Consider This: Could Europe build a structural advantage via cheap electricity?

Consensus seems to be that European capital markets are unattractive because of structural issues that governments do not seem to be able to address. This paper indicates that there is a combination of necessity, opportunity and urgency that could deliver sustainably low electricity prices in the medium term, and that could be revolutionary.

Key takeaways:

• A new economic and geopolitical order is shaping up, in which three centers of economic gravity stand out: The United States, China and the European Union. Each one has structural strengths and weaknesses and a different governance system, which ultimately determines policy direction. This new order prioritizes geoeconomic logic over traditional economic logic.
• In this increasingly geopolitically driven world, the role of energy security is central. For China and Europe, this is a critical vulnerability, which both are striving to address via electrification. Global electricity demand is forecast to grow faster than the rate of gross domestic product (GDP) growth, at least until 2030.
• This situation leads to a reorganization of economic geography where energy availability and cost are critical. Overall, electrification is not just a technological challenge but also interlocked with policy priorities, economic development and industrial and national security.
• In Europe, the three main drivers of electrification are climate change, digitalization and geopolitical pressure, which provides urgency. Fortunately, Europe is advanced in its transition to renewable energy and already derives 48%¹ of its electricity from renewables, thus enhancing its strategic energy security.
• There is a realistic route for Europe to develop a resilient, structurally low-cost continental power grid, which could provide a significant boost to productivity, catapulting the region out of the economic mire.
• The time horizon is 2030 and the signposts include domestic politics, project delivery, new interconnectors and storage infrastructure. Any slippage in the next three years could significantly delay the objective.
• The best-placed countries today are the Netherlands, Denmark, the United Kingdom, Spain and Germany, because they have advanced the most in renewables and either achieved low-cost electricity or are 3-5 years away. The most challenged is Italy (still 56% gas and only 20% wind and solar²). Poland (power deficit looming amid shutdown of old plants while still 61% dependent on coal, even as renewables soared to 27%³) and France could be leaders or laggards, depending largely on domestic politics. Some, like Sweden,⁴ are operating multiple regional markets, and Germany could move to two zones, incentivizing investment in interconnectors.
• Ultimately, the European Union’s (EU’s) wholesale energy market will operate with three pillars:
  • Supply priced off low operating cost and clean energy assets (e.g., renewables, nuclear) which require investment in interconnectors to facilitate the transfer of surplus power to areas that need it.
  • Additional supply priced off long-term contracts (e.g., piped gas, shipped liquefied gas under fixed, regular deliveries/prices).
  • Short-term needs priced off a European spot market (spot purchases of electricity supply or liquified natural gas [LNG] cargoes).

• The reason for confidence in this scenario is simple: The driver for both defense and electricity is the same: survival in an increasingly Hobbesian world,⁵ where countries must stand up or be trampled.