Europe's Energy Paradox
For more than 20 years, the European Union has established a reputation as a leader and role model on global climate change through its emission reduction aspirations and policies. However, a perfect storm made up by the 2008 financial crash, the North American natural gas boom, rising regional energy costs and lucrative renewable energy subsidies has influenced policy makers in EU countries to take a new approach to energy fulfillment – one that is paradoxical to what we’ve come to expect from the EU.
An October 14 Financial Times Energy Special Report explained that the EU, much like the rest of the developed world, balances a “trilemma” of considerations regarding energy including lowering (or at least managing) carbon emissions, preserving long-term security and protecting affordable costs.
Historically, enacting policies aimed at reducing carbon emissions have been a top priority for the region resulting in a heavy investment in renewables. In times of economic prosperity, higher consumer energy costs associated with this investment were offset by a booming economy.
However, the recent debt crisis in Europe has policy makers thinking differently. European consumers (voters) have shown they are less concerned with carbon emissions as they struggle to find cheaper ways to keep their lights on. Simultaneously, the North American natural gas boom has led to a drop in coal prices internationally – an appealing prospect for countries dealing with a struggling European economy.
Doubling down on coal, though. as a viable long-term energy solution in Europe could have irreversible, long-term negative environmental and energy security consequences. Namely, we’ve already seen a decline in the number of operational gas plants in the region and a lack of innovation that is occurring in areas like North America.
As the world’s population heads toward nine billion by 2050 and millions of people climbing out of poverty, global energy demand could increase by as much as 50 percent by 2050, according to Shell Scenarios. At Shell, we believe that a more viable solution could be a gas + renewables pathway, which will allow Europe to become more competitive, reliable and versatile without compromising its current energy and climate objectives.
Europe could achieve these objectives by:
• Setting a 2030 economy-wide CO2 emissions reduction target;
• Ensuring timely implementation of EU air quality legislation and directives;
• Implementing the Energy Efficiency Directive to promote efficient power generation, save energy and reduce CO2 emissions.
• Ensuring renewable electricity sources are fully integrated into the market when they can compete with conventional sources;
• Using legislative cooperation mechanisms to reduce the costs of renewable electricity;
• Reforming of the existing EU ETS regulations by delaying the sale of allowances (i.e., backloading);
• Strengthening the EU ETS to avoid future shortage of allowances;
• Creating an auction reserve price to keep allowances from dipping below a threshold;
This gas + renewables pathway also encourages growth of renewable energy systems and could support the progressive build of carbon capture and storage. A gas + renewables pathway increases security and reliability because gas can better back up the irregularity of renewables and allow for dispersed energy generation.
If changes aren’t made to the existing European energy scenario, Europe will face an increasingly expensive and risky “U-turn”. The current approach will create a gamble on nuclear energy, a rash up-scaling of offshore wind development which will drive up costs for consumers already in a pinch, while continuing to depend on coal. The longer Europe waits to pursue gas-related options, the higher the risk will be for less proven technologies to compensate for the increased CO2 emissions. Additionally, the low wholesale prices from the coal + renewables system will have to be compensated by more subsidies and higher market regulation.
Luis Pinto works in natural gas market development for Royal Dutch Shell.
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