January 23, 2023
Italy and Algeria Strengthen Energy Relationship
On Sunday, Italian Premier Giogia Meloni arrived in Algiers to meet with Algerian President Abdelmadjid Tebboune and other leaders in order to strengthen the two countries’ energy alliance (Washington Post).
WHY IT MATTERS: Since Russia’s curtailment of gas to Europe, Algeria has become the top supplier of natural gas to Italy (mostly via the Trans-Mediterranean pipeline). But Algeria’s ambition is larger than Italy alone: “Today we are the leading energy partner of Italy, but we aim to push beyond that… We want Italy to become a European hub for Algerian gas. A junction for other EU countries” said Algeria’s ambassador to Rome, Abdelkrim Touahria.
Algeria is on track to provide 38% of Italy’s gas needs in 2023, equal to what Russia was providing prior to their invasion of Ukraine. Eni (Italian energy company) CEO Claudio Descalzi has said that Italy will have enough gas to make it through the 2023-24 winter if it can increase imports from Algeria (Bloomberg).
NOTABLE CONTEXT: Meloni’s efforts to strengthen relations with Algeria builds upon previous Italian Premier Mario Draghi’s work, who visited Algeria several times and signed an agreements last year for Algeria to boost gas supply to Italy 50%.
The continued engagement with Algeria demonstrates strategic alignment between Draghi’s left-leaning government and Meloni’s new farther-right party, signaling the importance of energy security above partisan politics in the Italy.
ALGERIA’S PERSPECTIVE: In promoting Italy to become a hub for European energy imports, Algeria is furthering some of their own priorities. According to an in-depth essay from The Cairo Review, the country’s top priorities are: “to maximize its profit margins, leverage its energy industry to attract investment, and rehabilitate its depleting foreign exchange reserves.”
Since the Russian invasion of Ukraine, Algeria has resisted explicit alignment with either side, including a refusal to limit bilateral cooperation with Russia even as US pressure to halt relations mounted and Algeria moved to become a key energy provider to Europe.
President Tebboune has also complained about disfunction of the current international systems before the UN back in 2020. According to the essay this perspective now underpins Algeria’s rationale for opposing attempts to exclude Russia from the Human Rights Council and other UN agencies.
European Energy Firms Seek Support Defending Assets
This story builds on the pervious reporting about efforts by European governments to increase defense of critical energy infrastructure across the continent.
THE NEWS: At Davos last week, CEO of Norwegian-based Equinor, Anders Opedal, said that European energy companies need help from governments to better protect energy infrastructure from physical attacks and sabotage (Wall Street Journal).
“Normally, companies have been able to maintain and develop that infrastructure themselves…but now it is also about protecting the pipelines and the critical infrastructure, making sure there is no sabotage… Companies cannot do that alone. We need more broad collaboration between companies and governments to do this,” said Opedal.
Following the Nord Stream explosions, European energy firms are now having to take on a new role in defending their infrastructure from attacks. Equinor said it has been working more closely with intelligence agencies (though did not disclose which agencies).
EU President von de Leyen echoed this point in opening remarks at a meeting with NATO Secretary-General Stoltenberg on January 11th. “One important new focus for our cooperation is the security of our critical infrastructure, where we have to step up the cooperation.” (European Commission)
The two organizations are launching the EU-NATO Task Force for Resilient Critical Infrastructure, which will work to identify key threats and strategic vulnerabilities to critical infrastructure and implement mitigations.
WHY IT MATTERS: The call for more collaboration between government and energy sector firms on the basis of defense connects to the overarching theme of Strengthen Power of the State. While energy firms will gain a layer of added protection from government involvement, it will be interest to see whether their operational autonomy is lessened in the name of protecting energy security.
DIVE DEEPER: Al Jazeera has a nice macro-level overview of infrastructure sabotage events over the last year, which paints an interesting story running parallel to the war in Ukraine.
ON A RELATED NOTE: IEA chief Fatih Birol said at Davos this week that energy security is undoubtedly the biggest driver for renewable energy growth today. “This crisis gave a big boost to clean-energy developments… Now the biggest driver of global [clean] energy growth today is energy security” (Wall Street Journal).
EU Consumer Energy Market Reform Process Begins
THE NEWS: The European Commission has launched a public consultation process on reforming the EU’s electricity market to make consumer energy bills less tied to short-term swings in fossil fuel prices (European Commission).
The announcement cites that, “in the current crisis of high and volatile electricity prices, the economic burden has been pushed on to final consumers.”
The Commission will also consider structural reforms to the electricity market that advance the goals of securing European energy sovereignty and achieving climate neutrality.
POLICY TOOLS: The EC is considering expanding the use of long-term contracts to support fixed pricing for powers plants, including “contracts for difference” (CfD) and power purchase agreements (PPA).
The EU will start with incentivizing these stability mechanisms, but is considering mandating the use of such contracts for new and existing plants. Such mandates, however, “could risk the necessary investments in this type of generation, increase the costs of those investments and as a result be counterproductive.”
WHY IT MATTERS: EU energy consumers took a major hit last year when (among other energy challenges) Russia cut gas supplies to continent. The EU lacked structural economic mechanisms to shield consumers, and instead had to rely on a hodgepodge of emergency caps on energy bills and direct consumer payments to offset costs.
"We need to make the electricity market design fit for the future, allowing it to deliver the benefits of affordable clean energy to everyone," said EU energy commissioner Kadri Simson in a statement (Reuters).
The market reforms have the potential to change how Europe engages with global energy markets and how it structure the clean energy transition in the years to come. It will be worth tracking the proposed reforms as they become available to understand what the future of the European consumer energy market will look like.
NEXT STEPS: The consultation period will run January 23rd to February 13th, followed by planned commission adoption of changes later in Q1 2023. “The aim of this reform is to provide added value swiftly to EU citizens and companies during the ongoing crisis and the 2023/2024 heating season” notes the public consultation page.
Netherlands Gas Field Closure
THE NEWS: The government of The Netherlands has confirmed that it will go ahead with closing the once-largest gas field in Europe by October 2023 so long as there is no gas shortage in Europe going into the 2023-24 winter.
The Groningen Gasfield, which once produced up to 50 bcm per year of gas for Europe, has been curtailed down to just 2.8 bcm annually in recent years amid concern for gas-related earthquakes. There has been a notable reduction in earthquakes from 75 in 2021 to 58 in 2022 as output from Groningen was cut by 40% over the same period.
“It’s very, very simple: everybody who has some knowledge of earthquake danger tells me that it’s really very dangerous to keep on producing there. I’m quite convinced it’s wise to close it down” said State secretary for mining responsible for the field, Hans Vijlbrief (Financial Times).
WHY IT MATTERS: While the long-planned transition away from Groningen is largely complete as Europe has managed to secure alternative sources even amid the energy crisis, the pressing demand remains for Europe to develop “domestic” energy sources in the mid-term. The Groningen field currently still holds roughly 450 bcm of extractable gas which will now be considered stranded (Bloomberg). It seems an interesting illustration of tension between growing energy needs and the limitations of fossil fuel extraction.
“A New Era In Geopolitics” Sparked by US Industrial Policy
Following Davos, Bloomberg ran a piece highlighting the new clean tech arms race that has taken off due primarily to the US’s Inflation Reduction Act passed last year.
The historic US climate bill has “opened up a new era in geopolitics, one of unprecedented global competition to develop planet-saving technologies” they write.
Why It Matters: While we have covered the tension spurred by the US manufacturing incentives that are causing many companies to relocate or consider relocating clean tech operations before, the article illustrates that this is a decisive new chapter in the merging economics with the energy transition.
“To keep European industry attractive, there is a need to be competitive with offers and incentives” said EC President Ursula von der Leyen in Davos, who along with leaders from France and Germany is pushing for a new wave of EU-wide and country-specific industrial bills to match the incentives provided by the US.
The push for new industrial policy and incentive spending to keep countries competitive is a shift far beyond the older COP-style negotiations toward a competitive market economy for developing and scaling clean tech solutions.
In order to prevent a zero-sum competitive outcome, the US and EU need to work together toward value creation through cooperative incentive schemes, keeping in mind that the largest competitor in the clean tech space remains China.
Interesting Read: Why Governments Are Pushing Deeping Into Energy Markets
Flagging this Wall Street Journal piece by Phred Dvorak as an interesting discussion on the more active role governments are taking in the energy markets in response to the global crisis. As Daniel Yergin says in the article: “Government is back in the energy business in a big way.”