Sustainable energy transformation in Europe

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The “Fit for 55” package is one of the greatest challenges the European industry has been facing for years. When evaluating it, we must pay particular attention to transformation both in terms of energy and climate. Unfortunately, most often we do not undertake an analysis what is technologically and technically possible or at what cost we are to achieve the agreed goals. What I mean are the social and economic costs that are associated with the transformation of our economies which are based on unstable and expensive energy mix. Presently, energy accounts for almost 10% of all consumer spending in Europe. The lack of a well-thought-out approach to energy transformation means that energy may in the near future burden the budgets of EU citizens to an even larger degree.

The instability of the European energy system is slowing the transition to carbon neutrality

2021 very clearly showed us our weaknesses in terms of supply chain structures of electricity and raw materials. In many countries, we have experienced problems delivering the required electricity capacity due to the temporarily lower RES efficiency and higher than anticipated energy needs. Lower wind and photovoltaic energy production forces generation of energy from gas and in coal-fired power stations. The increased demand for gas along with supply restrictions from Russia led last year to historic gas price increases all over Europe. The negative narrative regarding energy generated from nuclear power plants is also rather puzzling. We should ask ourselves a business question whether it makes any sense at all to shut down existing or block investments in new nuclear installations. It certainly has nothing to do with either climate goals or the decarbonisation of the European economy. Fortunately, the European Commission has recently changed its approach to nuclear energy and recognised it as carbon-neutral. This change in the approach to the transformation of the European energy sector is a positive one.

At the same time, coal (bituminous and lignite) in 2021 was the largest source of electricity in Germany. This happens after more than 20 years of the Energiewende policy and spending hundreds of billions of euros implementing it. This is what the German energy mix looks like at the end of 2021 and it doesn’t count the full shut down of the nuclear energy. It also is a benchmark for the energy transformation in Poland proving it necessary to extend the process of shifting away from coal.

European companies need cheap energy. Diversifying supplies offers such opportunities

At the heart of energy transformation must be its diversified nature. Sustainable in the sense of having access to sufficient electricity to maintain European competitiveness. I am uncertain whether the events of 2021 made Europeans aware that having no differentiated approach will lead to the necessity to shut down energy-intensive companies and plants for good. Such companies will no longer be competitive internationally as they will not be able to sustain losses in the long run. This will have social consequences related to the layoffs. We have already seen this in microscale earlier this year. In mid-October 2021, one of the largest steel producers in Spain, Sidenor, halted production until the end of the year. Raging electricity and gas prices were the basis for this decision. Electricity prices in Spain have increased by more than 300% last year alone. Production has been reduced in other EU countries as well. In this context, it is necessary to take measures to increase the EU’s purchasing power on the gas access market in order to limit the speculative trend in gas trade.

Transitional fuels – support RES with fuels with a stable production profile

The process of phasing out coal in the power industry makes one ponder which fuel to replace it with. Currently, natural gas provides about one fifth of electricity in the European Union and is, next to nuclear, the most optimal transitional fuel. Natural gas increases the stability of the energy system since, unlike renewable energy, its production is not dependent on weather conditions. On the other hand, gas blocks also have a faster start-up time, so they are easier to adapt to fluctuating energy needs than coal power plants.

Unfortunately, recent years have seen the EU become more dependent on Russian gas which is used both in industrial installations as well as power plants. Limiting production and shutting down coal-fired power stations lead to an increase in the use of gas as a raw material, the combustion of which is half as emissive as coal. Coal power plants can be converted into gas units relatively easily and inexpensively. The role of the trader is exceptionally focused and as last year shows, this relationship is not good for European customers.

In my view, it is necessary to discuss a joint European wholesale gas purchase at the level of the EU. This will not only considerably stabilise relations with Russia, but also improve security of smaller Member States. Last year has shown us very clearly that European companies must have equal access to this raw material and that the political use of gas by some countries cannot be tolerated.

Importantly, it will not be possible to make use of the full potential of natural gas as a transitional fuel without developing the necessary infrastructure. In this context, it is crucial to expand gas networks in order to ensure supplies of this fuel to areas in Europe that are thus far metaphorical white spots. Investments in new LNG and CNG terminals will in turn allow the EU to diversify gas supplies, opening our energy market to cooperation with partners from all over the world. This will lead to the independence of the EU from supplies from Russia, which translates into a better negotiating position in joint gas purchases. On the other hand, increasing the number and capacity of gas storage installations will bring tangible benefits in terms of the possibility of storing larger amounts of fuel in case the use of gas in the economy increases rapidly.

Preparedness of the European system for critical situations

One can also discuss leaving a certain coal energy resource based on modern coal units as a backup source to be activated in extraordinary circumstances. It would allow for the stabilisation of gas prices, since it would always be possible to start up gas blocks should gas prices became speculative, as is currently the case.

Of course, we are aware of the irreversibility of the green transformation, but until emission-free sources, i.e. renewables, hydrogen or nuclear, are able to guarantee the continuity of cheap energy supplies, we should consider an energy mix that will not cause economic perturbations in many European countries.

EUA – a victim of speculation

Another important variable affecting electricity prices and the competitiveness of European industry is the cost of CO2 emissions. The EU Emissions Trading Scheme lets in financial institutions acting as intermediaries to the system that buy a limited pool of allowances. This happens at the expense of actual needs of industrial and energy companies that manage installations and are obliged to purchase emission allowances. Of course, the purchase of emission allowances takes place only for the purposes of subsequent resale to businesses at a higher price. In the period from January 2020 to December 2021, the price of an EU allowance increased from approximately EUR 20 per tonne to over EUR 90 per tonne. The system needs to be brought to a state of equilibrium in which only industry representatives can buy emission allowances. Financial institutions, hedge funds etc. should be all excluded from the system of intermediaries, whereas the speculative side of emissions trading should either be restricted or eliminated. It is also imperative to introduce some sort of a maximum price. The EU ETS is not an usual market. The supply of allowances is administratively defined, and there should also be a cap on the price, e.g. by introducing a penalty for emissions without allowances, which no longer requires the purchase thereof.

The atom – the right alternative to gas

Nuclear power plants have to be developed and maintained in order to secure our economies and stabilise the growing volumes of renewable energy. It is a stable source of electricity characterised by zero emissions. And France, whose energy mix is based in approximately 70% on nuclear energy, is one of the least emitting economies in Europe.

It would also be worthwhile to investigate the actual objectives of certain circles that are fighting against this energy source. There is, of course, the behind-the-scenes game of interests and technologies represented by some countries. At their core is the concept only gas should play the role of an RES stabiliser. I consider this a dangerous precedent. Therefore, I call for an extension of the process of shifting away from coal until other stable sources of carbon-neutral energy are developed to such an extent that they guarantee the preservation of the current economic status of European industry.

An particularly important element of Europe’s energy transformation may turn out to be the integration of the energy market, wherein individual countries would be allocated stabilising measures adequate to their capabilities. Certainly, such an integration would influence the stabilisation of prices on the entire European market – and at a reasonable level. Therefore, I would like to encourage European decision-makers to make more rational decisions when it comes to setting goals so that they are feasible later in the future.

The text has been partially published by the Open Access Government.

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