Energy Crisis

DANIEL LACALLE is chief economist at hedge fund Tressis and author of “Freedom or Equality,” “Escape from the Central Bank Trap,” and “Life in the Financial Markets.” Daniel Lacalle

Turn Off the Lights?

Europe’s stringent policies aren’t about energy efficiency, but control

The european union has announced strict “energy efficiency” consumption reduction measures to cut 15 percent of gas demand as Russia threatens to shut down gas supplies. Some regions and cities have imposed aggressive heating and air conditioning limits as well as cuts in building lights. Could this work or will it backfire?

Spoiler alert. It will backfire again. Interventionism always damages the ones they pretend to protect.

Energy efficiency is producing the same or greater goods and services with less energy use. Imposing restrictive measures isn’t about energy efficiency, but control policies looking to collect more taxes via fines.

The decision to turn off the lights of buildings at night has an extraordinarily minor impact on natural gas demand and a massive impact on safety. The demand for natural gas on a typical day already falls by between 20 and 25 percent between 11 p.m. and 8 a.m., according to Enagas and Sedigas. However, “electric power and adequate lighting, in addition to improving urban life, have an additional effect: reducing the crime rate at night,” according to Ariel Yépez, head of the energy division of the Inter-American Development Bank.

The solution to a supply risk from Russia is to increase diversification and supply sources, not repression.

We can’t forget that the same politicians who tell Europeans that they must turn off lights, cut air conditioning, and reduce heating are the ones who decided to shut nuclear plants, ban natural gas exploration, and introduce regulatory changes that have limited investment in domestic energy.

The solution is to close many more bilateral treaties and trade agreements with other natural gas suppliers, continue to develop wind and solar power, strengthen and extend the life of nuclear power plants, and develop our natural gas reserves, which is prohibited.

Imposing restrictive measures isn’t energy efficiency, but control.

Germany created its own problem by shutting down nuclear plants and making its energy mix more volatile, intermittent, and expensive despite—or due to—more than 150 billion euros of subsidies. The average power price for households and small businesses in Germany has increased by more than 45 percent since 2006, according to the German Association of Energy and Water Industries (BDEW). More than half of the price paid by households is due to politically determined components, such as taxes, levies, and surcharges.

If we want to improve efficiency, we must invest in technology, not multiply government spending that supposes a much higher energy consumption.

From a global demand and supply balance point of view, the set of announced limitations doesn’t make sense. European demand for natural gas is around 549 billion cubic meters (bcm) per year, according to the IEA. Europe imports 150 bcm a year from Russia. Reducing demand artificially and temporarily by 15 percent has no discernible impact on the global supply-demand balance, as it will be absorbed by China, India, and others, yet has an enormous impact on the European economy.

Government-imposed light and heating cuts will destroy the European Union economy with no relevant impact on Russia’s energy trade.

Temporarily and artificially limiting the demand for natural gas only harms the country that implements it and, at the same time, perpetuates long-term use: the economy contracts, but the energy mix doesn’t change.

Consuming 15 percent less gas doesn’t hurt Putin. On July 24, Gazprom, the Russian gas company, reached a new all-time high in sales to China, and Chinese consumption via gas pipeline has skyrocketed in the past 12 months.

In Europe, governments have created the problem: banning exploration and development of domestic resources, closing nuclear power plants, imposing heavy taxes on the companies that invest the most in solar and wind power, and introducing constant legal uncertainty in energy investment with random and harmful regulatory changes. The solution isn’t repression, it’s investment.

It doesn’t make any sense to force citizens to freeze from the cold in winter and suffocate from heat in summer while the European governments maintain enormous public spending programs and bloated administrations. That is huge power consumption.

If Europe wants to lower Russian imports, what it should do is stop putting limits and barriers on trade and investment in energy.

The solution to a supply risk from Russia is to increase diversification and supply sources, not repression.