Jean-Michel Glachant, Karsten Neuhoff, Michael Grubb and Simon Müller :
Energy is a backbone of economic development. The origin of the EU itself lies in the European Coal and Steel Community, an energy-based treaty that helped to power post-war reconstruction.
December’s Winter Package marks recognition that the energy challenge has changed fundamentally. Embodying the much-vaunted Energy Union, it is constructed around major challenges, which also offer profound opportunities.
The first opportunity lies in the way in which new technologies are revolutionising the potential role of energy consumers, and indeed could create a whole new class of ‘prosumers’.
Farmers, retail chains and even households, particularly in rural areas, have new opportunities to be active participants in the energy system.
They can offer generation from localised renewables, and deliver flexibility, for example from automated management of thermal (think fridge and freezers) or electrical (think electric cars) storage. Industrial consumers could also make money from smart scheduling of industrial production or cheap on-site backup generation.
If trust is a problem (and in few sectors is trust in suppliers so low as in energy), and ‘take control’ is seen as an answer, then offering more consumer control over energy use and potentially generation is not a bad place to start.
The EU package offers basic standards, legislative frameworks and data protection systems required to underpin this. Becoming ‘prosumers’ could give hundreds of millions of people a bigger stake in the energy system, and also stem the sense that technology modernisation is leaving rural economies behind.
But the energy transition also demands huge investment, at a time when European economies are struggling with stagnation. Much of European energy infrastructure is aged and polluting, and dependent on fossil fuel imports.
Better networks could improve security and reduce costs. Dramatic reductions in the cost of solar and wind energy in particular (in addition to batteries) brings within reach two interrelated goals: the delivery of the Paris Agreement goals on climate change, and reducing European energy dependence in a world of increasingly febrile international relations just as the US is losing its strategic interest in Middle East oil security.
The Winter Package establishes a governance system to coax and coordinate member states towards the goals already agreed.
The transition cannot be bankrolled by government expenditure or by imposing more costs on consumers, but neither is needed.
As many have noted, the paradox of modern finance is the huge pools of private capital which are earning next to nothing, indeed, some institutional investors are accepting negative interest rates for perceived safe havens, like German railway bonds.
This is effectively paying for infrastructure to hold their money. With such cheap capital, renewable energy and network infrastructure can make attractive destinations for investment in an energy transition with investment potentially exceeding €100 billion a year across Europe: enough to help inject some momentum into European economic recovery.
Programmes to improve Eastern Europe’s building efficiency and maybe infrastructure for electric vehicles would make the endeavour even bigger. And even more than modern railways, energy efficiency, and energy sources which once constructed will be very cheap to run, have every prospect of boosting long run productivity.
The key need is to establish investor confidence born of a clear commitment to building a consumer-oriented low carbon energy system fit for the 21st century. The Winter Package makes first promising steps into the direction.
The revised renewables directive includes an article on “Stability of financial support”, which is essential to attract cheap capital to the sector.
Effective reform of carbon pricing can underline the strategic direction for European energy (and raise finance). The financial framework in the package could further facilitate investment in particular against the background of the fragile finances of many southern European countries.
Those countries too would form the natural nucleus for a trans-Mediterranean investment programme to engage North Africa – countries with abundant clean energy resources just cables away, with a desperate need for productive investment which could also help to stem the tide of refugees.
Like the original coal and steel community, the key to stability is not markets, but investment with a common purpose. A crucial factor in Europe’s malaise is that it has lost its sense of ambition and mission.
Developing the energy industries and infrastructure for a 21st century energy system is an investment in all our futures, for which Europe is still best placed to lead.
And who knows, by bringing investment, purpose, and engagement, it might even save the Union itself.
(Michael Grubb is professor of climate change policy at University College London; Simon Müller is an analyst at the International Energy Agency in Paris; Jean-Michel Glachant is the director of the Florence School of Regulation; and Karsten Neuhoff heads the climate policy department at DIW Berlin)
