The European energy policy is standing at a crossroads where crucial decisions must be made in the near future. The principal decisions have been made, but conditions resembling planned economy in the energy sectors of many countries, environmental problems and changeable energy prices show that there still is a long way to go. In particular, there are several ways to go, and we decide the future / if we dare and we have the energy.
By Kåre Stamer Andreasen and Jane Pedersen
The world's energy consumption increases while the winning of fossil fuels is stagnating. If we get a situation where we lack energy, we will get increasing prices, geopolitical instability, etc. The environmental consequences of the use of fossil fuels will also make many stakeholders recommend that the energy supply be secured through more environmentally sustainable energy resources. Another problem with fossil fuels is the great shifts in prices, which creates uncertain conditions for economic development. The need for finding alternatives to the current dependence on fossil fuels is thus greater than ever.
The main purpose of the European energy policy is to improve supply security, ensure fair energy prices and reduce pollution when using energy. Major changes have already been implemented, including liberalization of the energy sector and higher CO2 taxes. Several fields in the energy sector are facing increasing political interference in the shape of environmental regulations, control of demand, and securing the energy supply.
When the environment is prioritized over economy, there are consequences for the competitiveness of the business community. Extra energy expenses will in the short term hit some companies and industries hard. However, in the long term, the survivors will gain a competitive advantage over non-European competitors who will lack the same energy-efficient production. If serious efforts are made to have environmentally correct energy production and consumption, there will be opportunities for new companies and industries in alternative energy technologies.
The question is what measures are required to ensure that EU's energy policy goals are met in the future. Should the energy sector primarily function on market economical or planned economical conditions? The answer very much depends on whether consumers, business and politicians focus more on environment or on economy. Below we outline four scenarios for the future energy sector. None of the scenarios may represent the actual future, but they illustrate different opportunities and threats for our energy supply.
A crisscross scenario as shown is based on two uncertainty axes, which here are the questions of environmental or economical focus and planned or market economy.
Environmental focus means that both population and politicians are focused on the environment. Decisions are made with respect to the environment, and the economy is secondary. If there is an economical focus, the decisions are made on the basis of what is cheapest rather than of what affects the environment.
If the market economy is dominant, market forces and free competition rule the energy sector. This is in opposition to planned economy, where the state owns part of the energy sector and politicians rule the energy sector through regulations and taxation.
Under market conditions the direct public expenditures in the energy sector will be very low. Private actors will be in charge of research and development (R&D), production, distribution and sales. If scenario one ("Low Price" / market economy and economical focus) is realized, economy will be the primary focus for business, consumers and politicians. The actors will provide energy at the lowest possible prices. There will be free competition between energy forms, and fossil fuels may be expected to be the primary energy source the next 20-30 years. Private and public investments in alternative energy sources will be low until oil prices reach so high a level that alternative energy sources become economically competitive. In its purest form, this scenario will result in increasing dependence on the Middle East and growing environmental problems. Large private actors will dominate the energy sector.
In scenario two ("New Energy" / market economy and environmental focus) the energy sector is based on market economy combined with an environmental focus for business, consumers and politicians. In this scenario, the direct public expenses to the energy sector will remain low, but the energy prices for consumers and companies will be higher than in the first scenario. The demand for a more environmentally friendly energy sector will facilitate more R&D in alternative energy sources, and in spite of the free competition between energy sources, the environment will be a competitive parameter that is valued more highly than energy prices. The environmental costs will be lower than in the "Low Price" scenario, and the dependency on the Middle East will be reduced. The energy sector is a mix of big private actors and a vast undergrowth of small decentralized actors, especially within R&D of alternative energy sources.
Under conditions of planned economy in the energy sector, direct public investments will be high. The energy infrastructure will be publicly owned, which most likely will create inflexible systems. R&D, production, distribution and sale will mainly be controlled by the authorities.
In scenario three ("Planned Energy" / planned economy and economical focus), the energy sector will somewhat resemble the conditions on which the Soviet Union based its energy policy. If the scenario is compared with a market with full competition, the direct energy prices will be high. R&D will primarily be in fossil fuels the next 20-30 years. This may change if the cost of fossil fuels rise dramatically or there is a possibility for economic benefits in a focus on alternative energy.
In the short and medium term, this scenario will mean increased competitive abilities for businesses and low energy costs for consumers. The authorities will dampen large temporary shifts in prices while the national economies generally will be very sensitive to shifts in international energy prices. International environmental commitments will either be ignored or be followed at the lowest possible level. The most likely public tool will be demands of consumers, companies and the public sector to save energy. In the long term, the environmental costs will be high, and the dependency on the Middle East may be very high.
Scenario four ("High Price" / planned economy and environmental focus) will have the highest energy costs for consumers and companies and on the societal level. In return, the derived environmental costs will be low. There will be public investments in alternative energy. The competition between the different energy sources will be based on other parameters than the purely economical. Perhaps regulation will in part take the shape of different degrees of taxation. Demands will be made of consumers, companies and the public sector to save energy. With the focus on alternative energy sources and different economical conditions for the different energy sources, dependency on the Middle East will rapidly diminish.
If we compare the four different scenarios for the energy sector, we see that scenario two ("New Energy" / market economy and environmental focus) best lives up to the main goals of the present European energy policy. Conditions of market economy for the energy sector create a flowering of many actors in the energy sector. This ensures R&D in alternative energy sources, which will reduce pollution and the dependency of fossil fuels and hence also dependency on the Middle East. However, this requires that consumers, companies and politicians make strong demands. If this doesn't happen, scenario one ("Low Price" / market economy and economical focus) will be realized, which in the medium and long terms is in direct opposition to EU's energy policy.
Conditions of planned economy in the energy sector will also be able to fulfil the goals of EU's energy policy. But this requires a focus on the environment and will lead to rather higher prices than under conditions of market economy. In addition, the structures will be inflexible, and we will see a less rich undergrowth of companies in alternative energy.
The future is full of changes / whether we like it or not. If we want to be better able to make qualified decisions now, we must be conscious of our values and the future we desire. Do we wish a near future with relatively cheap energy, dependency on the oil-producing countries, and a low priority for the environment? Do we desire a future with more expensive energy now, but with the opportunity for more environmentally friendly energy and independence of oil-producing countries? Or do we long for a future, which ,T (Bwell, that is up to us. We are the ones that decide the future, if we dare and we have the energy.
One thing is certain: One day the oil adventure will end, and we can choose to be ready in time for it or react to it when it happens.
Jane Pedersen is BS in Chemical Engineering and MS of New Materials.