations such as the United States and Australia.
4. Help energy sensitive customers – Wholesale energy prices have been on the rise for months and at current levels make European industry (particularly chemicals and steel production) uncompetitive globally. In addition, we will see the higher wholesale prices being passed onto retail customers which is going to have a severe impact on inflation and consumer spending but in particular the lower income groups in our society. Practically, governments will needs to help people and companies through these difficult times.
However, these are only reactionary solutions that help us over the next 12 months. Beyond that we need bigger, braver and more sustainable change.
In the long-term, we need a program that unites Europe and makes it stronger
To do this we need to immediately begin to:
1. Deeply electrify the energy system – The quickest way to decarbonise is to electrify as much as possible of the energy system. That also is the most sustainable way to ween off Russian fossil fuels and to build an energy independent Europe build around low cost renewables and other clean technologies. To that we need radical regulatory change to ensure a speedy and low cost transition. This starts with improving planning laws to allow quick build out of renewables and the necessary grid infrastructure.
2. Enable low cost electricity – Today across many European countries (Denmark and Germany for instance) electricity is the most expensive way to power your car and heat your home. The recent surges in natural gas prices have now made electricity even more expensive.
There are a whole pile of measures than can be put in place such as grid regulatory reforms which force competition and cost efficiency improvements to wholesale power market reforms which move away from the marginal cost pricing whereby the most expensive power plant determines the price for everyone. In addition, taxes and other charges should be removed to ensure that electricity becomes the cheapest form of energy. That will in turn given the financial incentive the customer needs to make long-term investment decisions.
3. Invest in clean energy and storage – There is still a large amount of European electricity produced with fossil fuels most of which is imported and if we are to decarbonise and gain energy independence then Europe needs to invest in renewables. The advantage of renewables is that the resources (be that wind, solar, wave or geothermal heat) are all local. They are also clean but we need to put in the incentive structures to ensure the cost effective and speedy buildout of this infrastructure.
However many of these technologies, although low cost, are not able to produce energy 24/7 which is why we need storage. The good news is that we have lots of fossil fuels storage which can be used if needed but there needs to be investments in other storage technologies such as batteries and fossil fuel alternatives such as efuels which can be stored in existing storage capabilities.
4. Embrace energy efficiency – the majority of energy is wasted in the form of lost heat. Electrification is a much more efficient way to use energy, noting that an electric car uses one third the amount of energy of an ICE car. But electrification is not enough. We need to invest heavily in improving the quality of our building stock as well as other regulations and measures to reduce energy consumption.
5. Cut demand for fossil fuels – Higher prices for fossil fuels will help to push customers to seek other alternatives and incentives need to be put in place to ensure any new investments go into cleaner alternatives such as heat pumps and EVs. In addition, it may well be that Europe needs to bring in a border carbon adjustment tax to ensure that European jobs and emissions are simply exported to another part of the world.
6. Change how Europe does innovation – The energy transition is a huge opportunity for European business and innovators but sadly to date Europe and all the various countries have been very bad at commercialising energy technologies.
This is particularly the case in two key energy transition technologies: solar and lithium-ion batteries where Europe has been at the forefront in terms of innovation but where we have no global leaders. Part of the issue is the university approach to innovation which is not commercially enough focused. This needs to change and EU and government money really needs to be much more strategically focused rather than the sprinkler approach that is currently used.
7. Bring together national security, decarbonisation and industrial interests – energy security has always been a part of national security but thanks to the onset of US shale oil and gas the general view has become that we live in a world flush with cheap oil and gas.
The current crisis is an eye opener to Europe which now needs to make energy independence a core focus going forward. Given that Europe has not a lot of fossil fuel resources that means a need to focus on locally available resources such as solar.
That is good for decarbonisation BUT here the issue is that nearly all solar panels come out of China which again is not good for national security or Europe’s industrial future. Thinking strategically about national security and decarbonisation would enable Europe to build competitive advantages in critical industries for the 21st century.
Finally, as Winston Churchill was working on the establishment of the United Nations after WW2, he famously said “Never let a good crisis go to waste.” We should not and we should focus on Rewiring Europe.
Gerard Reid, is a co-founder and partner of Alexa Capital, and a leading authority on the changes going on across the worlds of energy and mobility.
Read his latest column here:Â Europe’s 16,000 terawatt hour question: How to survive without Russian gas
