BP’s Energy Outlook & Europe’s Renewable Energy Future

Renewable energies are becoming increasingly important in the European Union.

The competition between renewable energies and fossil fuels will determine the fate of Europe’s energy future.

BP has identified what appear to be major global trends in energy markets. China’s growth trajectory shows that there is a strong increase in demand for electricity from renewable energy sources, at the same time energy consumption will not grow as much as it has in the past in parts of the world that are on the verge to become fully industrialized countries, especially the People’s Republic of China. By comparison, BP expects energy consumption to grow very significantly in India, mainly due to urbanization and increased mobility.

According to 2018 BP’s Energy Outlook, growth of energy consumption will depend primarily on productivity growth, in order to put into context Africa’s lesser growth rate of consumption of energy, it is key to understand that productivity gains lead to more energy consumption and that the two indicators are correlated. Even Africa will eventually see stronger growth rates due to urbanization. India’s growth trajectory may be hampered by slowing productivity growth.

1. Examining Europe’s energy future: Fall of the giants?

BP’s 2018 Energy Outlook shows that the Europeans will meet their energy needs from a growing, diverse mix of renewable energy sources in the most likely scenario. In terms of percentages this means their share of renewable energy will approach almost 40% of total primary energy consumption. That share could grow much more, but this depends on specific assumptions we uphold.

BP’s 2018 Energy Outlook is key to our understanding of Europe’s future energy dynamics because it gives us a window into the future, where we see that BP estimates that these long-term trends of Germany and in Europe will lead to strong growth in renewables. We contrast this with the rest of the world and we find that in absolute numbers,

China will add most to global renewable energy consumption, in BP’s most likely scenario. I will briefly go into some of the caveats to show what factors could undermine BP’s 2018 outlook, and affect the growth trajectory for Germany and for Europe more generally.

2. Building permits, grid connectivity, and who pays when base load electricity is uncompetitive

In the last few years, building permits were being withheld for producing wind energy offshore. The reason why construction has been held back was that various disputes arose regarding granting concessions and building permits to operators. The authorities were concerned that Germany’s transmission system operators, which were in disagreement with the operators, had other interests and would pass on costs for the transmission of offshore wind energy.

The plan to expand the grid network in Germany so as to encompass offshore wind was met by fiercely resistant communal associations in Germany, wishing to abdicate the plan to expand grid infrastructure through their home turf altogether. Grid expansion for the purpose of connecting offshore wind parks to the AC network of transmission system operators does not make good business sense, as transmission operators will not become co-owners of every single offshore wind field, but they will most certainly take on some of the costs, a service providing subsidized renewable energy.

As more renewable energy is fed into the grid network, it becomes vital to use interconnectors, connecting local markets in order to stabilize an intermittent supply of renewable energy with base electricity. By including other markets such as France and the UK, one can stabilize the electricity market in Germany which relies more heavily on renewables. France could become an important supplier of base-load electricity, as it has a wealth of nuclear power plants. This would also make France a major producer of radioactive waste. This is important, because conventional power plants cannot be switched off without incurring significant costs.

3. Allocation of new land to increase the share of renewable energies in Germany to the detriment of other interest groups, such as farmers.

As more and more land will be allocated for renewable energy production in Germany, it will become harder and harder to find new suitable construction sites where to build new plants. Because of this, wind energy has become a hot-botton issue in the country. We have to keep in mind that France and Germany are major exporters of grain and other agricultural products, this helps to balance trade accounts. 

Along the Baltic coast many port companies  were able to revamp part of their operational infrastructure, as they have hoped that this will enable them to export more grain from Central Europe. The port of Rostock has silos that can hold up to 500,000 tonnes of which up to 1,000 tonnes can be exported every hour. This already becomes an issue not shed light on in BP’s 2018 Energy Outlook. The issue will repeat itself all over Europe.

4. Germany’s heavy industry is in decline due to ever-increasing energy costs

The growth rate of renewable energy has contributed to the declining profitability of Germany’s heavy industry, it has seen increased operating costs. Energy costs contribute massively to energy costs. Chemicals producers and steel manufacturers have been looking elsewhere to make new investments, and instead of reinvesting capital in Germany they went overseas. They have been looking to the U.S. as they currently are under the assumption that gas prices in the U.S. will remain low for a very long time to come.

They do not take into account that the shale gas revolution is temporary at best, at the same time it is very costly to continue to produce shale gas at the current level. BP’s 2018 Energy Outlook sees the U.S. as the world’s foremost energy producer.

This is probably true in the near term, and the U.S. may be currently able to produce more crude oil than the Kingdom of Saudi Arabia, but much research has been done on the shale oil and shale gas revolution and it seems improbable that production rates will remain at this level and will lead to a more significant drop of national production once production rates from shale gas fields decline in earnest.

5. Electric vehicles (EV’s), local grids and the problem of  managing wind and solar intermittency 

BP’s 2018 Energy Outlook point to some efficiency gains, e.g. through energy storage. So far there is only scarce evidence of this happening on an industrial scale in Germany, which is in one of the most industrialized countries in the world. It is worth pointing out that Germany has some of the highest electricity prices (in kilowatt per hour) world-wide.

Some attempts have been made to use water reservoirs to conserve more energy, and battery storage does exist in Schwerin in the state of Mecklenburg-Vorpommern. But the options remain limited and in practice has been found that offshore wind energy cannot serve as reliable base load to provide Germany’s electricity supply.

6. BP’s 2018 Energy Outlook and Germany’s massive geothermal energy potential

BP’s 2018 Energy Outlook doesn’t elaborate further on the existing geothermal potential in northern Europe. In northern Germany and in the industrialized Upper Rhine region one could exploit Germany’s domestic geothermal potential. This could contribute to Germany’s base load electricity. There have been legal proceedings in southwest Germany, drilling has gone awry in Stuttgart and impacted local communities.

Besides that, Germany currently allows to drill 300 meters deep for heat exchangers, and drilling can be made profitable in the north of Germany as well as southern Germany.  Stadtwerke München in Munich has outlined that 80% of the city’s heat consumption will come from geothermal heat exchangers by 2040. This could become a profitable endeavor for other market entrants, a proven technology that actually works.

7. Russia’s gas reserves could exceed LNG gas supplies from the USA

Russia’s natural gas reserves have not yet been fully explored. In many places large swathes of the country were, due to permafrost, previously inaccessible. Russia remains Germany’s key importer of natural gas and crude oil and holds massive sway over energy markets in Central Europe. It is also far more convenient to deliver gas through Nord Stream due to the pressure water exerts on the pipelines, facilitating the movement of gas supplies.

We also have to keep in mind that Russia is an Artic power. In total, the Artic holds 1,700 ft³ of gas, most of it is located on the Russian continental shelve, and Russia is well-positioned to exploit these resources due to its Arctic policy. Central European nations already increase their use of natural gas as an energy source. This was exemplified by President Putin’s recent visit to Austria where he has further strengthened his long-standing ties to the current elected government, which was followed by his state visit to Germany the week after.

8. References

BP Energy Economics, BP Energy Outlook, BP p.l.c., viewed 19 August 2018, <https://www.bp.com/content/dam/bp/business-sites/en/global/corporate/pdfs/energy-economics/energy-outlook/bp-energy-outlook-2018.pdf&gt;.

To view under:

BP Energy Outlook 2018

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