The State of European Energy

The State of European Energy  

The good news is that winter is behind us in #Europe and there have been no #blackouts or emergency rationing of natural #gas and other fuels. The bad news is that Europe has a multitude of challenges going forward, starting with more expensive #energy, poor positioning in key energy technologies, and the growing threat to European industry from the US Inflation Reduction Act (#IRA). Together, these factors threaten to undermine Europe’s competitiveness and living standards. To combat these risks, Europe needs to respond rapidly with a long-term, joined-up strategy.

Back in August of 2022, as prices for #electricity, #coal, #diesel, and #naturalgas hit all-time highs, it was not clear whether Europe would be able to get through the winter without significant damage to its economy. Energy users reacted to high prices by reducing demand and by moving away from natural gas to alternatives such as coal, wood, and oil, averting part of the economic impact.

The weather gods were also kind. Europe had a warm winter, including record temperatures in December and January across many regions. #France also did a stellar job, considering that in August more than half of its #nuclear reactors were down for repairs and not expected to be back online in time for the winter months. That would have caused a significant risk of blackouts. Instead, by the start of January, almost three-quarters of the French nuclear fleet was up and running.

Natural gas #storage levels across Europe are currently high (twice what they were at this time last year) thanks to lower demand for the fuel and the aggressive purchase of liquified natural gas (#LNG) under order from the European Commission. Add the fact that Europe has added over 20 floating storage and regasification units to its gas infrastructure and, in the worst-case scenario, Europe can do without any Russian gas, going forward.

Despite these successes, the continent is still facing high gas prices in future as well as increased volatility of power prices and risks. Replacing low-cost #Russian pipeline gas with more expensive LNG means that European consumers are going to face higher prices in the months and years ahead. The silver lining is that customers will be forced to become more efficient and move to cleaner alternatives, such as #biofuels and #synthetic fuels and other heat solutions such as #heatpumps.

Facing gas prices that will remain substantially higher than they have been in the past will cause competitive problems for European heavy industry, however. Case in point, the German chemical giant #BASF which lost money at it’s main European plant in Ludwigshafen thanks to €1.4 billion higher natural gas costs, and that despite circa 35% lower gas consumption. 

To add to these worries, US President Joe Biden’s IRA incentives will reduce the cost of power for US electricity buyers which will increase the US’s energy cost advantage, noting that they already have massive amounts of low cost domestic fossil fuel production. The IRA also incentivizes local production of key decarbonization technology, such as batteries and solar panels, and it will help the United States reindustrialize around these key future growth technologies.

Meanwhile, back in Europe, there is not one manufacturer of #lithiumionbatteries or #solar panels in the top 10 worldwide, and the traditionally European-led wind industry is in tatters, with massive billion- euro losses at industry leaders #Vestas and #Siemens-Gamesa. This begs the question: What should be done about the situation?

What not to do is very clear. Most crucially, procrastination and endless discussion must be avoided because every day of delayed decisions lessens Europe’s ability to regain competitive advantage or even parity. Positively, the #europeancommission sees this need and the publication of their draft Critical Raw Materials and Net Zero Industry Acts are steps in the right direction. 

The second scenario that should be avoided is European countries trying to go it alone as the scale of the challenge can only be met with joint and unified European efforts.  The #europeanunion thus needs to be willing to collectively invest in its own future, by funding R&D and new infrastructure and by taking more risks especially around commercialising new technologies.

Companies such as the Swedish electric vehicle battery champion #Northvolt provide an example of success where European private and public efforts are combined to quickly scale up new production facilities. That said even Northvolt is considering placing its next factory in the United States rather than Europe. And why? US production will enable Northvolt to be more competitive especially against Chinese producers who already have the scale, the knowhow, the low energy costs and access to the value chain that Europeans players don’t have.

To compete with #China, which has shown itself much better at scaling up production facilities than Europe over the last 20 years, there needs to be a concerted effort led by governments of EU member states such as #Germany and #Italy, as well as by the European Commission, to incentivize and ensure swifter policy alignment across all member countries. Coordination and reaching consensus at a quick pace have always been a sore point for the EU. It is the toughest goal to achieve, as it requires compromises from large and small nations, both wealthy and less affluent. And it will also require the selection and support of winners by a mix countries just like what happened with #airbus. 

To be successful, European countries need to commit to the energy transition and to an open dialogue with all citizens. Member states must also take a more active role in international affairs, particularly around key raw materials and energy fuels. The big question is whether Europe can do it. The answer is yes and by doing so Europe will not only break its addiction to Russian fossil fuels but also help create jobs and economic progress in future-oriented clean industries.