If electricity is to become the green blood of the 21st-century economy, it will power both essential and non-essential needs. These essential needs include daily necessities such as heating and cooling in a warming environment, cooking, and food preservation. Electricity will also serve less critical functions, like enabling travel — the hallmark freedom of the 20th century. This includes commuting to work, which is nearly essential for non-urban residents who make up a significant, if not majority, share of the population. Air travel, by contrast, is often labeled as “frivolous” or a “privilege of the wealthy” by those who advocate grounding aviation, such as followers of Greta Thunberg.
Electricity, today covering 20% of the final energy demand, is already taxed in some countries more than natural gas, more than doubling the price for households compared to industries.
The massive growth in electricity usage, doubling or tripling in the next decades with the rise of renewables, wind and solar, envisaged to combat climate change, means it will remain taxed, if only to compensate for the loss of present taxes on fossil fuels, oil products and natural gas, from which many nation-states, like in welfare economy-based Europe, derive a significant part of their budget.
Taxes are the subject of endless debates between economists, social science experts, politicians and many others. The share of the final price, progressivity and discrimination according to usage, represent fracture lines when access, affordability and social justice are considered. This brings us back to the subject of essential versus non-essential usage.
An interesting debate is brewing in the EU regarding e-fuels, produced out of low-carbon (green) hydrogen, generated by electrolysis of water and CO2, proposed as the unlimited alternative to limited biomass-based solutions. This debate is focused on e-SAF (Sustainable Aviation Fuel: or should we say Synthetic Aviation Fuels nowadays?), the only Power-to-Liquid pathway having already obtained an incorporation mandate obligation in the EU and as from 2030, in ReFuel EU Aviation. SAF derived from biomass is already much more expensive than fossil jet-fuel, by a multiplication factor of 2 to 3 for the most affordable pathway (HEFA: lipids hydrogenation). e-SAF, with present electricity market prices in the EU is much more expensive by a factor 10.
Electricity management, at national or regional level, is complex. The limited possibilities of storage of electrons, for now at least, makes the supply-demand balance a 24/7 challenge to keep the grid stable, contrary to the handling of liquid or gaseous fuels, with their infrastructures offering intermediate storage capacities. This difficulty triggered the idea of using hydrogen as a proxy storage for the extra supply of intermittent electricity that renewables, like wind or solar-based solutions, regularly propose, especially in countries where electricity supply and demand do not align, in time or geography, or both.
But the complex electricity management does not stop at local level. In fact, it relies on supra-national mechanisms to adjust supply and demand, which proved helpful on many occasions to avoid painful black-outs, for instance. A continental market thus exists for wholesale power, creating a market price for bulk electricity, different from the production price. In the EU, the market mechanism reflects the marginal cost of the last-resort power producer, to incentivize utilities to own and operate such swing producers.
Apologies for the long development, but it is necessary to understand the brewing controversy. With e-SAF very expensive, supporters call for public support to improve affordability. As the cost of electricity is the major element of the final price of e-SAF, the ideal public support is then a subsidy to lower it, to bring it as close as possible to the production cost of renewables, much lower than the market price. Studies show e-SAF starts to show competitiveness with biomass-based SAF below 40 cts/MWh, in the region of the renewable electricity production cost.
But market price, which reflects mark-ups to the production cost to account for connection to the grid, distribution, investment amortization, maintenance and swing production, is closer on average and in publicly disclosed long-term deals, to 100 cts/MWh. Nuclear energy production cost, able to cover the massive investment and maintenance costs of this mode of power generation, a low-carbon alternative to natural gas baseload power plants, is around 70-80 cts/MWh. All these figures are before taxes. Households pay above 200 cts/MWh for the delivered electricity. If e-SAF producers manage to have access to an electricity price well below the market reference, it means air travelers will actually benefit from an electricity that is much less taxed than what average citizens pays for their essential usages. Unfair?
The debate can be extended to e-fuels for road transport, an alternative proposed by German car manufacturers to circumvent the 2035 ban of sales of internal combustion engine vehicles (ICEV) in the EU. Using the same argument as above, motorists using e-gasoline or e-diesel powered cars would then indirectly benefit from a tax-free electricity, when EV drivers would have to recharge with an electricity at retail price, heavily taxed. Unfair, again.
Taxation is a sensitive subject in the EU, as any reform calls for a unanimous vote by the 27 Member States, which have opposed views on the subject of mobility in the future. It is safe to predict that the taxation of electricity, if this energy becomes hegemonic, will take center stage in political debates, and rightly so, as acceptability of low-carbon solutions more and more depends on properly explaining the rationale behind the selection, including the key element of social justice.
Philippe Marchand is a Bioenergy Steering Committee Member of the European Technology and Innovation Platform (ETIP).
