Europe is not going to achieve a competitive energy transition with the current interventionist policies. Europe does not depend on Russian gas due to a coincidence, but because of a chain of mistaken policies: banning nuclear in Germany, prohibiting the development of domestic natural gas resources throughout the European Union, added to a massive and expensive renewable rollout without building a reliable backup. Solar and wind do not reduce dependency on Russian natural gas. They are necessary but volatile and intermittent. They need backup from nuclear, hydro, and natural gas for the security of the energy supply. Dependency on these backup sources rises in periods of low wind and little sun, just when prices are highest.
“Solar goes to zero for twelve hours a day, and that is guaranteed. The wind blows sometimes, and sometimes it does not, also guaranteed. They both depend on weather, which is 100% out of human control. They are on their best day a supplement,” wrote a Navy pilot follower.
Batteries are not an option, either. It is impossible to build an industrial-size network of enormous batteries; the cost would be prohibitive and the dependency on China (for lithium, etc.) to build them would be even more of a problem. At current prices, a battery energy 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.
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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. Consumer price inflation in Spain was 7.6 percent, in Portugal it was 4.2 percent, and in Germany, 5.1 percent. Euro area consumer price inflation 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 does not “depend on Russian gas.” It is codependency. Russia needs Europe to export, and Europe has no cheaper alternative. Let us 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 ten 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 diverse 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 CO2 taxes, Russian authorities will know that there is 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 fracking, a technology 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 cannot 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 on subsidies and renewables!
- All technologies are necessary, and renewables are key, but they are not the alternative because they need natural gas backup while the technology is developed, as it is still in its infancy. Let’s not forget that installing renewables involves a huge cost to networks. Who will lower bills if the fixed cost of networks is increased by the $150 billion we estimate is 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 magical investments announced?
- Demonizing nuclear energy has left Europe in the hands of expensive and volatile alternatives. The energy transition must be considered with an understanding of 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 pay more.
- It is absurd to maintain the hidden tax scheme for CO2 emissions during an unprecedented crisis. Governments must use this income to reduce citizens’ bills.
- Border taxes on oil products and natural gas are not taxing producers; they are 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 fewer politics. More competition and less ideology.
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Furthermore, the energy crisis that has been enveloping the EU long before the Ukraine conflict erupted has overwhelmingly shown the inadequacy of renewables to satisfy the EU’s electricity demand because of their intermittent nature.
Dogmatic environmentalists, hasty policies by the EU to accelerate energy transition at the expense of fossil fuels and calls by the hapless IEA to halt all new investments in oil and gas immediately to achieve net-zero emissions by 2050 have plunged the EU in the worst energy crisis in its history leading to sky-high energy prices and forcing it to shift from gas to coal and even oil for electricity generation.
Therefore, all this talk by the EU about reducing its dependence on Russia’s oil and gas exports let alone achieving energy independence is hot air. It will continue to depend on Russian oil and gas well into the future.
No one single oil or gas producer in the world or a group of producers can replace Russian crude oil and gas supplies to the EU now or for the foreseeable future.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London