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AUGUST 3, 2022

Good morning,

It’s the dog days of summer in the Northern Hemisphere and the U.S. Congress might be on the cusp of passing its biggest climate change bill ever—but in Europe, winter is coming into stark focus, as Anca writes in her latest article.

We have a Data Dive putting the congressional action into context, plus an extra-focused Lunchtime Reads on the legislative machinations. Stay tuned for more coverage!

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Send your energy photos, story tips and more to news@ciphernews.com or reach us directly at amy@ciphernews.com and anca@ciphernews.com.

Bracing for winter, Europe clings to natural gas

BY: ANCA GURZU

August is the time to hit the beach in Europe, but for many the focus is on something cooler: Winter is coming.

The threat of a full natural gas cutoff from Russia, historically the European Union’s main supplier, is leaving the bloc scrambling to fill up its storage sites and ration gas use to ensure people don’t freeze during the cold season and industries don’t have to shut down.

Germany is particularly vulnerable because it was receiving more than half of its gas from Russia before the war.

German authorities are putting a huge onus on its citizens to reduce individual energy consumption with instructions that would be political suicide in the United States.

The government laid out a plan last month that, among others, mandates unused office spaces, hallways and storage rooms no longer be heated. The measures include a ban on heating swimming pools in private homes and suspending minimum temperature requirements for apartment rental contracts.

A summer nationwide information campaign instructs citizens to take shorter showers. The German city of Hanover has turned off the heating and switched to cold showers in all public buildings.

On Tuesday, the state of Bavaria agreed to disallow heating in bathrooms in public offices during winter and instructed officials to avoid business trips.

The federal government recently had to bail out one of its biggest utilities due to severely reduced Russian gas imports.

It’s also considering extending the life of Germany’s three remaining nuclear plants—an unimaginable move just weeks ago in a country adamant about dropping nuclear.

Other nations are following suit.

Spain’s government this week ordered all businesses to limit their temperatures and told shops to turn their lights off at night. Belgium agreed last month to also keep open some nuclear reactors.

Only a couple of months ago the EU boasted its plan to shed quickly over the coming years its dependence on Russian gas, a fuel it relies heavily on for home heating and industrial uses.

But short-term reality is kicking in now, and countries are clinging to the dwindling supplies they are getting, accusing Moscow of using energy as a political weapon since Russia invaded Ukraine on Feb. 24.

"There is a clear pattern of Russian behaviour to create uncertainty, increase prices and undermine the EU unity," Energy Commissioner Kadri Simson said at the end of July. "We know that gas deliveries can stop any moment."

Russia supplied 40% of the EU’s gas needs before it invaded Ukraine. Supplies are now a third of what they were a year ago.

Earlier this summer, Moscow reduced gas flows further via Nord Stream 1, a pipeline from Russia to Germany that runs under the Baltic Sea.

The move is part of a weekslong geopolitical blame game ostensibly focused on turbine maintenance that is stoking anxiety in Europe. A dozen EU countries have already seen their Russian gas supply cut off or reduced.

An EU-wide gas savings plan kicked in Aug. 1, calling on member countries to reduce their gas consumption by 15% until the end of March to prepare for a worst-case scenario.

This corresponds to a gap of 45 billion cubic meters in case of a full cutoff and a cold winter, according to the European Commission, the EU’s executive arm. The gap would be 30 bcm during an average winter.

The bloc’s economy, already plagued by high energy prices, could shrink by up to 1.5% of GDP if Russia were to cut gas flows, according to the Commission.

But the EU’s gas-saving plan is voluntary and replete with exemptions—the result of nationalistic tendencies and political pushback from Southern Europe, which is less dependent on Russian gas.

This could leave the goal of staying warm this winter up to political will—and luck that winter isn’t too cold.

If all of the deal’s carve-outs were used, which includes exemptions for island states or countries with limited gas connections, the EU could get through an average winter, the Commission said. A cold winter would require more severe measures. The EU’s gas savings plan could become mandatory under several emergency scenarios.

EU officials have also been working hard to clinch new deals with other gas-exporting countries, including the United States, Azerbaijan, Egypt, Qatar and Nigeria.

But the head of the International Energy Agency says that’s not sufficient.

"It is categorically not enough to just rely on gas from non-Russian sources," Fatih Birol, the IEA’s executive director said in July. "These supplies are simply not available in the volumes required to substitute for missing deliveries from Russia."

The EU’s gas storage sites are 69.3% filled and countries need to reach at least 80% by November 1 to protect against the threat of Russia cutting supplies.

"Solidarity measures are needed now if the continent’s gas balance is not to be left to chance," consultancy Wood Mackenzie said.

DATA DIVE

Clean energy subsidies could offer best bang for our buck, study says

Source: The Energy Policy Institute at University of Chicago • Analysis covers electricity sector in a 16-year period beginning in 2019. Analysis excludes 10% of 2019 fossil-fueled generation from plants with the highest operating costs, which the authors designate as "peaker" plants (that balance out variable renewables) or those needed for local reliability.

BY: AMY HARDER

Subsidizing clean energy would lower electricity prices while drastically reducing greenhouse gas emissions, according to a new paper from the University of Chicago’s Energy Policy Institute.

In fact, such an approach is the only policy out of three considered—the two others being carbon price and a clean energy standard—that reduced wholesale electricity prices throughout a 16-year period. The other two raised prices, as the above chart shows.

The paper, released in mid-July, is timely.

It came just a few days before Sen. Joe Manchin (D-W.Va.) struck a deal with Senate Majority Leader Charles Schumer (D-N.Y.) on a package of nearly $370 billion worth of clean energy spending, much of which is in the form of tax credits, over the next 10 years. Manchin is an essential vote for Democrats’ climate change priorities.

The Senate could take up the bill as soon as this week, though final passage is still uncertain.

Although Congress has debated for decades the potential for a clean energy standard or a carbon price, lawmakers have almost always only passed legislation subsidizing clean energy.

Subsidies have long been considered a politically easier but economically less efficient way to tackle climate change compared to a carbon price.

This paper suggests that such conventional wisdom could be wrong—for a particular reason and with important caveats.

The authors examined just the electricity sector, whose unique makeup is unlikely to transfer to other sectors like transportation.

"We found that the standard economic logic of carbon pricing doesn’t fit the electricity sector very well, due to the other pricing distortions in the industry that have necessitated other regulations," said Severin Borenstein, co-author, professor and faculty director of the Energy Institute at the Haas School of Business at the University of California, Berkeley.

By making clean energy cheaper with subsidies, the federal government is effectively "counteracting" the higher electricity prices consumers are paying because of pricing distortions, said co-author Ryan Kellogg, a professor at the University of Chicago’s Harris School of Public Policy, in an interview with Cipher.

The paper considered technology-agnostic subsidies. The pending legislative package converts some technology-specific subsidies to be more tech neutral beginning in 2025 for at least seven years, according to an analysis of the bill by Washington Analysis, a research firm.

The less technology specific the subsidy, the better—as long as it reduces emissions, Kellogg said.

The potential that subsidies could lower electricity prices is critical because the power sector will play an increasingly central role in a clean energy economy as the transportation, buildings and manufacturing sectors all at least partially transition to being powered by electricity.

Although subsidies may save consumers money on their power bills, they’re costing someone—and in this case the government—more money.

In the pending legislation, the money to pay for subsidies comes largely from changing tax policy on other sectors, including corporations and private equity firms. Such provisions may prove problematic with another key Democrat, Sen. Kyrsten Sinema of Arizona.

The paper, which will be published in the Environmental and Energy Policy and the Economy journal, has important limitations because its focus is on the economics of electricity generation. It doesn’t consider transmission limitations or variability challenges with wind and solar, real-time hurdles that will surely affect electricity prices and emission-reduction efforts.

Kellogg said he hopes the paper inspires experts to apply it to more real-time grid models.

Lunchtime Reads and Hot Takes

Democrats’ side deal with Manchin would speed up projects, West Virginia gas — The Washington Post
Amy’s take: Interesting the way this is being framed as if it’s a concession to Manchin to speed up energy projects (to be sure, approving that pipeline is!). But clean energy companies really need to be able to build things (without disregarding communities). This should, broadly speaking anyway, be a victory for anyone who cares about climate change.

Climate Bill Stands to Give Green-Energy Investors a Lift — The Wall Street Journal (pay wall)
Amy’s take: This article talks about how private-equity firms and corporations are poised to benefit by taking advantage of new tax credits…

Corporate America strikes back — Axios
Amy’s take: …Yet some still don’t like it. I rationally understand why corporations fight ANYTHING that hurts their bottom line, but compromises are inevitable—on Capitol Hill and in board rooms. Maybe this compromise isn’t worth fighting given the potential upside in new green tax credits (and, uhhh, saving the planet!).

The two-week scramble that saved Democrats’ climate agenda — The Washington Post
Amy’s take: Gotta love this quote from Sen. John Hickenlooper (D-Colo.) urging companies to tell Manchin to support a climate bill: "You can sit on your hands, or be useful."

This giant 'water battery' under the Alps could be a game-changer for renewable energy in Europe — CNN
Anca’s take: What a cool project! It took 14 years to complete, however, which is a reminder that getting innovative tech off the ground can take time—and we don’t have time to waste. The project is also a reflection that we need a multitude of solutions to tackle climate change, and this is one of them.

Air conditioning is a climate disaster and Bill Gates is investing in this startup to fix it — CNBC
Amy’s take: I did a whole story once on air conditioners and regulations, so I find this innovation personally exciting.

More of what we're reading:

Democrats scramble for Sinema’s support on climate, health and tax bill — The Washington Post
India to order use of cleaner fuels under push for net-zero — Bloomberg
Gas in Africa: Still a ‘transition fuel’? — Energy Monitor
Intersect raises $750M to ditch PPAs and bet big on clean industry — Canary Media

AND FINALLY...

Hot Indian solar

Cipher reader and fellow journalist Bill Spindle shared this photo he recently took while on a reporting trip in India. This is of the Bhadla Solar Park, one of the world’s largest (if not the largest) solar farm. The solar panels are getting cleaned, Spindle writes: "It was 120 degrees the day I was there!" (Follow his energy and climate reporting by signing up for his newsletter here.)

Each week, we feature a photo that is somehow related to energy, the thing we all need but don’t notice until it’s expensive or gone. Email your ideas and photos to news@ciphernews.com.