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European funds, electrification and exit from the crisis

Exceptional measures are needed to deal with a historic situation. And precisely the urgency to spend money for everything to restart will give greater impetus to decarbonization policies.

by Davide Tabarelli
08 May 2020
4 min read
byDavide Tabarelli
08 May 2020
4 min read

The 2020 crisis, needless to say, is of historical significance, bordering on the dramatic. The event is unprecedented in history as a whole, not only modern history, with globalization connecting the whole planet in a single economic system, every part of which is suffering from the lockdown in activities. Nowhere is this clearer than in the world of energy, in particular oil, the lifeblood of the economy, where consumption collapsed by 30 percent in April 2020, causing prices to fall to record lows, even dropping below zero in the United States, a market failure that confirms the exceptional nature of the moment. The drop in the demand for oil demand in 2020 will be in the order of 10 percent at best, a contraction that will contribute to global GDP falling to minus 5%, the equivalent of around 8 trillion dollars, more than three times the entire economy of Italy. Never in peacetime has so much wealth been destroyed, and this explains the strong commitment of governments and international organizations to make capital injections proportionate to the severity of the crisis. 

European measures

For Europe, the first important decisions were made on April 24, with a series of measures to which will be added the Recovery Fund, which could bring total funding to 1,500 billion, equal to around 8 percent of European GDP, more or less the same amount as the fall in the value of the economy. This is a huge flow of money, which will have to be spent by Europeans according to the rules defined by the Commission, to which the Council has entrusted this responsibility.  The first page of the Commission's website illustrates the strategic plan for its mandate based on six strategic objectives, the first of which is the Green Deal, which, even before the crisis, gave greater political luster to European ambitions. Today, even if it wanted to change the priorities, there would be no time, and so the Green Deal has become the tool, along with others, to guide the expenditure that should quickly restart the economy. The path towards the transition designed by the Green Deal has not changed. On the contrary, it will assume greater vigor thanks to the urgency of investments. A few principles are clear and have been established in over thirty years of environmental and energy policies. 

The future also lies in electricity

Electrification is the key word, a kind of mantra for the future of energy, because it requires huge plans to overcome technical limitations that are slowing down the growth of renewables. Their production costs have plummeted, but more powerful transport networks from the production sites are needed as they are increasingly distant from consumption centers. To exploit economies of scale, wind or photovoltaic plants have become larger and are viewed negatively by those forced to live near them. The wind blows more powerfully at sea, away from the coasts, where furthermore there is no opposition from inhabitants, but if this solution is chosen, DC power lines are needed that cost more than the widely used AC lines and must cover large distances. Further downstream, the networks delivering electricity to the end customer need to be modernized, both to let small production plants enter the market, including photovoltaic systems on the roofs of houses, and to ensure that demand can be adjusted in real time to respond to the strong variability originating from intermittent renewables. Electricity is an electron that moves at the speed of light and the problem of how to store it is far from resolved. New technologies need to be developed for large batteries used both to accumulate electricity when there is a lot of wind or sun and to give greater stability to the networks, stability that will decrease precisely due to the intermittence of weather conditions. Climate change remains the dominant goal of politics, perhaps temporarily overshadowed by the pandemic emergency. However, paradoxically, the urgency to spend money on restarting everything will give greater impetus to decarbonization policies.

 

The author: Davide Tabarelli

President and co-founder of Nomisma, an independent energy and environment research company based in Bologna, he has always worked as a consultant for the energy sector in Italy and abroad, dealing with all the main aspects of the market, and currently writes for leading journals dedicated to energy-related topics.