Europe and the Energy Transition Challenge

September 14, 2016

Energy transition has become a buzzword to indicate the many transformations under way in the energy sector. The term is generally used to denote the transition from traditional forms of electricity generation – mainly fossil fuels and nuclear power – towards renewable energy sources (RES), especially wind and solar. But as a recent Financial Times article (paywall) points out, further transitions are under way in the energy world. I am here highlighting the following:

  • transitions in the oil and gas markets, which make the west less vulnerable to traditional suppliers in the Middle East and elsewhere;
  • a transition in energy use, with the prospect of electric vehicles (EVs) taking increasing shares of the market from gasoline- and diesel-powered vehicles
  • a transition in the patterns and dynamics of power production – with a shift away from large centralised utilities in favour of a variety of alternative production centres, from industrial self-producers, all the way down to individual consumers with their own PV panels – the “prosumers”.

All three these transformations are producing profound changes in the European energy landscape. The interaction between them makes it particularly hard to forecast the exact direction of the energy transition.

In the oil and gas markets, the US has undergone its shale revolution, essentially securing it against the uncertainties of world markets. In Europe, the ripples caused by the US shale revolution, along with gas deals with various countries and enforcement of EU gas transmission and distribution rules, are gradually reducing dependency on Russian gas supplies, though for oil, Europe remains largely dependent on imports from major world producers.

Compared to other OECD countries, the EU countries share a large, liberalised and increasingly integrated energy market. It is EU gas market rules that prevent Gazprom from forging monopoly supply deals with EU countries – prompting European countries to seek new intra-EU pipelines, and Russia to threaten to abandon the EU as a customer for its gas. And it is EU market rules that can facilitate the other transformations under way: large utilities have lost their monopoly status, leaving space for new and innovative market players.

Before the launch of EU liberalisation in the late 1990s, most of Europe’s electricity systems were beholden to centralised, vertically integrated utilities. Market liberalisation helped set the conditions for the expansion of renewables. So far, the main beneficiaries of the transformation in Europe have been RES generators. They have benefited from relatively open markets and from favourable government policies such as feed-in tariffs, which are intended to promote renewable energy but also help Europe’s chronic dependence on imported energy sources.

But Europe’s liberalised energy market can do more than that. It is often said that a common European energy policy is still hampered by the fact that the EU Treaty explicitly grants EU governments the right to set their energy strategies in full autonomy. However, the impact of the limited energy legislation that does come out of Brussels – from the energy market rules to climate legislation and state aids guidelines on RES subsidies – have had a major impact on the continent’s energy landscape. Over time, a convergence of policies is happening, partly because European countries, though autonomous in energy matters, already share so much in terms of economic policy and are increasingly interlocked politically, that energy policy making is is following a more general trend towards common goals.

Thus, energy transition also means transition towards shared European goals.

The current Polish government is an outlier in the EU, being the sole supporter of continued coal development and discouraging renewable energy development. Most other European countries are embracing an approach based on pragmatic support for renewables, combined with due recognition that traditional energy sources will remain part of the energy mix for the foreseeable future.

This common trend towards low-carbon energy and energy security, combined with the EU’s energy market rules, can create fertile ground for the application of innovative ideas, some of which are already being pioneered across the continent.

Energy storage is probably the area of greatest importance right now, and the one where the greatest opportunity for business innovation lies. Storage is necessary to make best use of intermittent energy sources such as wind and sun. It is needed to store power produced by RES installations at times when the sun is shining or the wind blowing while demand is incapable of absorbing all the RES supply. Batteries might never evolve to the point of storing the vast amounts of energy needed to power Europe’s economy during times of low wind and/or sun. But they are already being used for stabilisation of the electricity system, a crucial function to maintain reliability of power supplies as more and more intermittent RES come on the grid.  Car batteries are one possible way to store renewable energy. Several Vehicle-to-Grid (V2G) projects have tested the idea of transforming Europe’s EV park into a distributed store of electricity to help manage the transition to renewables.

The European energy market also sets positive conditions for companies to establish their own power production, which they can design to meet their specific needs while selling or purchasing any excess supply or demand.

But for the above energy transitions to succeed in Europe, the European energy policy must evolve further. The Energy Union initiative of Commissioner Maros Sefcovic is reinforcing a trend that has already been under way for some time.

But because all rapid transitions tend to be messy, unfortunately there are some losers in this process. Traditional European utilities are facing a period of crisis. Several are responding, as testified most visibly by E.ON’s decision to rebrand itself as a “green company”, putting its traditional generation activities into a slightly revised version of its former self. But the process of transformation is costing the sector billions.

The current financial weakness of Europe’s utilities could undermine Europe’s economy. While RES are on the rise, they still provide just above a quarter of Europe’s total electricity generation, and 13% of total energy consumption. With EVs set to grow in number, electricity demand is set to increase significantly over the coming decade. For the years to come, Europe will still need varying amounts of coal, gas and nuclear to provide the remaining 75% of electricity. European policy makers should not forget this or they risk putting the future of the whole process in jeopardy.

 

 

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