State intervention in energy sector needs long-term strategy

Many of the policy measures introduced over the past year are piecemeal responses to the fundamental challenges of energy insecurity and climate change
State intervention in energy sector needs long-term strategy

The role of the State in energy supply will likely expand further to address the investment gap when it comes to generating renewable energy, with Governments becoming the main source of capital. Picture: Eamonn Farrell

Although uncertainty prevails in today’s global energy market, one thing has become clear: Governments are reasserting their central role.

The motive is pragmatic rather than ideological, and the details vary from one country to another, but the trend is unmistakable.

Governments of all political hues are taking more control of a market that had largely been left to private firms with only limited regulation.

In many Western economies, this perhaps represents the largest shift in the balance of public and private economic power since the Second World War.

The State’s newfound assertiveness stems partly from huge price increases that threaten large-scale energy poverty and the collapse of some energy-intensive businesses.

After years of underinvestment in the sector, the surge in energy demand in the wake of the pandemic, especially in Asia, inevitably caused prices to jump.

The cost of natural gas to consumers in the EU rose by 12% in the second half of 2021.

But this was merely a prelude to the current price spikes resulting from Russia’s invasion of Ukraine

The EU’s plan to cut its imports of Russian natural gas by two-thirds by 2023, together with Russia’s reduction of supplies to countries including Germany and Finland, caused the European benchmark price to increase fivefold over the 12 months to June of this year.

A second powerful factor compelling government intervention is climate change.

Surge in demand led by coal

The surge in energy demand over the past year has been led by coal, which remains the dominant source of power in Asia, causing greenhouse-gas emissions to return to their pre-pandemic level.

Despite strong growth in renewables such as wind and solar, the world’s continued reliance on hydrocarbons means that, in the absence of further government intervention, emissions will continue rising for several years to come.

None of these challenges can be addressed by market forces alone. Without a carbon price or other regulatory measures that only governments can put in place, people will continue to use gasoline-fuelled cars.

Market forces can do little to help families facing a sudden rise in the cost of an essential commodity.

Nor can markets redistribute the windfall gains made by companies such as Saudi Aramco, which reported a record profit of $48.4bn (€49.2bn) in the second quarter of this year, to the many smaller businesses for which energy is a crucial input.

State intervention in the energy market is taking many and varied forms.

The German government has announced plans for 2% of the country’s land area to be used for the production of wind power, and is devising emergency rationing schemes.

Across the Atlantic, US president Joe Biden’s recently enacted Inflation Reduction Act provides $27bn to help low- and middle-income American households convert to cleaner energy, as well as funding to maintain the country’s loss-making nuclear-power sector.

In France, president Emmanuel Macron is in the process of fully nationalising the power utility EDF, a former flagship of French industrial strength that has suffered two decades of managerial and technical failure.

A major shift to electric vehicles makes sense only if both charging networks and secure supplies of the advanced materials on which EVs depend are available. Picture: PA 
A major shift to electric vehicles makes sense only if both charging networks and secure supplies of the advanced materials on which EVs depend are available. Picture: PA 

And energy-price controls have been tightened there and across much of continental Europe. Unfortunately, these and other recent government initiatives are piecemeal responses to the fundamental challenges of energy insecurity and climate change.

Too many measures are insufficiently thought through, provide poor value for money, and fail to address underlying obstacles to change.

For example, a major shift to electric vehicles makes sense only if both charging networks and secure supplies of the advanced materials on which EVs depend are available.

Small universal cash handouts are costly and do not address concentrated long-term energy poverty.

Policies to increase wind-powered electricity generation are irrelevant unless the infrastructure to cope with distributed electricity supplies is in place.

Temporary fixes

Governments will reach for short-term solutions that demonstrate that they are acting. But the resulting policies are not always the cheapest or the most effective, and many turn out to be no more than temporary fixes.

In none of the countries mentioned above is there a settled consensus on the shape of long-term energy policy.

Nonetheless, the trend toward greater government intervention in the energy sector is now well-established. As the limitations of particular policies are revealed, policymakers will respond with more intervention, not less.

The role of the state will have to expand further, not least to address the investment gap that has emerged.

Additional funds are needed to meet future demand for all forms of energy. Financing the transition to a low-carbon economy will require vast sums.

Governments are likely to be the main source of the necessary capital, as well as supplying guarantees and subsidies to the private sector.

But whether governments, many with finances already overstretched by Covid-19, will respond adequately is far from certain.

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