Oil slump undermines EU’s green agenda

Commission tries to steady nerves frazzled by low fossil fuel prices.

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.

“The moral of that is, people respond to prices,” Spencer Dale, BP’s chief economist, told POLITICO.  That’s why he believes that over the longer term the oil market will rebound, as an increased demand soaks up the oversupply.

As well as the possibility of higher future oil prices, COP21 also gives investors the reassurance to shift their money from fossil fuels to clean energy technology, further weakening the link between oil consumption and economic growth, Zachmann said in a recent report.

There are growing indications that the tie between fossil fuel prices and renewable investment decisions is eroding. Last year saw a record rise in clean energy investment worldwide, according to Bloomberg New Energy Finance. Investment rose by 4 percent to $315.9 billion between 2014 and 2015, while the European price of oil dropped by 67 percent and steam coal by 35 percent.

No matter the oil price, Arias Cañete said the European Commission remains focused on working towards the Paris agreement’s goal of limiting the temperature rise to well below 2 degrees Celsius, and eventually 1.5 degrees, by the end of the century. That, scientists and analysts say, would require the bloc to stop using fossil fuels soon after 2050.

“So, we will develop renewables, we will develop energy efficiency and we will reduce our emissions, regardless of the price of oil,” he said.

Cheaper fuel could even lower the political cost for governments to lift oil, gas and coal subsidies without pushing energy bills or pump prices too high. “We think that low prices of oil are a good opportunity to eliminate fossil fuel subsidies for governments,” said Arias Cañete.

The bridge to Paris

Under its transition plan, Brussels intends to use the cleanest fossil fuel — natural gas — as a bridge to a carbon-neutral environment, in which the amount of carbon dioxide emitted by humans equals the amount that is naturally absorbed.

And this is where rock-bottom oil prices come in handy.

Before oil prices started to tumble in the second half of 2014, everybody’s favorite oil and gas buyer was Asia. With growing economies, Asia’s demand for fuel, especially in the form of liquefied natural gas (LNG), appeared limitless.

The price of an LNG cargo to Japan could go for as high as $20 per million British thermal units in January 2014, compared to just over $15 to Spain and $10 to the U.K.

But optimism about this growing demand led to an oversupply of both oil and gas, and, combined with economic slowdowns in Japan and China, caused international oil prices to fall.

At the same time, the European Commission started its drive to boost gas imports in order to break the bloc’s reliance on Russian gas imports, while having to offset a decline in its homegrown production from old and depleting reserves in the North Sea and Netherlands.

“In the near term, we’ve got this problem, this situation, of really strong supply growth combined with relatively weak demand,” said Dale. “That’s not a bad thing for Europe at all. Europe can enjoy really cheap and plentiful and varied supplies of gas.”

Have I got your support?

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.”

Kalina Oroschakoff and Anca Gurzu contributed to this article.