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Raw material costs and looming shortages: these have been the dangers on the path of the world’s energy system transition from fossil fuels to low-carbon alternatives. Until inflation and recession reared their twin heads. Since the start of the year, economies in Europe and North America, previously stalwarts of economic growth, even with hiccups such as the 2008 financial crisis, have been slowing down, and fears of runaway inflation have been rising.
While most of the media attention in this respect has been focused on consumer prices because this is ultimately what people worry about, inflation has contributed substantially to the rising costs of transition metals and minerals as it has added to continued supply chain snags from the pandemic period and to a longer-term problem in mining: absence of investment in new capacity.
Meanwhile, inflation has put governments, especially in Europe, on high alert because of soaring energy costs and shrinking availability. With tens of billions pledged in energy aid to households and businesses, European governments have been busy looking for ways to replenish their cash stocks. And it seems that low-carbon energy investment is one source of that cash.
Germany last month said it would impose a windfall profit tax on low-carbon energy generators. All earnings above 130 euro ($137) per MW-hour for solar, wind, and nuclear power generators will be eligible for a 90-percent tax, Berlin announced in November to the annoyance of the abovementioned businesses.
Yet Berlin has lined up 99 billion euro, or a bit over $104 billion, in energy aid: the most generous in the European Union and one that attracted a lot of criticism from less wealthy EU members, who accused Germany of trying to give its businesses a competitive advantage over other EU businesses because of its deeper pockets.
Germany’s pockets might be deep, but bottomless they are not, hence the rush to secure money from windfall taxes and any other means available. And it’s not the only one: the UK is raising taxes and planning budget cuts to make ends meet. And this will inevitably affect that same low-carbon energy that Germany, the UK, the rest of the EU, and the U.S. so strongly support and work to advance.
Wind and solar were bound to suffer anyway because when the whole economy suffers, it is hard for a single industry to avoid the fallout, even if it is the golden industry of wealthy governments. In the U.S., the solar industry has also been hit by the administration’s trade spat with China, which has resulted in shortages of cheap panels, and in Europe, wind power companies are calling for help.
Amid all this, investment in low-carbon energy is showing signs of slowing down. BloombergNEF has calculated that sustainable debt issuance has fallen by close to a third this year from last and more declines may well be on the way given the current economic environment. Wind and solar projects get a lot of their financing from debt so they will take a hit.
Yet the United States just approved a funding program worth hundreds of billions that focuses on precisely that industry: low-carbon energy. The Inflation Reduction Act should surely help wind and solar, then.
Yet as inflation continues largely unabated, pressure to reduce public spending will be growing in both Europe and the U.S., and with a Republican-dominated House, pro-transition Democrats would have a harder time passing their pro-transition legislation than they did over the past two years.
Besides, for whatever that’s worth, Europe is not particularly happy with the IRA. In fact, it is quite the opposite of happy: French president Emmanuel Macron was uncharacteristically blunt during his recent visit in Washington, where he said that the IRA was “super aggressive for our business people.”
According to France’s leader, the giant spending program of the Biden administration will kill a lot of businesses in France and put millions of people out of a job as it focuses on support for U.S.-made products and technologies. According to Macron, this puts European businesses at a disadvantage, which is the last thing these businesses need right now with their astronomical energy bills.
The European Union is on the brink of recession. According to some, it has already stepped over that brink. Europe, then, is not doing particularly well, but at the same time, it insists on the importance of moving the energy transition forward. Unfortunately, fighting inflation involves raising borrowing costs, and that’s not exactly conducive to the advancement of the energy transition.
“With some developed markets struggling to balance their government budgets, fiscal woes could add to tighter monetary policy as funding costs rise, slowing down much required green investments,” Bank of America analysts said in a recent note cited by Bloomberg.
This sums up the fresh new challenge that the transition faces on both sides of the Atlantic. In a situation not dissimilar to the G7 price cap for Russian oil, politicians in Europe and the U.S. are trying to do something that is essentially paradoxical: tame inflation by tightening monetary policy, which normally discourages new investment, while at the same time trying to stimulate new investment—lots of it—in the energy transition.
