The European energy crisis is not over. The fear of natural gas rationing may have abated but the costs of Europe’s energy policy missteps continue to reverberate.
There has been so much energy demand destruction in Europe from high energy prices that European economies are barely keeping their heads above water. In fact, for some, the economic crisis is as bad as ever. Germany, so recently an industrial darling, with exports powering half of its economy, is now the world’s worst-performing major developed economy. Both the International Monetary Fund and European Union expect the German economy to shrink this year.
Bloomberg’s commodity columnist, Javier Blas, observed in August that industrial activity in Europe had contracted for 14 months in a row. “Europe is defeating its energy crisis thanks to the impact that said crisis has had on its industrial heartland,” he observed. “Across the continent, many energy-intensive companies have either closed or reduced production after not being able to cope with higher energy prices…. All those shuttered factories don’t need gas or electricity now.”
While European gas and electricity prices have come down from their initial peaks thanks to cratering demand, prices remain painfully high. Wholesale electricity prices are more than triple what they averaged between 2010 and 2020.
Europe – particularly Germany – is teetering on the edge of deindustrialization as companies either close plants or threaten to go elsewhere. German energy prices are so high that some companies are considering leaving the country altogether. Siegfried Russwurm, head of the German Industry Federation, was recently asked if the energy crisis remains bad enough to force companies to relocate, to which he responded, “It is indeed.” As the chief economist for one German bank remarked, “Germany is now paying the price for its energy policies.” The U.S. may soon as well.
Making the Same Mistakes
While American coal and natural gas came to the rescue of our European allies, replacing Russian energy and providing an energy security backstop, the U.S. is now making many of the same mistakes that left Europe so vulnerable to crisis. Remarkably, instead of learning from Europe’s missteps, the Biden administration seems determined to repeat them.
Europe made the grave mistake of sacrificing its own dispatchable fuel diversity and energy security when it chose to push coal off its grid in its rush to a green future. In practice, that rush to wind and solar power, and away from coal, actually meant an embrace of a notoriously volatile gas market dominated by Russia. If the Europeans had used their coal capacity – not Russian gas – as a bridge to the future, the story of the past 18 months would read very differently.
The U.S. may not face the same crippling threat of the weaponization of Russian energy, but we are dismantling our own energy security and dispatchable fuel diversity when we should know better.
Power demand is on the rise from electrification, efforts to reshore industry and the explosive growth of energy-hungry data centers. At the same moment, the Biden administration’s regulatory agenda is accelerating coal plant retirements – and now also zeroing in on the natural gas fleet – just as reserve margins drop into dangerous territory in regional grids across the country. Utilities and grid operators are forcefully warning of supply shortages and eroding reliability driven by policy. We don’t need a black swan event for a crisis—we seem more than capable of creating it.
Power shortages will send power prices up and usher in a return to the kind of crippling energy-driven inflation that remains such a problem in Europe. As the Germans can tell you, little more than a year of soaring prices can threaten deindustrialization and turn an economy on its head. That bleak reality may be coming for the U.S. before you know it.
- On September 27, 2023