NCPA - National Center for Policy Analysis


August 7, 2006

Europe's reliance on Russia for its future energy supplies is no doubt a headache. But the European Union's own energy policies, which produce rising costs, insecure supplies and unreachable emissions targets, are the reason this nuisance is turning into a nightmare, says Dan Lewis, research director for the Economic Research Council in London.

Almost all of Europe's energy comes from private companies competing in supposedly liberalized markets. Yet government intervention severely limits the Continent's ability to compete. Intensive regulation and lavish subsidies for renewable energy sources, nuclear and coal have all played their part. Even gas, once the low-carbon solution, now comes with a high-risk premium thanks to Russia's petropolitics.

As the Continental economy falters, its weakening energy position will only worsen, says Lewis:

  • Normally, one would expect such a slowing economy to result in waning energy consumption and lower prices.
  • After all, Europe's population is both shrinking and aging, and its heavy industry, the big energy user, is heading to the developing world.
  • But Europe has extra energy costs due to caps on emissions and rising subsidies.

In fact, this is an example of how Europe has become the low-growth region of the world: It prices away its competitive power.  And oddly enough, as output slackens energy needs will soar, says Lewis.  According to recent analysis by London-based Augusta Finance:

  • Electricity generation capacity will have to rise at a staggering 8.9 percent a year for many years ahead.
  • Just four years ago the firm's estimate was only 5.7 percent, so the need is becoming greater as time passes.
  • The forecast takes into account the retirement of existing plants and rising demand from countries like Portugal, which traditionally have been light energy users but now are catching up with the energy-intensive Scandinavians and Germans.

Source: Dan Lewis, "Bound for Failure," Wall Street Journal, August 7, 2006.

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