Control or Market: Dilemmas of European Energy Policy

Energy industry is par excellence a major industry. Power plants, fuel flows, networks, are one of the largest investment objects of any country. Take Three Gorges Dam in China, nuclear power in France or oil and gas in Norway. Few businesses have larger money flows than energy. Thus, it is not unnatural that it draws attention of powerful people, public and politics.

Common European energy policy had right roots to create unified market for coal and develop nuclear energy through Euratom. The starting point was in the post-war Europe of the state-run coal-based power industry. Famously, it was Margaret Thacher, who started to fight the marxist mining labor unions and privatize the power generation industry. Many European nations followed suit in 1980s with privatization of energy companies.

However, with the rise of leftist environmental movements things have started to go well, to the left. Indeed, it was important to clean the air from excessive sulfides and microparticles, but since late 1990s one can undoubtedly claim that the European air is one of the cleanest of any densely populated areas on the Earth. However, the struggle of environmentalists with fossil fuels before the climate change in 1980s and fighting nuclear power even before Chernobyl accident proves two points. Firstly, they were ideologically driven as a protest against market economy and economic progress as such. Secondly, they were separated from the real-world practices, the economics and technical reality.

In 2000s Europe experienced major policy craze with renewable energy that is still riding the waves of popularity, albeit with first subtle hints of realism. There was certain utopian idealism that all energy could be replaced with renewables such as wind, solar, biomass or wave energy. On top of that came emotional emphasis on efficiency and CO2 abatement.

Grandiose targets for renewables were set at 20 % CO2 emission cuts by 2020 (compared to the year 1990), 20 % higher efficiency, 20 % renewable fuels and 10 % fuels from biofuels by 2020. However, these goals are already somewhat contradictory. Renewable energy target with subsidies has substantially undermined European Emissions Trading Scheme, that was supposed to be key driver of CO2 reductions. European power generation industry has been facing major problems due to renewable energy priority which reduced to nil profits from conventional power production. European power companies are unprofitable, their ability to invest has decreased significantly.

With the emotional focus on efficiency, some key ideas of economics were lost. First of all, by reducing the consumption of some product, the capital costs will remain the same. For example in district heating, by having 30 % lower heat consumption of buildings, pipelines and power-plants still need to be paid for thus the prices have to be increased, what leads to far lower-cost saving than 30 %. Secondly, by pushing consumers towards most efficient solutions, the effective cost of a certain product is driven much higher. Let’s take the lighting – indeed, LED and halogen lamps are more efficient, but at the same time they are many times more expensive what means also invariably higher energy input for production. Hence the actual cost reduction of 1 light unit is debatable. Or let’s assume that the house energy efficiency target for a year for new housing by 2020 shall be established at the level of 60 kWh/m2. The current EU average for a house is somewhere around 150-250 kWh/m2. Certainly, there is a lot to gain if primary retrofitting of houses (replacing windows, doors, roofs or ventilation system) is being done, but low or marginal utility implies that by investing in additional retrofitting (such as exterior walls or basement) makes the cost of the saved kWh way too high.

1Fig 1. Top four CO2 emitters in the world.

Unfortunately, fighting climate change alone makes little sense. 10 % of the EU CO2 emissions reductions, at cost of billions of euros and thousands of jobs in Europe, balanced just two weeks of emissions in China. While the EU has cut its emissions over 2000-2013 years by 7-8 %, mostly due to natural replacement of older technology with more efficient solutions and reduced industrial production, the CO2 emissions in China have increased by approximately 250 %, effectively making the European effort meaningless (see Figure 1). What caused it? Well, the production has been increasingly shifted to Asia, but Europeans still purchase toys, electronics, clothing, chemicals etc. So the studies show that, due to Asian production, actually more carbon emissions are produced because of two reasons: less clean energy production and extra energy input needed for thousands of kilometers of transportation.

Based on the 20 years of experience, there is very little real likelihood that India, China, Japan, Brazil or even USA would cap their CO2 emissions in any comparable way to the EU measures. Indeed, they may promise introducing some schemes but, in fact, they will not sacrifice their economic development to protect the environment. It does not mean that EU should abandon its policies completely, but it should consider CO2 tariffs on imports from countries where there are no CO2 caps to level the playing field for the EU producers and workers.

Of course, what matters to politicians are electoral votes. And, unfortunately, even politicians as astute as German Chancellor Angela Merkel have bowed to the environmental populism and closed perfectly safe German nuclear power plants and made of the German subsidized renewable electricity one of the most expensive for end consumers (see Figure 2). European liberals shall therefore oppose the environmental populism with the ability to calculate and reason.

2Fig 2. Power prices to industrial consumers

Indeed, in the long run, nuclear power gives much longer-lasting chance than renewable energy. The bulk of the EU renewables comes from hydropower (thanks to mountains). Wind is both expensive and intermittent. There is also little chance that solar energy will ever constitute more than just a niche energy source with up to 10 % of supply (in comparison to the current 3 % in Italy and Germany). At the same time, 59 nuclear power plants have been supplying 80 % of French power for decades without any serious accident. France is the EU’s largest power exporter to Belgium, Germany and Italy with 45TWh. It is also reputable for one of the lowest power prices for consumers.

Nuclear power generation is quickly developing and its future lies in small, uranium-free, low-waste, passively-safe thorium reactors. These molten salt reactors will be tested in USA and are already developed in India, China, US, Canada and UK. There is three times more thorium than uranium on the planet – in a reactor there would be used 99 % of thorium instead of 5 % of uranium. There are also many more advantages (eg. unlike the uranium reactor, no plutonium is produced in the thorium reactor). And there are also plans of constructing a fusion reactor, albeit not in the ITER configuration but created by smaller, innovative designs developed by Lockheed Martin. Indeed, the new means of generating nuclear power seem more like the pinnacle of the civilization’s development than does the harvesting of the same modes of power generation that once propelled the ships of Columbus forward. If it does not make sense to return to wind-powered commercial ships, why should we go back to the wind-power age?

Economics is much better regulator of efficiency and energy than any politics. Industrial production has moved from Europe to Asia, Middle-East and both Americas due to lower labor and energy costs, lower regulation and thus reduced energy demand. However, because goods produced in Asia, Middle-East and Americas are still being consumed in Europe, the amount of energy that is actually consumed in end products is the same of even greater. Higher energy prices have prompted consumers to purchase more efficient technologies and cars. A breakthrough visible on the example of electric cars (Nissan Leaf or Tesla) has not happened thanks to government, but because of innovators and entrepreneurs. Just like smartphones and tablets are the breakthrough products not because of government, but entrepreneurs and innovators. Thus governments and politicians should meddle less with the energy sector and rather stand aside – except for the matters related to safety and reliability, when more economically innovative solutions come to the fore.

There should be no subsidies for any kind of energy production, nor should it be additionally taxed (as it is happening with nuclear power in Germany and Belgium). We should neither discriminate nor subsidize any energy source in Europe. We should create a level playing field.

In terms of strategic energy supply, Europe must realize that Russia is not a reliable energy provider and that the dependence on Russia raises serious political problems – by threatening the European security and undermining European integrity by funding of the Jobbiks and Le Pens. Europe may and must depend on its own energy resources – be it Polish coal, French nuclear power, Norwegian hydro, British oil, Estonian oil shale, East-Mediterranean gas fields or Danish wind. Excessive regulation and emotions should no longer intrude on energy policy. Reason, technical know-how and fair competition should prevail.

The article was originally published in the second issue of “ Review” entitled “Energy: The Challenges Europe Must Face”. The magazine was published by Fundacja Industrial in cooperation with Friedrich Naumann Stiftung and with the support by Visegrad Fund. 

Read the full issue online.

Kalev Kallemets