The power of green power

Energy prices are spiking across Europe. In nearly every part of the continent, energy consumers face higher fuel bills this winter, with surging prices predicted to stretch well into this year. Energy touches nearly every part of our economy and our lives, and so record-high prices are having a major impact on household finances and industrial competitiveness.

The price spike has been predominantly driven by international gas prices. As Asian economies rebounded from Covid earlier this year, the supply of gas, particularly LNG from the Middle East, struggled to keep pace with demand. Furthermore, the state-owned Russian giant Gazprom, which supplies about a third of Europe’s gas, did not increase supply to Europe in response to the higher prices - in a naked attempt to apply pressure on the EU to approve the controversial Nord Stream 2 pipeline.

Gas markets in Europe are now pricing in further supply constraints due to the build-up of Russian troops on the Ukrainian border. In the event of a Russian invasion of Ukraine, it’s a safe assumption that Putin would weaponise European dependence on Russian gas by ordering Gazprom to limit supply.

Although other factors have contributed to higher prices, such as lulls in wind power or interconnectors and nuclear power stations being offline, gas is the principal price setter in the European energy market. It is, after all, the only element of energy bills that has rocketed over the past year.

Just as we saw in the 1970s with the OPEC crisis, the price of fossil fuels is especially volatile, as it is sensitive to the geopolitical whims of autocratic petro-states. With the exception of Norway and the UK, Europe has few oil and gas reserves, and so is dependent on imports. Strikingly, every single EU member state is a net importer of energy, with 96% of oil demand and 90% of gas demand met by imports.

Unconventional oil and gas production may be superficially attractive in this context. However, in this densely populated, environmentally-conscious continent, and with the sun setting on the fossil fuel age, the prospects for kick-starting a fracking revolution to exploit shale gas reserves are minimal. The local environmental problems create too much political opposition and risk for investors.

With world-leading companies like Siemens, Ørsted, and Statkraft headquartered here, Europe can establish itself as the renewables capital of the world and a major exporter of clean tech.

We’ve long known that burning fossil fuels is the root cause of climate change, a primary threat to the economic and security interests of Europe. And with Europe’s dependence on them providing leverage to our competitors, the answer cannot be to double down on fossil fuels. That route just locks us into an increasingly expensive, volatile, and unsafe energy system.

Instead, Europe must accelerate the transition to home-grown renewable energy. Through creating an even more attractive market for renewables investment, European nations can seize an unprecedented opportunity to improve the continent’s energy security while also lowering its energy costs.

The rapid deployment of renewable energy does not need to be delivered through cumbersome state intervention and nationalisation. On the contrary, this endeavour is most likely to succeed if it harnesses the power of the free market to innovate, scale up, and drive down costs.

There is no trade-off between prioritising home-grown renewables and economic competitiveness either, as renewables are already cost-competitive with fossil fuels. According to the International Renewable Energy Agency, in the space of a decade the cost of solar power has fallen by more than 85%, while onshore wind prices have fallen almost 56% and offshore wind by almost 48%. They also found that, globally, 62% of new renewable energy projects could undercut up to 800 gigawatts of coal plants on cost.

There is also a big economic opportunity for EU member states in developing their own renewables industries. According to one academic study, global renewable energy jobs are projected to grow fivefold to 22 million by 2050, while jobs in the fossil fuel sector are due to fall by a quarter to 3 million by the same date.

Thanks to announcements made around COP26, around 90% of global GDP is now covered by net zero targets. These commitments will spur on vast investment into renewable energy projects around the world. With world-leading companies like Siemens, Ørsted, and Statkraft headquartered here, Europe can establish itself as the renewables capital of the world and a major exporter of clean tech. 

Market mechanisms, such as reverse auctions which the UK has used to great effect to build the world’s largest offshore wind sector, can help nations develop renewables quickly and cost-effectively. The cost of British offshore wind has tumbled from over £140 per megawatt hour in 2015 to less than £40 per megawatt hour. The UK government has achieved this through reducing risk for investors, because the auctions award contracts to generators with guaranteed minimum prices for 15 years, while unleashing fierce competition between projects.

But what about when the wind doesn’t blow or the sun doesn’t shine? Doesn’t this approach leave us once again dependent on gas back-up generation, and therefore at the mercy of volatile international fossil fuel markets? Firstly, the intermittency problem shouldn’t be overstated. Solar energy is increasingly efficient and predictable, capable of generating energy even when there are clouds. Similarly, modern offshore wind turbines, which are now as tall as the Shard in some cases, are able to generate electricity more consistently.

All the same, other technologies are needed for a modern, reliable energy grid. Batteries are good for short-term storage, but are currently being held back by various regulatory barriers that fail to recognise them properly as energy generators and prevent them participating in certain markets. And for long-duration storage, at least part of the solution will be to invest in green hydrogen R&D, which is produced using renewable energy and water, and which can be stored and burnt in power stations when required.

A more market-friendly European energy policy should also include the liberalisation of cross-border energy trading. When there’s no sun in Spain because it’s night-time, the wind might be blowing on the south coast of the UK. And when the wind isn’t blowing off the east coast of Scotland, hydro will be generating electricity in Norway. Joining up the continent’s electricity grid, and making it easier to buy and sell electricity across borders, helps countries keep the lights on in a cost-effective way, without needing to rely on volatile gas as a back-up.

Conservatives are instinctively free traders. We should be free traders in relation to energy too. Nations can avoid becoming too dependent on any one neighbour for their energy imports by diversifying their interconnectors. Multiple trading links, together with thriving domestic production, is the best formula for energy security.

Although many of these changes are already happening, this transformation of the European energy market will take several years to yield results in terms of prices. But it is imperative that regulators and governments act now to mitigate future crises and make our energy system more resilient in the long term.