The Future of the European Energy Sector

In a developed global economy, there are two sectors that can be considered the most critical to preserve its good performance: Energy and Telecommunications. Any modern productive activity cannot work without some kind of energy supply. Only a few services business could run without energy. For instance, financial services are today full-depending on telecommunications and this one requires electricity supply.

Energy sector is the basement of any healthy economy. Energy is required to run any industry and many industries could be built through self-financing. Financial sector provides efficiency to the economic system and let to increase its functionality. It is another critical sector due to the complexity of the economic system that cannot run properly without some mechanism for store the value of the production for the future.

Our modern societies are demanding a high quality, clean and sustainable energy supply. This is one of the main targets of any government thinking in the future.

Total Primary Energy Supply on GDP

Graph 1 Total primary energy supply of the main Euro economies, UK and US. Data Source: OECD

Looking at the main Euro economies and the Anglo-Saxon countries we can see the primary energy supply represents near the ten percent of the Gross Domestic Product. In the case of USA this figure is over the fifteen percent. This graph is showing how countries as Spain or Italy are more efficient in terms of energy consumption than USA, France and Germany. They can produce the same amount of money with less energy production.

If all of us usually think that the German one is a better economy than the Spanish or the Italian ones, the reason can be that efficiency is a variable overvalued by many managers. This is absolutely true. There are other management variables that can be more important as effectiveness or robustness.

This can sound odd for some people, and it can be important to be more precise: efficiency would be an extremely good variable to compare the same activity; however, an economy is the addition of many different industries, with different needs of energy. This value of the energetic efficiency of the economy depends strongly on the economic model. A country based on agriculture will require less energy for the same production than a country based on industrial sector, of course, a country based on agriculture will require other resources as a large and fertile countryside, an adequate climate, and a large workforce.

I have spent some time in explaining the concept of efficiency because it is an engineering concept used wrongly by some people on the TV. The goodness of the concept of energetic efficiency is not the same when we are talking about a building and when we are talking about a large economy however, many people have studied Schopenhauer and they know the dialectic stratagem of enlargement. Unfortunately, dialectic stratagems do not work with physical matters as real economy although they can increase the number of votes.

I am going to illustrate this reasoning with the following graph. We can think that a more efficient economy should provide higher GDP per capita, however, we can see that this is not true.

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Graph 2 GDP per capita of the main Euro economies and UK. Data Source: OECD

A first reason is easy to understand. The concept of efficient economy should be applied to every resources of the country not to the energetic ones only.

There are other aspects to be considered when we are talking about the validity of efficiency to drive the economic strategy of a government: complexity. When the economy is making more complex uncertainty decreases effectiveness; and a loss of effectiveness usually is a big increase of production costs that drives directly to a lower efficiency. The key point can be trying to reduce complexity instead of trying to increase efficiency.

Complexity is a problem when our economy is working in highly uncertain environment. The energy sector is a typical sector working in a very uncertain environment due to the variability of the price of the raw materials, especially oil.

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Graph 3 Crude oil Import Prices for the main Euro economies and UK. Data Source: OECD

The last decade it has been a linear increasing trend of the oil price until the subprime crisis in 2007. Prices seem to be more chaotic from then, and now are oil is much more expensive than ten years ago.

Spanish economy is traditionally more oil dependent than other ones, especially the French one. If we look back the total primary energy supply per GDP of France, we can see that France is less efficient than Spain. However, France has an energetic mix with more nuclear production that requires a raw material with a more stable price. Things like this can contribute to a better GDP per capita.

Oil large Spanish companies are doing a good work of managing oil resources. This fact can be seen looking the differences of the prices between countries.

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Graph 4 Crude Oil Import prices for the main Euro economies and the UK. Data Source: OECD

Although USA gets much better prices than European countries due to its own oil reserves and its influence as global leader, Spain can get better prices due to the good trading activity of its great multinational companies and traditionally good relationships with many production countries.

The strategy of the EU has been centered in the development of renewables. Nowadays, the degree of implementation is growing as we can see in the following graph.

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Graph 5 Contribution of Renewables to the energy production in the main Euro economies, UK and US. Data Source: OECD

 

Italy, Spain and Germany are leading the introduction of energy from renewable sources, however, it is important to consider some issues about this.

Renewable energy is an imprecise concept. This kind of energy is not fully renewable and it is not fully clean, and of course, it is not cheap. Generators have physical parts that must be built and can become finally waste with a limited life time. Under a cost benefit approach to analyze the investment other energy sources can be more competitive, nowadays.

This energy sources will continue increasing its penetration in the Euro countries but this growth must be supported by technological improvements to improve their competitiveness. There are several facts to support this sentence:

–          Oil neither is cheap nor has a stabilized price, and unfortunately Europe cannot preserve a proper production level exploiting their own oil resources.

–          There is a tradition against nuclear energy in Europe that it is not easy to change suddenly, although nuclear generation has improved the technology with better and safer reactors. Last attempts to change the European policies were stopped after Fukushima’s disaster.

–          The solution for limiting CO2 emissions against the greenhouse effect were substituting oil by gas, however, this policy can turn into a problem in countries as Germany due to geopolitical reasons. Spain has a different portfolio of suppliers and French policies against the greenhouse effect are supported through nuclear energy.

–          Spain has had an excellent sector of manufacturing of renewables generators with good technological level.

On the other hand, the selected scheme to promote the introduction of renewables has not been proper always. The EU should analyze new ways to implement an energy strategy centered on the introduction of renewables to limit its dependency of oil and gas.

 

Marengo Blanco Verde 0004Mr. Luis Díaz Saco

Executive President

saconsulting

advanced consultancy services

 

Nowadays, he is Executive President of Saconsulting Advanced Consultancy Services. He has been Head of Corporate Technology Innovation at Soluziona Quality and Environment and R & D & I Project Auditor of AENOR. He has acted as Innovation Advisor of Endesa Red representing that company in Workgroups of the Smartgrids Technology Platform at Brussels collaborating to prepare the research strategy of the EU
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