European Energy Independence Is Impossible With the Current Policies

March 14, 2022 Updated: March 25, 2022

Commentary

Europe isn’t going to achieve a competitive energy transition with the current interventionist policies. Europe doesn’t depend on Russian gas due to a coincidence, but because of a chain of mistaken policies: banning nuclear in Germany and prohibiting the development of domestic natural gas resources throughout the European Union, combined with a massive and expensive renewable rollout without building a reliable backup.

Solar and wind don’t reduce dependency on Russian natural gas. They’re necessary but volatile and intermittent. They need backup for security of supply from nuclear, hydro, and natural gas. Dependency rises in periods of low wind and little sun, just when prices are highest.

Batteries aren’t an option either. It’s impossible to build an industrial-size network of enormous batteries; the cost would be prohibitive and the dependency on China to build them (lithium etc.) would be even more of a problem. At current prices, a battery storage system of Europe’s size would cost more than $2.5 trillion, according to an MIT Technology Review paper—massively more expensive than any other alternative.

Just the added cost of a battery grid plus the distribution and transmission network would make household bills soar even further.

Inflation was already out of control in Europe before the invasion of Ukraine was even a risk. The consumer price index (CPI) in Spain was 7.6 percent, in Portugal it was 4.2 percent, and in Germany, 5.1 percent. The euro area CPI was 5.8 percent.

In the face of the impact on prices and energy from the invasion of Ukraine, we must remember:

  • Europe was already in an energy crisis in 2020 and 2021 with the cost of CO2 permits soaring and wholesale electricity prices reaching record-high levels by December 2021.
  • Europe doesn’t “depend on Russian gas.” It’s a codependency. Russia needs Europe to export, and Europe has no cheaper alternative. Let’s remember that Russian gas is much cheaper than any other realistic alternative. The long-term contracts signed with Gazprom are closed at prices that can be up to 10 times lower than some of the current alternatives. The 150 billion cubic meters that Europe imports from Russia can be replaced with liquefied natural gas from Norway and the North Sea, the United States, Algeria, Qatar, or Israel, but it will be much more expensive.
  • The only alternative to Russia is to show that European countries have diversified and cheap sources of supply. If Russia sees that European governments ban nuclear power, prohibit the development of indigenous gas reserves, intervene in imports, and add massive taxes like the cost of CO2 permits, Russian authorities know that there’s no competitive alternative, and that European industry and consumers will collapse due to the rising cost of energy.
  • European governments should think hard about misguided policies when the continent has been saved this winter by natural gas imported from the United States produced with a technology, fracking, that has been banned in Europe. Europe wants cheap and abundant energy, but politicians demonize nuclear, gas, and oil. All the interventionist proposals that are put forward by European politicians entail a higher cost for long-suffering consumers.
  • Natural gas flows all the time and is cheap and abundant. It can’t be substituted with renewables that are intermittent, volatile, and unpredictable. The example of Germany is clear. After investing massively in renewables and doubling bills for consumers, it depends more on lignite-coal and Russian gas to guarantee supply. Germany has had to reactivate coal plants after spending more than $200 billion in subsidies and renewable costs.
  • All technologies are necessary, and renewables are key, but they’re not the alternative, because they need natural gas backup while the technology is developed, as it’s still in its infancy. Let’s not forget that massively installing renewables includes a huge cost in networks. Who will lower bills if the fixed cost of networks is multiplied with the $150 billion we estimate are needed to strengthen distribution and transmission networks?
  • All the “magical” alternatives that interventionism sells mean going from depending on Russia to depending on China. Where are we going to get the silicon, aluminum, rare earths, copper, lithium, etc. necessary for those massive announced magical investments?
  • Demonizing nuclear energy has left Europe in the hands of expensive and volatile alternatives. The energy transition must be considered by understanding the importance of security of supply and competitiveness. We need all technologies without ideological bias. We need solar, wind, natural gas, hydro, oil, and nuclear or we will go from crisis to crisis and always paying more.
  • It’s absurd to maintain the hidden tax scheme of CO2 emissions permits during an unprecedented crisis. Governments must use this income to reduce citizens’ bills.
  • Border taxes on oil products or natural gas aren’t taxing producers, it’s taxing consumers in European countries. Whoever believes that the taxes that have been announced will be paid by Qatar, Nigeria, or Brazil has a serious problem of economic understanding.
  • A true energy transition must be competitive, reliable, and cheap, not a tax collection and looting machine. It must consider all technologies. More industry and less politics. More competition and less ideology.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

Daniel Lacalle, Ph.D., is chief economist at hedge fund Tressis and author of “Freedom or Equality,” “Escape from the Central Bank Trap,” and “Life in the Financial Markets.”