Why we need to Rewire Europe and learn from past energy policy mistakes

Politics and energy have never been far apart. In fact, if you look at history, energy is often the reason why wars have started (think the US-led invasion of Iraq in 2003) and energy access has also been the reason why wars have been won and lost (WW2 for instance).  What the Russian invasion of Ukraine is showing is how utterly dependent Europe is on Russia for not only natural gas but oil and coal. And what those tanks have done is broken the trust between in particularly Germany and Russia and that is a game-changer for European geopolitics and energy. This begs the question what should Europe do? In a nutshell, we need to REWIRE EUROPE. 

Europe needs bold ideas that help it in the short and long term and it needs to be brave in the implementation of these ideas. In the short term, Europe needs to:

Reduce demand for natural gas

We may need to pay customers to not use gas and to reduce the usage of natural gas in the electricity system it may mean keeping nuclear and coal plants running for the foreseeable future. Practically, Germany and Belgium may both have to delay closures of nuclear plants and the same may need to happen for coal plants across the continent.  

Move energy purchases away from Russia

This is not an easy task given that over one-third of European fossil fuels come from Russia but the reality is that every euro spent on Russian fuels can be used to strengthen the ability of that country to make war. Practically, we may need to rethink the closure of North Sea gas wells but also be prepared to import energy at higher prices from other parts of the world. 

Fill up storage tanks

Europe needs to buy as much as it can in terms of uranium and fossil fuels to ensure we have enough energy to keep the lights on and our economies working. Practically, this means working very closely with other partner nations such as the United States and Australia.

Help energy sensitive customers

Wholesale energy prices have been on the rise for months and at current levels make European industry (particularly chemicals and steel production) uncompetitive globally. In addition, we will see the higher wholesale prices being passed onto retail customers which is going to have a severe impact on inflation and consumer spending but in particular the lower income groups in our society. Practically, governments will need to help people and companies through these difficult times. 

However, these are only reactionary solutions that help us over the next 12 months. Beyond that, we need bigger, braver and more sustainable change. We need a Rewiring Europe programme that unites Europe and makes it stronger. To do this we need to immediately begin to: 

Deeply electrify the energy system

The quickest way to decarbonise is to electrify as much as possible of the energy system. That also is the most sustainable way to ween off Russian fossil fuels and to build an energy independent Europe build around low cost renewables and other clean technologies. To that, we need radical regulatory change to ensure a speedy and low-cost transition. This starts with improving planning laws to allow quick build-out of renewables and the necessary grid infrastructure.   

Enable low-cost electricity

Today across many European countries (Denmark and Germany for instance) electricity is the most expensive way to power your car and heat your home.  The recent surges in natural gas prices have now made electricity even more expensive. There are a whole pile of measures than can be put in place such as grid regulatory reforms which force competition and cost efficiency improvements to wholesale power market reforms which move away from the marginal cost pricing whereby the most expensive power plant determines the price for everyone. In addition, taxes and other charges should be removed to ensure that electricity becomes the cheapest form of energy. That will in turn given the financial incentive the customer needs to make long-term investment decisions. 

Invest in clean energy and storage

There is still a large amount of European electricity produced with fossil fuels most of which is imported and if we are to decarbonise and gain energy independence then Europe needs to invest in renewables. The advantage of renewables is that the resources (be that wind, solar, wave or geothermal heat) are all local. They are also clean but we need to put in the incentive structures to ensure the cost-effective and speedy buildout of this infrastructure. However many of these technologies, although low-cost are not able to produce energy 24/7 which is why we need storage. The good news is that we have lots of fossil fuels storage which can be used if needed but there needs to be investments in other storage technologies such as batteries and fossil fuel alternatives such as e-fuels which can be stored in existing storage capabilities. 

Embrace energy efficiency

the majority of energy is wasted in the form of lost heat. Electrification is a much more efficient way to use energy, noting that an electric car uses one third the amount of energy of an ICE car. But electrification is not enough. We need to invest heavily in improving the quality of our building stock as well as other regulations and measures to reduce energy consumption.   

Cut demand for fossil fuels

Higher prices for fossil fuels will help to push customers to seek other alternatives and incentives need to be put in place to ensure any new investments go into cleaner alternatives such as heat pumps and EVs. In addition, it may well be that Europe needs to bring in a border carbon adjustment tax to ensure that European jobs and emissions are simply exported to another part of the world.  

Change how Europe does innovation

The energy transition is a huge opportunity for European businesses and innovators but sadly to date Europe and all the various countries have been very bad at commercialising energy technologies. This is particularly the case in two key energy transition technologies: solar and lithium-ion batteries where Europe has been at the forefront in terms of innovation but where we have no global leaders. Part of the issue is the university approach to innovation which is not commercially enough focussed. This needs to change and EU and government money really needs to be much more strategically focussed rather than the sprinkler approach that is currently used.  

Bring together national security, decarbonization and industrial interests

Energy security has always been a part of national security but thanks to the onset of US shale oil and gas the general view has become that we live in a world flush with cheap oil and gas. The current crisis is an eye opener to Europe which now needs to make energy independence a core focus going forward. Given that Europe doesn't have a lot of fossil fuel resources that means a need to focus on locally available resources such as solar. That is good for decarbonisation BUT here the issue is that nearly all solar panels come out of China which again is not good for national security or Europe’s industrial future. Thinking strategically about national security and decarbonization would enable Europe to build competitive advantages in critical industries for the 21st century. 

Finally, as Winston Churchill was working on the establishment of the United Nations after WW2, he famously said "Never let a good crisis go to waste." We should not and we should focus on Rewiring Europe.

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How can Europe survive without Russian gas next winter

The good news is that it's possible; the bad news is that it will be expensive and highly disruptive. As it stands, Russia supplies some on average 1,600TW of gas per year to Europe which represents 40% of Europe's needs. There is probably about 300TWh in storage in Europe currently, meaning we would need to find 1,300TWh of gas over the next 12 months.

How can we do it?

Import lots of LNG

The global LNG market is around 5,400TWh per annum, but the bulk of that capacity has already been bought, under long-term contract, by countries like South Korea and Japan. The good news is the US can produce more gas and with many new LNG ships on the waters and an expanded Cheniere export terminal opening as I write the US may be able to supply 430TWh this year up from 230TWh in 2021. That is the first 200TWh.

Increase pipeline imports

The only real possibilities here are from North Africa and Azerbaijan, noting that there has, in recent years, been spare capacity on the connecting pipelines. A possible extra 200TWh could flow here. 

Substitute gas with all other forms of generation 

Europe used about 900TWh of gas for electricity generation last year. This can be in most countries be substituted by other fossil fuels such as oil and coal and cleaner resources such as nuclear and renewables. It will be critical to keep nuclear and coal plants on, noting that German nuclear plants which are due to close by end of this year produced 65TWh of power last year. The other critical thing is to build as much renewable capacity as possible this year which would mean bringing in emergency legislation to allow quicker regulatory approvals. Europe needs to invest significantly in flexibility measures such as energy storage and enable the use of electric vehicles as grid resources, all of which will impact the need for gas peakers on the power system. These combined measures could give us ad additional 400TWh.  

Increase European gas production 

A decade ago, Europe produced as much as 120TWh on average per month of gas, but by 2021, it was down to 40TWh. The major question mark here is over the Groningen field in the Netherlands, the largest gas field in Europe for many years, which is due to close this year. Technically, more gas can be extracted from the field, but there is a Dutch government moratorium because of tremors caused by drilling. The good news is that UK and Norwegian production should increase following COVID related production weakness which should see European production increase by 10TWh per month which would give us Europe an extra 100TWh this year. 

Engage with retail consumers

Customers need to be informed of the enormity of the challenge in front of all Europeans and be asked to immediately engage in both energy and cost-saving measures. One simple fact is that every one-degree reduction in temperature in buildings gains about 97TWh of gas. Putting on a pullover at home would allow Europe to thus gain 200TWh.  You could argue that price increases by themselves might force these changes but better still would be to explain the situation and ask people to do so of their own volition. In addition, incentives could be put in place to push energy efficiency measures such as better insulation and heat pumps as a replacement for gas boilers. 

Reduce demand by industry

We have already seen production stoppages in Europe at production facilities such as fertiliser plants which are highly sensitive to natural gas prices. Going forward, with a $15 difference between US and European natural gas and no end in sight businesses will naturally shut production. Beyond such curtailments, non-critical industries will also need to be incentivized or forced to close production, noting that industry represents 20% of demand for natural gas. A 200TWh saving may be possible with such measures.  

On paper, it is thus possible to quickly move away from Russian gas but there are other obstacles to executing this plan:

Higher energy prices 

We are seeing unprecedented volatility in oil, coal, gas and electricity markets which is a reflection of the high level of risk around energy. These prices will lead to higher retail energy prices which will have an impact on the cost of living of all European citizens and the competitiveness of many businesses. Practically, governments will need to help people and vulnerable commercial and industrial customers through this crisis. Engaging with them early is a key to being prepared. 

Europe’s gas infrastructure

Most of the European gas infrastructure was designed with a view to transport gas from east to central Europe. The issue now is that much of the needed gas infrastructure is not in place to transport gas from west Europe (Iberia) where most of the LNG terminals with spare capacity are situated to central and Eastern Europe. In addition, if individual countries decide to overbuy to make sure they have enough gas then it could well be that other countries do not have enough. The key is to make sure there is strong cross border cooperation. The issue is that the EU has a very slow and cumbersome decision-making process.  

Stress in markets

We have already seen energy companies like Uniper under liquidity pressure due to market volatility which resulted in them needing to secure a credit facility of €10bn from Fortum and the German state bank, the KfW. The volatility is now higher than it was before Christmas when they secured that facility which is making it a very difficult environment for all energy companies to operate in. It is critical that emergency loan facilities are put in place to prevent bankruptcies and further disruption. In addition, natural gas buyers need governmental guidance around their long-term ‘take or pay’ agreements with Gazprom which force them to pay even if they do not take delivery of the gas. 

Deep Electrification - How Europe can break the Russian fossil fuel addiction

As the Russian army continues their daily bombardment of Ukrainian cities, the European Union and individual European countries are obliged to scramble to secure energy requirements for the months ahead as we have become addicted to Russian Fossil Fuels. But there is good news, as even in the worst-case scenario, we will not freeze or run out of electricity next winter. However, the real question is what happens after next winter and the years after that. Our answer is to deliver Deep Electrification, and we have a road map to that critical destination, which we now set out below. Fossil Fuel addiction is a serious problem, and the Russian war on Ukraine is a wake-up call. At present, we burn fossil fuels every day to run our economies, despite the severe negative impacts on our environment and the climate. In Europe, we spend $1bn every day on gas, oil and coal, that we are buying from Russia. We must burn fewer fossil fuels and transition to clean energy sources and en route to reduce energy losses across the energy system. Currently, over 60% of primary energy used today is lost on the way to its final application. To achieve both objectives, we need to electrify our energy system. 

Deep electrification means electrifying our energy system as much as possible. We must start with transport, heat and cooling, and heavy industrial processes, which are the easiest. The advantages of electrification are multifaceted, but the key benefit is energy efficiency. As a rule of thumb, an electric vehicle uses less than a third of the energy used by a conventional vehicle running on diesel or petroleum. If we deeply electrify our energy world, we will need less energy and in turn, will save the customer money. In addition, deep electrification is the only realistic way to achieve total decarbonisation, aka the Net Zero objective. Fortunately, this is the approach favoured by many non-governmental organisations, such as the IEA (https://www.iea.org/reports/net-zero-by-2050). So, now to our road map.

Stop reliance on fossil fuels to generate electricity 

The priority must be to replace fossil fuels by generating clean electricity alternatives and ensuring that increasing demand for electricity is met through these sources. The good news is that there is no shortage of clean energy sources, and these are often lower costs. It is more a question of how best to harness the sun’s energy, which is the source of nearly all useful energy on our planet. Without the sun, we would have no food, animals, trees, and biomass feedstock. Besides, the process of photosynthesis, taking place over many millennia of the earth’s history, has left us with a valuable store of fossil fuels like coal, oil and natural gas. The amount of solar radiation that continuously strikes the earth is about 173,000 terawatts, surpassing the approximately 20 terawatts that humanity requires. We also have other renewable technologies such as geothermal, wind and hydropower, and nuclear, which, while controversial, will stay a core part of many countrys’ energy plans for the foreseeable future. 

Embrace Flexibility 

Since the bulk of electricity will come from low-cost renewables such as wind and solar that fluctuate with day–night cycles, weather patterns, and the seasons, we need to redesign a power system built for a different era. The keyword here is flexibility, a state of mind: it implies the readiness to abandon old ways of thinking and embrace new ones; for instance, by creating new market mechanisms that enable the fast deployment of flexibility technologies such as batteries, hydrogen, digital meters, smart charging stations and vehicle to grid. A critical tool is demand response. Many residential and commercial loads are flexible — for example, hot water tanks don’t care what time of day they are heated. By networking these devices, their demand requirement can be timed to when the supply is available. Further, by networking across multiple locations, we can ensure we don’t turn them all on simultaneously. 

 Invest in Grid 

A system filled with widely distributed renewables needs a more extensive and more intelligently connected grid, starting with electricity distribution systems which need to be upgraded to deliver 2-3 times more electricity than they can at present. Transmission networks will need to be constructed to move cleanly generated electricity from where the best renewable resources are located, such as in northern Norway and Sweden for hydropower, or the North Sea for offshore wind, to European population and industrial centres. Governments and the EU need to work together and introduce emergency legislation to speed up the grid build-out, which has historically been bogged down in planning delays for years.  

 Focus on the Low Hanging Fruit 

Some sectors, such as steel and cement production or shipping, are more challenging to decarbonise than others. This is partly because these are traditional industries where the technologies are not in place to reduce dependence on fossil fuels. They require synthetic fuels that require electricity to make the molecules they currently need - a costly game that compounds existing inefficiencies. If we are to move away from our dependence on fossil fuels, we should try to directly use that electricity for “easy to abate” sectors which are the quickest and easiest for us to decarbonise. Those sectors are road transport, buildings (particularly space heating) and industry. This is not a dream. All processes with industrial and building heat requirements below 1,000 degrees can be electrified with technologies available today.

 Change Fiscal Incentive Structures 

Across Europe, we must introduce taxes and subsidies that favour clean energy sources over fossil fuels. Existing tax structures are often intricate to change either politically or due to resistance from conservative tax offices and finance ministries. Retail energy is one example: governments such as Germany or Denmark insist on burdening customers with hefty levels of taxes and charges, making electricity unattractive against fossil fuel alternatives. We should get rid of VAT and all taxes on electricity. Simple. If we want to decarbonise quickly and effectively, we need fiscal tools aligned with fossil fuel reduction goals. A suite of fiscal incentives, such as tax credits, need to be implemented to kick off early-stage markets such as EVs and batteries to enable related technologies to reach critical mass. Fiscal incentives such as accelerated depreciation can incentivise private capital investments, both in business and in the home. 

 Reform the Power Markets

The current competitive electricity system became established in the fossil fuel era whereby the last and most expensive bidder in the power market at any one time determined the power price for all players. The idea was that power generators would compete based on their fuel costs and it worked well until recently. But what we are seeing in Europe today is extreme price volatility, with very high prices mainly being determined by costly gas and low energy prices being determined by how much wind is available in the system. This market volatility makes it challenging for customers to secure the power they need at fair prices. It also makes it complex and expensive for generators to deliver power to meet contractual obligations. It is absurd that a low-cost hydropower provider should receive the same high price in the market for power traded just because gas prices have gone up. 

It is a considerable challenge to make long-term investment decisions in new clean generation, storage and flexible technologies in this current volatile environment. The good news is that there is no shortage of capital. The world is flooded with low-cost money looking for a home. Our challenge is to make sure that this capital is directed into replacing the global capital stock of all fossil fuel-powered devices from vehicles to boilers with low and where possible zero-carbon alternatives. The cost of capital heavily influences the scale of investment and the cost of this transition. The higher the capital cost, the more expensive will this transition be. Low-cost capital is critical for the rapid introduction of clean energy technologies such as wind, solar and EVs, which have higher relative upfront investments costs than fossil fuels but lower lifetime costs.  

 The shift to a much more capital-intensive energy system from today’s fossil fuel world can be achieved and should be our objective. We have provided the road map to leave the current and inefficient electricity power market to ensure that low-cost capital flows can deliver our Net Zero objective through Deep Electrification. We want to help as many as possible on the journey.