Daniel Lacalle

Why Europe´s Misguided Energy Policy Must Change

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Europe needs to change its energy model. It is unacceptable that the debate about something as important as the energy ignores competitiveness and the enormous cost of erroneous central planned policies.

First, there are some important facts that should concern us when thinking about Europe’s energy policy, supporting industry and creating jobs:

. In the European Union, SMEs pay 20% more for electricity than in China and 65% more than in India. Between 2005 and 2012 electricity prices in Europe rose 38%, while in the United States they fell 4%. If we go to natural gas, in Europe prices rose 35%, while in the US they fell 66%. But the worst thing is that this trend has become more pronounced in recent years.

. The “green” policy in Germany has doubled bills for households while the price of wholesale generation fell, and in 2017 it still had over 52% of its electricity mix and 88% of primary energy consumption from fossil fuels. The German “energiewende” has already cost more than 243 billion euro between taxes and “renewable subsidies” since 2000, and greenhouse gas emissions are almost flat since 2009. Even worse, the impact of net job creation in the energy sector has been negative. Between the job losses in traditional companies and the bankruptcies of local solar names, job creation has turned negative. Germany once had a goal of 500,000 green energy jobs by 2020. After peaking at just below 380,000 a few years ago, the number is now approaching 350,000 and this means that the net effect in the industry will be a 20,000 loss.

Up to 33% of the total costs of industrial companies come from energy expenses, which have exploded in recent years due to the impact of subsidies, fixed costs, and taxes.

It is very simple, either we look for competitiveness or the negative impact on employment and delocalization of industries will increase.

. The European Union can not be less than 10% of CO2 emissions but at the same time 100% of the cost. China, with 30%, is the biggest pollutant, and the solution is very simple and complex at the same time. There is no need for climate summits in exotic locations and luxury hotels. The largest coal companies in China – and globally – are state-owned and the vast majority in the world are subsidized. Closing them is a political decision.

The energy sector is key in the decarbonization, but will not achieve it through perverse incentives and accumulated costs that penalize the efficient in favor of the inefficient, subsidize the expensive and tax the competitive ones, always under the excuse that “next year we will be competitive”. Solar companies brag about how competitive they are, yet keep filing for bankruptcy due to lack of “enough” subsidies.

To decarbonize, the best technological tool is a combination of natural gas, nuclear, hydro and renewable energy. But renewables are intermittent, while consumption is continuous. In addition, the technology that today seems to be “the future” changes at a spectacular pace. Anyone who thinks that in ten years solar panels and wind turbines are going to be like the ones of today, is seriously dellusional.

To these challenges, we must add the risk of spending too much betting on a future that is already “outdated” (placing too many funds on technologies in phase of development is like betting on Betamax or VHS when in a few years the VCR simply disappears). Electricity systems, in this transition, need firm and flexible means of production to support the whimsical meteorology.

These means of support, today, are combined cycle plants and clean coal,, which operate during few, but essential, hours. While the world thinks of batteries that are not yet a reality, or a truly competitive and viable solution, we must use those means what work, guarantee supply and do it in an economically viable way.

The least CO2-emitting plants, in addition, are nuclear plants. However, due to the high tax burden, many generate losses in Europe.

EACH COUNTRY, ITS SOLUTION

While the Clean Energy Package is issued in Brussels , each country adopts its own solutions:

Belgium, Sweden and Switzerland are betting on the extended life of their nuclear fleet.

Germany closes its nuclear fleet while the power bill multiplies for its residential consumers.

France is looking to close its coal plants in 2023 while maintaining its huge nuclear park.

All of them bet on renewables, but do not respond to the problem of cost .

Now that some renewable technologies are competitive, the solution cannot come from central planning, restricted markets, subsidies and regulatory patches. It must come, as in the US, from tax deductions that are gradually phased out, and competition in an open market, with transparent bilateral contracts.

Europe can promote competitiveness, lowering bills and advancing in clean energy. In order to meet demand properly, without charging the system with more fixed costs, we will have to use an environmentally friendly fossil. Natural gas.

Let us not forget the importance of competitiveness. The green economy’s “profit estimates” have been more than widely questioned in Germany where net job creation in the sector has been negative, bankruptcies have occurred despite huge subsidies and costs have soared without materially reducing Emissions.

We must all learn from our mistakes, to solve them, from a policy that avoids market constraints, perverse incentives, and accumulation of fixed costs. A system that supports efficiency and cuts real costs. Let us learn from mistakes, solve them, and – for once – think of consumers and companies.

Daniel Lacalle has a PhD in Economics and is author of “Escape from the Central Bank Trap”, “Life In The Financial Markets” and “The Energy World Is Flat” (Wiley)

@dlacalle_IA

Picture courtesy of Google

One Response to Why Europe´s Misguided Energy Policy Must Change

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