From Negative Prices to Net Zero: The Future of Europe's Energy Landscape

#Europe is currently grappling with a crazy situation where electricity generators are increasingly being paid to shut off power-plants or consumers are being paid to take excess #electricity. The most extreme situation was during the first weekend of July when Europe saw, for most of the day, negative wholesale prices across the whole continent, from Finland to Spain.  Paradoxically, consumers in countries like #Ireland and #Denmark are dealing with record-high retail electricity prices which are over 5x the average cost of wholesale electricity. At the same time, the German government is considering #subsidies to shield its heavy industry from international competition and escalating energy prices. In response the European Commission is attempting to reform the European power market but the changes being implemented are not broad enough to push #decarbonisation and lower energy costs for consumers. Instead, we need a multi-faceted and systemic approach.

Rapid #decarbonization calls for the #deep-electrification of the #energy system starting with transport, then heating, and eventually cooling. This according to organizations like the International Energy Agency (IEA) is the best route to achieve #net-zero not only in terms of economics but also in terms of speed. The way forward is to add as much #renewables and #nuclear in the system to meet growing demand for electricity and to ensure that the electricity mix is clean.  This approach has the added benefit of lowering overall energy demand as the whole process of creating, transporting and using electricity is much more efficient than burning fossil fuels.

Despite deep electrification being generally recognized as the best way to decarbonise most countries in Europe still have customer incentive structures in place skewed towards the #fossilfuel alternatives. In response, governments are putting in place subsidies to incentivise customers to buy EVs or install heat pumps. However they fail to deal with the major distortion in the market which is that it is still cheaper, across most of Europe, to fuel a car with diesel rather than electricity or heat a house with natural gas as opposed to a heat pump. The main reason for this are tax policies and misaligned incentive structures.  

Addressing these challenges requires a multi-faceted and systemic approach and is critical if we are going to decarbonize. There are six things we need to do: 

First, it is essential to make electrifying transport and heating economically viable for consumers by reducing electricity costs. This will likely involve a fundamental review of what comprises an electricity bill with a close examination on how best to optimise generation and grid elements. More importantly, governments need to review taxation policies noting that in many European countries taxes represent over 50% of the consumer electricity bill.  Such taxes could also be progressively placed on fossil fuels in the form of higher carbon taxes.

Second, wastage of power must be minimized by optimizing demand to coincide with periods of low prices and surplus electricity, requiring smart meters and conducive regulations especially around flexible tariffs which enable the consumer to take advantage of the periods of low electricity prices. It is also important to ensure that regulatory frameworks are in place to allow any excess electricity to be converted into other energy forms such as synthetic fuels that will further help with decarbonisation.  This will also kick off new business models which will benefit the consumer and speed up the energy transition.

Third, accelerate the phasing out of baseload fossil fuel plants with the most flexible ones being moved into reserves. This will lessen the amount of periods with low and minus wholesale power prices which will in turn incentivise the building of replacement new clean generation and energy storage while allowing other baseload clean electricity plants such as nuclear and run of the river hydro to continue thriving.  

Fourth, remove all barriers to energy storage development and consider putting in place incentives for flexible generation, some of which maybe fossil powered, for those Dunkelflaute days in winter when there is not enough wind or solar production.

Fifth, revise the incentive structure for grid operators to push quick and cost effective investments into power networks, while at the same time increasing utilization and efficiency of existing networks using new technologies and service structures. This will in turn unleash a whole range of new business models from smart charging for electric vehicles to domestic virtual power plants. 

Lastly, establish a European institution which would be responsible for overseeing the whole energy transition and for ensuring the most effective path forward for the decarbonisation of the European energy system. A key focus would be on enabling close cross border co-operation which is a key to keeping costs low which is in turn critical for continued European business and industry success as well as keeping the cost of living low for all European citizens. 

Without these reforms, the road to decarbonization will be exceedingly rocky. However, if implemented, these measures could enable quick, effective, and economical decarbonization.