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Oil Slump Undermines EU’s Green Agenda

Sara Stefanini, Politico

Slumping oil and gas prices could be a boon for the EU, but at the cost of weakening the economic argument for its green energy policies.

Making a case for renewable energy projects and ramping up energy efficiency is increasingly difficult at a time when oil prices are less than a third of what they were two years ago. As oil prices have tumbled, demand has turned back to old-fashioned fuels for heating, transportation and power generation.

At $34, producing energy from a barrel of oil costs 4 cents per kilowatt hour. It costs about 8 cents per kWh to generate energy from most advanced wind and solar projects in the EU, according to Georg Zachmann, a senior fellow at the Brussels-based think tank Bruegel.

Back when oil was around $100, it cost 12 cents to generate energy from a barrel, giving wind and solar an edge.

“I believe low energy prices may complicate the transformation, to be very frank, and this is a very important issue for countries to note,” Fatih Birol, the International Energy Agency’s executive director, told reporters last month. “All the strong renewable energy and energy efficiency policies may therefore be undermined by the low fossil fuel prices.”

That has EU officials scrambling to reassure the market that, despite short-term price fluctuations, the bloc’s long-term commitment to green policies hasn’t been shaken. A key reason is the promise made at the COP21 climate summit, which calls for reducing fossil fuel consumption and largely eliminating them by mid-century.

Miguel Arias Cañete, the EU’s climate action and energy commissioner, said in recent weeks that Brussels will even push to raise the goal for increased energy efficiency, no matter the signal being sent by low prices.

“If oil prices are going to be the guiding light, we will be lost,” Arias Cañete told MEPs during a hearing in February.

While there are no reports of EU renewable projects being cancelled because of low oil and gas prices, the price slump is having an impact on energy use. Last year, worldwide oil demand peaked at a five-year high and European demand rose for the first time in a decade, according to the IEA and U.K. oil and gas major BP. […]

While the shift from oil and coal to gas is made easier by low prices, it does make the final transition to renewables more expensive.

That’s because solar and wind still rely on government subsidies. However, low oil prices drag down the price of electricity, which means renewables need even higher levels of government support. Added to that, the more renewable energy use increases, the lower the demand for fossil fuels, which means oil and gas prices could stay low for longer, which again means more help for renewables from government budgets.

“Conclusion: If fossil fuel prices fall faster than the technology cost of renewables, supporting renewables becomes more and more expensive,” Zachmann said. “To drive out these low-cost fossil fuels, we might need to support renewable energy sources for a long time, until technology development makes renewable energy sources cheaper than all the fossil fuels we are not allowed to burn for climate reasons.”

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