HIKMA SUMMIT
OF INTERNATIONAL RELATIONS

After taking a swipe from Russia, it is now the turn of their overseas ally, and Europeans are once more caught in the middle without the means to actively secure their supplies. While governments should have taken measures long ago, heads of state are threatening President Trump to react, yet imports and tariffs are not only an issue in terms of dependency: they include far-reaching implications for European final consumers.

In the energy sector, for example, prices are higher in the EU than in most industrialized economies and the reason is raw materials, such as fossil fuels, are not domestically produced. Before, vulnerability stemmed from pipelines, now LNG imports represent another kind of sensitivity towards new suppliers, among which the US is the largest one for Europe. Energy bills are mostly composed of  energy and supply costs (30-70%), while VATs and other charges represent a fixed cost. Today, final consumers are  paying more because liquified gas brings in more costs - mainly associated with liquefaction and regasification processes. This is where the energy transition comes in: the shift to clean sources should provide a greater capacity for costs’ self-management. Indeed, renewable energy does not require fuel, and electrified heating, transport and other services present fixed capital costs rather than variable expenses.

The cost of energy will increasingly be driven by fixed capital expenditures for renewables, batteries, and the grid, while variable fuel costs will play a diminishing role. Much like other commodities, such as oil, wholesale electricity prices are set by the cost of the final unit required to meet demand, or the marginal unit price. Gas-fired plants frequently serve as this marginal unit in Europe, and thus determine the wholesale electricity price. But, as the share of renewables in the energy mix increases, gas will play a less prominent role in price-setting, leading to a reduction in average wholesale electricity prices. As a result, energy and supply costs will shrink in electricity bills. However, fixed costs are likely to grow because of the needed capital investments and the cost of maintaining reserve capacity during periods of system stress - managing the intermittency requires storage, transmission, and reserve generation capacity.

Despite renewables being a cost-efficient and secure technology compared to fossil fuels volatility, more affordable prices will pose a challenge in terms of total consumption. Since 2022, Europeans have defended themselves against Russian retaliation by reducing energy use as much as possible and focusing on energy efficiency. Lowering prices could push consumers to a more extensive use of resources, thereby producing a counter effect that goes against the very principle of the green transition. A further question mark is the supply of green minerals and the manufacture of renewable components. In March 2023, the EU adopted the Critical Raw Materials Act, which clarifies the European strategy for mineral processing. The goal is to overcome dependence by not exceeding 65% reliance on a single third country for any material. Although African countries do not pose a threat (yet) to the supply chain, Chinese influence in these matters is a cause for concern. European governments can either use the energy transition to gain strategic autonomy or risk trading one form of dependency for another. As the U.S. adopts a more protectionist trade stance and global energy markets continue to evolve, Europe must take decisive steps to strengthen its energy independence. The choices made today will define the continent’s energy future for decades to come.