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Just gas?

13 Oct 2021 - 14:58

Only when living under a stone you could have missed them: the soaring energy prices in recent weeks and months. They were swallowed as fast food by speculators, alarmists and complot thinkers. Brexit, COVID-19 and Russia would be the ones to blame.1  Allegedly, Vladimir Putin would use the increasing gas prices as a weapon2 , or EU climate change actions would be the reason behind the high gas prices.3

There is some truth in each of these argumentations. For the United Kingdom, Brexit has complicated its access to the European gas market and therefore contributed to high prices. The demand for gas is currently increasing more rapidly after the COVID-19 lockdowns than the reduced supply can accommodate. In the past year, Russian gas supply to the EU was lower than in previous years. Permits for Nord Stream 2 could probably increase the gas supply to the EU again.4  And the coal and nuclear exits aimed for in several EU member states drive up demand for gas.

The main question is whether these gas price spikes are actually that bad

However, the main question is whether these gas price spikes are actually that bad. Textbook economics would tell us that high prices will drive down demand. Indeed, that is exactly what is needed for a successful energy transition: to phase out fossil fuels as quickly and completely as possible in the coming years.

Yet, straightforward market economics become more complicated when political factors come into play. A transition should also take place in a ‘just’ way according to the European Green Deal and the recent ‘Fit for 55’ package, thereby preventing that many Europeans in the coming months no longer can afford to heat their homes, or to cool them during heat waves that might occur more often in the years to come.5

That is not an easy job, given that over 34 million people in the European Union are already experiencing energy poverty to various degrees according the European Energy Poverty Observatory, while gas prices in the Netherlands, for instance, have increased more than eightfold over the past months.6  That is why some analysts in the Netherlands already suggest to keep the Groningen gas field – once by far the largest gas field in the EU – open for a longer period than only 2022, or to make further use of the smaller gas fields in the Dutch part of the North Sea.7

This crisis confirms once more that gas is not the easy transition fuel on the way from fossils to renewables that it was sold for by the gas industry

The Dutch government now decided to reopen the field only in case of an extreme winter.8  Rather, it might be aiming for tax deductions or price limits as the easiest and quickest instrument available for distributional equity as a key element of just transition.

It seems likely that European policymakers will follow suit in an upcoming EU heads of state meeting later in October, thereby also guided by the examples of other EU member states, such as Italy, Spain and France, that have announced national ‘price shields’ for electricity and gas.

It is clear that reducing the current dependencies on natural gas will be very difficult. Switching to hydrogen for industry and getting rid of gas in the built environment are huge challenges for a country like the Netherlands, that has been very dependent on this natural resource for decades. Yet, a complete, or almost complete end to gas use will be inevitable to meet the climate goals agreed on in Paris and other climate ambitions established by the EU.

As more often, policymakers that are trying to solve the crisis will have to seek the art of balance: on the one hand, preventing that consumers no longer are able to pay their energy bills. This would most likely cause a fundamental blast to public support for EU energy and climate policies and perhaps even worse, to EU policymaking in general. On the other hand, still letting the market do its work, providing incentives for consumer investments in insulation, energy efficiency and renewables for the medium term.

Above all, this crisis confirms once more that gas is not the easy transition fuel on the way from fossils to renewables that it was sold for by the gas industry in recent years. Rather, politicians should recognise the signs of the times, embrace all possibilities to find new competitive edges for the future and aim to phase out gas as quickly as possible – in a sensible way, without endangering energy supply to European end-users, including the energy poor.

A ‘just’ phase-out is therefore required, even if we are talking about just gas.