Deep Electrification – How Europe can break the Russian Fossil Fuels Addiction

As the Russian army continues their daily bombardment of Ukrainian cities, the European Union and individual European countries are obliged to scramble to secure energy requirements for the months ahead as we have become addicted to Russian Fossil Fuels. But there is good news, as even in worst case scenarios we will not freeze or run out of electricity next winter. However, the real question is what happens after next winter, and the years after that. Our answer is to deliver Deep Electrification, and we have a road map to that critical destination, which we now set out below.

Fossil Fuel addiction is a serious problem and the Russian war on Ukraine is a wake-up call. At present we burn fossil fuels every day to run our economies, despite the serious negative impacts on our environment and in particular the climate. In Europe we spend $1bn every day on gas, oil and coal which we are buying from Russia.

It is obvious that we must burn fewer fossil fuels and transition to clean energy sources and en route to reduce energy losses across the energy system. Currently over 60% of primary energy used today is lost on the way to its final application. To achieve both objectives, we need to deeply electrify our energy system.

Deep electrification means electrifying as much as possible of our energy system. We must start with transport, heat and cooling, and heavy industrial processes which are the easiest. The advantages of electrification are multifaceted, but the key advantage is energy efficiency. As a rule of thumb an electrical vehicle uses less than a third of the energy used by a conventional vehicle running on diesel or petroleum. If we deeply electrify our energy world, then we will need less energy which in turn will save the customer a lot of money. In addition, deep electrification is the only realistic way to achieve total decarbonization, the Net Zero objective. Fortunately, this is the approach favoured by non-governmental organizations such as the IEA (https://www.iea.org/reports/net-zero-by-2050). So, now to our road map.

1. Stop reliance on fossil fuels to generate electricity

The priority must be to replace fossil fuels by generation of clean electricity alternatives and ensure that increasing demand for electricity is met through these sources. The good news is that there is no shortage of clean energy sources, and these are often lower cost.  It is more a question of how best to harness the sun’s energy, which is the source of nearly all useful energy on our planet. Without the sun we would have no food, no animals, no trees and no biomass feedstock. Besides, the process of photosynthesis, taking place over many millennia of the Earth’s history, has left us with a valuable store of fossil fuels like coal, oil and natural gas. The amount of solar radiation that strikes the earth continuously is about 173,000 terawatts which far surpasses the approximately 20 terawatts that humanity requires. We also have other the renewables technologies such as geothermal, wind and hydropower, as well as nuclear which, while controversial, will stay a core part of many countrys’ energy plans for the foreseeable future. 

2. Embrace Flexibility

Since the bulk of electricity will come from low-cost renewables such as wind and solar that fluctuate with day–night cycles, weather patterns, and the seasons, what we need to do is redesign the power system, which is was built for a different era. The key word here is flexibility which is a state of mind: it implies the readiness to abandon old ways of thinking and embrace new ones. For instance, by creating new market mechanisms that enable the fast deployment of flexibility technologies such as batteries, hydrogen, digital meters, smart charging stations and vehicle to grid. A critical tool is demand response. Many residential and commercial loads are flexible — for example hot water tanks don’t really care what time of day they are heated. By networking these devices, their demand requirement can be timed to when the supply is available. Further, by networking across multiple locations we can ensure we don’t turn them all on at the same time.

3. Invest in Grid

A system filled with widely distributed renewables needs a bigger and a more intelligently connected grid, starting with electricity distribution systems which need to be upgraded to deliver 2-3 times more electricity than they can at present.  Transmission networks will need to be constructed to move cleanly generated electricity from where the best renewable resources are located, such as in northern Norway and Sweden for hydropower, or the North Sea for offshore wind, to European population and industrial centers. Governments and the EU will need to work together and introduce emergency legislation to speed up the grid build out which historically has been bogged down in planning delays for years. 

4. Focus on the Low Hanging Fruit

Some sectors, such as steel and cement production or shipping, are harder to decarbonize than others. Part of the reason for this is that these are traditional industries where the technologies are not in place to reduce dependence on fossil fuels, or they require synthetic fuels that require electricity to make the molecules they currently need.  This is a very expensive game which compounds existing inefficiencies. If we are to accelerate away from our dependence on fossil fuels, then we should try to directly use that electricity for “easy to abate” sectors which are the quickest and easiest for us to decarbonize. Those sectors are road transport, buildings, (particularly space heating) and industry. This is not a dream. All processes with industrial and building heat requirements below 1,000 degrees could be electrified with technologies available today.

5. Change Fiscal Incentive Structures

Across Europe we must introduce taxes and subsidies which favour clean energy sources over fossil fuels. Existing tax structures are often difficult to change either politically or due to resistance from conservative tax offices and finance ministries.  This is particularly the case with retail energy where governments such as Germany or Denmark insist on burdening customers with massive levels of taxes and charges which make electricity unattractive against fossil fuel alternatives. We should get rid of VAT and all taxes on electricity. Simple. It is also critical, if we want to decarbonise quickly and effectively, that fiscal tools are aligned with fossil fuel reduction goals. A suite of fiscal incentives such as tax credits need to be used to kick off early-stage markets such as EVs and batteries to enable related technologies to reach critical mass.  Fiscal incentives such as accelerated depreciation should be introduced to incentivise private capital investments, both in business and in the home.

6. Reform the Power Markets

The current competitive electricity system became established in the fossil fuel era whereby the last and most expensive bidder in the power market at any one time determined the power price for all players.  The idea was that power generators would compete based on their fuel costs and it worked well until recently.  But what we are seeing in Europe today is extreme price volatility with very high prices largely being determined by very expensive gas and low energy prices being determined by how much wind there is available in the system. This market volatility makes it very difficult for customers to secure the power they need at fair prices and makes it complex and expensive for generators to deliver the power they must deliver to meet contractual obligations. It is absurd that a low-cost hydropower provider should receive the same high price in the market for power traded just because the price of gas has gone up.

In the present, volatile environment, it is a huge challenge to make long-term investment decisions in new clean generation, storage and the other flexible technologies. The good news is that there is no shortage of capital across the world. In fact, the world is flooded with low-cost money looking for a home. Our challenge is to make sure that this capital is directed into replacing the global capital stock of all fossil fuel powered devices from vehicles to boilers with low and where possible zero carbon alternatives.  The scale of investment and the cost of this transition is heavily influenced by the cost of capital. The higher the capital cost, the more expensive the transition. Low-cost capital is critical for the rapid introduction of clean energy technologies such as wind, solar and EVs which have higher relative upfront investments costs than fossil fuels but lower lifetime costs.  

The shift to a much more capital-intensive energy system from today’s fossil fuel world can be achieved and should be our objective. We have provided the road map to leave the current and inefficient electricity power market to ensure that low-cost capital flows can deliver our Net Zero objective through Deep Electrification. We want to help as many as possible on the journey.

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