Clean Energy and Expensive Energy: Two Policy Mistakes

You cannot conduct policy against price signals. Not for long, no matter how badly you want to.

Somewhere between 2015 and 2023, Europe made an interesting mistake. We believed both that energy must become sustainable (correct) and that it would automatically become cheap (wrong). Then, when it got expensive, we tried to make it deliberately more expensive through policy, to punish the fossil fuel industry. That also turned out wrong.

I recognize this from my years in public procurement. There is a pattern: you set a goal (for example: more renewable energy). Then you create pain in the other system (too bad for coal plants). Then you hope your goal automatically becomes cheap. When you realize it is expensive, you increase the pain further to prove yourself right. But then your economy weakens.

Let's be honest: the first mistake was diagnostic. Solar and wind do not cost less because they are renewable; they cost more because they are distributed, because they need battery backup, because the grid must be strengthened. The Germans called it Energiewende. They built enormous amounts of wind capacity. That was good. But they also closed nuclear plants, which was unnecessary. And they were surprised when electricity suddenly became much more expensive.

That was not nature, that was policy. And not good policy, because it was founded on an illusion: that you can transform a system without it costing something.

The second mistake was reactive. When energy prices exploded (partly from Russian shutdown, partly from post-corona demand, partly from bad policy), Europe tried to solve the problem by making gas unnecessarily expensive through the Emissions Trading System. Fine-meshed trading rules, carbon taxes, gas prices tied to CO2. The idea was: if gas hurts, companies will switch to renewables.

But a pain stimulus does not create economic transformation. It creates economic pain. German industry moved to China. Dutch horticulture left the country. French industry stopped producing. And we made our own neighbors poorer, which also does not help.

The fundamental problem is that you cannot conduct policy against price signals. Prices do something. They signal scarcity. They create incentives. You can regulate them, but you cannot push them up without consequences. You can say: this must be clean. You can invest in clean. You can subsidize. But if you say: this must be clean AND cheap AND now, then it is not just your economy that breaks. Your whole society becomes fractured.

What Europe should have done: invest in nuclear energy and renewable electrification, without making gas artificially expensive. That costs money, but money always costs something. What Europe did: create a chaotic system where you do not know if energy is expensive because of physical scarcity or because of policy penalty. That makes entrepreneurship impossible.

I recognize this from my advisory work. Ordering systems work if you state what you want and leave the path free. Ordering systems fail if you say: this is my goal, that other must suffer, and hopefully the desired result rolls out. The only way to clean energy is: invest in it until it is cheap. Until then it is expensive. And you must be able to accept that.

Apparently we cannot accept that. So we try to use policy to make it acceptable. That does not work. That makes it worse.

Sources: German Bundesnetzagentur, energy report 2022; IEA World Energy Outlook 2023; analyses of ETS implementation by E3G and Bruegel