Forecasting: Europe’s Energy Future 2020 – 2030 Predictions

 

When I have a day off I walk along the sandy beaches of the Baltic Sea. I find it easy to forget that we are just small widgets in a wide ocean of exquisit energy turbulence, and out there – somewhere in the Baltic Sea – offshore wind farms safeguard our energy security.


We find ourselves at rest and we are at ease, we rest assured and we believe that we are in control of our energy future. We think that we can make things happen just because we want it. But there are underlying trends that, to all my knowledge, determine which energy sources we can use and in what amount.


That’s the case with Europe’s declining oil and natural gas reserves in the North Sea. Until now, Europe’s oil and gas reserves in the North Sea were an important part of our energy security. This is about to change – the damns of the old, brittle energy world can no longer withstand the force exerted by portentous trends.


Introduction: In order to keep Europe’s energy system as it is we have to maintain current oil and gas production levels in the North Sea


I have written a short review on the European energy industry in 2018. In that article my emphasis was on natural gas and LNG deliveries. As a follow-up I wrote another article on recent energy policy changes in Europe in 2019, where I put recent energy developments into perspective. In 2019 my work highlighted the sprouting energy cooperation between Russia and Germany.


This year, I will take a closer look at Europe because there are just too many divergent energy policies in European nation-states, sometimes it almost feels as if countries go in completely different directions now.


On a grander scale – we must ask ourselves in which direction the European Union’s energy policy will develop 2020 – 2030. The real question is if the European Union has a plan on how to proceed, to meet the need for a reliable supply of energy, at a cheap price for the European populus, and ensure that energy is produced in such a way it does not harm the environment.


We will also look at the declining North Sea oil and gas reserves. These reserves are being shared by different countries bordering the North Sea. This includes Norway, Denmark, the Netherlands and the UK and they all have a stake in it. Currently we see that the oil and gas supplies in the United Kingdom are declining year-on-year – but even with the Scandinavian countries we see a contiguous downward trend when it comes to oil and gas production.


There is a lot of controversy when it comes to future natural gas supplies, where they are supposed to come from. There are three areas where energy imports could come from. One region is the United States, the second region is the Gulf region, and the third region where natural gas could come from is the Russian Federation, possibly via Nord Stream 1 and 2. Nord Stream 2 is still in construction. Nord Stream 2 has broadened into the political sphere. As far as politics is concerned, different European countries have different perspectives on this project. To a certain extend, this has to do with every country’s energy requirements and its existing energy supply agreements.


Paradoxically, it appears the attempt to interfuse Europe’s energy systems into one cohesive whole has led to divergent strategies how to solve regional imbalances in the electricity grid. Consider the UK for example where we have had peak oil production roughly in between 1990 – 2000, which meant the UK did not have to invest so much money in CHP technologies. This explains why the UK’s electricity system has to be revamped. Luckily, wind energy is readily available.

Let us take a closer look.

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In the UK, Offshore Wind Energy Has Become A Force to Be Reckoned With


It can be difficult to discern the UK’s energy future, where the UK’s energy supplies will come from. Most likely, they will either take the form of LNG, or gas imports from continental Europe. In some sense England is in a precarious position as the nation’s own oil and natural gas supplies are rapidly diminishing. The underlying assumption was always that there will be enough oil and gas supplies in the future.


There are 3 options available for the UK energy-wise. The first option is to cooperate more proactively with American oil and gas producers to ensure overall energy security of fossil fuel supplies, that can take the form of LNG deliveries to UK ports. The second option is to work more vigorously with the European Union and to expand oil and gas infrastructure that has been build, including but not exclusively to and from the remaining oil and natural gas production sites in the North Sea. This could take the form of shared investments in natural gas fields in the North Sea.

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The third option can be viewed an additional measure to ensure the UK’s energy safety. In this scenario, the UK cooperates with other countries such as Russia and the Gulf States (Saudi Arabia, Iran, Qatar). The UK is a leading nation for the exploration and discovery of oil and natural gas reserves. It seems plausible to me that the UK might offer its services in that domain to local market players in the oil and gas industry. England might choose an import scenario which encompasses all these options, and may actually benefit from all these scenarios.


There just aren’t that many options available. Thanks to its geography, England is in a fortuitous position that it can choose its trading partners. Countries in central Europe are more restricted. England has access to the world’s oceans which is a blessing. The nation has prime access to the North Atlantic which is the siphon of numerous maritime transport routes, is able to route containers back and forth between the United States and Europe but also the rest of the world. England can export services and import goods, and is taking advantage of its vast,  crannied coastline. It has access to the North Sea and can leverage trading routes in the Baltic Sea, the Baltic being an excellent sea transport route to get to Germany, Poland, the Baltic States and Russia. Britain has relatively good access to the Mediterranean (in part, due to Gibraltar). England is also on good terms with the United States (and the energy politics of the US and UK aligns with each other in many areas). Some may argue that this relationship ensures stability in the North Atlantic, which allows trade to flourish. England has been blessed by nature.

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In the coming weeks and months, we will see how Brexit and the recent election in the United Kingdom will affect England’s future energy politics. My wild guess is that there will be more LNG imports heading into Britain, mainly from the U.S. There will be less need to comply with EU energy regulation. This may lead to a profound shift in the UK’s energy policy. In what way?


England will likely see a growing share of its electricity production coming from renewable energy sources, especially offshore wind energy from North Sea wind farms which will supply the United Kingdom with electricity on a much wider basis then would be the case if wind would not blow  incessantly on the British Isles. The world’s largest offshore wind farms are located along the shoreline of the North Sea. Both intermittency and grid parity remain crucial to off-takers and suppliers. This is even more so the case for offshore wind power. Offshore wind power will surely have an effect on energy imports from Europe to the UK.

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Offshore wind power is the preferable option, given the choice between offshore and onshore wind energy. Whereas Germany’s offshore wind power plants are located far away from the coastline, England’s wind power plants are located closer to shore. That is an advantage as it reduces friction in electricity transport. We might see the UK become an energy forerunner, if offshore wind energy can provide electricity throughout the year to 66 million people. This is a project on an elephantine scale. And for the outcome: You don’t really know until you have tried.


Wind energy must be supplied on a constant basis and reducing intermittency is important. I would guess that TNO’s prime concern is to ensure there is a stable supply of electricity, meaning there is a stable base load. Offshore wind energy can only contribute a certain amount of electricity to the electricity grid. Too much offshore wind energy would undermine grid integrity. Renewable supplies will probably come from offshore wind energy which is readily available in the UK, and tidal wave energy in some regions, such as Scotland and Wales. Given current trends, renewable energy will never fully replace fossil fuels – at least not in the foreseeable future.

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Just like all other Western countries England requires base load electricity to ensure a functional electricity system. Base load electricity can come from fossil fuel sources such as coal, natural gas oil, although I would argue at this point natural gas is the preferred energy source when it comes to fossil fuels to meet the base load and because it’s viewed as more CO2 friendly.


England possesses coal reserves that it could exploit but is unlikely to do so simply because the cost of extracting coal out of the ground in places like Wales is just not economical enough in modern times, and it would be far cheaper to import coal from other countries such as Australia or China. It might even be worthwhile to import coal from Russia. Most people don’t realize this, but Russia does have large coal reserves and some of them are still untapped. It is uneconomical to use coal from domestic sources. There is a strong push to cut CO2 emissions in the UK and to be less permissible with regards to fossil fuel emissions. The environmental movement in Britain is not as strong as it is in Germany, but continues to grow.


There is the issue of importing and exporting electricity from Europe to Great Britain to stabilize the electricity grid in Britain, and a lot of interconnectors have been built in the last years. These interconnectors would still provide a meaningful contribution to European energy security. It is unlikely that Britain will fully abandon these projects that have started when Britain was still part of the EU. It is unlikely that Britain will refocus its entire energy policy domestically. Economy of scale as a concept means costs decrease when you are part of the bigger market.

The UK is building two new nuclear power plants to provide electricity, some might say a blessing in disguise.


The Energy Situation in France: Nuclear Power Remains Pivotal to Maintain Grid Integrity


France’s energy policy differs significantly from that of the United Kingdom. From my observation, France’s energy policy is much more focused on nuclear power. I wouldn’t say the UK is not interested in nuclear power. Two nuclear power plants have been planned in the UK. There have been some issues related to financing of nuclear plants and the risk of these installations had to be reassessed after the fallout in Fukushima (which incidentally led to Germany phasing out nuclear energy). But that is to be expected with plants that require so much capital. From what I can see, the French energy business has a different dynamic and you can’t really compare both countries in terms of their energy policy.


This is not to say that France doesn’t want to invest in renewable energy because a lot of wind energy farms are being built in France. But there is deep understanding that nuclear power is needed to ensure there is base load electricity. France pays a lot of attention to cheap electricity to meet its electricity needs and nuclear power has always been a very centralized form of energy planning, which is understandably much easier to manage in the electricity grid. Security concerns regarding nuclear power are there, but energy security is hugely important.


In the past the French energy industry was much more enthusiastic about nuclear power, but CAPEX on new nuclear reactors have exploded. Expensive technical overhauls make it considerably more difficult for nuclear power plant operators and companies to achieve a sufficiently high IRR on new project developments.


In fact, many nuclear power plants are located in geographic proximity to Germany and Belgium and these plants are exporting cheap electricity to Germany, which needs electricity when wind farms and solar farms are not producing. This is of huge significance: The argument boils down to this – how can we reduce electricity prices and ensure the electricity supply is as reliable as it is in France, and environmentally friendly as well.


People are still looking for an adequate answer. Until an answer has been found, Germany is importing (some) electricity from France.


Germany Tries to Balance Energy Exports and Imports, And Is Working Closely with Neigbors and Partners


Germany maintains and expands its existing electricity network, to link the energy markets of Western and Eastern Europe, Northern and Southern Europe through numerous cross-border electricity networks. This ensures that electricity is shared between EU member states. This reduces volatility in the market. More to the point, electricity produced by French nuclear power plants is transported from France to Germany and can fill some of the gaps.


Nord Stream 2 is adjacent ot Nord Stream 1 and runs all the way from the Kaliningrad Oblast to Mecklenburg-Vorpommern. It is one of the biggest civil engineering projects in Europe right now. There has been a lot of tension as Nord Stream has geopolitical implications. It is yet unclear if Nord Stream 2 will become operational and if it does when  Nord Stream 2 will come online. Most experts expect Nord Stream 2 become operational towards the end of this year. Either that or Germany imports more LNG from the United States. In order to do that, new LNG ports will have to be opened. We have to wait and see.


Germany will probably invest in HDVC systems, upgrade its existing electricity networks, adjoin cross-border electricity flows, and try assemble Europe’s distinctive electricity networks into one cohesive whole. The German energy transition “Energiewende” has made it more difficult to feed more renewable energy into the German electricity grid.


The Fukushima nuclear fallout – just like Chernobyl – has led to a shift in the country’s energy policy and impacted the bottom line of German energy producers. Germany phases out nuclear power generation and replaces nuclear power with coal power plants, natural gas and renewable energy. Interestingly, open pit mines producing brown coal are being phased out at a juncture in time when they are really needed. Most of these sites are located in Saxony and Brandenburg, in East Germany. The coal mining regions of the Ruhr region no longer produce anthracite. They were terminated because they were no longer commercially viable, unlike coal mining in Russia and China.


Italy Takes Bold Steps and Has Become A Leader in the Renewable Energy Field


Italy is one of the greatest beneficiaries of renewable energy and relies heavily on different energy sources that together contribute to more then a third of Italy’s electricity production. This includes geothermal energy in the south of Italy and hydropower in the northern part of Italy, as well as solar and wind energy spread throughout Italy. Photovoltaic installations are hugely significant. Despite Italy’s highly advanced technological abilities that would enable it to run nuclear power plants, the nation decided to abandon nuclear power completely.


Italy’s renewable energy sector is poised to grow considerably over the next 10 years, and will increase its relative share of total energy consumption. Renewable energy will not supersede fossil fuel energy consumption for another 10 to 20 years. But renewable energy supply could become the main contributor to electricity consumption over the next 10 years.


Italy might become an energy hub of the European energy system, if Italy finds a way to transmit electricity from the MENA region to Germany and other parts of Northern Europe. Italy has set itself very ambitious energy targets, and one of them is to abandon coal as part of the energy mix. Italy will rely less and less on the coal industry which can be seen as a major step into Italy’s renewable energy future. Italy will reach an inflection point, at that moment electricity might become an Italian export commodity. This is due to Italy’s geothermal potential, southern latitude relative to other EU member states, highly-developed hydropower plants and central location in the Mediterranean.


The Nordic countries (Norway, Sweden, Finland and Denmark) Are Focused on Renewable Energy Power Generation. This Includes Biomass Plants.


The Nordic countries heavily rely on renewable energy, they apply CHP technologies to maximize RE potential, and are one of a few regions worldwide where different renewable energy sources are available in large enough amounts to make this a viable strategy. Both Sweden and Norway produce a significant portion of their electricity from hydropower, a reliable renewable energy source with a high EROI (Energy-Return-On-Energy-Invested). Sweden invests in nuclear energy.


Conclusion: What is the most likely outcome for Europe’s energy industry?


It could well be the case that Europe’s energy system divvies up into separate sub-regions as different countries have different energy needs that they have to fill. Some countries, such as the Nordic countries possess a lot of hydropower whereas other countries rely on intermittent energy sources such as wind energy as is the case in the UK. Southern Europe could become an importer of solar power. Italy could act as intermediary for electricity transport from the Maghreb region to Central Europe. Poland may rely more heavily on LNG from the United States and other countries and considers increasing its intake of LNG in the coming years.


Many thanks for the shared interest in the energy world!



Disclaimer:


This article is just meant to inform the reader of recent developments in the energy industry at large and to share knowledge and insights with a wider audience. The author does not put forth investment recommendations.

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You are welcome to take a look at

The Energy World in Pictures 2020.


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