Pēteris Celms 
BluOr Bank Investment Portfolio Manager

140 years ago, the Edison Illuminating Company built the world’s first central power station and cogeneration plant in New York City. The Pearl Street Station in Lower Manhattan initially lit up only up to 400 lights and served 82 customers. While not particularly reliable, its electric lamps were a huge step up from the polluting and dangerous coal gas lamps that it would replace. The station would quickly scale up to serve many more.

Edison’s station ushered in the age of electricity and in lightning speed would hasten its adoption across the world. Today, electricity is ubiquitous. From the lights in our homes to the phones in our pockets, electricity is always flowing. It enables every aspect of the modern way of life and it is so reliable that we take it for granted. It just works.

But the systems underlying that reliability are extremely complex, and as we see today, have points of failure.

In Europe, the clear and present issue is the overreliance on cheap Russian natural gas to generate much of our electricity. Unfortunately it is the marginal supply that dictates market price, and for the past year, that supply has been harder and harder to come by. Today we are feeling the consequences. The lights are still on, but our bank accounts are getting lighter.

Gyrations in financial markets can be short-lived, but the impact they have on physical markets often last much longer and come with unintended consequences. The Covid-19 pandemic caused global energy prices to crater. Natural gas prices reached their lowest point in more than 20 years. Oil prices briefly went negative. As a result, producers felt significant pain. With prices low and demand dried up, a significant amount of production was not able to stay online.

After an extremely cold winter in 2020 led to depleted gas inventories in parts of the world, the lack of wind power generation in much of Europe due to a summer heatwave that year exacerbated this deficit. Then, Russia throttled its supply of gas. We all know what happened next. Russia invaded Ukraine.

Now Europe is facing record-high gas and electricity prices and an acute shortage in gas for electricity and heat as we approach winter. For the first time in my life, there exists a small, although unlikely chance that the lights might go off.

But in every crisis exists an opportunity.

European service providers are arranging alternative LNG gas supplies. Countries are ramping up energy conservation plans to mitigate the most extreme negative consequences over the medium term. Resource substation is taking place where possible. Efforts to accelerate the green transition are quickly taking shape. Significantly more solar and wind capacity additions are being planned and project approval processes are being streamlined to bring that capacity online faster than before. Reliance on Russian gas has already fallen significantly and will continue to fall as alternative sources especially green ones come online.

Amidst this good news though is the reality of the difficulty of what is being attempted. For the first time in history, we are trying to create an energy system that is less energy dense and less reliable than the one that came before it. We are moving from a highly centralized power grid that can guarantee a stable baseload of electricity to a decentralized system across a growing number of installations dependent on whether the sun is shining or the wind is blowing.

This poses significant challenges.

For one, even experts underestimate how much the intermittency issue strains grid operations. Since most wind and solar facilities sit idle most of the time, renewable power developers have to overbuild spare production capacity massively.

There is hope that breakthroughs in battery and other storage technologies, like the seasonal storage of green hydrogen, will make intermittency a minor problem, but current prices of these technologies prevent them from being economically viable, even when considering generous subsidies. More and more high voltage interconnectors will also increase transmission capacity and rebalance the market, pushing green energy from region to region, but these are huge infrastructure projects. Assuming that these technological breakthroughs do come to fruition, the sheer amount of commodities – copper, steel, battery metals, etc. – necessary to make a full green transition a reality are already in short supply for the foreseeable future. With ambitious plans for a green infrastructure investment across the globe as well as continued demand from other parts of the economy, supply shortages will not suddenly subside. It is naïve to think these commodities will be as cheaply available as the world has been accustomed to over the past decade.

Hamstringing these efforts is the fact that the European Union has done everything possible to make mining for these necessary commodities in Europe at best uneconomical if not downright impossible. Right now there is no alternative but to buy them on the open market from partners who are not always friendly. There is hope that this will change, but it takes years to bring new mining production online.

In short, a power grid heavily reliant on renewables will cost far more and take far longer to build than most anticipate and advocates promise. It is never wise to discount human ingenuity and ability to innovate, but to hope is not a strategy.

Even if we continue in this direction, some sort of flexible baseload power will still be necessary. With an increasing amount of renewables in the energy mix, baseload power that can be ramped up quickly will serve as a backstop to make sure that the grid operates smoothly.

But how do we maintain the necessary capital expenditure to maintain this baseload generation if an increasing amount of power is generated locally? If there is a shrinking base of consumers dependent on centralized generation for most of their power, who foots the bill to maintain that capability?

On the other end are the renewable projects themselves. Given the need to overbuild and an increasingly murky picture on project cost, how many projects become stranded assets due to poor economics? What is the runway for available subsidies that allow these projects to be developed in the first place? In the likely scenario that a boom/bust cycle of development takes shape, how sure can we be of our energy supply and security?

The fact is that renewable energies have many advantages, but what is needed is a clear and well thought out transition policy that does not restrict the supply of cheap and reliable energy to the end users - the businesses that drive our economy and those individuals who are least able to pay for price increases. This is detrimental to both growth and stability.

What is necessary is pragmatism in what is actually possible and economical. The current energy crisis has opened some eyes. The European Union has rightly moved to include natural gas and nuclear in its Green Taxonomy of transition technologies that it considers compatible with its Net-Zero ambitions.

With respect to natural gas, it may not be green but it is better than some alternatives. Technologies exist that can capture and store carbon from fossil fuels. If development continues, natural gas will still be a viable option for reliable fuel with minimal environmental impact. It is certainly better than burning coal.

Meanwhile, nuclear power remains the only proven means to produce electricity that is all at once reliable, emissions free and capable of being scaled up economically to meet growing demand. But anti-nuclear activism has significantly damaged its reputation across the world. If we have not lived through Chernobyl, we have seen it on HBO.

But these fears are overblown. It is not for nothing that a growing number of policymakers are reembracing nuclear power. France has recently announced a program to build up to 14 new nuclear reactors. Several other countries, Estonia included, are exploring partnerships with U.S. companies to build small modular reactors. After much hemming and hawing, even Germany has decided to postpone the closure of its remaining three nuclear power plants.

These may not be the long-term solutions we want, but they will provide the transition time for other decarbonized energies, such as green hydrogen, to really take off. The promise of green hydrogen is enticing. The storage potential of hydrogen is particularly beneficial for electricity grids as it allows renewable energy to be stored not only in large quantities but also for long periods. Hydrogen will also play an important role in promoting decarbonization in sectors where other alternatives may not be feasible or may be more expensive. It can be used to replace fossil hydrogen in transport and industrial processes, as well as to create new industrial products such as green fertilizers and steel.

If we really want to decarbonize everything - mobility, heating, industrial processes, etc. - then we need to be realistic about how to achieve these goals and how much it will cost. We must recognize that there is no going back to cheap energy while continuing to support ambitious long-term decarbonization goals. Today's economic and geopolitical crisis gives us the opportunity to focus on policies that meaningfully reduce carbon dioxide emissions and create secure electricity supplies. Pragmatic policies will ensure economic investments for society and its future development. It is time to turn on the lights and open our eyes to this challenge.

The Latvian version of this article originally appeared in the September 2022 issue of Forbes Latvia.