Why and How Europe Must Make Electricity Cheap

I was recently looking at a presentation showing average electricity prices for industrial and commercial customers across Europe. The lowest cost countries were Sweden and Finland, while the highest was the UK. The UK prices were roughly three times those in the Nordics, and the conclusion was hard to avoid and that was that if that gap persists, the UK is not going to just deindustrialise over the next decade, but it is also unlikely to attract new industry going forward. My thoughts then turned to Germany where industrial output is still close to 10% below pre-COVID levels, and the chemical sector is running at its lowest capacity utilisation in more than 30 years. These are not small warning signs, they are big blarring red lights from the two of the countries that led the industrial revolution at the turn of the 20th century. The reality is simple and that is energy, and in particular gas, is too expensive for Europe to be internationally competitive, and that is unlikely to change anytime soon given the ongoing war in Ukraine and the escalating tensions in the Gulf. There is, however, an alternative and that is to electrify as much as possible of the energy system while at the same upgrading industry by digitalising and AI enabling it. The good news about that electricity is that it can be locally produced which lowers dependency and geopolitical risks in and around the production and transport of oil and gas. But that raises the uncomfortable question: who is going to invest in electrification in a system where power prices are high and volatile, as they are today across UK, Germany and much of Europe which in turn begs the question on how to bring those prices down.

Here are some ideas to spark debate and progress!

Firstly, stop the stupidity which start with the German government’s plan to build lots of new gas generation capacity which will be switched to hydrogen by 2045. That means Germany is effectively proposing to subsidise a new fleet of plants that would run in a market still heavily exposed to imported gas and high price volatility and then hoping that cheap hydrogen will one day arrive to make the economics work. Hope is not a strategy and whatsmore the result would be tying German consumers into high power prices for years to come which could be economic suicide. The better answer is not no backup, but smarter backup which means better grids, more interconnection within Germany and with its neighbours, lots of storage as well as greater demand flexibility and much more intelligent market design so that Germany needs less gas in the first place.

Secondly, we need to stop treating renewable volatility as a problem and start using it as a feature of a 21st century low cost electricity system. When there is abundant wind and solar, electricity should be very cheap and that should trigger demand across the system. The practical answer is to push dynamic pricing much further so that all customers can actually see and respond to low price periods. Electric vehicle charging, heat pumps, hot water systems, cooling, and many industrial processes can all be shifted in time. Europe should also support the build out of energy storage solutions such as batteries and smart energy management systems so that excess power is stored for future use rather than curtailed.

Thirdly, we need to invest in upgrading the power system which does not equate to just ‘building more grid.’ Instead the focus needs to be on using the system we have more efficiently and more cost effectively. That means first and foremost investing in digitalisation and non-wire solutions, such as batteries and advanced power electronics solutions. which are quick to deploy. Europe also needs stronger and more resilient grids and more interconnection which means speeding up permitting for new transmission lines, upgrading distribution networks for EVs and heat pumps, connecting more renewable generation faster and using digital tools to manage the system in real time. To enable this to happen incentive structures for grid operators and the management of grids needs to be changed. Finally, one clear focus should be on sharing best in class practices across Europe and to benchmark operators against each other.

Fourthly, we need to fix power market design and pricing. We cannot continue with a system where expensive gas sets the price for everyone, even when most electricity is being generated much more cheaply. In practice, Europe should look at ways to separate low cost renewable and nuclear power from expensive fossil backup, expand long term contracts such as PPAs and contracts for difference, and reward flexibility and storage properly. Consumers should also be able to benefit more directly from periods of cheap electricity instead of seeing everything averaged out into high retail tariffs. There also needs to be far tougher scrutiny of how scarcity pricing works in gas and power markets, because when the most expensive unit sets the price for everyone else, the incentive to game the system becomes obvious.

Fifthly, we need to align incentives for electrification. This is where policy has to stop sending mixed signals. Europe should take taxes and levies off electricity bills and shift more of those costs either into general taxation or onto fossil fuels. It should redesign tariffs so that strategic industries such as chemicals, steel, aluminium, semiconductors and other critical manufacturing can access globally competitive power, especially where they are willing to provide demand flexibility or invest in electrification. At the same time, governments should give businesses clear long term signals that electrification will be supported through tax credits, accelerated depreciation, grants and cheap financing. If a company wants to electrify a furnace, switch to heat pumps, install storage or move vehicle fleets to electric, the support framework should make that decision easier, not harder.

Finally, we need to bring in low cost capital at scale. Electricity infrastructure is capital intensive but predictable, which makes it ideal for low cost financing through multilaterial institutions like the EIB, national development banks and infrastructure funds. The practical step here is to treat grids, storage, nuclear, renewables and electrification infrastructure as strategic assets and finance them accordingly. Governments and public banks can provide guarantees, blended finance, concessional loans and credit enhancement to bring down financing costs. Europe could also create dedicated electrification funds for industry, transport and heating so that businesses can borrow cheaply to switch away from fossil fuels.

If you put all of this together, what emerges is a very different picture of Europe’s future, one where energy is not a constraint but a competitive advantage. In this new world industry relocates not because of subsidies but because power is cheap and abundant and where households benefit from lower bills not through subsidies but through the structure of the system itself. And at the same time we break free from the risks of being dependent on fossil fuel imports.