We Need a New Framework for Thinking About Energy Policy
A year ago today, the price of EU natural gas was just off of its all time high of $55 per million BTU. For reference, up until that point, its price had rarely exceeded $10. The spike in energy prices was caused primarily by the sanctioning of Russian natural gas following the invasion of Ukraine, but exacerbated by everything from the continent’s transition out of the COVID-19 pandemic and away from fossil fuels. The sudden drop in natural gas availability and surge in prices spurred a flurry of fearful coverage on the likelihood of a dark and cold winter in Europe from reporters and armchair experts on Twitter alike.
I was finalizing a thesis research topic at the time, and, with encouragement from my advisor, I decided to devote my time to understanding what was going on with energy policy in Europe and how we got there.
One year later, the price of EU gas is roughly back to its 5-year average, and concerns about running out of energy to heat European homes have largely faded into the past. I thought I would never write about the topic again, but last week, I stumbled upon a podcast discussion between the New York Times’ Rogé Karma and the Financial Times’ Martin Wolf on the current state of the global economy. Wolf’s framework for thinking about the world immediately caught my attention. He spoke about “shifts, shocks and fragilities” as a means of making sense things. Similarly, my thesis had developed a framework of shifts, shocks and policy responses reflecting governments’ abilities to adapt and develop resilience — a framework I found eerily similar to Wolf’s. I took the coincidence as a sign to revisit my own work, and see how it was holding up against the present reality.
In 2022, the West found itself in the middle of an inflation crisis and full of doubt about the energy transition. Europe was so desperate to bring the cost of energy down that Germany was burning more coal than it was in the 1980s, and its government was even subsidizing wood-burning stoves as a means of generating heat. Experts were warning of blackouts and increased mortality due to cold.
Fortunately, none of this came to pass, and today, the narrative couldn’t be more different. Energy security has again taken a back seat to the longer term question of sustainability and cutting emissions enough to meet climate targets. More and more economists consider inflation to at least be on a path to stability, to the point where Germany has even slipped into recession.
Classic representation of the “energy trilemma” as coined by the World Energy Council.
Perhaps most importantly, and what gets me most excited today, is that the incentives of the age-old “energy trilemma” are swiftly continuing their re-alignment. The old paradigm was “pick two”: energy security, energy equity or sustainability. The idea behind this was you could burn lots of fossil fuels and have secure, cheap energy for everyone. Or, you can stop doing that and start investing in sustainable energy, but that would either mean having an unstable supply of energy, or making it unaffordable for most.
In our current paradigm, accelerated by decoupling with Russia and China and fortified by President Biden’s investment in renewables via the Inflation Reduction Act, a “trilemma”-shaped trade off is no longer the reality. Governments are making investments in renewables, and this is both bringing down the cost of energy and making the population less dependent on outside supply lines. As Noah Smith writes, “our climate change debate is outdated”.
A big reason behind this is the absolutely precipitous drop in the price of onshore wind (-70%) and solar (-90%), not to mention a 40% drop in the price of lithium ion batteries over the past year alone. The result is that renewables have once again become the biggest source of domestic electricity generation in Europe — even in Germany.
Electricity generation in Germany in the 1st half of 2023, dominated by renewables (from Fraunhofer Institute).
While it feels natural to regard the transition into renewables as a long-term shift, in my work I actually argue that it has acted more like a shock, if an endogenous one. Solar becoming economically viable this decade was far from certain, and the speed with which the US, European and Chinese private sectors were able to develop, distribute and connect the technology took most by surprise. More importantly, I view a shock as a development to which a system must react drastically. In the case of European energy in the 2020s, the triple shock of war, inflation and rapid technological change created the perfect conditions for an accelerated transition to renewables.
My modified “energy trilemma”, accounting for shifts, shocks and institutional resilience.
Coming back to Martin Wolf and his shifts-shocks-fragilities framework, I find it helpful not only to think about the world in terms of underlying fragilities, but also their complement: the resiliencies and adaptability of governments reflected in their policy responses to extremely novel and difficult circumstances. If you take a look at the turn towards supply chain resilience and green energy capacity that economies were taking in the early 2020s, it becomes substantially clearer that Europe was primed to weather the storm.
It should not be understated just how novel the circumstances of 2021–2022 were: a 21st century land war in Western Europe, the highest inflation rate since the 1980s and an entirely uncertain energy landscape. At the center of these shifts and resiliencies are institutions — yet another hypothesis in which my thinking closely aligns with Wolf’s (though I’m a bit embarrassed to admit that I use the word “institution” 109 times in my writing). But while his work focuses on the risk of fragile institutions, I again find it more instructive on where institutions succeeded.
Across both the EU and the UK, governments reformed regulations to allow for novel means of lowering household energy costs through price caps, and entirely new supply lines for natural gas were built to ensure energy security. The fact that the EU’s decentralized governing structure managed to not only keep heat and electricity broadly accessible and affordable but also accelerate their sustainability targets would have been unthinkable just 10 years ago, and today reflects a miracle of institutional resilience.
In contrasting my work with that of Wolf, what I’ve learned is it doesn’t really matter whether we view the impact of shifts and shocks as being shaped by fragility versus resilience. They are ultimately two different sides of the same coin, and I certainly do not view an analysis of fragilities as being inherently pessimistic. If anything, understanding our institutional weaknesses is what has enabled us to make the investments and re-alignments needed to overcome economic, geopolitical and energy crises.
In Martin Wolf’s own words, “I remain ultimately — provided we manage our politics in a sensible way, both nationally and globally, an optimist, and I want people to feel they should be and can be optimists. We have the capacity to improve our world, and we should take advantage of that capacity and that opportunity.” I don’t think I have much more to add.
