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“It Can’t Get No Worse”-Paul McCartney
The relationship between Germany and other countries with Gazprom and Russia goes back more than 50 years. For five decades, Gazprom has been the cheapest and most reliable supplier. The entire German industrial gear and energy strategy has been based for decades on Russia-Germany co-dependence —abundant and affordable energy in exchange for trade and export of value-added goods.
What today they call dependence on Russia was not forged by chance but by design. They are hoping that the trade relationship would bring the two governments closer together regardless of each ideology and the geopolitical moment.
Today, in the face of the war in Ukraine, it is easy to criticize this dependence. Still, since I started working in energy until now, the understanding between E.On-Ruhrgas, Uniper, and Gazprom was used as an example. The same logic spread throughout Central Europe.
When it is taken for granted that a supplier will always be available, ideological mistakes are more easily made. The elimination of Germany’s nuclear fleet will go down in history as one of the largest in the European Union. Faced with the fear created in the media by the Fukushima accident, Germany made its energy mix more expensive and erratic.
An accident that had nothing to do with nuclear technology but with the installation of a power plant with an insufficiently high wall on an island prone to tsunamis. Today, Japan is announcing increasing its commitment to nuclear power. The Kishida administration has launched a plan to restart up to 17 nuclear power plants from the summer of 2023.
The German government does not even take advantage of reactors that are not yet decommissioned. It is putting them on standby amid the biggest energy crisis in its history. Once again, politicians not only fail to recognize their mistakes but keep them even in an unprecedented crisis. We already explained the German energy policy mistake in 2018.
France’s veto to expand gas pipeline connections is another paradigmatic example. France has brought its public company that manages the nuclear fleet, EDF, to the brink of bankruptcy on at least two occasions with tariffs that do not compensate for the costs and which have led to having to renationalize the small part that was listed after plummeting the share and in the face of the refusal of shareholders to return to rescue a company decapitalized by interventionism.
The veto of gas pipelines to strengthen the north-south connection can only be understood from two perspectives. The cost of investing in the nodes passing through France is much higher than shown in the media and would have to be borne by France and the desperate attempt to keep EDF and its nuclear fleet generating profits above its cost of capital. Competition with natural gas in normal periods would be devastating for EDF.
The cost of investing in the nodes passing through France is much higher than what is portrayed in the media and would have to be borne by France.
It is very typical of Europe to waste periods of cheap energy to invest in the security of supply and, when a crisis arises, to double down on mistakes and hope that everything will be fixed with a decree in a couple of months.
In the European Union, the energy circle is always squared by discussing renewables as if they were a panacea, but the two mistakes mentioned above reappear.
Massively increasing exposure to renewables implies a co-dependence on China similar to that of Russia, from lithium to rare earth or silicon, which is key to the installation of renewables.
Additionally, the constant use of price intervention and regulatory risk puts the European energy sector in a situation of continuous economic fragility; it is allowed to breathe, but with the water around its neck, affecting investment and quality.
We explained last week that ramping up the installation of renewables does not eliminate gas dependence. As renewables are intermittent and volatile, dependence on gas and coal-lignite in periods of low wind and solar production skyrockets, coinciding with times of high demand and price.
Massively increasing exposure to renewables implies a co-dependence on China similar to Russia’s.
We often criticize the interventionist disaster of the Spanish energy policy. We seem to have forgotten the absolute failure of the tariff deficit era when the government announced that it would raise the tariff by a percentage and pass the unpaid cost on to all of us in a future bill.
The interventionist horror made the tariff deficit soar to 25 billion euros, and we are still paying it in our daily bills. More debt and a trap for all consumers.
These two huge mistakes, the tariff deficit and the constant regulatory risk, are what some now want for Europe. The “green” Europe has taken the price of renewable energy companies by storm, announcing an additional regulatory axe to the ones they and the rest of the technologies have previously suffered.
A substantial European tariff deficit will generate a ball of debt that consumers will pay for years and is already threatening a string of bankruptcies and serious financial problems for small and medium-sized energy companies.
There is no price cap or price limitation that is not paid by the consumer. On the other hand, that does not generate greater distortions.
There is no price cap or price limitation that is not paid by the consumer.
No government is aware of the cost of capital and the high legal uncertainty in the energy sector, but even less aware of the opportunity cost. The European Union is becoming the place not to invest because of the increasing number of legislative and regulatory barriers.
When a state gets used to having a cheap and preferential supplier, it tends to relax and forget the most important thing in energy policy: security of supply. An energy policy designed from an ideology that forgets the security of supply and competitiveness is doomed to fail. And it has failed.
Europe must rethink its energy policy
The cost of CO2 emission permits in Europe remains above €65/tonne as states limit supply. It is a disguised tax by which European governments will collect more than €20 billion in 2022.
In the case of Spain, more than 2.5 billion. Maintaining this cost amid an energy crisis makes no sense, but not using all this revenue to reduce consumers’ bills is irresponsible.
The Government of Spain will collect more than 11,000 million euros from the electricity tariff. It has only made an insufficient modest tax cut and has not reduced its collection since it has not deflated taxes to inflation.
We need all technologies, especially baseload technologies -which work all the time- to incentivize investment, not penalize it. We need solar, wind, nuclear, hydro, and natural gas. It is imperative that costs that have nothing to do with energy consumption are eliminated from the tariff and that such a negative idea as a European tariff deficit and cutting remuneration for renewables is abandoned.
We need an open, competitive energy policy that guarantees the security of supply, not a return to mistakes such as the stable regulatory framework – which had nothing to do with stability – or tariff deficits.
This column was originally published in the blog of economist Daniel Lacalle, www.dlacalle.com.
Daniel Lacalle es Doctor en Economía, profesor de Economía Global y Finanzas, además de gestor de fondos de inversión. Casado y con tres hijos, reside entre Londres y Madrid // Daniel Lacalle is a Doctor of Economics, a professor of Global Economy and Finance, as well as an investment fund manager. Married with three children, he lives between London and Madrid