The guest commentary below was written by written by Daniel Lacalle. This piece does not necessarily reflect the opinions of Hedgeye.
The European Union has announced strict “energy efficiency” consumption reduction measures to cut 15% of gas demand as Russia threatens to shut down gas supplies. Some regions and cities have imposed aggressive heating and air condition limits as well as cuts in building lights.
Does this work, or will it backfire?
Spoiler alert. It will backfire again. Interventionism always damages the ones they pretend to protect.
Energy efficiency is producing the same or greater goods and services with less energy use. Imposing restrictive measures is not energy efficiency, but control policies looking to collect more taxes via fines.
The decision to turn off lights of buildings at night has extraordinarily minor impact on natural gas demand and a massive impact on safety. The demand for natural gas on a typical day already falls between 20 and 25% between 11 p.m. and 8 a.m. according to Enagas and Sedigas. However, “electric power and adequate lighting, in addition to improving urban life, have an additional effect: reducing the crime rate at night” according to Ariel Yépez, head of the Energy Division of the Inter-American Development Bank.
The solution to a supply risk from Russia is to increase diversification and supply sources, not repression.
We cannot forget that the same politicians who tell Europeans that they must turn off lights, cut air conditioning and reduce heating are the ones that decided to shut down nuclear plants, ban natural gas exploration and introduce regulatory changes that have limited investment in domestic energy.
The solution is to close many more bilateral treaties and trade agreements with other natural gas suppliers, continue to develop wind and solar power, strengthen, and extend the life of nuclear power plants, and develop our natural gas reserves, which is prohibited.
Imposing restrictive measures is not energy efficiency, but control.
Take the example of Spain. The government wants Spaniards to limit air conditioning and heating while the same administration created an unnecessary diplomatic conflict with Algeria, its largest gas supplier.
Spain is also the only country in Europe that maintains the schedule for closing nuclear power plants when even Germany is considering extending the useful life of its plants.
Germany created its own problem by shutting down nuclear plants and making its energy mix more volatile, intermittent, and expensive despite -or due to- more than 150 billion euro of subsidies. The average power price for households and small businesses in Germany has increased by more than 45% since 2006, according to the German Association of Energy and Water Industries (BDEW). More than half of the price paid by households is due to politically determined components, such as taxes, levies, and surcharges.
If we want to improve efficiency we must invest in technology, not multiply government spending that supposes a much higher energy consumption.
From a global demand and supply balance point of view, the set of announced limitations does not make sense. European demand for natural gas is around 549 bcm (billion cubic meters) per year according to the IEA. Europe imports 150bcm a year from Russia.
Reducing demand artificially and temporarily by 15% has no discernible impact on the global supply-demand balance, as it will be absorbed by China, India, and others, yet has an enormous impact on the European economy.
Government-imposed light and heating cuts will destroy the European Union economy with no relevant impact on Russia´s energy trade.
Temporarily and artificially limiting the demand for natural gas only harms the country that implements it and, at the same time, perpetuates long-term use. The economy contracts, but the energy mix does not change.
Consuming 15% less gas does not hurt Putin. On July 24, Gazprom, the Russian gas company, reached a new all-time high of sales to China, and Chinese consumption via gas pipeline has skyrocketed in the last twelve months. Since the invasion of Ukraine, China has imported more than $25 billion of energy products from Russia and in June those imports increased by 72% compared to the previous year.
The European Union seems to take energy measures thinking that the rest of the world does not exist. It is impossible to think of an energy embargo on Russia while the rest of the world, especially Asia, takes advantage of the discounts offered to consume greater volumes of Russian energy products. In the first six months of 2022, Russia’s trade surplus has ballooned to an all-time high of $135 billion on exports of $154 billion.
Contracting Europe’s demand for natural gas has done nothing to the global supply-demand balance. The demand for natural gas in Europe has fallen by 10% in the first six months of 2022 according to the IEA and the impact on the world energy market was negligible, even less on the price of European natural gas.
As I have mentioned, the European Union accounts for 549 bcm of global gas demand. China and Asia Pacific are 907 bcm and global demand is 4,083 bcm according to the IEA. Artificially cutting 15% of European gas demand does not amount to 2% of world demand and does not reduce dependence on Russian gas at all.
In most cases, what governments calls “energy efficiency policies” are tax collection policies with no impact on efficiency.
Studies on the perverse effect of false energy efficiency measures are clear. “They cannot possibly contain or halt the shifting dynamics of energy demand or the changing complexes of practice on which that depend” (Elizabeth Shove, 2018, What is wrong with energy efficiency? Building Research & Information).
In Europe, governments have created the problem. Banning exploration and development of domestic resources, closing nuclear power plants, imposing heavy taxes on the companies that invest the most in solar and wind power, and introducing constant legal uncertainty in energy investment with random and harmful regulatory changes. The solution is not repression, it is investment.
It does not make any sense to force citizens to freeze from the cold in winter and suffocate from heat in summer while the European governments maintain enormous public spending programs and bloated administrations. That is huge power consumption.
If Europe wants to lower Russian imports, it should do is stop putting limits and barriers to trade and investment in energy.
This is a Hedgeye Guest Contributor note by economist Daniel Lacalle. He previously worked at PIMCO and was a portfolio manager at Ecofin Global Oil & Gas Fund and Citadel. Lacalle is CIO of Tressis Gestion and author of Life In The Financial Markets, The Energy World Is Flat and the most recent Escape from the Central Bank Trap. This piece does not necessarily reflect the opinions of Hedgeye.