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Leonard Hyman & William Tilles

Leonard Hyman & William Tilles

Leonard S. Hyman is an economist and financial analyst specializing in the energy sector. He headed utility equity research at a major brokerage house and…

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Europe’s Big And Expensive Energy Mistake

  • Europe failed to prioritize energy security and has now found itself overly reliant on Russian energy and paying sky-high prices for power
  • France is dealing with this issue by renationalizing its largest utility in order to ensure the survival of nuclear power.
  • Germany, which is arguably the country that has suffered most from energy security failures, may soon have to bail out its largest utilities.

France plans to renationalize EDF, its giant utility. That doesn’t sound like a big deal because the government already owns 84% of EDF’s outstanding shares. But here is how we read the story. The French government wants to expand nuclear production in France and it also wants EDF to spend big money on the rehabilitation of numerous nuclear power generating stations. It has put pressure on EDF to embrace those policies and we suspect that it could force the issue as the majority shareholder.

But a board of directors, with a fiduciary responsibility to shareholders and other providers of capital, would have a hard time approving a strategy that looked too risky or economically uncompetitive. EDF is, after all, not a division of the ministry of defense, but rather a somewhat privatized company with the government as its biggest and controlling shareholder. At least that is the appearance it would want to give to its shareholders. If France requires more nuclear power for geopolitical or strategic reasons, despite its seeming cost disadvantage in the marketplace, we have no quarrel with that decision. Our issue is with the current policy—to require some non-governmental shareholders to bear national security burdens and take financial risks that really belong uniquely to the government. The French have approached the matter with admirable clarity. 

Germany, taking the almost opposite path, rejected nuclear power in its future after the Fukushima accident, and as a result, became energy dependent on Russian gas instead. One risk was traded for another but not spelled out. A month ago Germany took control of Gazprom Germania, a vital piece of natural gas infrastructure. Now the country faces another problem, the rocketing cost of natural gas that results from the Ukraine war. Germany may have to bail out Uniper, one of Germany’s largest utilities, and even worse, allow utilities to pass on the higher fuel costs to consumers.  We would be curious to see an analysis of the cumulative savings that Germany amassed as a result of contracting for a “cheap” supply of Russian gas as opposed to the astronomical costs of the present situation.  

As an aside, the oil majors plan to sign long term LNG contracts beginning in 2026 (not much help now) with Qatar, the putative Saudi Arabia of LNG.  Presumably much of this new gas would replace Gazprom supplies to Europe. Diversification of supply reduces risk. But is dependence on Qatar necessarily a low risk decision? Dependence on Russian natural gas was once considered a low risk decision too. 

Our point, simply, is that energy infrastructure and supply is a vital component of national security. Ignoring the security aspects of energy policy in order to save money can turn into a big and expensive mistake.  

By Leonard S. Hyman and William I. Tilles

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Leave a comment
  • AlainBelanger on July 08 2022 said:
    I don't think NATO should decide the policy of Everybody's It so out off style they should not defined the faith someone need help stop winning resolve it stop blaming resolve it you China try resolve it with Taiwan not easy but it a beginning
  • Mamdouh Salameh on July 09 2022 said:
    The EU has let itself be conned by environmental activists on climate change and followed hasty policies abetted by the hapless International Energy Agency (IEA) to accelerate energy transition to renewables at the expense of fossil fuels without giving a serious thought to energy security or to whether renewables can on their own satisfy the electricity needs of the EU. That is why the EU has been enveloped in the worst energy crisis in its history since January 2021. It is now paying horrendous energy bills without any relief in sight and this will continue well into the future.

    The EU dependence on Russian gas and oil supplies wasn’t a mistake at all. Russia has proved through more than 20 years of cooperation a very reliable trade partner to the EU. Russia has invested heavily in the energy needs of the EU and this included gas and oil pipelines and plentiful supplies. This has been working extremely well to the mutual benefits of both sides until the EU let itself be led into a geopolitical trap by the United States vis-à-vis NATO’s expansion plans towards Russian borders including enticing Ukraine to join NATO. The rest is history. The EU will pay an exceptionally heavy economic, Strategic and geopolitical price for letting itself become a pawn in the United States’ proxy war on Russia.

    Russia has won the war in Ukraine and President Putin will achieve all his security demands but the EU, the old lady of Europe, will emerge from the conflict so diminished geopolitically and economically with a horrendous energy crisis to boot

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • George Doolittle on July 10 2022 said:
    There's no energy crisis in all of Europe *"Because Russia"* with in fact the exact opposite be true. In the meantime all of Europe does have a *LITERAL* World War 3 unfolding upon Ukraine which clearly collectively could be dealt with without need for firing a single shot. Why this hasn't been the case in the least remains quite the mystery absolutely.

    In the meantime the USA is..
  • viktor knapp on July 11 2022 said:
    The "west" created the energy mass, with it's stupid "sanctions". Russia would have keep on providing gas and oil,even after it's war with Ukraine.

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