Dreaming isn’t going to solve the energy crisis

 Europe is in the middle of the worst energy crisis experienced in a generation. And with the closure of nuclear plants in Germany and Belgium, this crisis will continue at least until the end of Ursula von der Leyen’s term at the European Commission.

When she took the lead in December 2019, von der Leyen decided to shift the Commission’s focus from the just approved Energy Union to a much more ambitious Green Deal, with the full support of the European Parliament and the Council.

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But while the Commission was drafting thousands of pages of legislation to flesh out this vision, the energy markets were tightening at record speed.

After seeking to phase out natural gas as fast as possible and promising to pour unlimited subsidies into hydrogen and batteries, EU institutions are now faced with hard choices. The Brussels narrative continues to assume that theoretical scenarios will help us achieve our 2050 climate target or face the truth: current actions based on wishful thinking do not solve the climate crisis, but they effectively worsen the actual energy crisis and a potential EU recession.

Record high prices show reality is different than dreams:

• On an energy basis, gas in Europe and Asia is two times more expensive than oil, while the US economy benefits from low domestic gas prices.

• Instead of the coal phase ‘down’ widely discussed at COP26, coal is growing because gas is too expensive.

• In electricity, with the political closure of nuclear plants in Belgium, France and Germany, Europe’s failed policy of demand reduction is now turning into painful demand destruction.

• Even at record price level, the EU carbon market fails to fast-track emissions reduction as too many allowances are still provided for free. As things stand, EU-27 emissions data for 2021 is likely to be higher than in 2019.

• High energy prices also lead to a massive wealth transfer from the EU to foreign producing states and could precipitate the EU into a recession if pursued further.

With the energy crisis deepening and now expected to last until the end of 2022 at least, we can expect Member State governments to put the climate crisis on the back burner.

In front of this, EU institutions are pushing hard to make themselves even more irrelevant by pursuing a Green Deal, which has already failed to promote a greener and fairer world as we are now moving back to expensive, polluting fuels.

The recent publication of the second EU taxonomy delegated act is a political recognition that gas and nuclear are needed for an effective energy transition. I would now hope that the European Commission will consider five real steps:

• Diversification of Supply: The EU cannot repeat the 2010s mistake, which saw Gazprom’s market share increase from 25% to 40% and should move to a maximum market share of 33% for all players, in line with the spirit of existing security of supply provisions.

• Security of Supply: As Europe needs more gas to fight both the energy crunch and the climate crisis (and considering we are 90% dependent on foreign supply), we need to incentivise the remaining top 3 suppliers (Norway, US and Qatar) to invest massively to grow their exports. This could be envisaged as a ‘Strategic partnership’ with the EU to increase the Security of Supply while fostering the energy transition. Hopefully, the recent EU-US Energy Council could kick-start this new partnership. After the political go-ahead, banks and companies will be able to finance and contract as they wish.

• Effective decarbonisation: To deliver an effective reduction in CO2 emissions, the EU ETS should stop providing free allowances (EUA) to industrial emitters. As this was done with power generation, back in 2013, all other industries participating in the EU ETS should have to pay for polluting. The polluter pays principle cannot be twisted with free allowances representing 43% of all EUAs. To reduce the risk of carbon leakage and as we need Carbon Capture Sequestration projects fast, I would advise incentivising negative CO2 emissions in the revised Emission Trading System (ETS), allowing innovative technologies to benefit from a record high EUA prices. That way, the polluters pay and the cleaners pocket the money to benefit the climate and consumers.

• Ban ‘Magic Maths’: Primary energy demand has, so far, been overwhelmingly positively correlated with economic activity. In the history of Europe, we have only seen the opposite between 2006 and 2014. Hence all tax-paid scenarios based on the assumption of decoupling between energy demand and economic growth should provide detail. This should be done in a straightforward way for all citizens to understand what is expected from them and avoid a Ten-Year Network Development Plan by ENTSOG and ENTSO-E that is based on a decrease in individual mobility’ without citizens having expressed their consent. The EU Ombudsman should also be able to fast-track investigation of any non-science-based scenario like the EU hydrogen strategy and ask for the papers to be amended/deleted in the case of the Commission one or for consultants to reimburse their fees.

• Stop ‘subsidy farming’ where all companies, from the smallest to the biggest, are only lobbying Brussels to get taxpayers money at the expense of EU next generation that will have to reimburse the debt. If the Commission rightly believes in competition in energy markets, no one should benefit any longer from direct or indirect subsidies as all companies are claiming that their respective technology is already profitable! The merit order should be set by the market, considering the cost of each technology and the price of CO2. Subsidies should be provided only for fundamental and some applied research.

I believe that the best way to solve climate change is not to set 2050 targets that nobody has a clue how to meet. Instead, I would make the Commission and each Member State government liable for reducing their CO2 emissions every year.

Failing should automatically lead to forced resignation. President Ursula von der Leyen would already be out on this simple metric unless she decides to react fast and correct her initial mistakes.

Dr Thierry Bros is an energy and climate expert. He is Professor at Sciences Po Paris and a regular contributor to Natural Gas World.

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