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January 09, 2013

Clean Energy Conundrum: In Europe, Regulations Have Helped Create a “Golden Age Of Coal.”

Every company and household wants to cut expenses. In the datacenter business right now, the best way to do that is to reduce energy costs. That has created a huge scramble to improve energy efficiency in the datacenter, where there's plenty of room for improvement. In a very real sense, this is creating a greener industry, since less energy use puts less smoke and CO2 into the air.

But only a few companies—such as Google, Ebay, Yahoo and, increasingly, Apple—are really dedicated to finding cleaner sources of energy for their computers. That's where the true heart of a green business philosophy lies. The problem with sustainable energy sources is that they will inevitably be more expensive for the foreseeable future. Companies that are truly interested in going green will have to do so not by seeking lower energy costs, but by demonstrating a willingness to pay more for their energy use.

That, at least, will be the case until new technology, shifting fossil fuel prices, or government regulations start making renewable energy more competitive. But the best-laid plans of engineers and regulators often go awry. Changes in the makeup of Europe's electrical grid demonstrate the difficulty of making a smooth transition to cleaner energy.

An article in the Economist explains the fascinating paradox. European countries have shown much more dedication to switching to renewable energy sources in the electricity grid than has the U.S. The EU has instituted plans and regulations to make it happen. But economic reality has made a mockery of those plans. Despite government efforts, the amount of electricity generated from coal, arguably the dirtiest form of energy, is rising at an annualized rate of 50% in some countries.

The story starts on the other side of the Atlantic. Natural gas has become very popular in the U.S., in part because of government funded research, incentives and subsidies in shale gas extraction technology. Natural gas prices, as a result, have dropped dramatically, under-cutting coal prices and making the electrical grids cleaner, if not as clean as renewables. Unfortunately for other countries, natural gas is not easily transported. Trucking it in liquid form is still expensive. Europe lags in shale gas extraction technology.

Coal, however, is easy to transport, and is priced more as a global product. U.S. coal producers are having trouble competing with natural gas prices at home, but can still underprice natural gas in Europe. Many European gas prices were negotiated years ago with Russia's Gazprom and have not been changing much. China has also been decreasing its use of coal, contributing to the coal price declines. European utility companies, therefore, have shifted to coal.

Regulations intended to move utilities toward clean energy have so far had the opposite effect. Germany, for example, wants to shift to solar and wind power. It gave renewables priority on the grid, helping them gain a foothold in the market. But they primarily displaced more expensive natural gas rather than cheaper coal. But the switch also hurt the profitability of the electricity suppliers. Their response has been to switch to coal as much as possible, displacing natural gas and increasing the carbon and other emissions.

European Union regulations, intended to make coal cleaner or to reduce its use, are also having the opposite effect. In 2016, utilities will have to either install expensive pollution control equipment on coal-burning plants or shut them down. The result is that the utilities are using as much cheap coal as possible now, before the regulations go into effect. For now at least, the electrical grids in Europe are getting dirtier, not cleaner.

This may all be a temporary situation, until gas extraction from shale catches on around the world and the new regulations on dirty coal plants go into effect. But it shows the difficulty of creating an electrical grid that does less harm to the atmosphere—and the difficulty that companies that use a lot of electricity will have in truly making their facilities greener. Unless, like Google and Apple, they're willing to spend extra to build their own wind and solar farms.

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