Current scenario and prospects for energy: some ideas to think about in the long term

"Political and business leaders have been sending the wrong message for years that the energy transition is costless"

In 2022, ninety years have passed since the approval by the parliament of the Second Republic of the Law on Agrarian reform. This was one of the central issues of Spanish politics in the years 1931-1936, and yet, in those years, the world was already moving fully towards a production system based on electricity and oil.

At this time, with digital revolution in the form of the third industrial revolution in full swing and as a great structural challenge of our economy, paradoxically we once again find that the challenge of electrifying the economy and designing the rules to produce and reward said electrical energy is becoming a central issue in Spanish politics.

The level of confrontation that the issue of energy regulation, and electricity in particular, will never be the same as the redistribution of land ownership in 1932, but it will undoubtedly strongly condition the political debate in the coming years, and not only in Spain. We are already seeing the first signs of it.

As in 1932 in relation to the agrarian reform, there is a certain basic consensus: at that time the consensus was based on the need to make the land more productive than it was, and now it is the need to decarbonize the system primary and secondary energy which, in practice, basically consists of its electrification through the use of renewable generation sources.

The problem of structural transitions is to determine how its cost is distributed and who compensates those affected by the transition. What, in 1932, was the debate on expropriation without compensation is now the debate on the remuneration of inframarginal technologies in a marginal market. But the question can be simplified: how is the transition paid?

And here we find the first fundamental problem. Political and business leaders have for years moved the erroneous message that said transition has no cost. The common citizens are very much in favor of the energy transition, but they are not aware of the cost that they will have to pay (economic and environmental). That does not happen with other infrastructures such as transport or health where the debate is much more mature and therefore more adjusted to the rules of democracy.

To make the energy transition, new production facilities must be built, dismantling many of the existing ones; distribute that energy with much more expensive networks than the current ones; and to support a production system that is naturally very unstable with technologies that are immature and very expensive today. All this requires huge investments. On the other hand, environmental problems such as, for example, the intensity of the occupation of physical space by solar and wind plants and the scarcity of mineral resources for the production of equipment are of great importance.

And this is where the consensus breaks down, since making the energy transition very quickly would be possible, but paying for these infrastructures would make it necessary to raise the price of energy a lot and, therefore, of most products and services. Is that spending a priority? How should it be paid? We are experiencing a moment of "awareness" about this problem in view of the shock caused by the Russian invasion of Ukraine and the supply restrictions due to the change in gas suppliers. East problem is circumstantial but it has had the ability to put the structural problem on the table. Also in the caso of the agrarian reform the consensus was broken when it was necessary to determine how the expropriations were paid.

It is possible that technological progress and the improvement of production bottlenecks will solve the problem of energy production in the next 20 years, just as the improvement in agricultural productivity caused the problem of agrarian reform to disappear from the 50s . But going back to energy, while that happens, if it happens, we have to decide how we invest the resources iscasoI know we have. And here comes the fundamental debate.

Some ideas about it:

  • To solve any problem first there is first that admit mistakes and the main one has been the enormous investment made in renewables before technological maturity. Spain alone has invested the astronomical figure of more than 100.000 million euros in subsidies to build extremely low-efficiency energy production infrastructures that today provide very little value in terms of electricity production (those built up to 2014 under the regulated tariff regime). . To put the figure into context, the cost of rescuing the financial system for the FROB was “only” 66.000 million euros. The problem is capital and has not been the subject of debate. We start off badly if we don't debate and accept our mistakes.
  • It is essential the cost benefit analysis of any measure. Planning for the energy transition requires that governments also make an effort to measure the cost, explain it to the public and, ultimately, say how much more will be paid by citizens and companies (because it is evident that you are going to pay more) and What environmental costs are we going to face?. This will allow a rational assessment of any technological option.
  • No technology can be conceptually superfluous. The nuclear debate it is extremely poor. Let's correctly assess the cost (including the environmental ones of course) before deciding.
  • At the same time, planning must give rise to a neutral market in technological alternatives and an incentive for competition in transparent markets. It is possible that alternatives such as “Iberian exception” are valid in the short term, but the exclusion of a technology (which apparently we will need many years yet) from the market and "setting an intervened price", which is what has been done, cannot be a long-term solution.
  • we can't give up invest in the industrial development of new technologies. If of the more than 100.000 million euros that we have invested in highly inefficient “first generation” renewable technologies, we had invested 10% in basic science of new materials for panels and storage, Spain would face the future differently.

Juan Martinez Calvo

Partner at Simmons & Simmons

Article originally published in the Blog Fide in the withfideinitial

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