We can only reduce energy costs in Europe together

Written for session 1 – Towards a new economy of scarcity?

On 1 July, Spain takes over the rotating EU Council Presidency and can then set the agenda for six months before the European elections take place in 2024 and then it is Hungary’s turn in the second half of the year 2024.

The stakes are high for Europe. The energy crisis has hit the continent particularly hard. Energy prices are still too high. Companies are reacting to this and are increasingly turning to Asia or North America, where the “Inflation Reduction Act” additionally entices them with subsidies. At the same time, geopolitical changes are forcing Europeans to reduce critical dependencies – on China, for example – in a timely manner.  Europe has so far shown itself united in its reaction to the war of aggression against Ukraine. But it must succeed in maintaining and strengthening cohesion, not least against the backdrop of the uncertain outcome of the US elections in 2024 and increasing tensions between the US and China.

Against this background, the Spanish goals for the Council Presidency are rightly ambitious: The reindustrialisation of the ÈU to achieve strategic autonomy and sovereignty. Progress in the green transformation to significantly reduce electricity costs. Furthermore, social justice, as well as strengthening the unity of the European Union.

Europe’s future role and support for democratic forces will depend on whether we can strengthen resilience and growth forces while maintaining social balance. The deepening of the single market, the completion of the banking union, the strengthening of relations with Latin America through the conclusion of the Mercosur agreement and the strengthening of sustainable investment are all on Spain’s wish list, and rightly so.

For the attractiveness of the location for investors, the acceleration of the green transformation and the sustainable reduction of energy prices is particularly crucial. In doing so, the member states must work together. This is easier said than done. For the transformation paths and the resulting interests are very different.

France, for example, like several Eastern European countries as well as Sweden, Finland and the Netherlands, relies on nuclear power. But the planned expansion of nuclear power plants is viewed critically by other EU member states – above all Germany – and is likely to drag on well into the next decade. At the same time, right-wing extremists, for example in France and Sweden, are campaigning against the expansion of renewables. The resulting sluggish expansion of generation capacities is likely to keep electricity prices uncomfortably high for the foreseeable future, especially in France and its neighbouring countries.

Germany has finally shut down its last three nuclear power plants on 1 April 2023 despite persistently high electricity prices and plans to quadruple the pace of renewable energy expansion. In addition, a capacity of between 20 and 30 gigawatts of hydrogen-ready gas-fired power plants must be added to make the coal phase-out around 2030 possible.

The procurement of large quantities of climate-neutral hydrogen and the expansion of the grid infrastructures that bring electricity and hydrogen to where they are needed require an unprecedented pace of infrastructure expansion in Germany and Europe. According to the plan, only about one third of the hydrogen needed will be produced in Germany in 2030. One third is to be imported by sea, one third via pipelines from Norway, from Spain and via Italy from Africa.

In Spain, in particular, there is great interest in using the country’s good conditions for the production of renewable energies and green hydrogen. It was not until the beginning of 2023 that it was agreed to extend the connection of the Iberian peninsula to Germany via the planned H2Med pipeline between Barcelona and Marseille.

France has long resisted this. The role of importing climate-friendly molecules is not considered so important by French policymakers. Instead, they want to produce hydrogen domestically from “cheap nuclear energy”. But this calculation is unlikely to work out in the foreseeable future. In the common European electricity market, the use of nuclear power for the production of hydrogen has high opportunity costs: the revenues on the electricity market, where prices will remain high due to the scarce supply in the medium term.

Everyone would benefit from abandoning the lines of conflict described above. The member states of the European Union should support each other in expanding the power supply along the national transformation plans, so that the price of electricity falls due to more quickly available capacities. And all should make the development of a hydrogen infrastructure and joint hydrogen imports possible – so that domestic hydrogen production in the EU does not unnecessarily increase the price of electricity.

The better the cooperation succeeds, the lower the electricity costs will be in each member state. At present, many countries are trying to lower electricity prices by means of subsidies. However, this puts further strain on the already strained public finances in many member states and restricts funds available for other purposes.

Germany and France should take a joint position right at the beginning of the Spanish Council Presidency. There may not be much time to set the first course: on 23 July, Spain will hold new elections after a debacle for the ruling Socialists in the local and regional elections.

Veronika Grimm is professor of economics at FAU Erlangen-Nürnberg and member of the German Council of Economic Experts