The growing Atlantic energy divide

When Donald Trump occupied the White House between 2017 and 2021, he encouraged a large increase in US gas and oil output. His successor, Joe Biden, reined in the growth rate, but still granted permissions for additional capacity. This was due to concern about escalating prices for fossil fuels and worries over the impact of the Ukraine war on energy supplies to democracies. President-elect Trump has now pledged to resume intensive exploration and development of hydrocarbons at home.

In contrast, the European Union (EU), with little domestic oil and gas to exploit, was dependent on imported Russian gas and oil. The bloc decided to switch away from these supplies as retaliation for the invasion of Ukraine, leaving the EU vulnerable to energy shortages.

This meant the EU had to import more liquified natural gas (LNG) from the US and Middle East. This is both more expensive and more carbon-intensive than gaining supplies of Russian gas by pipeline. Germany had already compounded the energy shortage by closing all its nuclear power stations.

The main regional deposits of oil and gas lie in the North Sea, mainly controlled by the UK and Norway who are not EU members. The UK has decided to accelerate the rundown of its own oil and gas operations as part of its net-zero strategy. The EU is putting in substantial renewable electricity capacity and argues that this will be cheaper in the longer term.

During the extended period of this energy transition there are many additional costs to build new facilities and infrastructure whilst still leaving fossil-fuel capacity in place for days when the wind does not sufficiently blow – or the sun does not shine enough.

The price of US electricity to high-energy-using industries is well under half the average EU price. EU residential consumers, on average, pay 80% more for their electricity. One quarter of the price of residential and industrial electricity in the EU is tax, with a combination of VAT, Renewables Tax, Environmental Tax and other duties.

Prices and supply are heavily regulated by Brussels, with policies designed to speed the transition to renewables. The EU is working on ways of storing renewable power to reduce the need for backup generation for low wind days and dark, still nights. UK energy prices are at the expensive end of the EU spectrum.

Some comparisons show a larger advantage to the US. There are substantial variations in electricity prices between different states in the US, so with sensible location industry can secure an advantage. There is less variation between EU member states, given the common regulation and taxes.

The issue with sun and wind

Scandinavia was recently alarmed by the way its imported electricity prices from the continent shot up during a period of little wind and sun. Electricity was available at 0.7 to 0.9 Euros a kilowatt hour (KWhr), a huge rise on more normal levels.

Germany needed plenty of extra power and had to pay for it. Norway sells a lot of energy to the continent by being plugged into the continental system through electricity interconnectors. Some in Norway are arguing that export sales at high prices leads to higher domestic prices.

As a result of the shock, Norway is considering not replacing Skagerrat 1 and 2 when those two interconnectors are retired soon. Norway is in a good position to be more energy independent with plentiful supplies of gas, oil and hydroelectricity when there is sufficient water.

The continent of Europe is running increasing risks with growing dependence on renewables. The EU has made various proposals to seek to overcome the issue of intermittency of renewable power. It proposes the roll out of more battery vehicles, and more battery storage.

It favours the use of smart meters to flex prices and availability of power, which will get more people to run machines at times when power demand is low. It would like electric-car owners to recharge when there is more power available. It also proposes the roll out of green hydrogen as a fuel for vehicles, given the difficulty of using large batteries for trucks and heavy equipment. It also proposes some carbon capture and storage to allow continued use of gas. It promotes green electricity for more industrial uses and for home heating.

All these proposals require substantial up-front capital investment. Several are mutually dependent, so it requires coordination of the pace of roll out. All of these depend on consumers and businesses wanting to make the necessary changes and spend large sums of their own money on the new equipment, vehicles and energy systems.

It is true that once you have enough windfarms and solar panels in place you benefit from the free energy that the sun and wind supply to drive them. This does not make the final electricity free. There are still the substantial capital costs of putting in the wind and solar arrays. There is the cost of financing them, repairing and maintaining them and replacing them at the end of their lives.

During the transition period the electricity system needs to pay enough to fossil-fuel generators to keep their plants available for the low wind and sun periods. So far it has required extra subsidy and privileged access or higher prices to promote renewables. The extra taxes on EU electricity paid by consumers are, in part, to help finance an accelerated pace of decarbonisation.

Industrial competitiveness

When in office, president-elect Trump will reinforce onshoring policies in the US developed by himself and President Biden over the last eight years. He will be pleased that US electricity is still considerably cheaper than European power. US gas has an even bigger advantage compared to European, now that so much European gas is imported LNG with all the extra energy cost of conversion to and from a liquid, and the long-haul marine transport.

Energy costs play an important role in much of modern industry. Factories and plants are now very automated, cutting labour cost. The most energy intensive areas include petrochemicals, aluminium, steel, glass, paper, oil refining, cement and ceramics -where energy costs way exceed labour costs. Capital costs are the other principal expenditure, where access to plenty of affordable investment money is a consideration when choosing a location. The wide and deep US financial markets assist the onshoring drive.

The US will also seek to make it more difficult for China to dominate in manufacturing via tariffs and selective bans on its products. This too has been a bipartisan US policy, with President Biden strengthening trade restrictions and tariffs as his term nears its end.

The EU has been more divided over how to respond to China, seeing it as an important market for items such as German cars, but also seeking to restrict Chinese export success by selective tariffs and regulations. EU tariffs on Chinese cars are under half the US equivalent because of internal debate and compromise about how far to go in arresting the surge of Chinese battery vehicles on the market.

As a result, it seems likely the US will be more successful in onshoring and bolstering manufacturing that the EU. The important EU car industry is struggling to accelerate its transition to battery vehicles, whilst the US industry is not similarly preoccupied.

Conclusion

The growing gap between US and European energy prices reflects the wish by the EU and UK to speed the end of fossil fuels, whilst the US allows their expansion where it delivers cheaper or more usable power. President Trump will intensify this difference, leading to more industry locating to the US rather than the EU.

Norway potentially seeking to distance itself a little from the EU market is not helpful to the EU given the bloc’s dependence on imports. It is still not clear what mix of battery storage, green hydrogen and carbon capture and storage will emerge to enable the scale of net-zero conversion the EU envisage. Meanwhile, leading world competitors such as China, the US and India will proceed without seeking speedy progress to net zero where it is more expensive or less convenient.

In the end, the success of the energy transition to net zero rests much on the consumers and businesses of the private sector. It is going to take a much faster rate of adoption of electric vehicles, electric heating and electrically powered industry to hit increasingly difficult net zero targets. So far, the EU has not yet managed to replace all the fossil fuel electricity generation, let alone make provision for the need for very large expansion in electrical power to replace the use of gas, oil and coal in heating, travel and industry.