It is astounding that the European Parliament and Commission are concluding new agreements between one another that shove up the targets for energy decarbonisation at various future times. While there is nothing wrong with target setting, it has to be remembered that targets are the outcome of a series of actions designed to produce these targets.
The press release from the Council of the EU makes no mention of the actions that are needed to decarbonise the EU energy system.
My question to European and national policymakers is, do you want to decarbonise or not? You will not decarbonise by setting targets alone. Urgent actions are called for and some of these actions have to address the huge blockages that stand in the way of further decarbonisation.
The first blockage is the lack of profitability of the wind turbine manufacturers and renewable developers. In 2022, every wind turbine manufacturer lost money, and installations of wind turbines went down. In contrast, the profits of the fossil fuel industry stood at an all time high. The wind turbine manufacturers made a collective loss of circa €5 billion. Shell made a profit of $45 billion and BP made a profit $34 billion. Both companies have rowed back on their already meagre commitment to renewable energy.
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The lack of profit in [wind turbine manufacturing] has been ongoing for the past 10 years, getting slowly worse with each passing year
Investments in offshore wind have to increase by a factor of 300 per cent for the most effective exploitation of the EU’s greatest renewable energy resource.
The reason wind turbine manufacturers are losing money is attributed to supply chain constraints, resulting from pent up demand and high prices for all components after Covid-19. This is at best partially true. The lack of profit in the industry has been ongoing for the past 10 years, getting slowly worse with each passing year.
The second action to be addressed is the absolute need to fix prices for renewables, and to cease basing prices on fossils as happens currently using the contracts for difference (CFD). The way to do this is to set fixed prices for renewables at levels that ensure a profitable, sustainable and investible renewable energy industry.
When attempting to win long-term contracts for renewable energy, developers and manufacturers are forced to compete with one another. This results in a steady lowering of prices for renewable energy. In a recent auction in the UK for offshore wind, Shell bid a price of £39.60 per megawatthour (MWh). This contrasts with £92.50 for the nuclear station at Hinkley Point. In a recent auction for offshore territory in England, BP bid an astonishingly high, non-commercial price for an offshore site in Liverpool bay. Despite these forays into renewables, Shell and BP still spend 95 per cent of their capital expenditure on new oil and gas developments.
Norms of competition
However much a pension fund may want to invest in renewables, it cannot do so, as it needs profitable investments to meet its duty to provide for future payments to retirees. The norms of competition do not apply to fossil energy.
Why are fixed prices such a good thing for the electricity customer? The fundamental reason is that renewable technologies are the only energy providers that are able to do this
Renewable energy used to be awarded fixed price contracts under various REFIT schemes. Currently, competitive auctions are the norm. This has resulted in unsustainably low electricity prices for renewables.
Why are fixed prices such a good thing for the electricity customer? The fundamental reason is that renewable technologies are the only energy providers that are able to do this.
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All fossil fuels are variable in price. Since 2000, oil for instance, with a reference price of 100 in 2001 averaged 261 to 2021, with a variability of 116 (as measured by the standard deviation). The oil price ranged from 100 to 456. Gas with a reference price of 115 in 2001 averaged 217 with a variability of 85 and a range of 92 to 344.
Because energy is an absolute necessity, we have to put up with fossil fuel price variability. Planning is made much more difficult, riskiness of every business increases, national budgeting is made more difficult, energy poverty increases, employment is negatively affected. Inflation ensues and all wealth is reduced in proportion to the level of inflation. When the price of fossils jump, recessions ensue.
Fossil based energy is a political tool. The most recent use of fossil fuels as a political weapon was by Russia as a method of supporting its war with Ukraine. We are living with the inflation consequences and will be lucky if we can avoid economic recession.
Important consequences
When renewables are included in the energy supply system, there are a number of very important consequences:
- Variability is potentially reduced. I say potentially because the price of renewables has to be fixed for this to happen. If 70 per cent of electricity is produced using fossils, and 30 per cent comes from fixed price renewables, then price variability is actually reduced by 30 per cent. The logical outcome of this is that if electricity is made from 100 per cent renewables, variability reduces to zero. Is this not a powerful political driving force, even if sustainability concerns were set aside?
- All of Europe’s renewable electricity can be made locally, in European land and sea areas. Foreign political risk can be abolished and recessions and inflation can be avoided.
- The renewable fuel is free. Wind and solar happen anyway, and we can use technology to harvest them and turn their energy into electricity. Of course this technology costs. A small proportion of the cost of operating wind and solar can vary due to maintenance charges, but all the other costs, such as interest charges, equity returns, rates, rent, and capital repayment can all be fixed. Europe paid almost €1 trillion in 2022 for fossils. The cost for the previous year was €330 billion, €300 billion of which was paid to non-European suppliers.
- Not every European country is endowed with enough renewable energy to meet its power needs. Those countries with maritime exposures have richer wind resources, particularly the more northerly ones. Solar resources are much more cheaply turned into electricity around the Mediterranean basin.
A completely new grid arrangement is needed, one which connects wind energy from various sea basins, and links it with solar resources in the Med area. This grid has to provide the same level of security that existing grids provide, so it has to be meshed, with sufficient levels of redundancy built in.
Eddie O’Connor is chairman of SuperNode, a technology development company involved in renewable energy.
