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

The OPEC meeting has failed, again. The decision to cut production was announced months ago as a great triumph because it included countries outside the organization. And it was a mistake. The result, several months after the largest production cut in history, could not be further from what the organization expected. Oil inventories in the OECD rose to five-year highs, the United States also recorded record levels of crude oil in storage despite a healthy demand, growing by more than a million barrels a day in annualized terms. However, oil prices remained far below those levels desired by OPEC, and especially its more wasteful members, Venezuela in particular.
Why? OPEC has underestimated the reaction of new technologies and independent producers. The cut by OPEC has been the biggest gift to shale in a long time. The US achieved a production growth that has surprised the most optimistic, and the country is closer to energy independence. That the US imports less and stores more, affects oil prices in several ways. On the one hand, US producers have done their homework and increased their efficiency and reduced costs by more than 40%, which has allowed them to be competitive at $45 a barrel. This makes the price of oil lose strength in the face of evidence that the market is better supplied and more diversified than expected.

There is another very important effect. The “oil weapon” mentioned by Chavez years ago has run out of gunpowder. With the drastic reduction of US oil imports, the geopolitical premium historically added to the price of oil due to the US dependence on politically unstable countries, disappears.
Evidence from recent years shows us that the success of the American energy revolution, carried out without any support from the Obama Administration, is twofold. The dream of energy independence of the world’s largest energy consumer is ever closer, and the combination of shale, renewables, coal and natural gas, has been an essential factor in competitiveness, growth, employment and has destroyed the power of OPEC to manipulate the price of oil.
The big mistake

With this meeting, the cartel shows that its control over the price of the barrel in the medium term is non-existent. Worse, if they continue with this policy, the response of alternative technologies will accelerate. The great error of OPEC has been to think that lowering prices would displace alternative technologies and the inexorable advance of efficiency, but the suicidal movement puts at risk OPEC’s role as the most reliable, competitive and flexible supplier. Throwing themselves into unnecessary cuts, they sent a dangerous message to their customers: it was worthwhile to continue to advance with disruptive technologies.

None – I repeat, not one – of the OPEC countries is losing money with the current prices.

None of the OPEC countries is losing money with the current prices. The production and development cost of all members is massively below the current oil price (average total costs $20 a barrel), but member states had become accustomed to financing unproductive subsidies and political spending, to squander their oil revenues. So, despite having costs well below $20 a barrel on average, almost no OPEC country balances its budget at these prices. Between $20 and the $100 some would like to see, there are hundreds of billions of dollars in political spending and subsidies.
I am sorry, because I have had the honor of attending several OPEC meetings and I value the principles that have always informed its policy: to defend an adequate supply and a price that is good for consumers and producers, to be a reliable and safe supplier. We mentioned it in the book The Energy World Is Flat (Wiley), the decision to manipulate the market will only make the market respond more quickly.

Today, OPEC is faced with the devil’s alternative. If it continues to limit production, the response of efficient operators in different technologies will accelerate, and if it recovers production levels prior to the cuts, it will not be able to finance the excessive expenditure to which the member countries have become accustomed.

OPEC’s response should only be one. Demonstrate that they are the most efficient and reliable operators and that their governments can stop irresponsible spending. Only in this way will these countries, full of wonderful opportunities, remain relevant and prosperous.

“Low” oil prices are a blessing in disguise to producers, even if they do not believe it. It is the shock they need to wake up from the nightmare of the petrostate, that wastes billions of oil revenues and thinks it will go on eternally. Disruptive technologies are here to stay and have only one future: brilliant.

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

Published in Expansion.

Picture courtesy of Google, BP.