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Europe's Climate Energy Fix Moves On

Politics / Climate Change Jul 19, 2012 - 02:54 PM GMT

By: Andrew_McKillop


Best Financial Markets Analysis ArticleWriting in the German daily Handelsblatt, July 16, the European Commissioner for energy, Gunther Oettinger claimed it was now urgent and rational for the Union to add "another 20% target" to the three 20-20-20 energy targets for 2020, enshrined in the December 2008 climate-energy package.

These energy targets are a planned 20% hike in energy efficiency, a 20% cut in CO2 emissions (both of these from variable base years with variable ways of measuring the goals), and attaining a 20% share of renewable energy in European power production by 2020. On this third goal, the fudge margin is larger than it might seem: we can take the present almost exclusive European focus of renewable energy development, for electricity production, and then take electricity's role in total EU27 energy of 21.1% in 2011. This shows that if the 20% renewables goal meant its share of total energy consumption, just about 100% of European electricity would have to come from renewable energy sources. The main talk-around margin for the 20% renewables goal in fact comes from biofuels - with at present a goal of approximately 6% of European road transport fuels being "of renewable origin" by 2020.

Always placed in very small print in Euro Comm (Commission) publications, footnote style, the achievement of these goal would leave Europe, in 2020, with fossil energy still supplying well above 65% of all energy - again with plenty of fudge room based on whether this concerns "primary energy" or "final energy". The paper targets for "after 2020" are of course spectacular - for example an 85% replacement and substitution of fossil energy in Europe by about 2045.

Oettinger wrote that Europe should add another permanent goal - of a 20% industrial contribution to European GDP by 2020. Pointing out this is no easier, and probably just as unlikely as raising renewable energy's contribution to total energy as high as many Euro Comm publications claim is possible, Oettinger underlined that the share of industrial output in GDP had sunk to 18% in 2010 from around 22% in 2000. As he added: "We need a strategy for the re-industrialization of Europe".

This is a totally welcome and rational wake-up call to European political deciders, who have only very slowly come around to understanding that de-industrialization equals permanently high trade deficits, and the loss of jobs, whatever New Economy diktat might claim. Totally switching focus however, and with the aim of defending the climate-energy package, Oettinger said Europe was too dependent on energy imports - its main natural gas supplier is Russia and its oil comes mainly from the Middle East and North Africa. He then said Europe had to cut its energy import dependence and ensure efficient energy production and usage, to help stand up to competition from the United States, China, India and other major industrial economic rivals.

Continuing his defence of the climate energy package, Oettinger said electricity would become the EU's "main energy benchmark" and would expand its role in energy for transport. For Oettinger, this gave a readout of Europe now understanding it must have a continent-wide common energy policy "that considered security of supply and affordability of power" as a "decisive location factor in the global context". Much closer to home, Oettinger, a German national, also replied to rising criticism and concern about runaway power prices in Germany, where subsidizing fast-expanding green power is burdening industrial and household consumers. His answer was that the Merkel government had already ordered a "rethink" on subsidies to renewable power, especially solar, made very clear by Merkel's new Environment minister, Peter Altmaier, telling ther mass circulation Bild am Sonntag, July 15, that he was "skeptical" about severa major goals of Germany's "Energiewende", or "energy U-turn". He also hinted that the ruling coalition may now think the nuclear exit strategy was overhasty. In particular and for Altmaier, he doubted that German power usage could be cut by 10% by 2020, which the government had initially set as a linked goal to completely quitting nuclear energy by 2021.

Oettinger not only defended green energy and energy saving - but also producing more oil and gas. Speaking at an energy conference in Brussels on 17 July, he said that against its economic rival the US,  the EU faced three disadvantages: higher dependence on imported oil and gas, higher energy prices, and high energy taxes especially hindering Europe's transport and industrial sectors. Concerning energy prices and transport, Oettinger said: "Whoever rules in Washington, one gallon (3.785 litres) can’t be more than $4” and this is due to low US energy taxation. Current EU27 forecourt prices, in US dollars per gallon, are around $8.50.

Interestingly enough, the "European price premium" on natural gas is even more extreme: major gas importer companies and entities, taking pipeline gas from Russia, Algeria and Norway, and LNG from Qatar, Algeria, Nigeria and other exporters, pay as much as $15 per million BTU compared with US gas prices close to $3. The two-word reason for this is US shale gas, but the oil price differential is mainly internal European tax-and-profit based. Also absent from Oettinger's talks, global natural gas prices (even for European buyers!) can only and will only fall from now to 2020.

This instantly links the energy issue with the environmental issue - or as Oettinger put it: “They (Americans) accept some risks with offshore drilling for ‘own sources’ in the Gulf of Mexico and they accept tarsand oils and others,” but by contrast, “We (Europeans) import oil and have high taxation.” Also, due to the environment link, this also instantly gets political both at national level and at European Parliament level, where its powerful Environment Committee is currently pressing for strengthened controls on offshore oil and gas, and on inland shale gas and shale oil development. The committee's vice-president G-J Gerbrandy put it this way, quoted by EurActiv: “We should be spending our money on further development of renewable energy instead of looking for the last drops of oil in the world in the most extreme places”.

This line is already heavily challenged, even simply ignored at the national level. States such as Poland and the United Kingdom incorporate shale gas and potential shale oil into their energy strategies, while Bulgaria and France (and possibly or potentially Germany) have banned the process of hydraulic fracturing, or fracking, over fears of earthquakes, freshwater contamination and other hazards. Other than the environmental fears linked with shale gas, there are also climate fears: earlier this year, an EU report on unconventional gas in Europe found no need for further environmental legislation on shale, but concerns over methane emissions from shale gas production led the International Energy Agency’s chief economist Fatih Birol to tell the European Union's EurActiv news site in May that shale gas was “not the optimum path.” At present, the "hot potato" of producing a European directive on shale gas, which would have to be approved by all states, has been pushed forward to at earliest mid-2013.

European renewable energy industry can already be called a victim of its own subsidy-fed explosive success. Massice market oversupply and production overcapacity are the two signs of this, now threatened by subsidies being slashed, as they are starting to be. Due to the industry only employing a widely estimated 1 million persons directly, and 2 to 3 million persons in total, compared with the EU's total workforce of over 226 million (of which 25 million are presently unemployed) in all activities, on a July 2012 basis, its role in employment can only be small.

Thinking sequentially from energy through re-industrialization to sustainable recovery is in fact putting the cart before the horse. The first priority is stopping the economy from melting down any further - because it is unsustainable, in major part due to a parasitic and dysfunctional financial "industry" that has overblown through the last 15 years, and has to be trimmed back. Europe's short-lived renewable industry boom leading to massive industrial overcapacity and market oversupply in at most 10 years is itself closely linked to the overblown financial "industry", making sure it can never be sustainable.

Much more dangerous for European de-industrialisation, the continent's car industry also suffers from market oversupply and production overcapacity, with sure and certain major negative impacts on the European economy and employment as the European economic and financial crisis continues. No quick fix energy-sector solution can be expected to slow the present de-industrialization process, making it necessary to look elsewhere for remedies. These can likely include the transport, urban development and agriculture sectors, which themselves have been distorted by the "marketized and financiarized" model of economic development, in Europe as elsewhere.

Energy commissioner Oettinger's homely idea that "4 dollars a gallon for gasoline" is a gate opener to a re-industrialized future for Europe is already being tested, and found inoperative in Obama's America where three-dollar natural gas ($3 per million BTU - equivalent to oil at $17.40 a barrel) does not work miracles re-industrializing the USA. The real problem is much more profoundly anchored in the past 20 or 30 years of economic de-structuring, making Europe's renewable energy quest a side issue.

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2012 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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