Politics and energy have never been far apart.
In fact, if you look through history, energy has often contributed to starting wars (think the US-led invasion of Iraq in 2003) and energy access has also contributed to why wars have been won and lost (the Second World War, for instance).
What the Russian invasion of Ukraine is showing is how utterly dependent Europe is on Russia for not only natural gas, but oil and coal too. And what those tanks have done is broken the trust between, in particular, Germany and Russia — and that is a game changer for European geopolitics and energy.
This begs the question: What should Europe do?
We need to unite the continent and make it stronger and more self-sufficient — while at the same time, taking the opportunity to decarbonise. In a nutshell, we need to rewire Europe.
To do this, we need to immediately begin to:
1) Deeply electrify the energy system. The quickest way to decarbonise is to electrify as much as possible of the energy system. That is also the most sustainable way to ween ourselves off Russian fossil fuels and to build an energy-independent Europe around low-cost renewables and other clean technologies. To do this, we need radical regulatory change to ensure a speedy and low-cost transition. This starts with improving planning laws to allow a quick build-out of renewables and the necessary grid infrastructure.
2) Enable low-cost electricity. Today, across many European countries, such as Denmark and Germany, electricity is the most expensive way to power your car and heat your home. The recent surges in natural gas prices have now made electricity even more expensive.
There are a whole pile of measures than can be put in place, such as grid regulatory reforms that force competition, and cost-efficiency improvements to wholesale power market reforms that move away from the marginal cost pricing whereby the most expensive power plant determines the price for everyone.
In addition, taxes and other charges should be removed to ensure that electricity becomes the cheapest form of energy. That will in turn given the financial incentive the customer needs to make long-term investment decisions.
3) Invest in clean energy and storage. There is still a large amount of European electricity produced with fossil fuels, most of which is imported. If we are to decarbonise and gain energy independence, then Europe needs to invest in renewables.
The advantage of renewables is that the resources (be that wind, solar, wave or geothermal) are all local. They are also clean, but we need to put in the incentive structures to ensure the cost-effective and speedy build-out of this infrastructure.
However many of these technologies, although low-cost, are not able to produce energy 24/7, which is why we need storage. The good news is that we have lots of fossil fuels storage that can be used if needed, but there needs to be investments in other storage technologies such as batteries and fossil-fuel alternatives such as e-fuels that can be stored using existing storage capabilities.
4) Embrace energy efficiency. The majority of energy wasted is in the form of lost heat. Electrification is a much more efficient way to use energy — an electric car uses one third the amount of energy of an ICE [internal combustion engine] car. But electrification is not enough. We need to invest heavily in improving the quality of our building stock, as well as other regulations and measures to reduce energy consumption.
5) Cut demand for fossil fuels. Higher prices for fossil fuels will help to push customers to seek other alternatives, and incentives need to be put in place to ensure any new investments go into cleaner alternatives such as heat pumps and electric vehicles. In addition, it may well be that Europe needs to bring in a carbon border adjustment tax to ensure that European jobs and emissions are not simply exported to other parts of the world.
6) Change how Europe does innovation. The energy transition is a huge opportunity for European business and innovators but, sadly, Europe has been very bad at commercialising energy technologies. This has particularly been the case in two key energy-transition technologies: solar and lithium-ion batteries, where Europe was at the forefront in terms of innovation, but today has no global leaders.
Part of the issue is the university approach to innovation, which is not sufficiently commercially focused. This needs to change, and EU and government money really needs to be much more strategically focused, rather than the sprinkler approach that is being used today.
7) Bring together national security, decarbonisation and industrial interests. Energy security has always been a part of national security, but thanks to the onset of US shale, the general view has become that we live in a world flush with cheap oil & gas. The current crisis is an eye opener to Europe, which now needs to make energy independence a core focus going forward.
Given that Europe does not have a lot of fossil-fuel reserves, that means a need to focus on locally available resources such as solar. That is good for decarbonisation, but nearly all solar panels are made in China, which again is not good for national security or Europe’s industrial future. Thinking strategically about national security and decarbonisation would enable Europe to build competitive advantages in critical industries for the 21st century.
In the short term, over the next 12 months, we need to be even braver. Europe needs to:
1) Reduce demand for natural gas. We may need to pay customers to not use gas and to reduce the usage of natural gas in the electricity system, and it may mean keeping nuclear and coal plants running for the foreseeable future. Practically, Germany and Belgium may both have to delay closures of nuclear plants, and the same may need to happen for coal plants across the continent.
2) Move energy purchases away from Russia. This is not an easy task given that over one third of European fossil fuels come from the country. But the reality is that every euro spent on Russian fuels can be used to strengthen the ability of that country to make war. Practically, we may need to rethink the closure of North Sea gas wells, but also be prepared to import energy at higher prices from other parts of the world.
3) Fill up storage tanks. Europe needs to buy as much as it can in terms of uranium and fossil fuels to ensure we have enough energy to keep the lights on and our economies working. Practically, this means working very closely with partner nations such as the US and Australia.
4) Help energy-sensitive customers. Wholesale energy prices have been on the rise for months and, at current levels, make European industry (particularly chemicals and steel production) uncompetitive globally.
In addition, we will see the higher wholesale prices being passed on to retail customers, which is going to have a severe impact on inflation and consumer spending, but in particular, the lower-income groups in our society. Practically, governments will needs to help people and companies through these difficult times.
Finally, as Winston Churchill famously said, while working on the establishment of the United Nations after the Second World War: “Never let a good crisis go to waste.”
We should not, and we should focus on rewiring Europe.
Gerard Reid is a co-founder of energy-focused financier Alexa Capital and a member of the World Economic Forum’s Future Energy Council.