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Trading Lessons

Europe's Energy Suicide Pact

Politics / Energy Resources Feb 12, 2012 - 06:33 AM GMT

By: Andrew_McKillop

Politics

Best Financial Markets Analysis ArticleENERGY FEAR
US media is warning gasoline consumers they are threatened with a possible mega price hike. If the long drawn out Iran crisis moved to war action like closing the Hormuz Straits this could spike barrel prices to $200, nearly doubling average US forecourt gasoline prices to $6 a gallon.


Today in Europe, with the Straits of Hormuz wide open, European gasoline buyers pay an average of around $2.15 or 1.60 euro per litre. This is $8.05 for one US gallon and $335 per barrel.

US motorists may quake at the prospect of $6 gasoline, but as consumers of US natural gas they benefit from historic declines in gas prices due to shale and coalseam gas: today's US gas price hovers around $2.50 per million BTU, but in Europe average gas import prices today are $11.45 per million BTU.

European coal prices are also vastly higher than anywhere else: driven up by carbon reduction commitments and mandatory greenhouse gas emissions trading, coal prices for final industrial users like iron and steel producers are as high as 130 euro per ton ($175 per ton), or up to 45% above comparative energy coal costs outside Europe.

Also due to Europe's climate-related policies and national member state implementation programmes European electricity prices are as high as 65 euro/MWh ($90/MWh) compared with current US bulk electricity tariffs below $30 per MWh. In the near future, to 2015, European electricity prices may rise by a further 33% or more, and by 50% before 2020.

WHAT WENT WRONG?
Two strands or so-called "policy pillars" drive the European energy transition plan, voted by the European Parliament in Dec 2008 and transferred since 2009 to EU member states as REAPs or national Renewable Energy Action Plans. One is global warming fear, and the other is fear of high oil and gas prices set by unreliable and unstable major exporters - notably Russia and Saudi Arabia.

Quantifying the costs of adverse climate change, like the operations of the UN IPCC is now a major business, but actual hard-edged answers are rare. The impact of climate change, whether human-caused or not, is only "shadow costed" in heavily disputed reports and studies like the 2006 UK Stern Report. This report could be interpreted as saying that global spending to cut CO2 emissions should run at an annual average of let us say $250 billion "forever", certainly for 50 years. The imputed or implied benefits are so widely and variably estimated that no single set of cost-benefit numbers can be generated. However, since Europe only emits about 15% of global climate changing gases, and this is declining, rational spending amounts can for a start be limited to 15% of implied or claimed global total amounts of needed spending to cut CO2 emissions from fossil fuel burning.

Oil and gas imports by the EU are a lot easier to quantify. Accepting present extreme high oil-indexed gas import prices, and current high oil prices, in 2010-11 European gas imports were running at about 145 billion euro per year, while net oil import costs after trade gains were 225 billion euro per year. Coal imports at about 185 Mtons per year covering nearly 60% of EU coal consumption, dominated by Russian supply, cost about 15 billion euro. For both gas and coal, European inland production is technically and economically able to be increased, especially for gas. Including uranium imports, estimated at about 10 billion euro in 2011, the sum for all fossil fuel imports by Europe is about 395 billion euro per year.

The proportion of this which could or might be saved or substituted by the European energy transition plan is very uncertain and rarely defined by European Commission or national REAP reports and data, but the goal of "at least 20% reduction in CO2 emissions" by 2020 can be used for rough analysis. To 2020, at this highest level of plan achievement assuming each 1% cut in CO2 emissions results in a direct 1% reduction in fossil energy utilization, which is not a reasonable assumption because oil substitution goals are much lower (about 6%), the NPV for savings at today's prices and import levels might attain 20% of 160 billion euro (for gas and coal), plus 6% of 225 billion euro per year (for oil). This total would be 45.5 bn euro per year of savings, by 2020.

In fact, the savings will be even more concentrated in gas and coal import savings with power stations using less gas and coal, and electricity supply from renewable wind, solar, and other "green sources" radically increased.  This is due to the European plan's already controversial biofuels programme depending on imported palm oil (for biodiesel) and sugar ethanol for gasoline substitution yielding very small net trade benefits, that is costs of importing the non-fossil fuels, against savings made in road transport oil demand. Taking account of this, and assuming only a full 20% cut in gas and coal imports, the savings would run at about 32 billion euro per year by 2020.

WHY NO COST BENEFIT NUMBERS?
One incredible fact of the EU energy and climate package, and most member state REAPs is that direct and simple cost-benefit numbers are not available. They can be derived or guesstimated, then denied or contradicted by European Commission and national government defenders of the REAPs, but no transparent or clear figures are available.

However, an increasing number of analyst reports and studies, depending on the scenarios for national REAPs, suggest that European spending needs for these plans could total 650 billion euro through the 8 year period to 2020. This amount of spending is in no way presently financed or programmed outside Europe's ETS (emissions trading scheme), carbon reduction commitments and similar piecemeal non-transparent "climate related" financing systems -  and could imply simple additions to the sovereign debts and national budget deficits of EU27 states.

The REAPs are expensive and can only drive European energy prices even higher because the targeted speed of transition is high, and extreme high goals are crammed into short timeframes. The leader country for energy transition away from fossil fuels, to green energy is Germany, with an official goal of cutting its CO2 emissions by 40% within 8 years from today: in the absence of economic and technologically feasible carbon capture, this would imply a 40% drop of German fossil energy use by 2020. Not so far behind Germany, several other EU states have extreme high REAP goals, like the UK which officially aims, or claims it can develop 18 000 MW of offshore windpower capacity by 2020.

Simply taking the German and UK REAPs, the German plan could or might need the spending of 350 - 400 billion euro, and the UK plan some 150 - 190 billion GB pounds in the period to 2020, for a combined two country total able to attain 600 billion euro.

The elite political goal of "energy security" in Europe, and of course saving the planet, in fact translates in the real world to extreme high energy prices. Unfortunately, being disconnected from reality, or simply having contempt for reality, Europe's elite deciders have set in motion the REAPs which feature electricity generation from renewable energy sources.  Expected electricity prices on a levelized base for the REAPs favoured offshore wind and solar power plants (also possibly located offshore in some REAPs), are often in the 10 - 15 euro cents per kWh range. This is around $165 per MWh, to compare with today's US spot prices on bulk electricity of below $30/MWh.

OUT OF SYNCH WITH REALITY
The European energy transition plan is de facto aimed at saving gas and coal for power generating, substituting this power plant fuel with very high priced alternate energy power systems. These feature offshore windpower and solar power plants, which will obligatorily need the development of a so-called Smart Grid, to ensure power system balancing and supply integration across Europe. Current real world action, on the ground, to build a "pan European Super Grid", of about 42 000 kms length, is almost zero (one international project of 75 kms length). The reason is simple: it is too expensive.

The pernicious results and net effect of this action, and inaction on European energy prices is to lock them in at an extreme high or "punishment" level. When this is fully understood, which will come, we can expect blowback. This will include calls for abandoning or heavily reforming the policy. At that time, simple energy economic analysis, resource and technology assessment, and "net energy" accounting will show where reform action should be concentrated.

Numerous global energy supply side changes are under way, especially the large increase in likely recoverable or producible shale gas and coalseam gas, and rising "stranded" gas discoveries, heavily extending the lifetime of global gas reserves. To be sure, larger supply and lower prices for gas can be used by defenders of energy transition to renewable as the best fossil backup for intermittent output wind and solar electricity, possibly eliminating the need for extreme high cost Super Grids - but at minimum the new "gas window" suggests that Europe's unrealistic energy transition plan must now be slowed, stretched over a longer timeframe, and a firm cap placed on European energy prices.

A decline in gas prices, especially in Europe and Asia is probable, but rising oil prices, and increasingly oil-linked coal prices will also tend to refocus energy transition goals by the world's major economic powers and regional groupings. Despite their present economic stage and their emerging energy economic structures, China and India will almost certainly move away from the previous one-only "historical model" of energy transition, applied by the US, Europe, Japan, South Korea, Taiwan and a few other states through the 1945-1980 period.

This was based on radically increasing oil and electricity utilization, decreasing or abandoning the role of coal energy, and raising the use of nuclear power, but this strategy is now unlikely or impossible for China, India and other emerging economies. In addition, both China and India have developed cutting edge industrial production of wind turbines and solar power arrays, and can select efficient energy economic fuel mix strategies, including both renewable and fossil energy.

We can say the European transition plan was too extreme, unrelated to real energy economic fundamentals, and had no firm cost-benefit rationale. In a complex context, with changing outlooks for world energy, reform or abandonment of the European plan is now urgent.

By Andrew McKillop

Contact: xtran9@gmail.com

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

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.


© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Robin
14 Feb 12, 06:24
Energy analysis

Do our politicians ever read (and understand) the subjects and information you have set out above. I would think that this sort of analysis should be mandatory reading for anyone attempting to make policy decisions. They probably still believe Stern and the IPCC versions of what is going on in climate affairs. Oh dear!


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