Gerard ReidThe founder of Alexa Capital, a corporate finance advisor, considers whether the EU can cope with the twin threats of the energy crisis and the attraction of the US’s revived clean energy industry.
The good news is that winter is behind us in Europe, and there have been no power cuts or emergency regulation of natural gas and other fuels. The bad news is that Europe faces many challenges, starting with rising energy costs, the misplacement of key energy technologies, and the growing threat posed by the US Inflation Restraint Act (IRA) to European industry.
Together, these factors threaten to weaken Europe’s competitiveness and standard of living. To combat these risks, Europe must react quickly with a long-term joint strategy.
In August 2022, with electricity, coal, diesel and natural gas prices hitting all-time highs, it was not clear whether Europe would survive the winter without significant damage to its economy. Energy users respond to high prices by reducing demand and switching from natural gas to alternatives such as coal, wood and oil. avoid some of the financial impact.
A warm winter
The weather gods were also kind. Europe had a warm winter, including record temperatures in December and January in many areas. France also did a great job considering that in August more than half of its nuclear reactors were down for repairs and not expected to be back online in time for the winter months. That would have caused a significant risk of power outages. Instead, at the beginning of January, almost three quarters of the French nuclear fleet was operational.
Natural gas storage levels across Europe are now at very high levels thanks to falling demand for the fuel and aggressive liquefied natural gas (LNG) purchases ordered by the European Commission. Add to that the fact that Germany and Finland have now opened a handful of floating storage and gasification units, and – in the worst case – Europe will be able to do without Russian gas in the future.
The price of gas
Despite these successes, the continent is still threatened by high gas prices and increased volatility in electricity prices and risks. The replacement of cheap Russian pipeline gas with more expensive liquefied natural gas means that European consumers will face higher prices in the coming months. The silver lining is that customers have to improve and switch to cleaner alternatives, such as heat pumps.
However, gas prices, which remain significantly higher than before, cause competition problems for European heavy industry. To add to these concerns, U.S. President Joe Biden’s IRA incentives reduce the price of electricity for U.S. electricity buyers, increasing the nation’s energy cost advantage. The IRA also encourages local production of key carbon-reduction technologies, such as batteries and solar panels, and helps the U.S. re-industrialize around these key technologies for future growth.
Meanwhile, Europe does not have a single lithium-ion battery or solar panel maker in the world’s top 10, and the traditional European wind industry has disintegrated, with industry leaders Vestas and Siemens racking up huge billion-euro losses. -Gamesa. This raises the question: what should be done about the situation?
What not to do is very clear. Most importantly, procrastination and endless debate must be avoided, because every day of delayed decisions undermines Europe’s ability to regain its competitive advantage or even equality. Another scenario that should be avoided is that European countries try to survive alone, because the challenge can only be met with common and united European actions. The European Union must therefore be ready to jointly invest in its own future by funding research and development and new infrastructure and by taking more risks.
Companies such as Swedish electric vehicle battery master Northvolt are an example of the success of combining European private and public action with the rapid expansion of new production facilities. In order to compete with China, which has shown itself to be much better at growing manufacturing facilities than Europe, concerted efforts led by the governments of EU member states such as Germany and Italy and the European Commission are needed to encourage and ensure faster policy alignment across member states. Coordination and reaching a quick consensus have always been a sensitive issue for the EU. It is the most difficult goal to achieve because it requires compromises from large and small nations, both wealthy and less wealthy.
To succeed, European countries must commit to the energy transition and open dialogue with all citizens. The member states must also take a more active role in international affairs, especially with regard to the most important raw materials and energy fuels. The big question is whether Europe can do it. The answer is yes, and by doing so, Europe will not only break its dependence on fossil fuels, but also help create jobs and economic development in forward-looking clean industries.
About the author: Gerard Reid is the founder and partner of Alexa Capital. He has worked for over 20 years in investment banking, equity research, fund management and corporate finance, focusing on the energy transition and the digital energy revolution. Before founding Alexa Capital, he was MD and head of European cleantech research at Jefferies & Co.