The perfect storm

In less than a year, carbon-quota prices have more than doubled. The total annual revenues from the sale of electricity in Bulgaria are actually slightly more than the amount that the energy sector will likely pay for emission allowances in 2021. And the government is oddly missing from the picture. We are in free fall, with the worst-case scenario also the most likely one.

So what to do? There are two options:

The first is a mass shutdown via insolvency—which is feasible, since most thermal power stations have negative capital—followed by a write-off of losses to the tune of 5 billion leva. Large-scale Imports of electricity will become indispensable to balance demand and supply. 

The second is a 70-100% jump in electricity prices for households and for industry.

An essential rule in managing technological change is that those who are subject to it and are supposed to benefit should experience a positive profit-loss balance for most of the period of transition from old to new technologies. If the shift is too radical—that is, “revolutionary”—the negative balance between value-destruction and value-creation will end in cataclysm.

As in a giant accelerator during the journey to the carbon-free economy, negative trends are likely to interact and mutually enhance their impact, eroding the EU’s edge as the global ideological hub of climate change.

To mitigate climate policy shocks, the European Commission and EU states’ governments have made provisions for billions of euros in grants and soft loans to act as buffers.

Brussels’ cash, however, will prove too little and too late to prevent disaster. Even in an optimistic scenario, European consumers will be hit hard by permanent electricity price hikes long before climate policies offset losses in income and jobs.

EU power market integration and market coupling are likely to even out price differences and, overall, to result in cheaper power, leaving countries like Bulgaria—with production costs of just ten eurocents/KWh—balancing high-price countries like Germany, where retail electricity prices top 30 eurocents/kWh.

The same pattern applies to the natural gas market. In the offseason of May, natural gas prices topped €25/MWh, the highest since early January. The official explanation is that levels of stock in gas storage facilities are low, at slightly over 31% of capacity. But this is unconvincing: compared to previous years, such levels are pretty normal for early May.

And even supposing that gas stock levels are low, would it have been logical to replenish them at peak “winter” prices? Hardly. Unless, that is, you believe the situation is out of control and that gas prices will escalate further, making it more important to have gas physically in place in your storage facilities.

But there has been a third factor driving up natural gas prices, apart from climate change and the pandemic. This has been the unique role of natural gas as the bridging fuel of the energy transition and the €50/t “carbon-neutrality premium” built into the price of carbon-neutral gas.

The first deliveries of expensive carbon-neutral LNG—from Cheniere Energy and Shell—left Cheniere’s Sabine Pass liquefaction terminal in Louisiana, destined for the most climate-conscious segment of the global market, the EU. So it’s reasonable to suppose that this premium is directly reflected in the €25/MWh price for natural gas.

Oil and natural gas prices will rise further due to the assault on oil and gas companies and the resultant additional costs investing in exploration and development of new reserves. Most major energy companies have warned against this “climate frenzy” which is driving up energy prices, offering to cooperate and seek more accommodating patterns to achieve climate goals. Tired of being ostracized, oil and gas companies—including U.S. shale oil and gas companies—have joined the price surge, opting to translate higher prices into shareholders’ dividends instead of competing with each other on a global scale.

In short, climate change considerations have given rise to something like a cartel, which is now benefitting from a “perfect storm” at this most critical and vulnerable point of transition, before the consumer starts to enjoy the blessings of climate-neutral energy and industry. Which is very dangerous indeed, since the double whammy of high energy and emissions prices threatens to deal a fatal blow to the competitiveness of the EU’s economy and to the EU’s global standing, social peace and democracy.

It’s not unprecedented. A century on from the Great October Socialist Revolution, another generation of Bolsheviks threatens to derail humanity from the normal track of its development. Only, this time, they are inspired, not by the Communist Manifesto and Leninism, but by the new creed of climate radicalism. And, once again, it is Germany that is taking the lead—unleashing the forces of well-intended evil, this time, without even having to resort to a sealed train with a new Lenin inside.