Rhein on Energy and Climate

(Presentation to Austrian Consultants, Vienna 26.11. 2010)

In the coming 40 years Europe will be confronted with two overriding challenges:

Make its energy supply essentially C02 emission-free as part of the global fight against climate change and energy security;

Maintain its competitiveness in an increasingly harsher global environment.

I. To make its energy supply essentially C02 emission-free Europe will have to proceed by a dual track approach: Increase energy efficiency and shift from fossil to renewable sources.

This is a political, technical and economic challenge:

Whatever the justified apprehensions about climate change, fossil energy reserves, including coal, are limited and will not suffice to satisfy the fast growing energy needs of a global population of nine billion citizens by the middle of the century. Replacing them by renewable resources is therefore indispensable for preserving Europe’s long term energy security.

The EU has to set the political and regulatory framework, including proper incentives, without which we will continue business as usual.

Business has to step up its efforts in view of developing the most effective technical solutions for pushing energy efficiency and reducing the costs of renewable energies.

Banks, utilities and engineering companies have to step up investments in non-conventional technologies.

In the short and medium term, raising energy efficiency is the most promising and profitable method for reducing C02 emission. Its potential remains huge. Just take two key strategic sectors like buildings and automobiles, where it should be possible to easily enhance energy efficiency by 30 percent without revolutionary new technologies.

But in the long run, higher energy efficiency will not do the job. We shall need cost-effective renewable energies, wind and solar as the two main pillars of our future energy supply. This will not be possible without economies of scale.

China has shown the way. In a record time its companies have expanded the production of PV panels and wind turbines, thus achieving cost reductions of 20-50 percent. The government has actively assisted that process. It considers renewable energies as an infant industry of strategic importance, which Europe has never done with the same determination.

Investments in energy efficiency normally pay within less than 10 years. They do not need public financial support. The role of governments should be to fix ambitious energy efficiency standards. That is what Scandinavian countries do very well. Germany is following by toughening energy efficiency standards for buildings.

The situation is different for renewable energies. With the exception of hydropower, they are not yet competitive with coal, gas or oil. Subsidies are therefore justified. But they should be temporary and take into account declining costs. Their competitiveness is bound to rise thanks to further technological progress (.e.g. bigger capacities of solar/wind power plants, plastic films in recently invented by 3M place of glass mirrors,) on the one hand and rising cost of coal, gas and oil.

Investing in energy efficiency and renewable energies will require huge amounts, some € 75 billion annually for Germany refitting its housing stock and € 30 billion for building 20 GW wind turbines + grid in the North Sea during the next 10 years. EU € 1000 billion until 2020!

But investments in renewable power and energy efficiency do not require any subsequent fuel inputs!

In parallel to the revolution of the power industry the automobile industry will undergo the most profound changes since its beginning 120 years ago by the swift from the internal combustion the electric engine, with wide ramifications for the chain of supplier companies. But to have a full impact on climate change it will require a complete decarbonisation of the power sector. The process can and will unfold only slowly. Maybe by 2050, all the 100 million automobiles to be produced then globally will be equipped with electric engines.

In conclusion,

It is feasible to Transform our energy supply and make it essentially emission-free by the middle of the century. It will pay economically because fossil energy prices are set to rise. It will substantially improve Europe’s energy security. But it requires very ambitious policy makers putting their weight behind the necessary transformations.

The progressive transformation of the energy systems in Europe, USA, Brazil, Mexico, India and China will take place whatever the results of endless and unproductive UN climate conferences.

This will offer big opportunities for consulting companies. They should closely follow the developments. Some should specialise and help develop better solutions for saving, transporting and storing energy or even carbon capture and storage. Energy will turn into a major market for consulting companies globally. No country can escape from radically transforming its energy sector. Europe may have a temporary advance. But this is not to last eternally, as recent developments in China, South Korea and even the USA show.

II. How can Europe maintain its competitiveness?

Presently Switzerland, Germany, Finland and Sweden are among the 10 most competitive countries on earth (World Economic Forum). That is a proud record! But no South European country is among that list!

They owe their standing to three major factors:

High educational standards;

Well-trained and motivated work force;

A business community continuously striving for technical and commercial innovations.

Europe’s position is threatened by emerging competitors, especially in Asia with its dynamic, hard-working and fast-learning societies in quest for better living conditions.

Europe has lost parts of its scientific and engineering lead. It does no longer invest enough in education and research. Tiny Singapore aims at investing 3.5 percent of its GDP in research and development by 2015, compared to less than 2 percent for the EU in 2009.

Asia is rapidly enhancing its share of global scientific publications. It has already reached about 30 percent!

Europe’s decline in the world is not irreversible. With proper action it can remain fully competitive, without draconian measures or abandoning its commitment to sustainability and a healthy environment.

This requires action at all levels, from the small company to the municipality, the province, national governments and the EU.

Here are some recipes.

All EU countries must raise their public/private expenditures for education and research.

The EU has fixed a target for investing 3 percent of GDP in research by 2020: It is essential to reach and do better than between 2000 and 2010.

All EU countries must teach more science in schools. Scandinavia may serve as a yardstick.

Member states must spend at least as much on education as on social benefits. To this end, it is indispensable to progressively raise the retirement age to 70 and fight against lifestyle diseases (diabetes, obesity, tobacco, alcohol).

Europe must reduce its spending for defence. It can best do so by highly efficient professional armies, EU wide-procurement and a progressive transition towards European defence.

The European patent must finally – after 30 years – see the day, whatever linguistic or legal objections.

Europe has to put more emphasis on meritocracy. Competition remains an essential push for achievement. This goes for schools, universities and, of course, business.

Last not least, the EU budget should reflect the concern for global competitiveness. It is not healthy for the EU budget to devote three quarters of expenditures to regional transfers and agricultural subsidy payments. The share of R& D should rise to 20 percent of spending, some € 25 billion annually (from some € 6 billion presently), focused on a few strategic sectors (e.g. energy technologies, nanotechnologies, material science, biotechnologies, information technology).

Europe must accelerate procedures for authorising new products, high-transmission lines, railway connections etc. without impairing the quality of the process. This is a matter for municipalities and national governments.

The implementation of political or business concepts takes too much time. National governments should examine how to shorten such delays. There are still too many administrative obstacles to business. It takes much longer than Hong Kong or Singapore to open a business in Europe.

At the global level, the EU must prosecute China and other sinners against WTO rules more energetically. It must not tolerate China’s frequent violations of intellectual property.

More generally, we need to broaden our productivity concept. In the future we should pay more attention to material/resources/energy productivity and not only look at labour productivity. This must be part of our drive for a sustainable society.

III. Consultancies have a crucial role to play for making Europe more energy-efficient and competitive.

To this end, they have to be top quality.

Consultants have to know better than their clients. They must be at the cutting-edge of scientific and engineering know-how. This requires substantial investment in training and research. Mc Kinsey spends a few hundred million euros annually for improving its knowledge base (e.g. market research in China, assessment of competitors).

In a global market and a declining weight of Europe consultants must operate globally, either directly or through networks.

With a growing size of their clients consultants must merge and/or specialise, first within Europe, second world-wide.

Brussels 20.11.10 Eberhard Rhein

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