Energy prices, geopolitical crisis and net-zero goals: a brave new Europe towards energy independence
The major challenges for ‘post-pandemic’ Europe
As the EU economy began to slowly recover from the pandemic, new and old crises are looming on the horizon. We are fully aware of the energy prices situation — that must be mainly traced to gas volatility and not to carbon price — and we are cooperating with governments and institutions to find common, swift solutions to give relief to families and companies affected by the price increases. In this context and in addition to the soaring energy prices, Europe is now also facing a complex geopolitical crisis, which is not only a menace to its energy transition strategy but to the very essence of its own energy independence. A society that does not have access to abundant, reliable, cheap and clean energy is at stake for its economic and social progress, and this concern today affects Europe as a whole. It is a pan-European matter more than an issue that only touches individually the interests of the member countries. In order not to wipe out the Energy Union, it is essential to propose a European solution to the issue and to avoid compiling a series of uncoordinated national measures.
The dependence on gas imports is one of the main problems Europe is facing today in the energy sector. Member countries depend on gas very differently, but the interconnection of gas markets is now such as to reverberate the excessive dependence of some countries on the entire eurozone. Europe’s long-term goal would therefore be completely independent from fossil fuels. But in the short to medium term, Europe must become self-sufficient and avoid being exposed to potential disruptions from one single supplier, as evidenced by the current energy price increase: the recent shortage in gas has drastically driven gas prices up, thus increasing electricity prices on the markets overall throughout this autumn and winter. Europe might be tempted to take short-sighted actions to solve the energy price crisis and address the geopolitical risks. But reverting back to oil, gas, or even coal, is not the right answer to secure Europe’s energy independence in the medium to long term. Just the opposite, with the ever-present threat of climate emergency, the urgency of transitioning to a zero-emission Europe is now increasingly pressing. In this context, Europe’s energy transition has also become a security and economic issue that could preserve European economy for years to come.
The energy price crisis: root causes, recent interventions and real solutions
The current energy price crisis has sparked a growing number of interventions in the electricity market but, surprisingly, not in the gas markets, even though gas prices are the main driver of electricity prices and clearly selling prices of natural gas are not aligned with the real cost of supply. These interventions have typically focused on trying to capture so-called ‘windfall profits’ earned by electricity producers. We can’t help but notice that they are frequently based on several misconceptions. For instance, they assumed that high spot prices mean windfall revenues for electricity generators not subject to gas prices, and vertically integrated companies. But they ignored that most of the energy does not receive the spot or day-ahead price, as a majority of the electricity is sold in advance to consumers through supply contracts. The EU Commission, in its March 8 Communication, rightly proposed safeguards and limits for the implementation of such measures at member countries’ level. But this may not be sufficient. And solutions must be implemented at EU level. Indeed, these uncoordinated market interventions distort and end up destroying the integrated electricity market, which is based on a common price formation rule across all the EU.
There are several concrete measures that could be taken to keep prices down. As concerns structural measures, liquid forward markets and long-term price signals must be developed and play an even greater role, helping to hedge risks and facilitate investments. But right now, the European Commission is looking at possible options to temporarily limit the contagion effect of gas prices in electricity: we believe we need an EU-wide cap on gas prices to bring them back at least to price levels prior to the crisis. Nonetheless, the real solution to the current price crisis will not come from ill-conceived changes in electricity market design or capturing non-existing additional profits. The structural solutions must allow the acceleration of the rollout of zero-carbon, reliable and flexible technologies. This is the only way to eliminate our energy system’s dependency on gas.
The road ahead: a new energy sovereignty for Europe toward net-zero
A net-zero Europe is an evolving process. But we have almost run out of time. 2050 is only one investment cycle away. We strongly believe that this energy crisis is the impetus to accelerate Europe’s energy transition. The direction is clearly irreversible. For instance, we need to deploy more renewables much faster, by ensuring swift permitting and licencing procedures at EU level. In the framework of the REPowerEU Plan, we could feasibly deliver an additional 35TWh of generation from new renewable projects over the next year, bringing down gas use by more than 6bcm, according to IEA. That would also ensure a concrete benefit in the household electricity bills. We need to progressively replace gas boilers with high-efficiency heat pumps and support the development of a European clean heating industry. As stated by Commissioner Timmermans, the EU must double the installation rate of heat pumps over the next five years, which would save 20bcm of gas annually by 2026, and more than 60bcm annually by 2030 with 50mln heat pumps installed across the bloc. The equivalent of 25 percent of the EU’s current fossil gas imports from Russia can be saved by 2030 through renovating and electrifying Europe’s residential buildings, according to the European Climate Foundation. We should promote interconnections and electricity infrastructure to provide flexibility and reliability of the system and optimize the use of our current resources. A Europe that swiftly builds out zero-carbon technologies, which electrifies home heating and transport, and which diversifies fuels for heavy industry is a more sustainable, more citizen-friendly and more independent Europe.