The energy crisis in Europe was created by political interventionism


An energy policy that prohibits investments in certain technologies on the basis of ideological opinions and ignores security of supply is doomed to abysmal failure.

The energy crisis in the European Union was not created by market failures or a lack of alternatives. It was created by political nudges and impositions.

Renewables are a positive force within a balanced energy mix, not by themselves, due to the volatile and intermittent nature of the technology. Politicians have imposed an unstable energy mix by banning basic technologies that work almost 100% of the time, driving up prices for consumers and threatening security of supply.

Last week, Ursula von der Leyen, President of the European Commission, delivered two messages that made headlines. First she announced a strong intervention in the electricity market, then she declared at the Baltic Sea Summit the proposal to increase renewables to 45% of the total generation mix by 2030 She considers that this is not an energy crisis but “a fossil fuel crisis.

However, von der Leyen’s messages have two problems. Europe’s energy crisis is due to large-scale intervention. Moreover, the massive increase in renewable energies does not eliminate the risk of dependence on Russia or other suppliers of raw materials.

The European electricity market is probably the busiest in the world. More intervention will not solve the problems created by a policy design that has made most countries’ energy mix expensive, volatile and intermittent.

Ideology is a bad energetic partner.

Between 70 and 75% 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” production, the cost of the quotas of CO2 has skyrocketed due to those same governments limiting the supply of permits and imposing an energy mix through political decisions.

In Germany, according to the German Association of Energy and Water Industries (BDEW) for 2021, only 24% of all costs of a household bill are “supplier costs”. The vast majority of costs are taxes and costs set by the government: grid (24%), renewable energy surcharge (20%), sales tax (VAT) (16%), electricity tax electricity (6%), a concession fee (5%), an offshore liability fee (0.03%), a surcharge for combined heat and power plants (0.08%) and a levy for an industry discount on network fees (1.3%). However, the “problem”, according to the messages of the President of the European Commission, is the market. Go figure.

It is surprising to read that European electricity markets are “free markets” when governments impose technologies in the energy mix, monopolize and limit licenses, prohibit investment in certain technologies or close others, as well as force up the cost of CO2 permits by limiting their supply.

The intervention was to shut down nuclear power and rely heavily on natural gas and lignite, as Germany did. The intervention was to ban the development of unconventional domestic natural gas in Europe. The intervention involves closing reservoirs when hydropower is essential to reduce household bills. The intervention is to increase subsidies at the wrong time and then increase taxes on efficient technologies. The intervention consists in stopping the gas pipeline which would double the interconnections with France. The intervention consists of prohibiting the extraction of lithium while talking about defending renewable energies, which need this product. The intervention consists of filling the consumer’s bill with taxes and regulated costs that have nothing to do with energy consumption. The intervention, in essence, is the chain of errors in energy policy that has led Europe to have electricity and natural gas prices more than twice as expensive as in the United States, as the European Commission President Durao Barroso warned in 2013.

Electricity prices in Europe are not expensive by chance, but by design. The exponential increase in subsidies, regulated costs and the price of CO2 emission rights are political decisions.

Eliminating basic energies (nuclear, hydro) that work all the time and replacing them with renewable energies that require a reserve of natural gas and heavy investments in infrastructure is expensive. It has been throughout Europe and will continue to be so.

An energy transition must be competitive and guarantee security of supply, otherwise it will not be a transition. More intervention does not solve the problems.

European governments should care about erasing all items from household bills that have nothing to do with electricity consumption, including the cost of past planning mistakes, and should reduce taxes that are simply unaffordable . These items should be included in the national budget and other non-essential expenditures should be reduced to avoid increasing deficits.

The market is not always perfect, but government intervention is always imperfect.

Governments are terribly 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 for.

What happens when the government intervenes? It closes nuclear energy by ideological obsession and then depends on 40% of its energy mix of coal, lignite and gas, like Germany. Either it brings its flagship public company to the brink of bankruptcy by intervening on tariffs, like France. Or, like Spain, it creates a diplomatic row with its largest natural gas supplier, Algeria, and with it has doubled its gas purchases from Russia from the start of the war until July 2022.

Now, the European Union is rushing to install new floating regasification plants, more than thirty. The problem? Virtually all liquefied natural gas vessels for this winter have already been contracted.

The same governments that refused to bolster natural gas supply chains when it was cheap are now rushing to spend vast sums on low-efficiency solutions.

The installation of renewable energies does not eliminate the dependence on natural gas. Renewables are, by definition, intermittent and volatile, as well as difficult to schedule. Moreover, the installation of more renewable energies requires huge expenditures in investments in transport and distribution, which makes the tariff more expensive.

Investing more in renewable energy is positive, but no politician can say that renewable energy is the only solution. The problem of storage, the astronomical cost of a battery network, and the necessary infrastructure, estimated at more than 2,000 billion euros if it were feasible, are key factors. If Europe had a 100% solar and wind mix today, it would be excessively volatile and intermittent, and in periods of low solar and wind availability, it would increase dependence on natural gas, which is needed as backup , and the need for hydroelectric power and basic nuclear power that works all the time. Moreover, renewable energies, positive in a balanced energy mix, do not reduce dependence on other countries. Countries are becoming dependent on China and other nations for lithium, aluminum, copper, etc.

The installation of 45% of renewable energies in the mix does not eliminate the dependence on natural gas; it only reduces it slightly in the most stable part of the renewable load factor (wind generation part). In fact, periods of low wind power and low solar yield would be extremely likely and, as we have experienced before, these coincide with periods when gas and coal are more expensive due to increased demand. .

If there is one thing this crisis shows us, it is that what Europe needs is more market and less intervention. Europe arrived at this crisis thanks to a mixture of arrogance and ignorance on the part of the legislators who control the energy mix. The importance of a balanced mix, with nuclear, hydraulic, gas and renewable energies, is more evident every day.

The interventionist energy policy has failed miserably. More intervention is not going to solve it.

The opinions expressed in this article are the opinions of the author and do not necessarily reflect the opinions of The Epoch Times.


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

Mary I. Bruner