European energy crisis: it will get worse before it gets better
Chef for Macro Analysis
Oversigt: History tells us that crises lead to instability or innovation. But what will be the outcome of the current European energy crisis?
In America's First Great Depression: Economic Crisis and Political Disorder after the Panic of 1837 (2013), Alasdair Roberts masterfully explains how the United States dealt with the consequences of the country’s first great depression. He demonstrates how the commitment to democracy was put to test during the crisis. He also examines how European countries navigated through this troubled period of history and how the doubling of food prices combined with very high interest rates probably caused the 1848 revolutions across Europe, at a time when labour was in high supply while capital was not. « By early 1847, prices for basic foodstuffs doubled across Europe, triggering riots and raising fears of famine. The European government […] responded with restrictive monetary policies that induced recession at home. In 1848, Europe realized the political consequences that followed from two years of economic distress ». History doesn't repeat itself—but it often rhymes. The current economic period echoes that of the mid-19th century, but there are two major differences: capital is abundant (although less so than two years ago) and labour is scarce (the fertility rate in Europe was above 3 in 1848 and now stands at 1.5). Should we expect similar political instability? We cannot exclude a recurrence of the 2018 Yellow Vest movement in France, in one form or another, but this is unlikely to spread across Europe. In fact, the rightward evolution of European voters is the most immediate political consequence (see Italy and Sweden’s September election results).
A third difference exists in comparison to the mid-19th-century crisis: potato disease and poor cereal harvests were among the main factors behind the doubling of food prices in 1847. These were external factors that were impossible to predict and avoid. The current inflationary crisis in Europe is mostly fuelled by a failed energy policy, with a strong, decades-long dependence on Russia’s low-cost fossil energy and an exit from nuclear energy, combined with investments channelled towards solar and wind which are unable to provide a constant supply of energy at this stage. Nevertheless, if Europe had embraced a pragmatic rather than ideological approach on energy, we would have certainly avoided record-high energy prices—for instance, France’s one-year electricity forward increased by 1000 percent compared to the long-term average of 2010–2019.
The European energy crisis is here to stay, and my colleagues and I have extensively written about it in recent months. But there are reasons for hope, as there are at least three solutions to mitigate the effect of the current crisis, with one of them able to ease the situation almost instantly:
Energy efficiency, the blind spot of the European energy policy. While policymakers are advising to turn off the wi-fi, how much energy does an internet box actually consume per hour? 12 Wh. For a dryer we are talking about 3 kWh, which is basically 250 times more. Thus, we give the wrong impression to European citizens that we can solve the energy crisis with daily small and simple eco-gestures. As a matter of fact, we need to invest in technological innovations, especially artificial intelligence (AI), which could bring quick and concrete benefits to users and lower consumption from this winter onwards. The Barcelona metro operator for example, has installed an ‘intelligent’ air conditioning system controlled by AI in its 128 stations, in stations where there are more than 1 million passengers commuting per day. The results are positively striking: energy consumption has been reduced by a stunning 25 percent on average and users' satisfaction has increased by 10 percent. A similar system can be installed almost anywhere, in office buildings, in cinemas, suburban infrastructures, etc. This will lower energy consumption significantly, not in a matter of years, but within a few weeks of the technology being deployed.
Focus on nuclear: whether we like it or not, nuclear energy is an integral part of the solution. Therefore, we should take advantage of this crisis to rethink our policy stance on nuclear power. In early September, several non-partisan organisations launched a petition to prevent Switzerland from abandoning the use of nuclear power in 2027, as scheduled. Further, only France and the United Kingdom have reported sizable nuclear capacity under construction. However, while most European countries are reluctant to move forward with nuclear power, Asia is embracing it. South Korea is reversing nuclear phaseout and China is accelerating its huge buildout in reactors. It is important to highlight that nuclear power is not without issues (see corrosion issues in France’s nuclear reactors), but it guarantees energy independence and low energy prices in the long run. Moreover, the concept that nuclear power is unsafe is not accurate. In particular, the prevailing belief that nuclear waste is uniquely dangerous and that the industry does not know what to do with it is false. In fact, radioactivity diminishes quickly with time: about 40 years after it’s done making power, the radioactivity of a fuel bundle falls by over 99 percent. Most of the industrial waste we manage never gets less toxic over time—not even in a million years. In addition, the industry is working on recycling processes with some success. In France, 17 percent of nuclear generation is already produced thanks to recycled materials, and this is only the beginning. Nuclear should definitely be an integral part of the energy transition if we ever want to reach a low-carbon economy.
Building industrial infrastructures to accelerate the green transition: In recent years, Europe has invested massively into the green transition (solar, wind, biomass, etc.), but there is a missing piece. Namely, Europe's lack of industrial infrastructure and inability to control the supply chain required for this transition. Let’s take the example of electric vehicles (EVs). On 29th June 2022, the European Union member countries agreed that new passenger cars and vans will only be sold if they don’t emit any CO2 from 2035 onwards. In theory, this should have boosted the adoption of EVs. But who is controlling the mining and processing of critical minerals needed for EV batteries and the green transition? China. The economic power represents 50 percent of the global manufacturing capacity for wind turbines, 66 percent for solar modules and 90 percent for storage batteries. The majority of rare earth elements are mined and processed in China (59 percent and 88 percent respectively). The share is almost as important for other minerals such as lithium and cobalt – see the chart below. Diversification from China’s supply won’t be easy, and it won’t happen overnight. But there are other countries that can at least partly serve as supply hubs: Chile for lithium, South Africa for platinum and Congo for cobalt. What we have done wrong until now has been to focus on the final product (EVs, for instance) without securing the supply chain. We are repeating the exact same mistake we made with Russia (for fossil energy) and China (for masks and vital drugs during the Covid pandemic).
The winter will be tough—there’s no doubt about it. But a recurrence of the crisis is not inevitable in 2023. There are ways to create solid ground for the energy transition in Europe on the condition we escape ideology, and we focus on tried and tested solutions to diversify our energy mix. It’s now up to policymakers to make the right choice.