Energy certainly feels cheap these days. Oil dropped to less than $30 a barrel in January 2016. It’s since recovered to around $50, but that’s still a far cry from the heady days of 2008, when a barrel of the black stuff would set you back $140. Coal and natural gas have also plunged from their 2008-2009 highs.
Recent advances in technology, including the shale gas revolution, renewables, and greater energy efficiency (combined with the global economic slowdown after 2008) have put significant downward pressure on prices. That’s been bad for exporting countries like Russia, Saudi Arabia and Venezuela, but good for importers like the European Union. In 2014, almost 54% of the EU’s total energy consumption came from imported sources.
How important is it that energy stays cheap? We had a comment from Bódis, who believes that securing cheap energy is vital to keeping Europe competitive. Is he right? Europe has other advantages (such as good infrastructure and a skilled workforce). How important is it that energy is cheap?
To get a response, we put Bódis’ comment to Arlan Brucal, Research Officer at the Grantham Research Institute on Climate Change and the Environment at LSE. What would he say?
Countries with relatively lower energy prices, such as the US, have comparative advantage over EU in producing and exporting energy-intensive products. However, energy price is just one of the multitude of factors influencing the competitiveness of EU. Moreover, policies that improve the competitiveness of energy-intensive exports at the expense of low-energy-intensive industries may do more harm than good to the EU economy. Of course, doing nothing can be equally detrimental and then some.
Thus, the increasing energy price gap between EU and its major competitor merits an in-depth analysis in order to determine the cause of the gap and identify the means by which it can be addressed, which may require investments in alternative sources of energy and/or energy efficiency.
For another perspective, we also put Bódis’ comment to Dr. Jonathan Cobb, Senior Communication Manager at the World Nuclear Association. Does he think an economy like the European Union can still be globally competitive if it doesn’t have access to cheap energy resources?
I think we’ve got to ask what is ‘cheap’ electricity. Electricity produced by poorly-regulated fossil fuel power stations that contributes to air pollution that harms the health of millions of people is not cheap. It’s got a huge human cost.
Countries in Europe have been absolutely right to seek to improve the way that they generate electricity. More than half of the electricity in Europe comes from low-carbon sources: about 27% nuclear, 13% hydro, and 13% from other renewable sources. That’s something we should be very proud of, and we need to increase that low-carbon share further. We should be working, through international agreements such as the yearly United Nations climate change meetings, to put pressure to have more environmentally acceptable electricity generation across the world so you can’t have cheap and dirty electricity being used for a competitive advantage.
Next up, we had a comment from Catherine, who thinks the free market cannot be trusted to provide cheap, green energy on its own. She also believes there is a danger of one or two big companies monopolising the best technology and charging exorbitant rates. Is she right?
How would Arlan Brucal respond?
The direction for the global energy market is clearly going for cheap and clean energy sources. The continued investment growth and improvement in cost-competitiveness of renewable energy sources are driven by several factors, including government subsidies and policies to promote renewable technologies but I think these would diminish over time as consumers are becoming more aware of the benefits of renewables and as energy security and environmental concerns on fossil fuel continue to grow.
Now, is there a danger that one or two big players will dominate the market? It is possible, but to say that these big players would be able charge high prices is unlikely. Global competition, coupled with continued innovation, can ensure that prices for renewable energy will continue to fall.
Finally, what does Jonathan Cobb think?
Well, free markets can help drive lower prices. But, at best, the market is only going to provide what the customer buys and, for the majority of customers, that’s simply electricity. I choose to be on a low-carbon tariff, but others won’t make that choice. And there’s no way customers can buy ‘long-term-planning’ electricity, or ‘reliable supplies-in-20-years’ electricity.
Our current markets focus on too short a time horizon. They don’t incorporate the true cost of carbon emissions; the European Emissions Trading System is not doing that effectively. They favour generation sources that can give short-term returns but won’t offer the most cost-effective generation in the long-term. They don’t protect against price-volatility of fossil fuels. They don’t take into account the cost of dealing with intermittent supplies, and they don’t deal with the long-term planning which is needed to ensure we’ll have affordable and reliable electricity for decades to come.
To address the second point: You may have a large company producing electricity through a very good technology and supplying it at a competitive rate, but I think the fact that electricity can be generated through such a wide variety of different technologies and supplies, can come from inter-connectors across Europe, means that there’s very little likelihood that a small number of companies could charge highly-inflated prices for electricity and not have competitors come in and offer a more cost-effective option.
How can we ensure cheap, clean energy for Europe? What’s the best way to achieve a competitive, cheap and secure energy supply whilst also cutting carbon emissions and preserving the environment? Let us know your thoughts and comments in the form below and we’ll take them to policymakers and experts for their reactions!