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Europe is not going to achieve a competitive energy transition with the current interventionist policies.
Europe does not depend on Russian gas due to a coincidence, but because of a chain of mistaken policies. Banning nuclear power in Germany, prohibiting the development of domestic natural gas resources throughout the European Union, added to a massive and expensive renewable roll-out without building a reliable back-up.
Solar and wind do not reduce dependency on Russian natural gas. They are necessary but volatile and intermittent. They need back-up for security of supply from nuclear, hydro, and natural gas. Dependency rises in periods of low wind and little sun, just when prices are highest.
“Solar goes to zero for twelve hours a day, and that is guaranteed. The wind blows sometimes, and sometimes it does not, also guaranteed. They both depend on weather, which is 100% out of human control. They are on their best day a supplement” wrote a Navy pilot follower.
Batteries are not an option either. It is impossible to build an industrial-size network of enormous batteries, the cost would be prohibitive and the dependency on China to build them (lithium etc.) would be even more of a problem. At current prices, a battery storage system of Europe’s size would cost more than $2.5 trillion, according to an MIT Technology Review paper. Massively more expensive than any other alternative.
Just the added cost of a battery grid plus the distribution and transmission network would make household bills soar even further.
Inflation was already out of control in Europe before the invasion of Ukraine was even a risk. CPI in Spain was 7.6%, in Portugal it was 4.2% and in Germany, 5.1%. Euro area CPI was 5.8%.
In the face of the impact on prices and energy from the invasion of Ukraine, we must remember:
– Europe was already in an energy crisis in 2020 and 2021 with the cost of CO2 permits soaring and wholesale electricity prices reaching record-high levels by December 2021.
– Europe does not “depend on Russian gas”. It is codependency. Russia needs Europe to export, and Europe has no cheaper alternative. Let us remember that Russian gas is much cheaper than any other realistic alternative.
The long-term contracts signed with Gazprom are closed at prices that can be up to ten times lower than some of the current alternatives. The 150bcm that Europe imports from Russia can be replaced with liquefied natural gas from Norway and the North Sea, the United States, Algeria, Qatar, or Israel, but it will be much more expensive.
– The only alternative to Russia is to show that European countries have diversified and cheap sources of supply. If Russia sees that European governments ban nuclear power, prohibit the development of indigenous gas reserves, intervene in imports, and add massive taxes like the cost of CO2, Russian authorities know that there is no competitive alternative, and that European industry and consumers will collapse due to rising cost of energy
– European governments should think hard about misguided policies when the continent has been saved this winter by natural gas imported from the United States produced with a technology, fracking, which has been banned in Europe.
Europe wants cheap and abundant energy, but politicians demonize nuclear, gas and oil. All the interventionist proposals that are put forward by European politicians entail a higher cost for long-suffering consumers.
– Natural gas flows all the time and is cheap and abundant. It cannot be substituted with renewables that are intermittent, volatile, and unpredictable. The example of Germany is clear. After investing massively in renewables and doubling bills for consumers, it depends more on lignite-coal and Russian gas to guarantee supply. Germany has had to reactivate coal plants after spending more than $200 billion in subsidies and renewable costs!
– All technologies are necessary, and renewables are key, but they are not the alternative because they need natural gas back-up while the technology is developed, as it is still in its infancy. Let’s not forget that massively installing renewables includes a huge cost in networks. Who will lower bills if the fixed cost of networks is multiplied with the $150 billion we estimate are needed to strengthen distribution and transmission networks?
– All the ‘magical’ alternatives that interventionism sells mean going from depending on Russia to depending on China. Where are we going to get the silicon, aluminum, rare earths, copper, lithium, etc. necessary for those massive announced magical investments?
– Demonizing nuclear energy has left Europe in the hands of expensive and volatile alternatives. The energy transition must be considered in order to understand the importance of security of supply and competitiveness. We need all technologies without ideological bias. We need solar, wind, natural gas, hydro, oil and nuclear or we will go from crisis to crisis and always paying more.
– It is absurd to maintain the hidden tax scheme of CO2 emissions during an unprecedented crisis. Governments must use this income to reduce citizen’s bills.
– Border taxes on oil products or natural gas are not taxing producers, it is taxing consumers in European countries. Whoever believes that the taxes that have been announced will be paid by Qatar, Nigeria or Brazil has a serious problem of economic understanding.
– A true energy transition must be competitive, reliable, and cheap, not a tax collection and looting machine. It must consider all technologies. More industry and less politics. More competition and less ideology.
Daniel Lacalle is one the most influential economists in the world. He is Chief Economist at Tressis SV, Fund Manager at Adriza International Opportunities, Member of the advisory board of the Rafael del Pino foundation, Commissioner of the Community of Madrid in London, President of Instituto Mises Hispano and Professor at IE Business School, London School of Economics, IEB and UNED. Mr. Lacalle has presented and given keynote speeches at the most prestigious forums globally including the Federal Reserve in Houston, the Heritage Foundation in Washington, London School of Economics, Funds Society Forum in Miami, World Economic Forum, Forecast Summit in Peru, Mining Show in Dubai, Our Crowd in Jerusalem, Nordea Investor Summit in Oslo, and many others. Mr Lacalle has more than 24 years of experience in the energy and finance sectors, including experience in North Africa, Latin America and the Middle East. He is currently a fund manager overseeing equities, bonds and commodities. He was voted Top 3 Generalist and Number 1 Pan-European Buyside Individual in Oil & Gas in Thomson Reuters’ Extel Survey in 2011, the leading survey among companies and financial institutions. He is also author of the best-selling books: “Life In The Financial Markets” (Wiley, 2014), translated to Portuguese and Spanish ; “The Energy World Is Flat” (Wiley, 2014, with Diego Parrilla), translated to Portuguese and Chinese ; “Escape from the Central Bank Trap” (2017, BEP), translated to Spanish. Mr Lacalle also contributes at CNBC, World Economic Forum, Epoch Times, Mises Institute, Hedgeye, Zero Hedge, Focus Economics, Seeking Alpha, El Español, The Commentator, and The Wall Street Journal. He holds a PhD in Economics, CIIA financial analyst title, with a post graduate degree in IESE and a master’s degree in economic investigation (UCV).
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