Europe's About-face on US Subsidies, Protests in Moldova, and Africa's Fossil Fuel Push
Plus perspectives from German energy regulator Klaus Mueller and IEA’s Fatih Birol on the energy crisis one year in.
Protestors take to the streets in the Moldovan capital of Chișinău (Source: Balkan Insight)
This week we're sharing news out of Europe and Africa. The EU’s contentious response to US climate subsidies has continued to evolve, with more European leaders pushing for the loosening of state aid restrictions and government subsidies. We explore the ongoing energy crisis through the eyes of two industry leaders, and its effects on the ground as protests erupt in Moldova (notably another ex-Soviet state reportedly being pressured by Russia). Finally, Uganda and other African nations are raising difficult questions about the rights of countries to develop their fossil fuel resources in the name of economic development, especially as wealthier nations calling for low-carbon futures continue to increase oil and gas production.
Quote of the week: “Russia played the energy card, and it didn’t win” - Fatih Birol, IEA Executive Director
Europe Dials Back Criticism of US Climate Spending, Redirects Focus toward China
THE CONTEXT: This builds on previous updates about the EU’s discontent with the IRA’s domestic manufacturing provisions. In early February the EU shared proposals for their own climate spending package and potentially loosen state aid rules to enable member states to provide their own subsidies.
WHY IT MATTERS: As one anonymous EU official puts it, “We’ve moved from a debate on what the U.S. shouldn’t have done, to ‘What do we do now? How do we take care of our own fate and destiny?” (Wall Street Journal)
DRIVING THE NEWS: After months of vocally criticizing the climate provisions of the US’s Inflation Reduction Act (IRA) as protectionist and a threat to European clean technology manufacturing, EU leaders seem to have reversed course and decided the economic threat is minimal.
European Union Executive Vice President Margrethe Vestager recently shared that upon closer analysis, the US domestic manufacturing subsidies pose less of threat to European competitiveness than previously thought. While Vestagar said that US subsidies do risk “pausing the acceleration of green industries in Europe,” she acknowledged that relocating businesses to the US is no easy feat: “If people think that it’s easy to do business in the U.S. just because of the ease of getting a subsidy, they’re wrong” (Wall Street Journal).
Frans Timmermans, EVP of the European Commission’s work on the Green New Deal, admitted that EU renewable energy subsidies already top €70 billion annually; in aggregate much larger than the IRA’s climate spending of $369 billion across 10 years[1]. Europe’s amount is “at least comparable to the amount of money that the Americans are putting on the table,” says Timmerman (Bloomberg).
Figure 1: EU Subsidies on clean energy technology compared to expected U.S. IRA spending (Source: Bloomberg & European Commission)
GERMANY’S RESPONSE: Economic minister Robert Habeck is now proposing Germany implement its own tax credits to strength production capacity for clean energy. As he explained, “this is important if the energy transition is to succeed and to safeguard jobs and value creation in Germany and Europe.” (Washington Post)
Germany will need to roughly double its current wind and solar production to meet its 2030 target of 80% gross electricity generated by renewables.
Two key concerns are driving Habeck’s push for federal subsidies: first, the threat of US subsidies luring clean tech companies to relocate across the Atlantic, and second, the long-acknowledged risk of overdependence on China for critical clean technology components and materials.
MOVING FORWARD: As with Germany’s concern above, the EU has largely pivoted its focus (back) to China and the risk posed by highly concentrated clean technology and critical material supply chains.
Dive Deeper: Bruegel, a Brussels-based think tank, published a very in-depth policy briefing that investigates what the IRA is, how it compared to similar EU policies, what the IRA’s impact will be on the EU and how the bloc should react.
Interview with Head of Germany’s Energy Regulator, Klaus Mueller
Last week the Washington Post interviewed Klaus Mueller, head of the Federal Network Agency (Germany’s electricity and gas regulator).
WHY IT MATTERS: The interview provides insight into what German (and more broadly European) officials are thinking about how the energy crisis will unfold and what the key remaining dangers are moving forward.
CONTEXT: Germany successfully cut natural gas demand by an impressive 14% in 2022[2] through a combination of behavioral action (lower thermostat temperatures), fuel switching (largely to coal), and slowing energy-intensive industries.
KEY TAKEAWAYS: Overall, Mueller remains “optimistic” that no further issues will emerge this winter, but cautions heavily against relaxing too much, noting that a lot could still go wrong.
One key danger is if consumers and businesses start to tire of conservation efforts that were originally motivated by active fears of winter blackouts and rationing. He says that at this point it is difficult to tell whether the efforts will wane or if the population will “redouble their efforts based on experience thus far.”
Mueller noted an interesting parallel: based on the COVID-19 pandemic rules for masking and social distancing, “always being told what to do is not especially popular.”
Second, the potential still exists for unplanned shocks including a late winter cold snap or a pipeline accident that requires a large drawdown of stored natural gas, thus weakening Germany’s storage preparations for next winter.
Finally, Mueller reiterated the importance of preparing for next winter starting now: “We’re focused already on winter 2023-24, and we know that Germany, and large parts of Europe, will have to get through the next winter without Russian pipeline gas… The risks are in plain sight.” He added: “Will next winter be so mild? On one can say.”
Protests in Moldova Over High Energy Costs Backed by Pro-Russian Sor Party
WHY IT MATTERS: Protests over high energy costs have been on the rise around the world over the last year as the energy crisis continues. Worry has grown over the potential destabilization and/or violence in developing and developed countries alike. Moldova–which still relies heavily on Russian gas imports–is facing similar risks, and its European neighbors are watching closely as the government seeks to manage the crisis..
DRIVING THE NEWS: Thousands of protestors took to the streets of Moldova’s capital, Chisinau, last week to demand government subsidies for high winter heating bills.
The protest was organized by Moldova’s pro-Russian Sor party, which reportedly covered the cost for many protesters to travel to the capital city of Chisinau.
Moldovan president Maia Sandu said that the protests are part of an ongoing Russian effort to undermine the government (Washington Post). Last year Russia cut gas supplies to Moldova by half in what Sandu says is an effort to “cause major discontent among the population and lead to violent protests" (BBC).
She added that the plan now is for "diversionists with military training […] who would undertake violent action, carry out attacks on buildings of state institutions or even take hostages"
GOING FORWARD: President Sandu says that energy bills now consumer more than 70% of household income in many parts of the country. Moldova is working to diversify its energy sources since the beginning of the war, but Ukraine’s short supplies and high costs for Romanian electricity has made that difficult.
THE GEOPOLITICS: Two important geopolitical themes are on display in the Moldovan protests: first, the continued weaponization of energy supplies by Russia and the concerning accusations of Russia putting pressure on another ex-Soviet state even as the invasion of Ukraine continues. And second, the trend of rising discontent and protests around the world driven by high energy prices, which although coming down from their 2022 peak remain much higher than before the war.
DIVE DEEPER: For more information on the rise in energy and cost of living protests, see Politico’s January 2023 article Protests over food and fuel surged in 2022–The biggest were in Europe and a paper by Hossain and Hallock titled Food, energy & cost of living protests, 2022, which includes case studies on food, energy, and cost of living protests in Ecuador, Panama, Sierra Leone, Lebanon, Sri Lanka, France, and Germany.
Figure 2: A graphic illustrating the concentrations of food, energy, and cost of living protests, November 2021-October 2022 (Source: Hossain & Hallock, 2022)
Fatih Birol’s Commentary on the Extended Energy Crisis
IEA Executive Director Fatih Birol published his observations of the global energy crisis at the one-year anniversary of Russia’s invasion of Ukraine.
IMPACTS ON RUSSIA: Russia’s standing as a global energy leader has been lost, permanently. As Birol writes, “Russia played the energy card and it didn’t win.”
Prior to the invasion the country was the largest oil and natural gas exporter to world markets, with the EU purchasing roughly 50% of Russia’s oil exports and 60% of natural gas. Now Russia’s share of global markets and overall energy production has fallen significantly, and it is expected to continue declining in 2023.
Energy is the “backbone of Russia’s economy.” With the budget deficit widening due to military spending, consumer and business subsidies to counteract sanctions, and lower export revenue, the economic situation will continue to deteriorate.
Not only is Russia’s loss of standing as an energy leader causing it to lose customers, but it is also losing access to key technologies and financing. This could potentially drive a reinforcing cycle through which Russia falls behind other energy producing counties as its energy infrastructure ages in the coming years and cannot be as readily replaced or updated.
LOOKING FORWARD: The global situation remains fragile for both oil and gas.
Natural Gas: First, Russia is still delivering natural gas via pipeline to Europe, meaning a full shutoff would have major consequences for the entire continent (relating back to Mueller’s comments about unforeseen shocks above). Second, China–the world’s largest gas importer–is still reopening its economy. Return of China to full demand would add major competition for European gas buyers and make things even more difficult for purchasers with low buying power in emerging and developing countries.
Oil: More recently global markets have seemed to balance and are currently well supplied. Similar concern exists, however, with China’s economic mobilization and resulting increase in oil demand. The sector is also just starting to feel the impacts of Western bans on Russian oil, particularly diesel.
Uganda, African Nations pushing for more fossil fuel projects
WHY IT MATTERS: As more Western governments and banks are aligning to low carbon future goals, African countries looking to develop their oil and gas resources are finding it increasingly difficult to do so. Many African governments are calling this double standard unfair, particularly as countries with existing energy infrastructure are increasing their production through the crisis.
As Irene Batebe, Secretary at Uganda’s Energy and Minerals Ministry describes it: “The energy transition shouldn’t be looked at globally where we are all lumped together… When you look at our pollution levels, you cannot say Uganda has overpolluted.”
DRIVING THE NEWS: Uganda, Tanzania, and many other African nations are becoming a flashpoint in the argument between climate action and economic development (Wall Street Journal). The governments of Uganda and Tanzania argue that they cannot afford not to exploit their natural resources while the world still needs fossil fuels.
Uganda is currently working on 900-mile, $10 billion crude pipeline at the Murchison Falls National Park. The project is estimated to produce 230,000 bpd and earn $2 billion per year for the government in taxes and sales. For reference, Uganda currently receives roughly $4.5 billion per year in domestic taxes.
The project is being developed by TotalEnergies and China’s Cnooc Ltd. Dozens of international banks and insurers–including those that have financed past TotalEnergies projects such as HSBC and Barclays–have refused to get involved. Instead, the developers have had to turned to South Africa’s Standard Bank, the Industrial and Commercial Bank of China, and the Sumitomo Mitsui Bank of Japan.
Despite pushback and hurdles from governments, non-profits and others globally, President Yoweri Museveni said, “Nothing will stop this project. We shall not accept any pressure from anybody. We know what we are doing.”
ZOOMING OUT: Despite a recent uptick in fossil fuel projects in response to higher energy prices, investment into energy projects in Africa remains at roughly half of what it was a decade ago.
The World Bank and many Western development banks, have halted such investments, and commercial lenders say they are becoming more wary of the public relations fallout. As a consequence, international criticism of such projects could potentially damage African’s leaders’ reputation and limit funding and aid in the future.
[1] One example of EU subsidies outpacing US is on electric vehicles: The IRA offers a $7,500 incentive for new EV purchases with at least 40% of raw battery materials derived from US or FTA countries. However, nearly every EU member state also provides some state-backed incentive for EVs, including subsidies up to €10,000.
[2] More broadly, the European Union overall was able to cut natural gas demand by 19%.