Sustainability and security
Institutional Communication Service
20 July 2022
The issue of energy supply is most likely the "hottest" topic throughout Europe. It is said that the dreaded energy crisis is an opportunity to accelerate the transition to renewables, which, however, is unlikely to happen quickly. On the contrary, it seems to be significantly delayed by first the pandemic followed by the conflict in Ukraine. Indeed, there is talk in Europe of a temporary return to coal and nuclear power and, more generally, of a combination of resources instead of focusing solely on renewables to deal with the impending contingency of the autumn-winter term, when we may find ourselves in the cold and without power - but also without work, due to the possible shutdown of many energy-consuming manufacturing activities. In recent weeks, a conference dedicated to public services and the ecological transition was held in Milan, attended by several key players in the energy and distribution sector, including Enel and Snam. The panel discussion was moderated by Prof. Barbara Antonioli Mantegazzini, Deputy Director of the Institute for Economic Research at USI and a scholar of energy markets. We present the interview that appeared in Corriere del Ticino on 15 July 2022.
Professor, is the risk of blackouts in Switzerland (and Europe) real, and how much would it cost us?
We are experiencing a period of significant volatility in both prices and energy flows. Regarding gas, Switzerland is clearly dependent on foreign supplies, as our country has no domestic production or storage facilities. Almost half of the imports come indirectly from Russia, some through pipelines in Ukraine. For electricity, although we have substantial indigenous production, the situation still has margins of uncertainty. In 2021, 62 per cent of domestic production came from hydropower plants, which are currently affected by the ongoing drought. The share of imports from the neighbouring countries also has obvious criticalities. Consider France, one of our partners in the electricity trade, where nearly half of the power plants are shut down due to planned maintenance and technical issues. As a result, nuclear production has fallen to its lowest level since 1998. Returning to Switzerland in 2020, the study conducted by the Federal Office for Civil Protection had already shown an increase from 2015 in the risk of electricity shortage, defined as a possible reduction in electricity supply for several months (especially winter). The overriding reason was climate change. If it were to occur, the economic counter value of such occurrences would be significant, especially in terms of economic losses and community repercussions. Let me be clear: these risks affect not only Switzerland but Europe as a whole. I say this to highlight the already anticipated severe turbulence in the energy market. The Blackout simulator from the Energie Institute at the University of Linz estimates the cost of a potential power outage in Europe on a regional level. Running a simulation for Germany, France and Italy and assuming a one-hour blackout at eight o'clock in the evening, the related costs for the system and society would be around 7 euros per kWh, thus 7,000 euros/MWh. If we consider that the spot price of electricity is just over 400 euros/MWh for the same time slot, the issue's magnitude can be easily understood.
Will the return to coal and nuclear power be just transitory, or are we facing a more consistent course?
Nobel Prize-winning economist George Stigler once said that "a transitional period is a period between two transitional periods.'" The feeling is that the transitional has been extended further for contingent needs, for example, the use of environmentally unpopular measures such as a return to coal. According to Eurostat data, fossil fuels are back to being the primary source of electricity in 2021, reversing the trend from 2020, also aided by the economic recovery. The executive director of the International Energy Agency (IEA) recently said that the world would need crude oil and gas for much longer, the better to get them from reliable partners who are working in the direction of reducing CO2 in their production processes (such as, for example, Canada). However, I do not believe that this represents a lasting reversal, an afterthought. The path to decarbonisation is now definitively marked out, as evidenced by the amount of investment made available by Europe for the Green Deal (1 trillion euros over 10 years) and the strategies pursued by companies, which are increasingly oriented in this direction. Even what has seemed to many to be a step back for Europe in identifying sustainable technologies- including gas and nuclear in the Energy Taxonomy- should be scaled back. For example, gas plants will require a set of technical specifications that can significantly reduce the CO2 produced. The perception is that we have broadened the vision of the energy strategy by contemplating a broader production energy mix."
What can we do to accelerate the energy transition without compromising the security of supply? In other words, should we prioritise security or sustainability, understood as economic?
While sustainability has been the key issue on policy makers' agendas for quite some time, energy security is a fundamental element for society and the industrial system that we have perhaps overlooked for too long. There has been a preference for affordable supply, secured by the geographic proximity of trusted trading partners, even by good neighbours, and ending up becoming partially short-sighted in delineating national strategies. This is particularly true for Europe. Just think of Germany and Italy. This short-sightedness ended up taking its toll. Security and sustainability must once again travel in parallel. The key question for the future ahead will be how to accelerate decarbonisation and energy transition without compromising security and ensuring supplies at bearable prices. Because sustainability is not only environmental but also economical. High energy bills are a problem for consumers, especially economically fragile ones, and businesses, whose competitiveness risks being compromised.