European Energy Policy after the Crimean Crisis: Focus on Flexibility

With Russia‘s taking of Ukrainian territory in a way reminiscent of the times before the 1648 Peace of Westphalia set the current order in international relations, the focus in Europe is shifting from admonishing Russia for its behavior towards diplomatic and economic sanctions.  The "dependence of Europe on Russian gas" is moving into focus, and Europe is contemplating how to live with little or no Russian gas.  Russia exports fossil energies: coal, oil, and gas; but gas dominates discussions; for background, see http://www.eia.gov/countries/cab.cfm?fips=rs). 

In the wider picture, the following changes are likely:

• The little coal Russia exports will simply go elsewhere; the world market geometry will adapt.  Total cost will go up slightly because of "dislocation" from the current market equilibrium.  No great impact,
• Oil will be redirected in part, as far as possible given the pipeline and shipping infrastructures in place.  In the short and medium term, expect lower exports from Russia, slightly higher world market prices.  Over the long term, as additional infrastructure may be built, more oil might flow East and South from Russia; Russia will want to reduce its dependence on the European market and develop its markets in Asia.
• Gas is the most interesting, because it is largely pipeline-bound.  (Russia has increased export of LNG notably to Japan, and this may increase in importance.)  In the short run, expect significantly lower gas exports from and revenues going to Russia.  This will cause some general economic dislocation in Russia as well as more limited adjustments in the European energy systems.

Nuclear Nonsense

In Germany, the prospect of lower gas supplies from Russia has already resulted in calls to reconsider the nuclear phase-out.  That was to be expected from the nuclear die-hards, but their arguments are nonsense:  Nuclear power and gas occupy very different parts of the energy market and -- with very few exceptions -- cannot substitute one another. Nevertheless, European utilities and policy-makers will not focus on the costs and risks of nuclear power as much as their attention is drawn towards gas.

Reflexive Focus on Gas

Europe will develop responses in the gas market, and in its policies on energy transition. The short to medium-term response in the gas market can be to: 

• Use strategic reserves to cushion market effects and avoid panic, and prepare to change gas flow directions to provide "Western" gas to countries in Central and Eastern Europe, and the Baltics;
• Expand supplies from indigenous sources, but that is limited;  
• Import more gas from Norway (as first choice) and other neighbors, notably Algeria (second choice, because of Abdelaziz Bouteflika‘s regime and Russia‘s role in the Algerian gas industry); 
• Save gas; use it more efficiently, and substitute gas with (renewable) power wherever and whenever possible (which requires marginal retrofits in many gas-using installations);
• Build up the biogas industry (which has limited potential but still some room to grow);
• Try to frack Europe while events in the Ukraine may muffle opposition to fracking for fossil methane for a while, even if it is a deviation and distraction from rational energy policy; 
• Invest in power-to-gas conversion as a domestic source of synthesized gas.

The impact on energy transformation policies can be significant.  Policies needed for reducing dependence on gas have not been in focus so far, but they are essentially the same as for phasing out nuclear and coal power.  The EU and the Member States might accelerate the rollout of policies modeled on Germany‘s Energiewende.  (It is worth noting that Germany is not a leader here, neither in technologies across the board, nor in terms of growth or market share of renewable energies.  Yet, Germany is seen as the trailblazer in the development of effective policy frameworks.)

From Gas to Flexibility …

So far, gas has been billed as a "friend of renewable energies" because gas-fired power plants can ramp up and down quite quickly and thus compensate for the predictable fluctuation in the supply of some renewable energies, notably wind and solar energy.  (Others, such as biogas-to-power are dispatchable, as is a part of hydropower.)  Together, renewable energies and gas could displace nuclear and coal power more effectively, more economically and quicker than either could without the other.  With gas as the "flexible friend" of renewable energies taking a smaller role, the flexibility will have to come from 1) storage and 2) demand response:

… through Storage and …

The more storage in the system the easier it can evolve to 100% renewable energy.  Put simply, storage comes as:

• "Pre-power storage" -- for instance of biogas, water head behind hydropower dams (pump and flow), or as heat (in the form of molten metals from concentrated solar energy installations;
• "Power storage" in batteries, for instance in electric vehicles, but utility-scale batteries are also coming onto the market;
• "Interim or side storage" with conversion from power and back to power, such as flywheels, compressed air storage etc.;
• "Post-power storage" -- such as ice (for subsequent cooling) or heat (in hot-water tanks, for instance). 

The legal frameworks for storage have to evolve rapidly to enable new technologies and business models to be introduced.  There is much pent-up invention waiting to be brought to market.

… Demand Response

Demand response has not been used much in any of the EU Member States; the current energy grids and regulatory frameworks are "hard wired" against it.  Yet the potential is enormous when you consider the ease with which power demand can be shifted by a few hours or days. 

Trimet, a German aluminum recycler, has developed the skill of ramping its processes up and down so as to "surf the weather systems bringing cheap wind power to Germany".  It has become a "swing consumer" of electricity with a business model that has allowed it to push a Dutch rival company into bankruptcy.  The process innovation could be replicated in other industries, notably steel and chemicals. 

For households and small businesses, electricity tariffs giving real-time incentives depending on the grid load and supply, could stimulate sufficient flexibility to compensate the loss of gas in the system.  But that requires changes in the tariff and taxation policies: Taxes (and charges) must be expressed in percentages of the basic (market) price rather than as fixed amounts expressed in Euro cents per kWh as is currently the case.  (Tariffs must stop muffling the price signals and rather amplify them.)

Hope from the Ukraine

With the right narrative and conceptual framework, and with principled and forward-looking policies adopted by the European Union and its Member States, the Crimean Crisis might hasten the transformation of Europe‘s energy systems towards 100% renewable supplies in a smart grid, a system that stimulates and provides for dynamic efficiency with many economic and social benefits.  This hope does not belittle or excuse anything Russia is doing in its neighborhood, but Europe should still make the best of a bad situation.

The Energiewende is about Democracy and Technology (but not Fukushima)

Much hash is made of the Fukushima 2011 catastrophe in trying to explain the Energiewende, Germany‘s energy transition to 100% renewable energy. It is time to put events and policy decisions into their historical context.

The period 2009-2011 is at the heart of frequent misrepresentations and misunderstandings.

The CDU/CSU/FDP won a majority in the 2009 elections to the German federal parliament on a platform including an extension of the running-times of existing nuclear power plants, but the election was not fought over that. The "nuclear question" was a side-issue that no-one took seriously in a contest over economic and social policy during the Euro crisis.

The legislation extending the running time was introduced and adopted in parliament as part of a legislative frenzy in 2010; there was no time for public or adequate parliamentary debate: it constitute "Legislative Ambush". The new law was challenged as being unconstitutional on (at least) two separate arguments by the Länder as well as the federal opposition parties; the cases were dropped when the law was repealed but the constitutionality of the law may be tested in possible future cases over compensation for nuclear plant operators for the 2011 phase-out law. The legal challenges meant that no significant investment was made to the nuclear plants even after the law was adopted.

As a consequence of the legislative ambush, the old "Grand Societal Conflict" over the nuclear question, that had been settled with the negotiated phase-out agreement of 2000, was re-opened. The Greens a few months later polled just under 30% and were threatening to overtake the CDU as the most popular party across Germany. The running-time extension was a complete blunder, not only in terms of industrial and energy policy but also electorally. (I had the pleasure to attend a Mittelstandsforum in Munich a few days after the law was adopted, with about 300 predominantly conservative owners and managers of SMEs in the room.  Even when it would have been perfectly safe and acceptable to speak out for nuclear power, no-one did.  Not one!  Some were scathing about the new law, and most of the (average millionaire) participants simply shook their heads in disbelief over the federal government's evident stupidity.)

Had the CDU defended the nuclear extension much longer, they might have lost all electoral chances for a generation, thus was the power of the nuclear issue in the politicization of young people (teens and twens). It was clear to observers that the running-time extension would be reversed, whether by the then government, through the courts on the basis of the constitutional challenges, or as a result of the next federal election (which might then have produced a Green chancellor!). Fukushima provided a face-saving opportunity for Angela Merkel to regain control over events, do the right thing (by the majority on the conservative part of the political spectrum as well as elite opinion), and re-instate the nuclear phase-out approximately as it was before.  The nuclear plant operators had reason to be happy; they actually won additional running hours and power output to sell to the grid, as is shown by comparing the 2011 law with the terms of the nuclear phase-out agreed in 2000.

The Energiewende is successfully reducing greenhouse gas emissions in Germany, and stimulates the development of technologies and business models that may be used for energy transitions also in other countries.

It must be said and put in context that the industrial decline of Eastern Germany also helped reduce emissions, but that process had a steep price in economic, social, and political terms. It was not a wind-fall. Germany used the opportunity to rejuvenate the productive capital stock. If about half the emission reduction is the result of Eastern Germany‘s industrial collapse, the other half is due to public policies since unification.

For historical reasons, there is too much lignite in the German energy system, including for power export.  Lignite mining and its conversion into electricity has a nasty habit of forming strong path-dependencies, in the case of lignite on the basis of laws essentially unchanged since the 1930s.  The way to drive out lignite is to improve energy efficiency, build up renewable energy supply and storage, and shift to a smart grid.  In addition, at least some large (continuous) industrial power users need to become "swing consumers" like Trimet did in aluminum recycling, but BASF is refusing to contemplate for its multitude of processes requiring steam or power or both.

It must also be admitted that there is still enormous energy wastage in Germany, including in energy-intensive industries; energy efficiency is not a successful field of public policy. The focus is too much on (capital-intensive) retrofits rather than (smart and inexpensive) policies stimulating energy-efficiency in behavior.  The technology-forcing power of standard-setting is not being used enough. That could not be changed as long as the Federal Ministry of Economic Affairs is responsible, with its senior officials believing that energy-saving is bad for the national economy, depresses GDP, and reduces tax-take.

My bet is that the "Federal Ministry of Energy", currently being incubated in the Federal Ministry of Economic Affairs under the leadership of State Secretary for Energy Rainer Baake, will become independent and enlarged after the next federal election in Germany in 2017.  The country will then be able to break with the inherited totalitarian or state-monopoly-industry reflexes in its energy system and policy-making, and will be free to shift further towards a distributed energy supply structure with real-time price signals stimulating changes in supply and demand.  Then, the power-and-gas system, more tightly linked to the transport sector than today, will become efficient in its dynamics, in the aggregate behavior of all its users as befits a democracy and market economy.

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I have written an earlier essay entitled "Germany, Fukushima and Global Nuclear Governance": http://www.ecologic.eu/7436.

More background: http://www.ecologic.eu/4140 and http://www.ecologic.eu/2984. 

The 3+1 Objectives of the Energiewende in Germany

The German Energiewende -- or Energy Transition -- has 3+1 key objectives:

1.     Phase out nuclear power, sooner rather than later, avoiding expropriation of assets that would result in an obligation to compensate owners;

2.     Phase out fossil energies to protect the climate, as soon as possible bearing 1) in mind, while meeting obligations under the Kyoto Protocol and EU burden-sharing; and

3.     Expand the use of renewable energies, as a solution for 1) and 2), and as a contribution to the economic and social well-being of Germany.

Since Chernobyl in 1986, the Energiewende has majority support across the political spectrum, and is favoured by public opinion generally as well as that of elites -- e.g. business, media, public administration.  There is broad cross-party consensus on the first three objectives, but some disagreement on the fourth: 

4.     Breaking the power of the incumbent "Big 4" utilities, which have for decades dominated energy policy-making and milked their customer, including the Mittelstand industry (SMEs), the innovation and employment backbone of the German economy.

For an overview of the economic and social benefits of the Energiewende see:
http://raandreaskraemer.blogspot.co.uk/2014/02/the-economic-or-competitive-advantages.html