European Energy Policy: “Current Path Unsustainable”

The shale gas revolution hadn't yet changed energy policy in Europe, but it would.

That was one view from economist Dieter Helm, Professor at the University of Oxford a Fellow of New College, Oxford, and Professorial Research Fellow of the Smith School of Enterprise and the Environment, who offered a wide-ranging assessment of and prescription for European energy policy at Flame in Amsterdam, the Netherlands. For one, he noted that things had changed drastically from the days when it was thought the world would reach “peak oil.”

“We have an abundance of fossil fuels,” he remarked, mentioning the potential for North American energy independence. However, the profound effects from the shale gas revolution were not yet understood, like the connotations for the US trade balance, or the effect upon geopolitics in the Persian Gulf, where the US strategic interest was diminishing.

“Displaced by the gas-burning US, 'Green Europe' has been importing lots of cheap US coal,” he reported, “increasing its coal-burn and its carbon emissions.”

Now the US had the fastest falling CO2. Europe had become not the green wonderland that people imagined in the first decade of the century, but actually had become a center of dirty polluting and environmentally unfriendly framework of enterprise and policy, said Prof. Helm. “We've simply de-industrialized, reduced our energy intensive industries, had a good recession, too, and displaced those energy intensive activities.”

Some of the UK's carbon footprint, argued Prof. Helm, had simply been exported to China.

“The UK had, between 1990 and 2005, a form of carbon reduction of about 15%, but if you adjust for the things we used to produce in Britain and now import, our consumption goes up by 19% in that period,” he explained.

Carbon emissions were mainly growing in China, which was producing carbon intensive goods to export to Europe and the US. This meant that Europe's carbon footprint was pretty awful: Germany was now producing about 45% of its electricity from coal and Britain had gone up to 40%.

With new coal plants coming online in Germany and the Netherlands, plus many more already operating in Eastern Europe, the situation had led to a decline in gas-fired generation, which he said was key for a low carbon future.

In addition, lignite, which was an extremely dirty form of coal, was increasingly being mined.

Prof. Helm commented: “Any serious attempt to claim world leadership in climate change cannot be compatible with developing new coal stations. In Germany we've gone from nuclear – almost zero carbon – to coal, based on coal and lignite mining. That has led to a decline of gas, which is arguably the clean transition fuel to get to a low carbon future.”

Europe, he said, had failed to do anything serious about climate change. And it had rendered itself uncompetitive, some of which had to do with the eurozone and associated issues like social spending.

“Investments into energy intensive industries are overwhelmingly no longer a European business,” he said. “Energy intensive investment is an American business now. It's hard to find many, if any, significant energy-intensive industries investing in new plant within the European Union, and certainly not within the original, western European countries.”

He said that while the US had a 4:1 labor cost disadvantage with China, it had a 3:1 advantage in energy pricing against China, with relatively cheap labor from Mexico along its border.

He explained, “This geopolitical change of the competitive landscape leaves Europe very much adrift as the expensive energy location, without the labor cost advantages that China has. That competitive future is deeply damaged by the cost for energy that we've got in Europe – not just from an importing perspective, but because we've decided to invest in one of the most expensive ways known to mankind to generate electricity – things like offshore wind, which even make nuclear power look economic.”

Prof. Helm recalled the energy security wake-up calls that Europe had received in 2006 and 2009, a “couple of dry runs,” commenting: “The remarkable thing about those episodes is how little has happened since then as a response. You might think if you had a couple of dry runs, you would've had the chance to put in place the building blocks to cope with the potential problems, which were inevitably going to come again over Ukraine, given that Russia has never accepted it as a sovereign independent country able to stand on its own two feet, completely independent of Russia's sphere of influence.”

Nabucco, he said, could have been done but wasn't, despite it being cheaper than building a couple of nuclear power stations. Meanwhile, the reverse-flow issue remained a dominant one.

According to him, Europe would see what would happen to Ukraine and some EU members, as Russia would inevitably threaten to cut off gas supplies. Renewables did not have proper back-up by gas, he added.

Policymakers, he said, were not fulfilling their objectives of competitiveness, climate change and security of supply be mutually consistent. “It's pretty obvious that coal, in the short run, is one of the best ways to improve security and one of the worst ways of addressing the climate problem. These are not consistent.”

Poland, he offered, was pushing for coal.

In light of this, did Europe value climate change first, or energy security? He reported that Europe planned on setting its 2030 climate targets regardless of what the rest of the world was doing.

“These targets were just like the old ones,” he said, “as if nothing seriously whatsoever had been learned in the intervening years.”

There was also a renewables target for 2030 for which individual countries had to submit national renewables plans, whose implementation Brussels needed to approve and monitor; these also had to be approved by the Council of Ministers, he said, and this was pending for the autumn, but the Ukraine crisis had changed the situation substantially, according to Prof. Helm, who said while one might have thought that the Ukraine crisis would have galvanized Europe, instead each country had a shopping list of things it wanted the EU to pay for in the energy field, like a pipeline project on the Iberian peninsula, to France; others wanted more renewables.

“On the other end of the continent, people who are really on the front line with Russia, and have size – Poland – want common terms for gas purchase and therefore propose a European central buyer and a European energy union based on the old atomic treaties and the iron and steel community in the origins of the EU.”

Not a lot was likely to happen, he opined, as Europe was more concerned about itself than it was about Ukraine, rejecting a number of proposals like an EU grid or that of a European energy union.

“The outcome will be that Russia will basically win; it's proved that the so-called borders after the collapse of the Soviet Union are no such thing, but fungible. Ukraine's status is questioned and there's plenty more action to come around that border going forward – Russia has been able to absorb Crimea with virtually no serious consequence, getting the benefits of all the oil and gas offshore from Crimea and a much better route for the South Stream pipeline if only they can twist the arms of the Bulgarians and dominate that particular line of supply.”

Regarding the goal of a complete internal energy market in EU member states, he said this had happened in most countries according to the letter of the law, but in the spirit there was a lot left to be desired. “National energy markets, national energy policy remain the driving force.”

But one of the core principles – unbundling and wholesale electricity markets – had been undermined by the policy framework, which meant that most countries wanted to implement capacity mechanisms for new electricity investments like into gas-fired generation, which needed fixed-price contracts as they were no longer being used for baseload but only intermittent generation. But none of this was compatible with the internal market, he explained.

As for solutions to this complicated mess, Prof. Helm said there was little room for carbon targets.

“We should decide our climate framework at, and in the light of, the 2015 summit in March and not before. Either China and the US play ball, or they don't, but we shouldn't go on kidding ourselves that by skewing carbon production we're somehow making a difference to the planet – we're not; actually, we're just encouraging carbon consumption.”

To decarbonize the economy in a world where fossil fuels were abundant and cheap, technologies needed to be devised which could really challenge the fossil fuel industry, he said.

“The extremely good news is that what's coming out of the R&D front for future renewables as opposed to current renewables – the electrification of transport and so on – are incredibly exciting,” Prof. Helm reported, who noted the enthusiasm surrounding developing new energy technologies.

Electricity storage, he said, would see massive improvements; existing technologies just weren't doing the job, so it was necessary to look to the future.

Regarding security, he said Europe must increase its bargaining power with Russia, diversify its sources of gas, consider alternatives to gas, among other suggestions.

What could Europe do regarding competitiveness, he asked.

“The unconventionals are sitting there and there are many reasons why they are difficult in Europe, but one thing is pretty clear: from an environmental perspective, anything which is bad about unconventionals is comparably trivial compared with what's wrong with coal.”

Noting that many countries in Europe had banned fracking, but were also promoting lignite was environmentally ludicrous, according to him. He explained, “Coal mines leak methane – compare that with leakage from a fracked well; they're almost always in the water table, putting heavy metals into the water table.”

The energy intensity of extracting the coal was high, and when burned in a power plant it eventually released all kinds of toxic substance into the air.

“It's one of the most dangerous industries in the world,” he added.

In terms of competitiveness, Prof. Helm said investments should be made into R&D instead of endless investment into offshore wind farms.

Finally, grids and interconnectors needed to be connected.

“We are where we are, because our masters saw the world today completely differently from how it's turned out, but instead of pausing and reassessing, the policy needs to be retrenched, particularly regarding the targets for 2030.

“Our current path is not sustainable,” concluded Prof. Helm, offering that there were sustainable paths to pursue that were secure and addressed competitiveness.