Study: Renewables key to fighting energy-price inflation

"The importance of energy for most economic activity means its effect on inflation goes much further than headline numbers suggest," said the report’s lead author, Max Krahé.

The report’s authors conclude that the best way to prevent inflation caused by energy prices is by speeding up the deployment of renewable energy, especially wind and solar power.

Faster uptake of renewable power saved European consumers €95bn between 2021 and 2023 and lowered overall power prices by up to 15 percent, according to the International Energy Agency calculations.

Much of the price volatility of recent years was associated almost entirely with the price swings of gas and oil caused by the gas cutoff imposed on Russian president Vladimir Putin by the EU after his invasion of Ukraine, and lower oil production by the world’s oil-producing countries.

A power system based on renewables will deliver more stable prices because it is less vulnerable to these price swings.

This aligns with much of the recent criticism on how central banks have managed inflation in recent years.

The European Central Bank unleashed the steepest interest rate hikes to counter inflation since the bank was founded in 1999.

Nobel laureate and economist Joseph Stiglitz has told EUobserver that raising interest rates is "counterproductive because we want more investment to solve shortages and constraints on the supply side, not less."

ECB president Christine Lagarde, in February 2022, seemingly agreed when she told MEPs that higher interest rates would not bring down energy prices.

"High energy prices cause at least 50 percent of today’s inflation. [But] it is not up to the ECB to determine the oil price," she said at the beginning of 2022.

But with inflation increasing throughout 2022, the central bank’s governing council eventually decided to raise rates out of fear that "inflation would become entrenched" because workers would demand higher wages.

The fear was that this could result in a wage-price spiral, where higher wages would continue to drive up prices and vice-versa.

Stiglitz and other economists featured on these pages over the past two years have criticised this argument for having no foundation in data, with over two-thirds of inflation caused by corporate profits, according to ECB data.

Three challenges

Krahé and his colleagues at Dezernat Zukunft argue that the longer-term trend is that renewable energy is expected to reduce power costs even more and will reduce energy-price instability.

The report notes that three challenges continue to cause price instability in energy and power markets.

"As long as electricity prices remain linked to fossil-fuel prices, especially gas, any increase in fossil fuel price volatility spills over into the pricing of electricity," the report’s authors note.

Other risks highlighted in the report are supply chain risks as wind and solar deployment speeds up.

One bottleneck is the slow development of grids, energy storage in the form of batteries and interconnectors that can bring the power across EU boundaries to where it is needed.

Although these challenges remain, the authors conclude that fossil fuels "added to the economic and political instability of recent years," and that replacing them with renewables will result in less price swings in the future.