3 minute read
Energy Policies
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
Interventionism Led to Energy Crisis
Europe’s energy shortage was created by intervention on a massive scale
n energy policy that bans investment in some technologies based on ideological views and ignores the security of supply is doomed to result in a strepitous failure.
The energy crisis in the European Union wasn’t created by market failures or a lack of alternatives. It was created by political nudging and imposition.
Renewable energies are a positive force within a balanced energy mix, not on their own, due to the volatile and intermittent nature of the technology. Politicians have imposed an unstable energy mix by banning base technologies that work almost 100 percent of the time, and this has made prices soar for consumers and threatened the security of supply.
Ursula von der Leyen, president of the European Commission, recently gave two messages that have grabbed many headlines. First, she announced a strong intervention in the electricity market, then she announced a proposal at the Baltic Sea Summit to increase renewables to 45 percent of the total generation mix by 2030. She said she believes that this isn’t an energy crisis but “a fossil fuel energy crisis.”
However, von der Leyen’s messages have two problems. Europe’s energy crisis is the result of intervention on a massive scale. Furthermore, massively increasing renewables doesn’t eliminate the risk of dependence on Russia or other commodity suppliers.
The European electricity market is probably the most intervened in the world. More intervention isn’t going to solve the problems created by a political design that has made most countries’ energy mix expensive, volatile, and intermittent.
Ideology is a bad partner in energy.
Between 70 percent and 75 percent of the electricity tariff in most European countries are regulated costs, subsidies, and taxes set by governments, and, in the remaining part, the so-called liberalized generation, the cost of carbon dioxide (CO2) allowances has skyrocketed because of those same governments that limit the supply of permits and impose an energy mix by political decisions.
In Germany, only 24 percent of all costs in a household bill are “supplier costs,” according to the German Association of Energy and Water Industries (BDEW) in 2021. The vast majority of costs are taxes and costs set by the government. However, the “problem” is the market, according to the messages of the president of the European Commission. Go figure.
It’s surprising to read that Europe’s power markets are “free markets” when governments impose the technologies within the energy mix, monopolize and limit licenses, prohibit investment in some technologies or close others, and force the rising cost of CO2 permits by limiting their supply.
Governments are awfully bad at picking winners, but they’re even worse at picking losers. Constant intervention leaves a trail of debt and cost overruns that all consumers pay.
What happens when the government intervenes? It closes nuclear power out of ideological obsession, then depends on 40 percent of its energy mix from coal, lignite, and gas, like Germany. Or it brings its flagship public company to the brink of bankruptcy by intervening in tariffs, like France. Or, like Spain, it creates a diplomatic conflict with its largest natural gas supplier, Algeria, and, because of that conflict, has doubled its gas purchases from Russia from the beginning of the war in Ukraine to July.
Now, the EU is rushing to install more than 30 new floating regasification plants. The problem? Practically all the liquefied natural gas ships for this winter have already been contracted.
Installing renewables doesn’t eliminate dependence on natural gas. Renewables are, by definition, intermittent and volatile, as well as difficult to plan. Additionally, installing more renewables requires huge spending on transmission and distribution investments, which makes the tariff more expensive.
If there’s one thing that this crisis has shown us, it’s that what Europe needs is more market and less intervention. Europe arrived at this crisis because of a combination of arrogance and ignorance on the part of the legislators who control the energy mix. The importance of a balanced mix, including nuclear, hydro, gas, and renewables, is more evident every day.
Interventionist energy policy has failed miserably. More intervention isn’t going to solve it.
