Energy Prices Cause Pain but Spur Innovation

Green Energy

Presentation by Matt Simister, Central European CEO for Tesco (left), and Andreas Beckmann, regional CEO of WWF Central and Eastern Europe, on the sustainability of the food supply chain.

From expected themes such as solar and wind generation via technical limitations like grid stability to the seemingly exotic historical relationship between energy and war, participants at the third Budapest Climate Summit discussed progress to date and challenges currently faced on December 7.

For some decades, the world has been facing a dichotomy: while evidence has been mounting that human activity has been driving CO2 emissions and that, in turn, these emissions have been driving the rise in global temperatures, decision-makers have largely dithered when it comes to addressing these issues.

In this regard, they have mirrored the feelings of their own public. On the one hand, some segments of their populations, notably the youth, have been increasingly frustrated with the seeming inaction of their political leaders, making “climate anxiety” a growing phenomenon.

Yet, on the other hand, these same populations, as customers, are likely to be most reluctant if asked to give up buying their new dress or their next holiday to Thailand.

Thus did Gábor Molnár, head of renewable business development at MET, the Swiss-based, Hungarian-owned energy group, summarize the energy-climate conundrum faced, knowingly or otherwise, by every person on the planet. So, what will drive the much-needed change in attitudes, he asked rhetorically?

“After many years of price stability, low volatility, and predictability, we are now entering a completely new era. I think it’s pretty evident that the sky-rocketing [energy] prices have profound implications on the economy and customer choices,” he declared in his address to the Climate Summit.

Molnár had the evidence to hand. He noted that power and gas prices had been on the rise, even before the Russian invasion of Ukraine, but “the unfortunate event that happened this year triggered huge volatility and price levels that we have never seen before.”

Never Before Seen

The impact has been dramatic on both sides of the supplier-consumer divide. With the end of summer, across Europe, electricity prices began to rise, and “you could see a clear decoupling from the previous year’s patterns, starting from the heating season. This had never been seen before, and obviously, this has been caused by the huge financial incentives on the cost side,” he argued.

The results were even more dramatic in Hungary, where retail price caps had smothered the effects of the earlier price rises.

“Even during the summer, there was a huge difference compared to the [previous] years’ figures, driven mostly by industrial customers [cutting demand]. Unfortunately, many of the production systems are closing, some of them permanently, and the trend is continuing, and it’s getting worse,” Molnár said.

Indeed, the current electricity demand is close to 10% below last year’s level, which in the context of the power sector, with its high fixed costs, represents a “huge” drop.

“This is something that nobody saw in advance. And, frankly, nobody knows where this will stop,” he added.

Yet, despite this gloomy analysis, Molnár expressed optimism that the crisis would ultimately lead to innovation and a more energy-efficient future. He cited forecasts by the International Energy Agency (IEA) to bolster his case.

“The 2010 forecast by the IEA said that, by 2020, the annual installation of wind and solar capacities would be around 20 GW. Nine years later, in 2019, they said the same figure by 2020 would be around 100 GW. The reality was over 130 GW,” he said. He argued that if even an organization that is part of the energy industry cannot grasp the actual pace of renewables deployment, “I think there will be some positive surprises down the line.”

Julian Popov, European Climate Foundation fellow, speaking on Climate, Energy and War.

“The relationship between conflicts and climate [...] is an area we must explore. One reason is that war moves things fast. We tend to think that our renewable energy ambitions, policies, and drives are driven mostly by our climate policies. Well, the biggest driver in renewable energy [has been] war. The Israeli-Arab War of 1973 led to the Arab oil embargo, which triggered a chain reaction of what we’d now call climate policies. It, the oil embargo and the war, started the development of the wind industry in Denmark. The wind industry, which in the ’70s nobody believed would lead to anything, now takes 10% of global electricity generation, and the IEA suggests that, by 2027, that will be 15%. It’s massive! It’s overtaken nuclear energy!”

Eszter Zádori, partner with law firm Dentons in Budapest, on investor sentiment.

“I think solar remains a very important target, especially in Hungary, but it’s very promising to see, in the [Hungarian national] recovery plan, that the government is planning to lift the bars around wind. I see a lot of potential in that. To have a healthy mix, we need wind. And it’s on the agenda of this conference, although very late, but Geothermal is also something that needs to find its place. It’s very unrepresented at the moment, but I’m pretty sure this will not remain as it is now.”

Martin Melecky, World Bank lead economist, on investment concerns.

“There are some other areas that might still need more support, that we still need to address somehow, and they are, for example, [the carbon footprint of] cement and steel and others. It can also happen, and that’s the danger of green bubbles, that some areas of green investment might be a little bit overheated in the short term. The other area we need to support is, for example, green innovation, a new generation of batteries; that might need to be addressed with supplement mechanisms and risk sharing from governments.”

Eric Sievers, director of investments at ClonBio, on the danger of relying on official statistics, taken from his keynote address.

“Europe incessantly publishes reports about renewable technologies, not just Europe, but Hungary also, and almost nothing in those reports comes from industrial reality. For example, in Hungary, there’s lots of discussion of bio-methane this year, and officials get up and say things, [yet] they don’t know that we are the largest biogas producer in Hungary. They just don’t know that our plant exists.

“More often as not, a 2022 report cites a 2018 report, which in turn took the info from a 2015 report and so on all the way back to 1990. Part of the reason for this is that people just don’t get out into the real world. Pannonia Bio has issued roughly 500 invitations to policymakers and academics who write about bio-fuels to visit us over the last decade [in order] to collect actual information and see that what they are publishing is just not connected to reality. One, just one of those 500 people, accepted our invitation, and that was a private individual: no one from the Commission accepted. Without industrially relevant data, EU Climate Policy is ideology, not leadership.”

ClonBio Group owns Pannonia Bio, the largest biogas plant in Europe, based in Dunaföldvár, 100 km south of Budapest.

This article was first published in the Budapest Business Journal print issue of December 16, 2022.

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